England and Wales are covered by the same legislation. Scotland retains some legal differences to the rest of the UK. As such, there is no specific act of parliament covering factoring in England and Wales.
A factoring company may purchase receivables outright using assignment. Where the seller of the receivables is incorporated there is no requirement to register the assignment in a public register.
With or Without Recourse
A key difference legally is if the receivable is made on a with-recourse basis. In this case if the seller goes insolvent the receivable will not be counted in the list of assets of the seller. This means the factoring company can still collect on the receivable. If the receivable is sold on a non-recourse basis the factoring company cannot collect payment if the seller goes insolvent.
An assignment of receivables is still valid even if the debtor is not informed of the assignment. It is common practice for a factor to retain the right to notify account debtors at a later date. There are 3 reasons for this:
- If there are competing claims on an assignment, the earliest notification is given priority.
- Given notice should ensure that the factoring company is not subject to any right of set-off that the debtor may have against the seller. This right starts with the date of notice.
- There is the procedural advantage that if the debtor is notified then any court proceedings that the factor initiates against the debtor can be done in the factor’s name, not the seller’s name.
Under the Business Contract Terms (Assignment of Receivables) Regulations 2018, contractual prohibition or restriction on the assignment of a receivable will have no effect. Exemptions to this law applies to a range of contracts. These exemptions apply to financial services contracts (such as banking and insurance contracts) and contracts with ‘large enterprises’. A large enterprise is defined as not a sole-trader, a partnership, an unincorporated association, or a company or LLP that qualifies as a small or medium-sized company.