managing payment risks in commercial transactions

Managing payment risks in commercial transactions

Managing payment risks in commercial transactions

SELLER’S EXPECTATIONS AND RISK FACTORS

Not fully conversant with the financial status of the buyer To receive payment as early as possible without disturbing his

funds flow If required, to avail credit facilities with financial institutions at

the cheapest interest rates against the receivables If it is an export - Not fully aware about the legal formalities

prevailing in buyer’s country If it is a service provider – delayed settlement of receivables To receive correct amount - in the desired currency - in his

own place at the right time

Buyers expectations and risk factors

To receive the same consignment at the right place Not to pay until the consignment is received at his

end to defer the payment as far as possible to avail cheapest credit facility from any financial

institution at concessional rate of interest for the payables…

UNCERTAINITIES AT BOTH THE ENDS…..

With all these risks and uncertainties, trade is continuously growing with no boundaries

Who takes the risk .. the buyer, the seller or both or the intermediaries ?

How do they manage the receivables and the outstanding ?

At what cost….

METHODS OF MANAGING THE RECEIVABLES

Documentary collectionClean collectionDirect collection

Documentary credit / letters of creditGuaranteesPost Dated ChequesFactoring / ForfaitingAdvance Payment

seller buyerCommercial contractual terms

Features of a commercial contract…

Sale / purchase contract is a document recording the terms of delivery and terms of payment

Who will bear the expenses / risk factors up to which stage Whether transport charges will be for the buyer or

seller’s account Transit risk will be covered by marine insurance at

whose expense At which stage transfer of title of the goods will

take place

2

Remitting Bank Collecting bank

1

Submission of

documents

Documents forwarded

3

Documents Presented

COMMERCIAL CONTRACT

Seller buyer

2

Remitting Bank Collecting Bank

1

Submission of

documents

Documents forwarded

3

Documents Presented

4

Payment made

5

6

Payment Transferred

Payment made to Exporter

SALE CONTRACTseller Buyer

RISK FACTORS

If the buyer refuses to accept the documents and not paying – Seller To offer discount To search for an alternate buyer offering the goods with or

without discount If alternate buyer not found, goods are to be re-booked Expenses – transport charges, freight charges, bank

charges….Cost of funds Or abandon the goods….. Documents are safe but payment not assured

Goods consigned directly

1

SALE CONTRACT

seller buyer

3

Sellers Bank Buyers Bank

2Submission

of Draft / Bill of

Exchange

Documents forwarded

4

Documents Presented

Goods consigned directly

1

SALE CONTRACTSeller buyer

3

Sellers Bank Buyers Bank

2Submission

of Draft / Bill of

Exchange

Documents forwarded

4

Documents Presented

5

Payment made

6

7

Payment Transferred

Payment made to Exporter

Goods consigned directly

1

SALE CONTRACTseller buyer

CLEAN COLLECTION.. RISK FACTORS

Seller should have absolute faith and confidence on the buyer… since goods are directly consigned.

Payment on due date by buyer If defaulted…. No assurance Has to resort to legal procedures

Sellers Bank buyersBank

2

Payment made on the

agreed date

3

4

Payment Transferred

Payment made to Exporter

Goods consigned directly with documents

1

SALE CONTRACTseller buyer

DIRECT COLLECTION.. RISK FACTORS

No control on the goods since it is directly consigned to buyer

Documents are also forwarded directly to the buyer … Only if the Seller has absolute confidence on the

buyer’s capacity to pay..this method will be suitable; Otherwise… this will be more risky

Legal aspects of credit collection

Transaction is covered under Indian Contract Act 1872.

Bank is appointed as an agent for collection by the seller

Bank does not assume any responsibility for credit protection

Seller has to proceed against the buyer for non-fulfillment of contractual obligations under civil suit.

In case of exports – no legal support except ICC Paris guidelines on collection documents

Commercial contract

Payment made in advance through the bank

Goods consigned

seller buyer

Advance payment

ADVANCE PAYMENTS…

Buyer remits the payment in advance Receiving the consignment or getting back

the payment if shipment never takes place will be the risk for the buyer

Seller enjoys buyer’s funds

Letter of credit and guarantees

To manage the receivables with lesser risks corporate may opt for any of these payment methods: Letter of Credit / Documentary Credit

Inland / Foreign Guarantees / Standby credits

Inland / Foreign

Establishing Letter of Credit

SALE CONTRACT

1 2 3

1. LC application submitted by the applicant to the issuing bank

2. LC established by issuing bank through their correspondent

bank with a request to pay on their behalf against submission

of prescribed documents by the beneficiary

3. LC advised- with /without confirmation

ISSUING BANK

CONFIRMING /ADVISING

BANK

buyer seller

NEGOTIATION OF DOCUMENTS UNDER CONFIRMED CREDIT

ISSUING BANK

CONFIRMING BANK

1

2

35

6 4buyer seller

NEGOTIATION OF DOCUMENTS IN UNCONFIRMED CREDITS

ISSUING BANK

NEGOTIATING BANK

1

2

35

6 4buyer seller

DOCUMENTARY CREDIT…..

An arrangement whereby a bank acting at the request and on instructions of a customer i.e., the applicant / buyer

To make payment to a third party (the beneficiary) by themselves or authorize other bank to pay or negotiate

Against stipulated documents

Provided Terms and conditions of the credit are complied

with

Inland letter of credit - discounting

Issuing bank Sellers Bank

1

235

6 4buyerseller

Documents under LC

Bill of Exchange Commercial Invoice Transport document Inspection certificate Insurance Certificate of origin (in foreign trade)

4

Exporter’s Bank Issuing Bank

2

Submission of

Draft / Bill of

Exchange

Documents forwarded

7

Documents Presented

8

Payment made

5

6

Payment made

Payment made to Exporter

Goods consigned directly

1

Payment demanded on due date and defaulted by importer

3Standby credit

seller buyer

STANDBY CREDITS

Promise to honour beneficiary’s presentation of a document indicating the default of the applicant

Act as a standby arrangement in case the obligation is not fulfilled by the applicant

STANDBY CREDITS

MORE USEFUL IN COLLECTION INSTRUMENTS.

TO PRESENT A COPY OF COMMERCIAL INVOICE & UNPAID BILL OF EXCHANGE

STANDBY CREDITS..

In respect of any debt,obligation or any liability by the overseas party in connection with bonafide trade transaction

As a back up instrument for collection ICC 500 & ISP 98 are the governing

guidelines

guarantees

Issuing bank

buyer seller

contract

appl

icat

ion

Guarantee issued

Guarantee invocation

Issuing bank

buyer sellerNon performanceDefault stage i

Stage 2 - invocationRecoveryStage 3

GUARANTEESINLAND/FOREIGN

FINANCIAL / PERFORMANCE /DPG DIFFERENCE BETWEEN FIN/PERF

GUARANTEES TYPES OF GUARANTEES –RECEIVABLES

AND PAYABLES CHECK POINTS

GUARANTEES - CHECK POINTS

PURPOSE – SPECIFIC VALIDITY PERIOD CLAIM PERIOD VALUE LIMITATION CLAUSE REASONS FOR INVOKING – SPECIFIC HOW TO EXTINGUISH THE LIABLITY

INLAND GUARANTEES

TYPE STATUS OF THE IB DOCUMENTARY CONDITIONS DOCUMENTS TO BE SPECIFIED REINSTATEMENT CLAUSE CHARGES INTEREST FACTOR

Post dated Cheques

Advantages Wrongful dishonour Rightful dishonour Implications of dishonour

Criminal N I law (Amendment) Act 1988

CRIMINAL LIABLITY

IPC 415 CHEATING IPC 417 PUNISHMENT FOR CHEATING IPC 420 CHEATING AND DISHONESTLY

INDUCING FOR DELY OF PROPERTY – 7YEARS

SEC 2 & 11 DEFINES ‘PERSONS’ – CO, ASSNS, BODY OR PERSONS WHETHER INCORPORATED OR NOT

CRIMINAL LIABLITY

Sec 138 – dishonour of cheques For insufficient balance Exceeds arrangement Account closed Payment stopped by drawer

Issuing notice by the drawer to the payee not to present the cheque – but the payee presents the cheque – dishonoured – can the drawer prosecuted?

Modi cements vs Kuchil kumar -1998 Drawer can easily get rid of the consequences.. Hence stop

payment will not preclude action under Sec 138

Non cognizable offence

CONDITIONS

Cheque to be presented within 6 months or expiry date whichever is earlier

Payee or holder in due course makes a demand to drawer within 30 days from date of receipt of the returned instrument

Drawer’s failure to pay within 15 days of receipt of notice Non-payment leads to ‘cause of action’ Complaint to be registered within one month of the ‘cause of

action’ Period of one month should be from the day immediately following

the day on which the period of 15 days from the date of receipt of the notice by the drawer expired.. Supreme Court judgement in Prem Chand Vs Yashpal Singh

No court lower to that of Metropolitan Magistrate or Judicial Magistrate of I class will try the offence

GUIDELINES

Complaint in writing

With dishonoured cheque / return memo / copy of notice / evidence for receipt of notice by the drawer

Sec 146 conveys ‘Bank’s slip prima facie evidence of certain facts – court will presume the fact of dishonour of such cheques until such fact is disproved’

Sec 147 – every offence punishable under this act is compoundable

To be filed either where cheque is issued / dishonoured

With metropolitan magistrate/ judicial magistrate/ I class magistrate

Cause of action

Drawer can be punished only if he could not pay during the notice period

Not for dishonour of cheque Punishment

Twice the cheque value Two years imprisonment

Liability of Directors…

Sec 141 of NI Act – every person of a company in charge of and responsible for business shall be deemed guilty

Recent Supreme Court judgment by Arun Kumai in Appeal by SMS Pharmaceuticals Only directors responsible for the particular deal would be

liable under NI Act No universal rule that a director of a company is in charge

of its every day affairs… Depends upon the respective roles assigned to the officers

in a company