November 2018

The demand for receivables finance – as well as other forms of supply chain finance – has substantially risen over the past two to three decades: they reach places, and solve problems, that no other types of finance can. Sullivan & Worcester’s Geoffrey Wynne and Francesca Umicini-Clark, explain its rise in popularity and highlight the legal issues corporates should be aware of when setting up or entering into a receivables – or wider supply chain finance – programme

Supply chain finance (SCF) programmes have been around for at least three decades, but they have reached new levels of popularity in recent years, with growth rates of 20–30% 1.  A number of factors have contributed to their success.

The first was the financial crisis of 2008/2009, following which manufacturers, retailers and suppliers found traditional bank-supplied credit lines falling away. Corporates started to see the improved management of working capital as key to their survival, allowing them to access previously idle pools of liquidity in their supply chains, while procurement managers sought to lengthen supplier payment terms. Yet, at the same time, the crisis was also disrupting their suppliers, who could ill afford to wait longer for their invoices to be paid.

Buyer-led SCF solutions using bank-supplied finance were uniquely fitted to bridge this divide. The fact that this finance supported suppliers at a rate reflecting the risk of the better-rated entity in the supply chain – often, but not always, a multinational buyer – was the icing on the cake.

A newly open, and responsible, world of trade

Additional factors have helped advance SCF’s popularity. The significant rise in trade on open-account terms (SWIFT estimates that 80% of all trade is done this way today) rather than through letters of credit, for instance, made extension of supplier payment terms easier, but heightened risk for suppliers, who consequently welcomed the early payments offered by receivables programmes.

The increasing importance of corporate responsibility over the past decades also played its part, making companies prioritise long-term sustainability, choosing sustainable suppliers, dealing fairly with them and supporting them through times of vulnerability.

New offerings, new providers…

Today, SCF has matured into a complex market with a wide range of offerings, and new types of players have emerged. Traditionally, the global banks dominated, focussing on the “short tail” (the top 20–30%) of the supply chain finance market, typically covering more than 70% of overall procurement volume, and leaving the “long tail” of small to medium-sized suppliers to third-party providers.

More recently, this has changed, with third-party platform providers garnering a significant overall market share  ̶  the PwC/Supply Chain Finance Community SCF Barometer published in December 2017 shows fintech platform suppliers holding 14% of payables finance programmes. Banks in turn have extended their own business propositions to attract smaller players  ̶  often collaborating with third-party providers.

However, while corporates are rightly keen to take advantage of the benefits of both buyer- and supplier-led SCF structures, they must ensure they are well advised and that their agreements are legally watertight.

Due diligence is key

It is impossible to over-emphasise the importance of carrying out appropriate due diligence prior to entering into SCF programmes, such as receivables or payables finance – particularly where these are based on cross-border transactions. Without this, parties may not have the entitlements they believe they have, or may face difficulties enforcing them in foreign jurisdictions and, resulting in costly and lengthy legal disputes with uncertain outcomes.

Most of the questions that need to be asked make perfect sense to any business person. However, if the seller(s), buyer(s), the receivables purchased and their purchaser are all in different jurisdictions, many of them need to be answered with respect to more than one system of law and jurisdiction, adding layers of complexity to the task.

Know your documents’ effect – in all relevant jurisdictions

It is essential to know the likely effect of your documents, because advice will need to be sought from local legal counsel in all relevant jurisdictions, including:

  • the jurisdiction of incorporation of the receivables’ purchaser
  • the jurisdictions of the sellers assigning their rights
  • the jurisdiction of the buyers owing payments
  • the law governing the receivables where they were created (the law governing the sales contract)
  • the governing law and jurisdiction of any incorporated industry terms and
  • the governing law of the receivables purchase agreement.

The questions set out in Figures 1 to 4 below provide an impression of the range and complexity of the questions that need answering (a selection only – not exhaustive). Where there are multiple buying entities and multiple sellers in different jurisdictions, the task grows further still. And using an electronic platform in no way removes the need for due diligence  ̶̶  all the same questions need to be asked of the underlying documents uploaded onto the platform, plus the question of whether electronic communication works within a given jurisdiction.

Major risks

A major risk in a receivables context is the possibility of an imperfect assignment to the financier/assignee: where the right to receive the proceeds under a sales contract has not actually passed from the seller/assignor to the financier/assignee.

Where the documents rely on a true sale of a receivable (rather than on a security interest), it is crucial to take all required steps to effect this. The English courts, for instance, will enquire into the genuine intention of the parties to effect a sale (rather than a financing), and will construe all documents on their form (i.e. on what they purport to be doing) rather than on substance, although many courts in other jurisdictions will do the reverse. Title must be properly transferred, and the purported owner of the receivable must act as such. There are numerous further considerations, and there may of course be additional (potentially divergent) ones in a relevant foreign law or jurisdiction.

If a true sale has not taken place, the apparent receivables purchaser is not its owner. If the seller becomes insolvent, for example, it will form part of their estate, creating the risk that the buyer is forced to pay the same invoice twice (once to the seller’s administrators or liquidators, and again to the receivables purchaser) or, even worse, the receivables purchaser loses his claim. This is just one of a number of considerations relevant to SCF structures.

The underlying sale and purchase agreement may (and frequently does), place restrictions on a receivable’s assignment, in which case any purported assignment is not enforceable against the buyer/debtor, though it may still be against the seller/assignor. There may be a number of possible work-arounds to protect the receivables purchaser.

Where notice of assignment is required or recommended, there may be specific requirements concerning its form, the manner of service and the party serving it, depending on applicable law and jurisdiction. Interestingly, for example, it is currently questionable whether electronic notice is acceptable notice under English law in all circumstances.

“Good” vs “bad” debt

Corporates would also be well advised to ensure their SCF debt is classified favourably. Ever since ratings agency Moody opined on 16 December 2015 that reverse factoring arrangements put in place by British multinational facilities management and construction services company Carillion plc, and Spanish environment and energy group Abengoa S.A., had ‟debt-like features”, making them more akin to bank debt than trade receivables, corporates have been open to the risk that the debt owing under a receivables (or other SCF) programme is reclassified as ‟bad” financial or bank debt, rather than ‟good” trade debt.

This attracts different accounting treatment, which may adversely affect the financial ratios used to evaluate companies’ financial health, restricting their ability to access credit and even acting as an early indicator of potential bankruptcy. However, there are steps companies can take to lessen the likelihood of such reclassification, one of which is to ensure the exact same rights are assigned and no more: specifically, no additional corporate guarantee or security from the buyer.

Be forearmed: know your documents

Receivables finance and other forms of supply chain finance offer substantial benefits to trading companies. Their key feature is that they extend these benefits to both buyers and suppliers, allowing buyers to free up pools of liquidity, and keeping suppliers solvent and trading – supporting trade, and optimising working capital for both.

However, it is essential for all parties to be properly advised on the effect of documentation, both prior to entering a programme and on an ongoing basis, to ensure that there are no nasty surprises, and that they reap the anticipated fruits of those deals.

This must be done not just from an English law and jurisdiction point of view, but for all laws and jurisdictions relevant to the deal and the programme. Cutting corners will almost certainly prove a false economy and could prove very costly. Instead, competent banking and legal teams can work together to benefit all involved.

For more information, see Deutsche Bank’s whitepaper on Payables Finances

Figure 1: Questions to ask of the seller’s jurisdiction

  • Does the seller have the capacity to enter into the receivables purchase agreement (RPA), e.g. does it have authority? Is it validly incorporated in the seller’s jurisdiction?
  • Will the RPA be enforceable in the jurisdiction of incorporation of the seller?
  • Are there any local law formalities for execution e.g. stamp duty, translation and associated costs?
  • Will the assignment of receivables be effective and enforceable against third parties? 
  • At what point will the assignment take effect? (It may be different in this jurisdiction.)
  • Has the seller actually sold the receivables, and has there been a true sale in accordance with local law?
  • Are there any additional requirements for enforcing the assignment against the buyer?
  • Is there any local receivables-related legislation that needs to be referenced in the RPA?
  • What happens if the seller receives the proceeds of the purchased receivables in error: will the receivables purchaser have recourse or proprietary interest in the proceeds?
  • Does this jurisdiction recognise the concept of a trust, or is there some other form of work-around?
  • Is there a risk of recharacterisation as a secured financing? Should you be making any security searches or filings?
  • What happens in the case of the seller’s insolvency? Will those purchased receivables form part of the seller’s estate and be made available to other creditors? Will an insolvency practitioner try to set aside the transactions and claw the receivables back?

Figure 2: Questions to ask of the buyer’s jurisdiction

  • Can the receivables purchaser enforce its rights to receive payment on maturity in the buyer’s jurisdiction?
  • Will payment be for 100% even though the receivables have been purchased at a discount?
  • How does the receivables purchaser enforce its rights? Do they need to join the seller in any notification? What if the seller doesn’t co-operate? Are any specific local perfection steps required?
  • What happens if the buyer continues to pay the seller? Will he discharge his obligations under the underlying contract?
  • What is sufficient notice of assignment in the buyer’s jurisdiction? What requirements are there as to form? Who can serve effective notice, and how must it be delivered? Can it be delivered electronically? Can effective notice be given of multiple or future receivables assignments?
  • Is acknowledgment a requirement, or just advisable?
  • Can the buyer give a separate enforceable undertaking to pay to the receivables purchaser? Does it have capacity to do so, and will it be enforceable?

Figure 3: Questions to ask of the governing law of the receivables

  • Are there any restrictions on the assignment of receivables under that contract?
  • Are there requirements to comply with, such as consent or notice?

Figure 4: Questions to ask of the governing law of the receivables purchase agreement

  • Is it enforceable?
  • Does it give effect to a true sale?
  • Are there any requirements for enforcement against the buyer?


This article is based on a breakfast seminar talk, ‟Recapping Receivables” given on 24 May 2018 by Geoff Wynne, Partner and Head of Trade & Export Finance Group, and Francesca Umicini-Clark, Associate, in the London office of law firm Sullivan & Worcester UK LLP. See also Deutsche Bank’s white paper, "Payables finance: A guide to working capital optimisation"


 1 See European Commission case study summary at

Geoff Wynne

Partner and Head of Trade & Export Finance Group, Sullivan & Worcester UK LLP

Geoff Wynne

Francesca Umicini-Clark

Associate, Trade & Export Finance Group, Sullivan & Worcester UK LLP

Francesca Umicini-Clark

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