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Legal framework for factoring missing in Bangladesh

M S Siddiqui | May 26, 2019

Factoring is an asset-based finance product where the credit extended is

based on the value of the borrower's accounts receivable or the payments
owed by the borrower's customers. This asset -based lending is purchase of
receivables by the factor rather than using it as collateral in a loan. That is,
under Factoring, the title and ownership of the receivables shift from the
seller to the factor. Factoring also typically involves more than just financing
and generally includes two other services: credit and collections.

Shortage of working capital is a common problem for businesses throughout

the world as a bulk of corporate funds is locked up in receivables. A finance
product to finance receivables allows funds to be released without waiting for
the debts to mature for payment. This method increases overall liquidity
position and allows the corporate to finance new commercial ventures.
Factoring is a transaction of sale and purchase of existing non -matured or
future short-term receivables arising from agreements on the sa le of goods
or provision of services, either nationally or internationally. The maturity of
receivables may even be up to 180 days from the date of sale of goods or
provision of services.

Factoring has been defined in the Civil Code of a country: "Under th e

contract of financing for assignment of the monetary claim, one party (the
finance agent) transfers or undertakes to transfer to the other party (the
client) monetary funds with reference to a monetary claim of the client
(creditor) against a third party (the debtor) arising from the supply of goods,
performance of works or provision of services by the client to the third party,
and the client assigns or undertakes the duty to assign that monetary claim
to the finance agent." Factoring is presumed to be n on-recourse, unless
otherwise stipulated in the contract as refereed as: "Unless otherwise
provided by the contract between the client and the finance agent, the client
is not liable for non-performance or improper performance of the assigned
claim by the debtor …"

Unidroit Convention on International Factoring (28 May 1988) came to a

conscious that International Factoring has a significant role to play in the
development of international trade. It has given due importance to 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.

Factoring is usually contracted as a complex partnership agreement,

covering a range of business services based on two main functions: financing
and administration of receivables. Unidroit Convention on International
Factoring (1988) came to conclusion that "Factoring contract" means a
contract concluded between one party (the supp lier) 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: (i) - finance for the supplier,
including loans and advance payments; (ii) - maintenance of accounts
(ledgering) relating to the receivables; (iii)- collection of receivables; and (iv)
- protection against default in payment by debtors. By combining these
functions, the Factoring market has developed various types of products that
require different and specific contract law considerat ions, not legally
supported in every jurisdiction.

Factoring provides services such as domestic and international Factoring,

Factoring with recourse and without recourse and reverse Factoring.
Additionally, a Factoring company is assigned to perform servic es which are
directly or indirectly related to the business of factoring, in particular: (a) the
gathering, producing, analysing and giving of information about the
creditworthiness of legal entities and natural persons which are self -
employed; (b) managing the client's receivables arising from sale of goods,
provision of services and consultations in relation to these; (c) export
financing on the basis of a purchase with a discount and without recourse to
long-term, still undue claims on secured financial instruments (forfeiting); (d)
purchase of due claims (under certain conditions); (e) discounting bills of
exchange issued based on the sale of goods or provision of services and (f)
issuing credit cover when performing foreign factoring.

Bangladesh is not a member of the UNIDROIT, The Convention on

International Factoring or UNCITRAL Convention on the Assignment of
Receivables in International Trade. There is neither a law on Factoring nor
special contract law provisions for Factoring in general. No special definition
of Factoring or Factoring types exists in the existing legislative framework.
Some of the financial institutions use discount invoice/bill against some local
transactions. There are some overseas companies (PrimaDollar and DS
Concept) offering export trade finance services, which are close to factoring.
It is understood that Bangladesh Bank is in the process of formulating a
policy on Factoring, particularly International Factoring and more specifically
Factoring for export trade.

Factoring can be seen as simply an assignment of accounts receivable,

which is possible in the majority if not all jurisdictions. Due to the lack of
understanding of the product in a developing environment and due to the lack
of developed case law and the tradition of p ublishing judicial decisions, this
sometimes creates uncertainties in relation to interpretation of contracts and
hence increases perceived risks and/or stifles creativity of business
practices.

Of late, many of the countries have started working on or hav e already

introduced specialised laws on Factoring. There are still some countries
where there are no special provisions on Factoring contracts or established
and published court practice that would compensate for this lack of clarity.

The Unidroit Convention (1988) does not require that the agreement
complies with specific formalities. These are left to be regulated by national
law. India passed The Factoring Regulations Act, 2011 while USA and some
other countries have law on Factoring and some have incor porated it in the
code of civil procedure. China regulates Factoring under law of contract and
some guidelines of court. Armenia does not have a special law on factoring,
but a chapter of the Civil Code (Chapter 48 - "Financing upon assignment of
monetary claim (Factoring)") is dedicated thereto. Some countries regulate
Factoring by Banking law or law of Non -Banking Financial Institutions.
Instead, in these countries the factoring framework constitutes only of
general contract law provisions. Many countries have either adopted a
specific code on factoring or their civil code contains some specific
provisions on factoring. A number of countries do not have specific contract
law rules on factoring. This is why parties there rely on the general
assignment provisions when drafting contracts.

Both Civil Code and Banking Code contain a definition of a contract of

financing against assignment of monetary claims (Factoring), which are quite
similar. The lack of clear definitions or long established court practice
increases legal risks thus, influencing on the price and competiveness of
factoring.

Both monetary claims-the payment under which it is already due (existing

claim) and the right to claim payment that will arise in the future (future
claim)-can be assigned to a Factoring company.

As regards the types of factoring, the rule indicates that the factoring
company becomes an owner of assigned claims, thus it should be entitled to
dispose of such claims including by negotiating/ restructuring their terms. No
conditions are stipulated in the law with respect to such disposal.
A third type of an approach that is somewhat of a middle ground approach is
represented by countries regulating factoring industry as a type of a financial
service but stopping short from subject ing it to extensive capital
requirements. This type of regulatory approach usually consists of
introducing regulators/supervisors authorised to issue operating licenses,
approve managers, review business plans and financial reports, control start -
up capital and conduct occasional on-sight inspections.

Bangladesh needs either a law or a rule to regulate Factoring for smooth

operation of Factoring companies. In a proper legal atmosphere, a good
environment for regulating factoring companies is usually subject to capital
adequacy rules and prudential risk -based supervision of their supervisors.
On the other hand, in jurisdictions where factoring is not at all considered a
regulated financial service, each factoring company has the liberty to operate
according to its own corporate rules and contractual relationships being
usually subject only to anti -money laundering laws.

Bangladesh should either make a law and or rule so that local and overseas
companies come forward with Factoring services to support both loca l and
import and export trade.

M S Siddiqui is a Legal Economist .

mssiddiqui2035@gmail.com