1 52 Singapore Academy of Law Journal (1993) BOOK DEBT FINANCING 1 Factoring is now a highly developed form of finance in England, yet there remains widespread ignorance both as to its basic purpose and as to the law and practice governing factoring operations. From a legal viewpoint factoring is both fascinating and complex, because it spans so many different branches of law and poses numerous questions on which the law is unclear. (Professor R M Goode in Foreword of Salinger, Factoring Law and Practice (Sweet & Maxwell, 1991) I. INTRODUCTION BOTH worldwide and in Singapore, the use of book debts as a form of financing has increased in importance in recent years. Locally, the move to upgrade local smaller enterprises has intensified: for example, the government recently announced the setting up of a Retail Promotion Centre to help retailers upgrade their businesses. 2 The use of sound financing methods is vital to any successful business management. For Singapore businesses, these methods include trade credit from suppliers, mortgage of real property, bank overdraft secured by chattel mortgage and inventory financing by way of floating charge. Another important method is the raising of finance through the sale (factoring) or mortgage or charge (accounts receivables financing) of book debts This article is adapted from part of a paper entitled Factoring and Forfaiting which the author jointly wrote with Professor E P Ellinger in conjunction with the Sixth Singapore Conference on International Business Law organised by the Faculty of Law, National University of Singapore on 9-11 September The conference papers will be published by the Faculty of Law, National University of Singapore in 1993 as a volume in the Singapore Conferences on International Business Law series. It also updates the anthor s article Legal Aspects of Factoring  2 MLJ ccxi. In particular, relevant provisions of the UNIDROIT Convention on International Factoring 1988 and the important case of E Pfeiffer-Weinlcellerei-Weineinkauf GmbH & Co v Arbuthnot Factors Ltd  1 WLR 150 are discussed. Many schemes to assist local enterprises have been introduced by the Economic Development Board (EDB). These are reported and elaborated on in Singapore Investment News, a monthly publication of EDB. Two examples are the Local Enterprise Finance Scheme (LEFS) through which over S$2.2 b in loans have been extended to local enterprises since 1976 and the Small Industry Technical Assistance Scheme (Sitas) whereby grants exceeding S$33 m have been extended to local companies for more than 2,300 projects since its inception in 1983 (See interview with Mr Lim Boon Heng, Sr Minister of State for Trade and Industry in Singapore Business, July 1992, 66). See Oditah, Legal Aspects of Receivables Financing (Sweet & Maxwell, 1991) at p 94 for the differences between a mortgage and charge of book debts. There are now more than 20 companies offering factoring services in Singapore. Some are credit companies set up specifically to provide factoring services, others are finance companies branching out into this non-traditional form of financing, and yet others are newly-formed divisions of banks. Factoring has also increased in popularity as a means of financing and managing export business in recent years. See How to
2 5 S.Ac.L.J. Book Debt Financing 53 Despite its importance in facilitating the transfer of goods and services worth millions of dollars and the fact that, in itself, it has grown into a multimillion industry, the legal regime supporting the raising of finance through the sale of and mortgage or charge of book debts is still not totally clear. This is so because businessmen have run ahead of lawyers. 4 They have creatively adapted a somewhat ancient legal device to suit modern requirements. 5 Some areas of law are still not definitively settled, as this article will show. Two forms of financing are available: factoring or sale of book debts 6 and use ECICS Factoring Scheme, Bankfin Journal 1985/86, More Electronic Firms Using Factoring, Credit Insurance, Singapore Manufacturer Sep 1988, A New Factor in the Local Lending Scene, Singapore Business, Oct 1989 and BOC to use DBS Factors services, Business Times, 17 Sep 92. Worldwide, export factoring business rose by 14% in 1991 whilst domestic factoring increased by 9%. In terms of turnover, country ranking in 1991 was (in descending order) Italy (80 companies), US (20 companies), UK (30 companies), Mexico (70 companies), Japan (43 companies), France (17 companies), Netherlands (5 companies), Germany (14 companies), S Korea (15 companies) and Sweden (20 companies). However, in some countries like the UK, the recession has taken its toll as volume of business done has declined, (see Financial Times Survey on Factoring on 1 April 92.) This is not an unusual phenomenon and is repeated in other areas such as shares financing and credit and charge card transactions. For shares financing, see Peter Chi Man Kwong & 2 Ors v Asia Commercial Bank & 20 Ors: Re Lin Securities (Pte)  2 MLJ 137 and Re City Securities Pte; Ho Mun-Tuke Don & Anor v Dresdner Bank Ors  2 MLJ 257 (both are decisions of Chao J.) The Court of Appeal upheld the learned judge s decision in Re City Securities Pte but on somewhat different grounds. For credit and charge card transactions, see Re Charge Card Services Ltd  3 All ER 289 and Customs and Excise Commissioners v Diners Club Ltd & Anor  2 All ER 385. Choses-in-action were traditionally assigned either at common law (common law assignment) or equity (equitable assignment). Common law only recognised assignment of a limited class of choses, that is, negotiable instruments, crown debts and assignments under special statutory enactments. Other choses such as company shares or rights arising from an insurance policy or annuity were assigned in equity. Historically, a distinction was also drawn between legal chosesin-action (the rights of which could only be enforced in a common law court such as contract debts, shares in a company and policies of insurance) and equitable choses-in-action (the rights of which could only be enforced in a court of chancery such as rights arising from a trust or legacy, or partnership shares). In Independent Automatic Sales Ltd v Knowles and Foster  3 All E R 27, Buckley J approved the following definition of book debts established a century earlier in Shipley v Marshall (1863) 14 C B N S 566:...a debt arising in the course of a trader s business which is of such a kind that it would ordinarily be entered in a trader s books whether in fact so entered or not... (at p 34) In the literature, there is debate as to what would actually qualify as a factoring transaction. Essentially, the debate is whether the definition should incorporate more than just the sale aspect to include other aspects such as the factor s assumption of risk, duty to monitor and collect debt, bearing of administrative burden etc. The US adopts a narrow definition:...a continuing arrangement between a factoring concern and the seller of goods or services on open account, pursuant to which the factor performs the following services with respect to the accounts receivable arising from sales of such goods and services:
3 54 Singapore Academy of Law Journal (1993) accounts receivables financing. The essential differences between the two are: FACTORING constitutes a sale either with or without recourse to the seller no registration is required 8 ACCOUNTS RECEIVABLES FINANCING constitutes a loan whereby the security interest created is that of a charge registration is required under the Companies Act if the client is an (1) Purchases all accounts receivable for immediate cash. (2) Maintains the ledgers and performs other book-keeping duties relating to such accounts receivable. (3) Collects the accounts receivable. (4) Assumes the losses which may arise from the customer s financial inability to pay (credit lossess) See Moore, Factoring-A Unique and Important Form of Financing and Service The Business Lawyer (1959) Vol XIV, No. 3. In the US, the sale of book debts is treated as a security transaction for purposes of UCC Article 9 (See n 73 below). Salinger has this definition: The purchase of debts (other than debts incurred for goods or services purchased by a debtor for his personal, family or domestic use and debts payable on long terms or by instalments) for the purpose of providing finance, or relieving the seller from administrative tasks or from bad debts or for any two or all of such purposes. (Factoring Law and Practice, Sweet & Maxwell, 1991, at p 2) Biscoe has this definition:...a continuing legal relationship between a financial institution...and a business concern...selling goods or providing services to trade customers...whereby the factor purchases the client s book debts either without or with recourse to the client, and in relation thereto controls the credit extended to customers and adminsters the sales ledger.. He goes on to say, it is apparent from this definition that credit factoring is concerned with debts due from traders as opposed to consumers, and has four functions: (a) sales ledger administration; (b) credit control, including collections; (c) credit protection (when without recourse to the client); (d) finance (Credit Factoring, Butterworths, 1975, p 3). The Unidroit Convention on International Factoring defines a factoring contract as one 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; and (c) notice of the assignment of the receivables is to be given to debtors. See notes 34 and 35 on a fuller description of the Convention. For a discussion of the differences between these two forms of financing, see Oditah, Legal Aspects of Receivables Financing (Sweet & Maxwell, 1991) and Salinger, Factoring: An Alternative? (1983) 1 Law & Tax Review 89. In practice, some companies register these documents as an act of caution. See Ellinger and Ho, Factoring and Forfaiting, paper presented at the Sixth Singapore Conference on International Business Law on 9-11 September 1992.
4 5 S.Ac.L.J. Book Debt Financing notice of the assignment is given to the debtor unless the factor takes the assignment with recourse, he bears the risk of bad debts the factor bears the responsibility of collecting the debt ad valorem stamp duty is payable on a legal assignment factor assumes administrative task of monitoring payment of debt incorporated body 9 the debtor is not notified the risk of bad debts remains with the client who continues to handle the collection process the client continues to bear this responsibility different tax rates apply client continues to bear this responsibility The focus of this article is on factoring as, of the two, it is a more common form of financing. II. TYPES OF ASSIGNMENTS There are two types of assignments: legal (or statutory) and equitable. In a legal assignment, legal interest is assigned. In an equitable assignment, equitable interest is assigned. For a statutory assignment to be validly effected, the requirements of section 4(6) of the Civil Law Act 10 must be complied with. They are: The assignment must be absolute; The assignment is of a debt or other legal chose in action ; 12 In Singapore, an unincorporated trader need not register his book debts This is unlike the position in the UK, where, under s 344(1) of the Insolvency Act 1986, an unincorporated trader s general assignment of his existing or future book debts or any class thereof is avoided as against his trustee in bankruptcy unless it has been registered as a bill of sale. See Ellinger and Ho, Factoring and Forfaiting, supra, note 8. Cap. 43 of the 1988 Rev. Ed. This provision is largely based on section 136(1) of the English Law of Property Act 1925 which in turn is a re-enactment of section 25(6) of the Judicature Act An absolute assignment is contrasted with (a) an assignment by way of charge; (b) an assignment of part of a debt; and (c) a conditional assignment (such as an assignment subject to the approval of a third party). See eg Durham Bros v Robertson  1 Q B 765. A mortgage of book debts is considered as an absolute assignment. This phrase was defined in Torkington v Magee to mean any debt or right which the common law looks on as not assignable by reason of its being a chose-in-action, but which a court of equity deals with as being assignable. The coverage is wide and includes both legal and equitable choses-in-action (n 5 above). The phrase has been held to include the benefit of a contract for the sale of a reversionary interest (Torkington v Magee  2 K.B. 427), rights to claim indefinite sums of money (Dawson v G N & City Ry  1 K B 260) and the right to a salary under a contract of service (Horwood v Millar s Timber and Trading Co Ltd[l9l7]
5 56 Singapore Academy of Law Journal (1993) The assignment must be in writing under the hand of the assignor; Express notice in writing must be given to the debtor. 13 The formal requirements of an equitable assignment, on the other hand, are more relaxed. An assignment that fails to satisfy the requirements of section 4(6) may still be valid as an equitable assignment. An equitable assignment need not be in writing although it is normally the case. No particular form of words is required provided the meaning is clear that the assignor intends the assignee to have the benefit of the debt. 14 The words must however indicate that more than a mere mandate or authority to receive the debt has been given to the assignee. 15 The efficacy of an equitable assignment is not affected by absence of notice to the debtor. Nevertheless, notice is normally given for three reasons: 1. to prevent the situation where the debtor pays the assigned debt to the assignor thereby obtaining a good discharge; 2. to prevent the debtor from setting up further equities against the assignee; to obtain priority, so far as is possible, over other competing interests. 17 An equitable assignment may be created by: 1. transfer or agreement to transfer. This is the most common method in the case of book debts; 2. declaration of trust by the assignor where he declares himself a trustee of the debt for the intended assignee; 3. direction to debtor to make payment to assignee. For this to be effective, it must either be given pursuant to prior agreement between the assignor and assignee, or communicated to the assignee subsequently. In order to avoid payment of stamp duty, agreements are usually structured K B 305. On the other hand, the following choses-in-action have been held not to fall under the Act: the equity of redemption in a mortgage debt already assigned by way of mortgage (Cronk v McManus (1892) 8 T L R 449), the right to sue for damages for a breach of contract already committed (May v Lane (1894) 64 L J Q B 336) and the benefit of a contract to lend money (Western Wagon and Property Co v West  1 Ch 271). Notice need not be given by the assignor, nor need it be given at the time of the assignment. It may be given by the assignee and is effective so long as it is given before action is brought. No particular form of words is needed but the notice must clearly inform the debtor to pay a third party as assignee and not merely as agent for the creditor. See eg Walker v Bradford Old Bank (1884) 12 Q B D 511. Smith v SS Zigurds Owners  A C 309. Note the important case of William Brandt Sons & Co v Dunlop Rubber Co  A C 454. See Part A(III)(2) below. The time when the debtor receives notice of the assignment is when the respective rights of debtor and assignee are fixed. See Part B below.
6 5 S.Ac.L.J. Book Debt Financing 57 in such a way so as to constitute the assignments equitable ones. The point is to be able to argue that no document falling within the Stamp Duties Act exists. 18 A Singapore decision on equitable assignment is Interschiff Schiffahrtsagentur GmbH. v Southern Star Shipping & Trading Pte. Ltd. 19 In that case, Lai J. decided, as an alternative ground, that there was an equitable assignment of a debt. The debtor received notification of the assignment from the assignor. Despite this notification, he nevertheless paid the assignor who subsequently became insolvent. The debtor was held liable to pay once more to the assignee. In the process, the learned judge construed the effect of two telexes as tantamounting to an equitable assignment. 20 The House of Lords decision in William Brandt s Sons & Co. v The Dunlop Rubber Co. 21 was cited and the description of what constitutes an equitable assignment was adopted:...the document does not on the face of it purport to be an assignment nor use the language of an assignment. An equitable assignment does not always take that form. It may be addressed to the debtor. It may be couched in the language of command. It may be a more courteous request. It may assume the form of mere permission. The language is immaterial if the meaning is clear. All that is necessary is that the debtor should be given to understand that the debt has been made over by the creditor to some third person. If the debtor disregards such a notice, he does so at his peril. If the assignment be for valuable consideration and communicated to the third person, it cannot be revoked by the creditor or safely disregarded by the debtor In contrast, another local decision on assignment that leaned towards the opposite conclusion is American Express International Banking Corporation v United Bearings and Machinery Pte Ltd. 23 In that case, the Court of Appeal held that the content of several letters written by the plaintiff to a bank did Two types of agreements are commonly used. The first is a facultative agreement whereby the client is bound by the agreement to offer for sale to the factor every debt arising within a defined period whilst the factor is under no obligation to accept the client s offer of the debt. In effect, the client makes a standing offer. No stamp duty is attracted as there is no agreement binding on both parties in the first place. The second type of agreement is of the whole turnover type whereby the client agrees to sell and the factor agrees to purchase all or defined debts of the clients within a certain defined period. As this agreement relates essentially to future debts, no agreement binding in law arises. Thus stamp duty is again avoided. However equity ensures that the assignment of these debts will take place. Equity mandates that that which ought to be done is done so that ownership of future debts (as choses) can be transferred by an earlier agreement. When consideration passes under this agreement (as when the factor pays or gives credit to the client on the first debt arising), the agreement is effective to assign debts as they come into existence without requiring any further act.  1 M L J 342. Ibid, at p 344.  A C 454. Supra, n 19 at p 345.  2 M L J 245.
7 58 Singapore Academy of Law Journal (1993) not amount to an assignment and were merely instructions to the Bank...and no more. What are the legal consequences of adopting either a legal or equitable assignment to transact one s business? They are firstly, payment of ad valorem stamp duty: legal or statutory assignments are subject to stamp duty whilst equitable assignments are not as there is usually no document setting out the terms of the assignment which is taxable; 24 enforcement procedures: a legal or statutory assignee can sue in his own name whilst an equitable assignee has to take proceedings to join the assign or as plaintiff or as defendant and lastly, priority contests: legal interest is transferred in a legal or statutory assignment whilst equitable interest is transferred in an equitable assignment. III. PROBLEM AREAS Several issues have given rise to uncertainty in this area of the law. These issues have defied clear and easy answers. They can be broadly divided into two areas; namely, problems arising from the legal relationship between assignor(seller) and debtor(buyer) which impact on the assignee and problems involving competing claims and priority situations which may arise between assignee(factor) and third parties such as a romalpa seller. A. Problems arising from the legal relationship between Assignor and Debtor which impact on the Assignee 1. Effect of term in underlying contract between assignor and debtor prohibiting assignment of debt If the contract between assignor and debtor ( underlying contract ) contains a clause prohibiting assignment of the resultant debt and the assignor nevertheless assigns the debt, can the debtor resist an action by the assignee (factor) to enforce payment of the debt? Would it make any difference if the assignee knew of the clause when he took the assignment? 25 Prima facie, it may be argued that if the debtor makes clear that his 24. See section 4 of the Stamp Duties Act (Cap. 312, Singapore Statutes, 1985 Rev Ed.). From a practitioner s viewpoint, this is an important consideration. He will therefore try to structure the transactions in such a way as not to attract stamp duty. This is achieved by using facultative agreements or whole turnover agreements. See supra, n 18 and Salinger, Factoring Law and Practice (Sweet & Maxwell, 1991) at p The solution to this difficult problem varies in different jurisdictions. In the U.S., Article 9-318(4) the Uniform Commercial Code (U C C) renders such a clause ineffective even if the assignee took the assignment with knowledge of it. On the other hand, the German Civil Code recognises the legitimacy of these clauses although in practice, their efficacy have been cut down. See Salinger, Tolley s Factoring: A Guide to Factoring Practice and Law, at p. 132 (1984, Toley Publishing Co. Ltd.). In Australia, the approach is to determine the effect of the term by looking at the subject matter of the assignment, the circumstances of the parties and ordinary principles of construction. See Rogers, The Unidroit Convention On International Factoring Journal of Banking and Finance Law and Practice  June 100.
8 5 S.Ac.L.J. Book Debt Financing 59 undertaking to pay is made only to the assignor, that is to say, it is of a personal nature, there are no grounds to force a variation of this contractual undertaking upon him. Any variation of contract should be mutual. 26 A prohibition clause is capable of four interpretations, the consequences of which are now set out in ascending order of severity. First, as a mere personal undertaking by the assignor to the debtor not to assign, breach of which exposes the assignor to a claim in damages but which does not prevent the assignee from recovering the debt from the debtor, that is, the assignment is still valid. Secondly, it is void between assignee and debtor, but does not prevent the assignee from having rights against the assignor. Thirdly, it renders the assignment void as between assignee and debtor as well as between assignor and assignee. Lastly, it entitles the debtor not merely to claim damages for breach of contract against the assignor but also to terminate the underlying contract between assignor and debtor. 27 As between assignee and debtor, the judicial approach is to look at the prohibition clause and interpret it according to its terms. There is limited case-law on this point. In Helstan Securities Ltd. v Hertfordshire County Council, 28 a 1978 decision of Croom- Johnson J., it was held that a clause stating that the (assignor) shall not assign the contract or any part thereof or any benefit or interest therein or thereunder without the written consent of the (debtor) enabled the debtor to successfully resist an action by the assignee to recover the debt from him. 29 The debtor was the defendant council for whom Renhold Road Surfacing Limited. ( Renholds ) had undertaken to execute certain roadworks. The contract, in addition to restricting sub-letting of the contract works, contained the above-mentioned clause. In breach of it, Renholds, which was in financial difficulties, assigned to the plaintiffs the sum of 46,437 alleged to be owed by the defendant council for works that had been carried out. The defendant council refused to pay the plaintiffs. When sued, they relied on the prohibition clause against assignment. The judge held that the prohibition clause invalidated the assignment so that the defendant need not pay the debt to the plaintiff assignees. The judge did not adopt a restrictive interpretation of the The debtor may wish to make this undertaking for two reasons: first, a debtor who overlooks receipt of notice of assignment and pays the assignor does not get a good discharge and may be compelled to pay once more to the assignee. The debtor may not wish to suffer such a penalty; and secondly, the debtor s substantive rights may be affected in that any set-offs he may have against the assignor, which he would be able to enforce personally against the assignor, may not be available to him against the assignee. Two principles are in contention. The first is based on the strict enforcement of contractual undertakings whilst the second recognises assignment as an exception to the privity rule and the economic function of bookdebt financing. The latter consideration was uppermost in the minds of the drafters of the UCC when they decided on the position under Article 9-318(4). For a fuller discussion of these interpretations, see Goode, Inalienable Rights  M.L.R. 553 at p. 554 and Allcock, Restrictions On The Assignment of Contractual Rights  C L J 328 at p 340.  3 All E R 262. In that case, the assignee had sued the debtor who had paid neither assignee nor assignor. The assignee, on the other hand, had made payment to the assignor.
9 60 Singapore Academy of Law Journal (1993) clause as was urged by the plaintiff s counsel. After a quick review of no less than seven cases, he commented that if the reported cases are not a sure guide, one is thrown back in this case on the agreement. 30 Croom-Johnson J. also said that there was no injustice in expecting the purchaser of debts to make enquiries before he buys a debt as to the likelihood of the debtor having the money with which to pay, or the prospect of a counterclaim which would extinguish the debt, or the existence of a prohibitory condition such as the present. 31 Such an expectation does not comport with reality where the factor probably has to deal with many clients. In any case, it has been argued that this approach is supported by the outcome of another situation where the rights between assignee and debtor come into focus: this is the case where the debtor, in the underlying contract, undertakes not to raise any equities he may have vis-a-vis the assignor, against the assignee. The law is that such an undertaking is binding on the debtor so that the assignee, although not a party to the contract, may avail himself of it. 32 Helstan involved a suit between assignee and debtor. What about the effect of the clause as between assignor and assignee? It is one thing to say that the assignee cannot recover the debt from the debtor; it is altogether a different thing to say that, if the debtor pays the assignor, the assignee cannot recover payment from the assignor. In short, is the assignment also void as between assignor and assignee? The answer is critical if the debtor makes payment to the assignor, who becomes insolvent or refuses to hand over the monies to the assignee. Such an assignor (or rather his creditors) would be doubly enriched if he has already received payment from the assignee as would usually be the case. To the writer s knowledge, there are no reported decisions on this point. Croom-Johnson J in Helstan suggested that such an assignment may also be void so that the assignee would not have any legal right to demand a return of the monies from the assignor. In practice, it is common for the assignee to provide in the factoring agreement that in such an event occurring, the assignor holds the monies on trust for the assignee. 33 In the case of international factoring 34, Article 6 of the 1988 Unidroit Supra, n 28 at p 266. This requirement will no doubt cause difficulty and concern to factors who operate in bulk on a commercial basis. In re Blakely Ordinance Co Ex parte New Zealand Baning Corporatio n(1867) L R Ch App 154 and Phoenix Assuranc e Co Ltd v Earl s Court Ltd(1913) 30 T L R 50. See Biscoe, Law and Practice of Credit Factoring (Butterworths, 1975) at p 116. The analogy may not be entirely accurate. In the case where the debtor agrees not to raise equities against the assignee, he personally assumes that disability, even though it is against a third party. There is no injustice when this clause is invoked against him. However, in the case of a prohibitory clause, the law allows the debtor to extract a benefit by way of promise by the assignor (with whom he has privity of contract) - that the assignor would not assign the debt - from a third party, the assignee. It is always safer for the assignee to provide in the assignment agreement that if monies are paid to the assignor for whatever reasons, the assignor holds the monies on trust for the assignee.
10 5 S.Ac.L.J. Book Debt Financing 61 Convention on Factoring provides that a prohibition clause will not bind an assignee. 35 The rights of the debtor against the assignor for breach of the undertaking not to assign are also preserved. In view of the uncertain legal position in some jurisdictions, the clear approach in others, and the fluid approach in yet some others, it is understandable that Article 6 was the most contentious at the drafting stage of the Convention. 2. Countervailing Rights of Debtor Against Assignor An assignee obtains no better rights than his assignor. His title to the subject of assignment is a derivative one. In the case of book debts, the general rule is that the assignee can be in no better position as regards his right to recover from the debtor than the debtor was at the time when the debtor receives notice of assignment. As assignor, he takes subject to equities. 36 The term equities here does not refer to the nature of the interest, that is, equitable interests, but to equitable claims, defences and remedies. The cardinal principle is that the debtor should not be prejudiced by the assignment. James L.J. in Roxburgh v Cox explains as follows: Now an assignee of a chose in action, according to my view of the law, takes subject to all rights of set-off and other defences which were available against the assignor, subject only to this exception, that after notice of an asignment of a chose in action the debtor cannot by payment or otherwise do anything to take away or diminish the rights of the assignee as they stood at the time of the notice. 37 There are two aspects to this principle. The first is that the assignee takes the debt subject to all defences which the debtor could have availed himself against the assignor arising from the underlying contract or a closelyconnected contract, and the second is that the assignee takes the debt subject to equities existing at the time the debtor receives notice of the assignment Under the UNIDROIT Convention, an international factoring transaction would be one where the debts to be factored arise from sales between persons whose places of business are in different states and either both these states and the state of the factor are contracting states or when both the sale contract and the factoring contract are governed by the law of a contracting state. This Convention was adopted on 28 May 1988 at a Diplomatic Conference in Ottawa which was attended by 59 countries. Its finalisation climaxed 14 years of work by the International Institute for the Unification of Private Law (UNIDROIT), an inter-governmental organisation, set up in 1926, which is based in Rome. As of Sep 91, there were 7 countries which had acceded to the Convention which was not yet in force. To the writer s knowledge, Singapore has not acceded to the Convention. Article 6 was one of the more contentious clauses and the present position represents a compromise. It is the only Article in the Convention that allows Contracting States to provide that they would not be bound by it. Section 4(6) Civil Law Act. (1881) 17 Ch 520 at p 526. This principle is embodied in Article 9 of the Unidroit Convention. These two limbs are based on the principle of equitable set-off. Other set-offs usually considered in the literature are statutory or independent set-offs, contractual set-offs (Garnet v McKewan (1872) 27 L T 560) and set-offs in insolvency (British Eagle International Airlines Ltd v Compangnie Nationale Air France  1 W L R 758 and National Westminster Bank Ltd v Halesowen Presswork and Assemblies Ltd  A C 785. The topic of set-offs is a complex one and is outside the purview of this article.
11 62 Singapore Academy of Law Journal (1993) The topic of set-off is a comprehensive and difficult one. 39 For present purposes, our focus is a narrow one, confined to the situation of an assignment of book debts. Two situations are contemplated: if the set-off arises from the underlying contract or a closely-connected contract (as in the case of damages for defective goods or late delivery), there is no time limitation. However, if the set off arises from some other contract, then it must have accrued due before notice of the assignment is received by the debtor. 40 Templeman J. in Business Computer s Ltd. v Anglo-African Ltd. framed the principle as follows: The result of the relevant authorities is that a debt which accrues due before notice of an assignment is received, whether or not it is payable before that date, or a debt which arises out of the same contract as that which gives rise to the assigned debt, or is closely connected with that contract, may be set off against the assignee. But a debt which is neither accrued nor connected may not be set off even though it arises from a contract made before the assignment. 41 The other situation is that of a set-off arising from the underlying contract of a closely connected contact. Lord Hobhouse in an earlier Privy Council decision of Newfoundlan d Govt. v Newfoundlan d Rly. Co.put it thus: (Set off is possible) not merely if the (claim) arises out of the same contract but if they flow out of and are inseparably connected with the dealings and transactions which gave rise to the subject of assignment. 42 The problem area here is as to what constitutes a closely connected contract or put another way, a debt which is closely-connected with the underlying contract? Cases that have dealt with this term are in areas other than assignment of book debts. 43 The problem is not acute if the assignor is solvent as the assignee may seek an indemnity from the assignor for any shortfall in payment from the debtor. It is when the assignor is insolvent that such a right of set-off becomes important to the assignee. It is likely that the assignee will find that his retention (of normally 20% or thereabouts) of the purchase price of the assigned debts is not sufficient to cover his claim against the assignor based on the indemnity. Some relevant assignment cases See eg Wood, English & International Set-of f(1989), Derham, Set-off and Goode, Legal Problems of Credit and Security (2nd ed). See eg Re Pinto Leite and Nephew, Ex parts Des Olivaes  1 Ch 221.  2 All E R 741 at p 748. (1881) 13 App Cas 199. For a review of the cases, see Derham, n 39 above, pp and Wood, n 39 above at pp Examples of closely-connected transactions include sale and lease-back contracts, building contracts, divisible letters of credit, agreements for lease and lease-back and a series of related contracts such as consecutive charterparties.
12 5 S.Ac.L.J. Book Debt Financing 63 are Young v Kitchen 44, Newfoundland Govt v Newfoundland Rly Co 45 (involving the same underlying contract), Business Computers Ltd v Anglo-African Leasing Ltd 46 (involving separate contracts) and The Raven 47 (involving a closely-connected contract). Two other noteworthy points are firstly, that the equities which a debtor may raise against the assignee are limited in value to the amount of the assigned debt. This underscores the fact that these equities are raised in defence as a set-off. Any excess must be recovered from the assignor; 48 and secondly, that a provision in the underlying contract that the debtor will not raise claims or defences against an assignee is enforceable by the assignee Assignee s Liability to Debtor It is clear that the assignee, as a stranger to the underlying contract, may not be sued by the debtor for breach of any terms in the contract. Less clear, however, is the question of whether the assignee is liable to return monies paid when there has been a total failure of consideration of the underlying contract, for example, if the goods are never supplied or are lawfully rejected. The answer to this question is important if the factor pays to the client the amount represented in the invoice; the client becomes insolvent or refuses to repay the debtor; and the amount retained by the factor is insufficient to cover his recourse against the client for breach of warranty. It does not appear that this point has been settled. The debtor may seek to rely on the doctrine of total failure of consideration. However, arguments may be raised against allowing the debtor to have rights of recovery against the assignee. First, the quasi-contractual remedy of recovery of money paid on a total failure of consideration seems to be confined to cases where there has been either an actual or purported contract which has become ineffective. Secondly, in principle, there are no strong grounds to expose an assignee to claims of this kind. Thirdly, it is a general principle of assignment law that the debtor should neither be advantaged nor disadvantaged by the assignment. To allow him recovery against the assignee would be to give him a remedy against two parties, assignor and assignee, when in the absence of any assignment his claim would be against the assignor alone. 50 There appears to be no reported cases in which recovery has been allowed. A basis on which the debtor may rely is the doctrine of money paid on a mistake of fact. 51 In (1878) 3 Ex D 127. Supra, n 42. Supra n 41.  2 Q B 266. Young v Kitchen (1878) 3 Ex D 127 at p 131. Re Blakely Ordinance Co. (1867) 3 Ch App 154 per Rollit L J at pp Goode, Some Aspects of Factoring II - The Factor and the Debtor (1982) J B L 338 at p 339. It is an established principle that money paid on a mistake of fact is recoverable in most circumstances. See Barclays Bank Ltd v W J Simms Son & Cooke  Q B 677.
13 64 Singapore Academy of Law Journal (1993) this instance, the factor may rebut a claim for restitution based on this ground by arguing that he has changed his position. Here again, there does not appear to be any authority for this approach. 52 What is the position if there is a positive balance in the factor s favour in his running account with the debtor? Can he merely debit the account in the amount claimed in the debtor s favour? Unlike the situation discussed earlier, the factor in this situation will not be out of pocket: he merely effects a book entry. But the question that arises is whether, by so doing, he is favouring an unsecured creditor of the client s (assuming the client is insolvent) to the detriment of other creditors? It has been argued that the debtor has grounds for recovery either on the basis of payment made under a mistake of fact, or on the basis that it is the factor who, in the first place, authorises the creation of the credit balance by the client issuing a credit note to the debtor. Therefore in making a refund to (the debtor) in respect of the overpayment, the (assignee) is not acting voluntarily or officiously but is discharging a legal liability for which he is entitled to recoupment from (the assignor). 53 In the case of international factoring, the Unidroit Convention states the basic rule that non-performance or defective or late performance of the contract of sale of goods shall not by itself entitle the debtor to recover a sum paid by the debtor to the factor if the debtor has a right to recover that sum from the supplier. Limited rights are then set out. 54 B. Competing Claims and Priorities 55 Only one contest, which is becoming common, will be highlighted. This is the contest between the factor and a Romalpa Seller. It has become common practice to insert reservation of title ( romalpa ) clauses in sales contracts Goff and Jones, The Law of Restitution (3rd ed, 1986), pp 113 and 114. Goode, supra, n 50, at p 341. See also Salinger, supra, n 20, at p 197 and Factoring: Are the True Benefits Still to Come The Company Lawyer Vol 2 No at p 246. A unique feature of the factoring transaction is that the relationships between the factor and client, and between the client and debtor are usually continuing ones where there is a series of underlying contracts for the sale of goods or provision of services between client and debtor. There are therefore running accounts between factor and client, client and debtor, and factor and debtor. Adjustments in the account between client and debtor is common-place eg for defective or late deliveries. This is effected by the issuance of credit notes by client to debtor. When this is done, the balance in amount between factor and debtor is also adjusted. Occasionally, a credit balance in favour of the debtor may arise if the amount of the credit note is a large one: in other words, money is due to the debtor from the factor who will of course recoup the amount from the client by adjusting the balance in their mutual account (assuming he is solvent and all goes well). As this will affect the amount the debtor is liable to pay to the factor, it is normal that the factor would insert a clause in the factoring agreement for the factor s consent to be obtained before these notes are issued, or at least, for the factor to be informed of the issuance of these notes. Article 10. Para 1 states the basic rule and para 2 sets out the limited situations where recovery by the debtor against the factor is permitted. The Unidroit Convention does not address this topic. The drafters felt that the wide variation in national laws would make it virtually impossible to draft any rules that would find general acceptance. It can be lamented that the omission of this important topic, particularly from the factor s point of view, has reduced the Convention s usefulness. However, the counterpoint to that is that, but for the omission of these controversial areas, the Convention may not have found general acceptance in the first place.
14 5 S.Ac.L.J. Book Debt Financing 65 Although the judicial trend is to cut down the effect of these clauses 56, and initial uncertainty over the effect ofthese clauses is clearer now after several decisions 57, difficulties remain. An important outstanding issue is the contest between a romalpa seller and a factor in respect of monies representing the purchase price of goods covered by a romalpa clause which are sold to a subpurchaser and which have been assigned to the factor. These monies may still be in the hands of the sub-purchaser (as unpaid purchase price) or are already paid to the factor. The romalpa seller claims under the romalpa clause and the factor claims under the assignment. Who wins? This contest is an intriguing one and has attracted much academic comment. 58 Some of these doubts were cleared (at least for now until a higher court makes its pronouncement), in the recent case of E Pfeiffer- Weinkellerei-Weineinkauf G m b H & Co. v Arbuthnot Factors Ltd. 59. In that case, the plaintiff (romalpa seller) was a German company which carried on business as a wine exporter. It sold wine to an English importer, on terms which included a property reservation clause. The clause provided that the property in the wine, both legal and equitable, was to remain in the plaintiff until the importer had fully paid for it, but that the importer could sell the wine so long as there was no delay in payment. The contract also provided that all claims that the importer had in respect of the sale of the wine to subpurchasers amounting to S s [the importer s] obligations to the plaintiff were to be passed to the plaintiff, and on demand [the importer] was to notify the assignment of any such claim and to provide the plaintiff with all information with respect to it. It was further provided that monies arising For example, see In Re Bond Worth  3 W L R 629; Borden v Scottish Timber Products  W L R 672; Re Peachdart Ltd  3 All E R 204; Re Andrabell Ltd  3 All E R 407 and Pfeiffer Weinkellerei-Weineinkauf v Arbuthnot Factors Ltd  1 W L R 150. The latest decision highlighting this trend is Re Weldtech Ltd  B C C 16. On the other hand, in respect of one particular situation, that is, the all maonies clause, two cases have breathed hope as to the efficacy of relying on a Romalpa clause. They are the Court of Appeal decision of Clough Mill v Martin  3 All E R 982 and the House of Lords decision of Armour v Thyssen Edelstahlwerke AG  3 W L R 810. See eg Hicks, Retention of Title-Latest Developments  JBL 398 and Spencer, the Commercial Realities Of Reservation of Title Clauses  JBL 220. What has become clear is judicial endorsement of any particular clause will depend on several factors including the nature of the claim (purchase price, original goods, mixed goods etc), the precise wording of the romalpa clause in question and the nature of the relationship between the romalpa seller and romalpa buyer, in particular, whether or not there is a fiduciary relationship. See eg Goode, The Right To Trace And Its Impact In Commercial Transactions - I (1976) 92 L Q R 360; Goode, Some Aspects of Factoring - II The Factor and the Debtor (1982) J B L 338; McLaughlan, Priorities-Equitable Tracing Rights and Assignments of Bok Debts (1980) 96 L Q R 90; Salinger, Factoring: Are the True Benefits Still To Come? The Company Lawyer (1981) Vol 2 No 6, 243 and Whitehouse, Romalpa Clauses and Factoring (1986) L S Gaz  1 W L R 150. For a detailed account and analysis of the case, see McCormack  L M C L Q. See also Lawson  L M C L Q 141 The decision has been followed by Mummery J in Compaq Computer Ltd v The Abercorn Group Ltd  BCC 484..
15 66 Singapore Academy of Law Journal (1993) from cash sales were to be kept separately. 60 The English importer sold the wine to sub-purchasers on credit terms. He then entered into a factoring agreement with the defendant (factor) under which it assigned to the defendant all debts owed to it by the sub-purchasers. The sub-purchasers paid over the purchase price of the wine to the defendant. The plaintiff (romalpa seller) sought a court ruling to direct the defendant (factor) to hand over these monies to it. It was held that the reservation clause constituted an agreement by the importer to assign to the plaintiff future book debts owed by sub-purchasers to the importer up to the amount of any outstanding indebtedness owed by the importer. Phillips J held that this amounted in effect to an equitable assignment of the debts. As such, the agreement operated to create a charge in favour of the plaintiff over book debts owed to the importer and should have been registered under section 95(e) of the UK Companies Act. This, the plaintiff had failed to do. What if registration had been effected? Would the romalpa seller have won? Positing this possiblity, the court further held that even though the defendant had effected a statutory assignment of the debts so that it had acquired a legal interest in them, the question of priority between the plaintiff and defendant had to be determined on the basis that the assignment of these debts had been effected in equity. Section 136 of the UK Law of Property Act was merely procedural in effect (enabling the assignee of debts to sue on his own without having to join the assignor) and did not affect the substantive rights of the parties. Therefore, the priority point accorded to the assignee would be as if he did not effect a statutory assignment, that is to say, the section preserved prior equities on the basis as if the statutory assignment was an equitable one. 62 In a contest such as this, it was held that the rule in Dearle v Hall applied so that the first to give notice to the debtor of his interest would prevail. Despite the fact that the plaintiff s interest had been created first in time, it was displaced by the defendant s later interest. Of course, it was important that when the defendant s interest was created, the court was satisfied that he did not know of the plaintiff s interest. 63 On the facts, notice had been given first by the defendant (factor) and he was entitled to retain the monies in question The relevant clause read: All claims that [the importer] gets from the sale...with all rights including his profit amounting to his obligation towards [the plaintiff] will be passed on to [the plaintiff]. On demand [the importer] is obliged to notify the assignment of the claim to give [the plaintiff] in [writing] all necessary information concerning the assertion of [the plaintiff s] claims...in case of cash sales, the money that has come from a third person immediately becomes [the plaintiff s]...this money has to be separated from other money, it must be booked correspondingly, and must be administered until called for. Our section 4 Civil Law Act (Cap 43, Singapore Statute 1988 ed) is largely based on this section. The relevant words in the section are:...subject to all equities which would have been entitled to priority over the right of the assigned under the law as it existed before the twenty-third of July Supra, n 59 at p 154.
16 5 S.Ac.L.J. Book Debt Financing 67 Two other important points which Philips J. did not have to decide were: firstly, did it make any difference that the monies had already been paid to the defendant (factor)? Secondly, would the rule in Dearle v Hall apply if the contest was between an equitable tracing right and an equitable assignment? On the first point, Phillips J. was relieved that he did not have to decide it which he said (was) not an easy one. 64 He commented however that Taylor v Blakelock 65 favoured the assignee-factor in a situation like that. 66 The second point is one that has received greater academic comment, with the views being divided. Some like Professor Goode have argued that the rule should apply. 67 Others, in particular, D.W. Maclaughlan, have argued strenuously that the rule should not apply. 68 IV. CONCLUSION Factoring originated in the United States. In the US, the law as enunciated in the Uniform Commercial Code is clear in many respects. 69 In other parts of the common law world, however, where the law on factoring has developed piece-meal, important gaps remain. 70 Legal uncertainties in commercial settings can be unsettling. As the implications of the Diamond Report 71 are discussed in the UK, it will do well for us in Singapore to follow the proceedings closely. It is time that the part of the Crowther Committee Report which recommended a revamp of personal property security law be adopted. 72 It is Supra, n 59 at p 163. (1886) 32 Ch D 560. See McCormack, Effective Reservation of Title and Priorities (1990) J B L Jul 314 at p 323 for a fuller discussion. See eg Goode, Right to Trace and its Impact in Commercial Transactions (1976) 92 L Q R 360 and Legal Problems of Credit and Security (2nd ed, 1988) at p 121 and Commercial Law at p 873. McLaughlan, Priorities - Equitable Tracing Rights and Assignments of Book Debts (1980) 96 L Q R 90. For a fuller and recent review of these arguments, see McCormack, supra, n 66 at p 320. See also Salinger, Factoring Law and Practice, p 172. The UCC takes a pragmatic, functional and situational approach where conceptual difficulties are kept to a minimum. In some Canadian and Australian states, adaptations of the U C C have been enacted. See eg Ontario s Personal Property Security Act, 1989 which came into effect on 10 October Following the publication of the Crowther Committee Report in 1971, Professor Aubrey Diamond was commissioned by the UK Department of Trade and Industry to write a Review of Security Interests in Property Other Than Land. The Report was published in It highlighted the major weaknesses of the current system of credit and security in the UK (Singapore has many of these weaknesses) and joined existing calls for changes. Essentially, he advocated for an adaptation of Article 9 of the U C C to be introduced in the UK. Consumer Credit Report of the Committee (the Crowther Committee) Cmnd (1971). The other major recommendation to revamp the law on consumer credit has been largely adopted in the form of the Consumer Credit Act 1974.
17 68 Singapore Academy of Law Journal (1993) hoped that the law on assignment will also be included in such a review. 73 Much academic thought and discussion have taken place. 74 What is required now is legislative will. HO PENG KEE* * Both Article 9 of the U C C and the Canadian Uniform Personal Property Security Act apply not only to transactions creating security interests, including those in debts, but also to sales or assignments of accounts. The Official Comment to Section explains thus: Commercial financing on the basis of accounts...is often so conducted that the distinction between a security transfer and a sale is blurred, and a sale of such property is therefore covered...whether intended for security or not...the buyer then is treated as a secured party, and his interest as a security interest. For example, see Goode, The Modernisation of Personal Property Security Law  L Q R Vol 100, 234; Goode, Personal Property Security Law: the Time for Reform  J B L 79; Davis, The Reform of Personal Property Security Law: Can Article 9 of the US U C C be a Precedent? I C L Q Vol 37, 465; Lee C Y, Towards New Consumer Credit Legislation in Singapore (1979) 21 Mal L R 266 and Insolvency Law and Practice Report (the Cork Committee) Cmnd 8558 (1982). LL. B (Sing.), LL. M (Harv.), Advocate & Solicitor, Supreme Court of Singapore, Senior Lecturer, Faculty of Law, National University of Singapore.
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PRE-LEGAL & LEGAL PROCEDURES FOR DEBT RECOVERY (SA) M A R S H A L L S Solicitors Level 10 111 Gawler Place Adelaide 5000 Telephone: (08) 8213 4000 GPO Box 648 Adelaide 5001 Facsimile: (08) 8213 4099 Email
Commercial Terms of Business Agreement The purpose of this document is to set out our professional relationship and the services we will provide to you. This is our standard client agreement upon which
Legal Costs, Cost Agreements, Disclosure & Billing under the The Legal Profession Uniform Law NSW Law Society Seminar John Fleming Solicitor (Legal Costs Unit) Law Society of NSW Tel: (02) 9926 0373 Email:
Bill No. 41/02 Payment and Settlement Systems (Finality and Netting) Bill Read the first time on 31st October 02. PAYMENT AND SETTLEMENT SYSTEMS (FINALITY AND NETTING) ACT 02 (No. of 02) ARRANGEMENT OF
Personal Property Title Insurance (PPT-1) Any notice of claim and any other notice or statement in writing required to be given to the Company under this Policy must be given to the Company at the address
Glossary of terms Administration Order a) A Court order placing the company that is, or is likely to become, unable to pay its debts under the control of an administrator following an application by, inter
Session 01 Friday 15.05.15 MODULE 1 Introduction and Background of Banking Law in Ireland The introductory session will consider the current economic market, recent trends and what the market holds for
Terms of business agreement - commercial customers M & N Insurance Service Limited Authorised and regulated by the Financial Conduct Authority No: 305837. Registered Office: 248 Hendon Way London NW4 3NL
1. BROKER INFORMATION TERMS OF BUSINESS AGREEMENT - INSURANCE BROKING Stephenson s (2000) Ltd T/As Cooke & Mason, Manor House 3 Low Moor Road Lincoln LN6 3JY is an independent Chartered Insurance Broker.
AMP Home Loans Home loan terms and conditions Effective November 2014 RELATIONSHIP BETWEEN AMP HOME LOANS, AMP AND KIWIBANK AMP Home Loans Limited is a home loan provider. AMP Services (NZ) Limited distributes
LECTURE NO.8 THE ROLE OF GUARANTEES AND BONDS IN INTERNATIONAL TRADE A guarantor issues a guarantee or bond, usually a bank or an insurance company, on behalf of an exporter. It is a guarantee to the buyer
CONTRACTUAL TERMS FREQUENTLY ASKED QUESTIONS INDEX Adopting the new Contractual Terms Q.1 I want to adopt the New Contractual Terms in their entirety, what do I need to do? Q.2 Who and what is an Authorised
Scheme Rules The JLT (Schools PA) Discretionary Trust Arrangement Distinctive. Choice. JLT GROUP SERVICES PTY LTD Version (SchoolsPA) 2014 Distinctive Choice JLT is an international group of Risk Specialists
LCRO 241/2011 CONCERNING an application for review pursuant to section 193 of the Lawyers and Conveyancers Act 2006 AND CONCERNING a determination of Auckland Standards Committee 2 BETWEEN SI Applicant
Overview of Entities in the DIFC Table of Contents Page Topic Objectives... 3 Session 1: Legal structures in the DIFC... 4 Session 2: Legal structures & their use... Error! Bookmark not defined. Session
T s And C s. Home loan terms and conditions Effective June 2015 It s Ours. 1 What s Inside Here. 1. What are these terms about? 1 2. When can your home loan documents change? 2 3. What are the different
EFFECTIVE DEBT COLLECTION FOR WINERIES An article written by Mark Hamilton for the Australian & New Zealand Grapegrower and Winemaker Magazine. The most effective debt collection strategy is to act now.
CLIENT TERMS OF BUSINESS AGREEMENT General Information Seascope Insurance Services Limited (SIS) is an independent Lloyd s broker and is not tied to any one insurer. SIS has received a Grant of Permission
Client Care and Terms and Conditions Introduction We set out below our standard terms and conditions which apply if we act for you. We also provide you with information relating to the Rules of Conduct
TIME LIMITS ON LOANS PAYABLE ON DEMAND SEMINAR FOR THE INNER WEST LAW SOCIETY 17 FEBRUARY 2010 EFFENDY RESTAURANT, BALMAIN BY EDMUND FINNANE 1 Loans payable on demand 1. This seminar concerns loans payable
The following standard terms of business apply to all engagements accepted by Thompson Jenner LLP. All work carried out is subject to these terms except where changes are expressly agreed in writing. 1