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https://dailyasianage.com/news/194466/factoring---unidroit-convention-and-bangladesh

Published: 12:14 AM, 08 September 2019

Factoring - UNIDROIT Convention and Bangladesh

M S Siddiqui The divergence of national law of States relating to receivables financing has become obstacles to cross-border receivables transactions as it engenders complexity as well as uncertainty, which increases the cost of credit and frustrates the parties involved. Considering the significance of cross-border receivables financing to the development of international commerce, efforts have been made by some international organizations to facilitate harmonization and unification of the law of receivables financing. Among these attempts is the 1988 UNIDOIT Convention on International Factoring (the UNIDROIT Convention). It is mainly focuses on specific contracts of the assignment of receivables, namely, factoring contracts. As is stated in Article 1 of the UNIDROIT Convention, it deals with one of the most basic forms of receivables financing i. e. factoring. The International Institute for the Unification of Private Law (UNIDROIT) is an inter-governmental organization whose objective is to harmonize private international law across countries through uniform rules, international conventions, and the production of model laws and guidelines. Established in 1926 as part of the League of Nations, it was re-established in 1940 following the League's dissolution through a multilateral agreement, the UNIDROIT Statute. As of 2018 UNIDROIT has 63 member states. Bangladesh is not member of UNIDROIT. The private law is to apply for relationship of individuals, families, businesses and small groups. While the private international law deals with private relationships across national borders. Under the Factoring Convention, the internationality of a factoring contract depends upon an objective rather than a subjective element. By virtue of Article 2(1), a factoring contract is international when the receivables assigned arise from an "international" contract of sale of goods, i.e., a contract of sale between the supplier and a debtor whose places of business are in different states (or if they arise from an "international" contract for the supply of services, i.e., a contract for the supply of services the parties to which have their places of business in different states). Consequently, the convention's applicability depends not so much upon the "internationality" of the factoring contract as upon the "internationality" of the receivables. The UNIDROIT Convention requires all the three parties involved (assignor, assignee and debtor) having their place of business in a Contracting State. The UNIDROIT Convention applies when the governing law of both the original contract between the debtor and the assignor and the factoring contract between the assignor and the assignee are governed by the law of a Contracting State as a result of the application of conflict-of-laws rules by the forum.? In the UNCITRAL Convention, the legal connection only relates to the application of the debtor-related provisions. According to Article 3 of the Convention, even though the debtor is not located

in a Contracting State, those provisions may still apply if the law of a Contracting State governs the original contract. The Rome Institute for the UNIDROIT in May 1988 produced a Convention on International Factoring in Ottawa, Canada. The UNIDROIT Convention on International Factoring (the "Factoring Convention") was created to: (1) Adopt uniform rules providing a legal framework to facilitate international factoring (2) Maintain a fair balance of interests between the different parties involved in factoring transactions. The convention applies to international factoring transactions. In the preamble of the UNIDROIT Convention on International Factoring (28 May 1988) conscious of the fact that international factoring has a significant role to play in the development of international trade. Therefore, the importance of adopting uniform rules to provide a legal framework that will facilitate international factoring, while maintaining a fair balance of interests between the different parties involved in factoring transactions. UNIDROIT Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. Factoring is national and international factoring. A transaction is international when the parties have their place of business in different states (A 24). A factoring contract is one which involves the assignment of receivables arising from commercial (excluding transactions with ultimate consumers) sales of goods transactions and under which the factor provides finance, ledgering (Article 25), collection of receivables and protection against the debtor's default (article 26). The transaction in international trade and enforcement of contract is a major issue of concern. In recognition of the importance international factoring has as a source of funds for the purposesof international trade. The Convention aims to encourage the practice of international receivables financing as a method of facilitating international trade. Its main goal is to reduce the cost of transactions such as international factoring, project financing and securitization (among others) through the use of uniform rules41. This Convention in Article 1 (2), "factoring contract" means a contract concluded between one party (the supplier) and another party (the factor) pursuant to which: (a) the supplier may or will assign to the factor receivables arising from contracts of sale of goods made between the supplier and its customers (debtors) other than those for the sale of goods bought primarily for their personal, family or household use; (b) the factor is to perform at least two of the following functions: - finance for the supplier, including loans and advance payments; - maintenance of accounts (ledgering) relating to the receivables; - collection of receivables; - protection against default in payment by debtors; (c) notice of the assignment of the receivables is to be given to debtors. The Convention has another characteristic is the access to finance. The financing of receivable is a method of raising finance for trade. Factoring is a form of financing that helps companies with cash flow problems due to slow-paying clients. It allows your business to finance invoices, which improves your company's working capital. It allows a credit to buyer and immediate payment to the seller. The other functions of factoring like advance payment, book keeping, regarding claims, collecting of the claims, protection against failures of payment are also very important. The Factoring Convention applies: (a) Where supplier and debtor (customer) are in different states; and (b) The Factoring Convention is in force in the States of client, debtor and factor; and (c) Supply contract governed by law of a contracting state; and (d) Factor provides at least two of these services: - Finance; or - Ledger accounting; or - collections; or - bad debt protection.

International factoring is a method of obtaining finance and enhancing liquidity with great potential. The use of factors to provide prepayments for the sale of goods and services in an international context is necessary to increase the volume of international trade. Further, what factoring does in essence is to introduce intermediaries between the buyer and the seller where the communication between them may be difficult due to language, culture or different trading practices. The factor can facilitate trade in such situations and undertake the burdensome obligations of debt collection across national borders. Thus, international factoring can be used to effectively finance and facilitate international trade. The international conventions such as the United Nations Convention on Contracts for the International Sale of Good (CISG), the Factoring Convention are based upon the principle of good faith. The good faith is mentioned as an interpretative criterion provided for by Article 4(1) of the Factoring Convention, and also mentioned in Article 6. Article 6 validates the assignment of receivables despite the existence of a non-assignment clause. In effect, this provision places upon the supplier "an indispensable general duty of good faith towards the debtor for breach of the non-assignability clause contained in the sales contract. The operation of the UNIDROIT Convention and the adoption of the UN Convention by Bangladesh will help overcome difficulties of international transaction and create an environment of certainty of legal framework this practice needs to flourish. Receivables financing in general and international factoring in particular have too great a potential to be overlooked as methods of financing cross border transactions. Bangladesh should sign the convention. The writer is a legal Economist

E-mail: mssiddiqui2035@gmail.com