Recapping Receivables Presentations by Geoffrey Wynne, Partner and

Francesca Umicini-Clark, Associate

Sullivan & Worcester UK LLP

24 May 2018

New Broad Street House, 35 New Broad Street,

London, EC2M 1NH

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What is a receivable?

Receivables: › The payment by a buyer of goods or services to a seller, until the time when it is

paid › An asset of the seller › A liability of the buyer

Key factor in any trade arrangement

Each sale and purchase, from raw material to finished product, can create a receivable which could be the subject of financing

Seller and buyer may need financial support for a sale and purchase transaction

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Receivables financing – commercial motivations A solution to conflicting interests?

› Seller wants to receive payment sooner/remove asset from balance sheet › Buyer wants longer payment terms › Seller and buyer want to reduce working capital needs

An arrangement providing credit to a party using an amount payable by one party to another for goods and services

Commercial considerations for financier: › Quality of the receivable › Credit standing of buyer › Performance risk on the seller › Logistics affecting seller performance › Level of recourse to seller › Assisting seller/buyer/both › Cross-border issues

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Receivables and financing – legal nature

How is a receivable established? › Negotiable instrument? › Letter of credit/deferred payment undertakings? › Contract receivables/invoices? › Traps and solutions

How are receivables transferred? › Legal/statutory assignment – Law of Property Act 1925 › Equitable assignment

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Assignments – applications in trade finance

Most commonly used in two situations › Security assignment

Assignment of rights under sales contracts/prepayment agreement Used within PXF or advanced payment structure to ensure proceeds of sales stay within

the security structure May include step-in rights that allow the Lender to perform the obligations of the

Borrower and deliver goods that have been appropriated from the Borrower through possessory security (e.g. pledge) and obtain payment from the end buyer

Proceeds applied in discharging debt Equity of redemption

› Receivables purchase Legal mechanism for transfer of right to receive payment i.e. debt Used in payables finance, supplier finance, factoring etc. Debts purchased before maturity date at a discount Outright sale i.e. no equity of redemption

› Level of recourse

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Assignments – the basics

Transfer of a right from one person to another

The benefit of a contract is a right (a “chose in action” – intangible asset that can be assigned to another party)

The effect of an assignment › Assignee is entitled to the benefit of the relevant right › The burden of a contract cannot be assigned › Assignment only transfers existing rights – does not create new rights › The assignee’s rights are subject to any limitations, defences and set-offs (i.e.

equities) that the original contracting party would have been able to raise against the assignor (at least until notice of assignment has been provided)

Ways to deal with issues (or accept them)

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Assignments – legal assignment

Legal Assignment › Meets requirements of s.136 of the Law of Property Act 1925

Absolute assignment in writing Signed under hand by the assignor Not purport to be by way of charge only Express notice in writing given to “the debtor, trustee or other person from whom the

assignor would have been entitled to claim such debt or thing in action”

› Allows assignee to sue the debtor in its own name › Requirement for absolute assignment does not exclude assignment by way of

security › BUT does prevent legal assignment of a partial debt – this can be significant in

the context of receivables purchase › Electronic document considered to be “in writing” under English law

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Assignments – equitable assignment

Equitable Assignment › An assignment that does not meet the requirements s.136 of the Law of

Property Act e.g.: Unnotified/undisclosed assignments Assignment not in writing Assignment of partial debt e.g. assignment of 90% of a receivable (although consider

workarounds) Assignment of future rights

› In theory there is a requirement to join the assignor in proceedings as a procedural matter, however, in practice this is often dispensed with by the courts unless there is a dispute as to ownership of the relevant debt or there are multiple owners

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Assignments – key issues to be aware of

Restrictions on assignment in the underlying agreement

Notice of assignment

Governing law and due diligence in the context of receivables purchase

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Assignments – restrictions on assignment Contractual restrictions on assignment

› Effect Linden Gardens Trust Ltd v Lenesta Sludge Disposal Ltd [1994] 1 A.C.85,108 First Abu Dhabi Bank PJSC (Formerly National Bank Of Abu Dhabi PJSC) v BP Oil

International Ltd [2018] EWCA Civ 14 (18 January 2018).

› Consent/waiver › Declaration of Trust

Public policy

Small Business Enterprise and Employment Act 2015 and the Business Contract Terms (Restrictions on Assignment of Receivables) Regulations 2015 – regulations now withdrawn

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Assignments – notice of assignment

Applicable to legal and equitable assignments

Priority › The rule in Dearle v Hall (1828) 3 Russ 1

Effect in respect of equities between debtor and assignor

Ability to give good discharge of debt

Registration?

Right to sue debtor directly

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Case update – a view on E.ON – serving notice under LPA 1925 E.ON UK Plc v Gilesports Limited [2012] EWHC 2172

Lease incorporating provisions on notices – s.196 LPA 1925

S.196: notice shall be sufficiently served if it is in writing and it is either: › left at the last known place of residence or business or if it is to be served on a

tenant by affixing notice to the property; or › sent by post in a registered letter addressed to the lessee or lessor at the last

known place of abode or business, if that letter is not returned undelivered; and that service shall be deemed to be made at the time at which the registered letter would in the ordinary course be delivered.

Tenant served notice of a request for assignment by email (not permitted under s.196)

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Case update (2)

Tenant argued valid notice on the basis that the email was received by the landlord and that the methods of service under s.196 are permissive, not mandatory

Tenant relied on wording that service by these methods shall be ‘sufficient’

Court held that service by email was not valid

S.196 LPA 1925 requires that service must be in one of the permitted ways under that section

So what has this got to do with receivables financing?

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Case update (3)

Consequences of E.ON on notices to debtor to perfect assignment › If the case extends beyond its facts – notice of assignment by email not possible › That means that you cannot have a legal assignment (i.e. only an equitable

assignment) using electronic notices – especially in platform based receivables › This may not be critical – an equitable assignment is still valuable › Debtor (especially in buyer-led structures) already knows whose it must be –

that is enforceable › Most structures already lock in other parties – having competing notices is

unlikely › Can case be distinguished on its facts?

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RPAs – True sale Risk is that transaction will be recharacterised as a financing

secured on the receivables › Receivables purchaser will be deemed not to own the receivables › Receivables will form part of receivables seller’s estate on insolvency › May be subject to priority claims and/or competing claims of other creditors › Bank may not have valid security if required formalities not complied with at time

transaction was entered into

Relevant to all forms of receivables financing?

Welsh Development Agency v. Export Finance Co. Ltd [1992] BCLC 148 – leading English case

“It is necessary therefore to look at the provisions in the master agreement as a whole to decide whether in substance it amounts to an agreement for the sale of goods or only to a mortgage or charge on goods and their proceeds” (Dillon LJ)

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RPAs – True sale structuring Some points to consider commercially to achieve a better argument for a true sale:

› Intention: the genuine intention of the parties is to effect a sale – this is a key consideration under English law

› Act as owner: act as any owner of those receivables would AND not as a secured party trying to divest itself of any risk in the transaction receivables

› Transfer of title: ensure title is properly transferred

› Repurchase triggers: limit when any obligation to repurchase the receivables arises

› Where are receivables to be paid: during receivables purchaser’s ownership, the receivables are only paid to it or as it determines (directly or via a collection agent)

› Non-payment: the receivables purchaser takes the risk of non-payment (although this may reasonably be mitigated with insurance or properly structured indemnities)

› Insurance: any payment insurance is obtained by the receivables purchaser or it is co-insured while it is owner of the receivables (rather than just being loss payee)

› Price risk: the receivables purchaser takes any currency risk in the receivables (but may mitigate this through separate hedging arrangements)

Fallback security may be possible or arise automatically – local due diligence into requirements for valid security interest is important

Structure the transaction to reduce recharacterisation risk (ability to do this will depend on commercial structure and/or jurisdictions in question)

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Buyer-led structure

The buyer/debtor is the receivable purchaser’s primary client

Contractual arrangements with the buyer/debtor

Confirmed/accepted receivables

Often uses an electronic platform

Disclosed assignment

Commercial reasoning › suppliers obtain early payment (improving DSO) with financing costs based on

creditworthiness of buyer › used as a wider scheme to help buyer/debtor lengthen payment terms

(improving DPO) producing cash-flow benefit

Focus on accounting treatment for supplier AND buyer/debtor

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Buyer-led structure

Supplier (Seller)

Receivables Purchaser

Debtor (Buyer)

Supply Contract

1. Purchase Order

2. Supplies goods/services and invoice

5. Request for receivables

purchaser to purchase receivable (manual

discount only)

6. Payment of discounted purchase price in exchange for assignment of receivable

8. Payment of face value of receivable on maturity date

7. Notice of assignment of

receivable

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Electronic platforms

Do they create or solve problems?

Bank “owned”

Third party run

What to look for?

The magic of the irrevocable payment undertaking

Some risks › Who takes what risks?

Limited or non-recourse Against whom?

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Supplier-led structure

The supplier is the receivable purchaser’s primary client

Usually contractual arrangements with supplier only

Less frequently electronic platform-based

May be confirmed or unconfirmed receivables

May be disclosed or undisclosed

Supplier as collection agent of the receivables purchaser

Focus on accounting treatment for the supplier

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Supplier-led structure

Supplier (Seller)

Receivables Purchaser

Debtor (Buyer) Supply Contract

Receivables Purchase A

greement

2. Supplies goods/services and invoice

4. Details of accepted invoice/receivable and

request for receivables purchaser to purchase

1. Purchase Order 5. Paym

ent of discounted purchase price in exchange for assignm

ent of receivable

5a. Notice of assignment (disclosed structure or supplier default only)

6. Payment of face value of receivable on maturity date

3. Acknowledgement/acceptance of invoice (confirmed structure only)

7. On-paym

ent of face value of receivable on m

aturity date

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Third party structures

Wide variety of structures

Usually buyer-led

Relationship of the buyer and often the supplier is with the third party originator

Multiple receivable purchasers within the structure

Identity of receivable purchasers may be disclosed or undisclosed (to buyer and/or supplier)

Third party originator as paying agent and collection agent

Specific issues?

Who takes what risk?

What about auction sales?

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Third party structures – other contractual structures

Supplier (Seller)

Receivables Purchaser

Debtor (Buyer)

Third Party Platform Provider

Supply Contract

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Third party structures – other contractual structures

Supplier (Seller)

Receivables Purchaser

Debtor (Buyer)

Third Party Platform Provider

Supply Contract

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Key issues in context of cross-border deals

Key issues in context – what and who to ask? › True sale › Assignment › Perfection

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Cross-border RPA – structure

Supplier 1 (Seller)

(Country B)

Debtor 1 (Buyer)

(Country D)

Debtor 2 (Buyer)

(Country E)

Receivables Purchaser

(Country A)

Supplier 2 (Seller)

(Country C) Supply Contracts – Jurisdictions X and

Y?

RPA – Jurisdiction Z?

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Local due diligence (1)

Seller, buyer and receivables purchaser each in a different jurisdiction

Relevant jurisdictions? › Jurisdiction of the seller(s) and the buyer(s) › Jurisdiction of the receivables purchaser › Governing law of the receivables › Governing law of the RPA

Questions to ask counsel in seller’s jurisdiction › Capacity of seller(s) › Enforceability of RPA › Enforceability of assignment of receivables › Insolvency of seller

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Local due diligence (2)

Questions to ask in buyer’s jurisdiction › Enforceability of assignment against buyer › Form of notice of assignment and acknowledgment

Governing law of receivables › Requirements for effective, perfected assignment of receivables

Governing law of receivables purchase agreement › Enforceability › True sale › Enforcement against buyer

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Collection agency structure

Sales contract

Export of goods

RPA Purchase of receivable at discount

Seller, buyer and receivables purchaser each in a different jurisdiction

Buyer continues to pay invoices to seller

Seller collects payment and remits to receivables purchaser

Structure may be undisclosed to buyer

Payment when due to seller as collection agent

Payment of proceeds

Receivables Purchaser

(Country C)

Seller/ Exporter

(Country A)

Buyer/ Importer

(Country B)

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Collection agency structure – due diligence

Undisclosed structure › Possible to enforce against buyer? › Perfection steps › Contractual obligations on seller to assist with enforcement › Power of attorney

Proceeds in hands of seller › Will proceeds form part of seller’s estate on insolvency? › Trust wording

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The treatment of trade debt - update

The original “true trade” debate › What is true trade debt – determined by reference to how it arose › Debt incurred for purchase of assets in course of trading would be trade debt

Why is the nature of true trade debt debated?

Abengoa and the mood of Moody’s › Reverse factoring has debt-like features

The case of Carillion

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Trade debt (2) – Carillion – Moody’s view

Bridge financing to

Carillion under reverse factoring arrangement

Cash generated included financing, not disclosed

Amounts owed to banks detailed as “other creditors”, not “borrowings” – effect on net-debt to EBITDA

Costs of financing not represented in income statement

Contract receivables subsequently written down – reduced profits

Goods/services

1. Extended payment terms to 120 days - no increase in trade payables liability reported

2. C introduced Early

Payment Facility – pay suppliers “on at least same terms […] and in many cases […] earlier”

3. Moody’s infers trade payables liability reduced by payment from Bank and added to “other creditors”

Financing costs

5. C makes payment to Bank when bridge financing falls due on day 120

Suppliers Carillion

Bank

Commercial contract

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Trade debt (3)

Moody’s view that trade payables held by bank should be finance debt not trade debt

Who is affected by this? › All of you/us › In particular – risk for financiers on relying on better treatment for trade debt in

restructurings and/or insolvency

What pointers to avoid this?

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Trade debt as finance debt

Not just balance sheet question – legal v accounting treatment

Auditors need to appreciate effect

Why should holder of “debt” (invoice) determine what sort of debt it is?

What problems › Requirement to do trade debt transactions only

› What about insurers?

› What about rescheduling?

› What about liquidation?

What could be affected › All supply chain finance?

› All forfaiting transactions?

A work around? › Make sure variations and payment period are in the original invoice/payment obligation

› Look at useful life of asset in receivable 34

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Summary and conclusions

So can we still do receivables transactions?

Do we still have to be careful?

Would it help to have more unified procedures?

Where would that help best be provided?

Always a new point, a new trap

Technology helps but…

Are auditors, ratings agencies and regulators putting up unnecessary obstacles?

Are there abuses that need “stamping out”?

We have good structures to facilitate trade – why block them?

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Geoffrey L Wynne Partner Geoffrey Wynne is head of Sullivan & Worcester’s London office and also head of its Trade & Export Finance Group. He has extensive experience in banking and finance, specifically trade and structured trade and commodity finance. He also advises on corporate and international finance, asset and project finance, syndicated lending, equipment leasing and workouts and financing restructuring.

Geoff is one of the leading trade finance lawyers and has advised extensively many of the major trade finance banks, multilateral financers and companies around the world on trade and commodity transactions in virtually every emerging market including CIS, Far East, India, Africa and Latin America. He has worked on many structured trade transactions covering such diverse commodities as oil, nickel, steel, tobacco, cocoa and coffee. He has worked on warehouse financings in many jurisdictions and advised on how to structure involving warehouse operators and collateral managers. He has also advised on ownership structures and repos for commodities and receivables financings.

Geoff sits on the editorial boards of a number of publications and is a regular contributor and speaker at conferences. He is also the editor of and contributor to The Practitioner’s Guide to Trade and Commodity Finance published by Sweet & Maxwell and A Guide to Receivables Finance, a special report from TFR published by Ark.

Sullivan & Worcester UK LLP Tower 42 25 Old Broad Street London EC2N 1HQ

T +44 (0)20 7448 1001 F +44 (0)20 7900 3472 gwynne@sandw.com

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Francesca Umicini-Clark Associate

Francesca Umicini-Clark is an associate on the Trade & Export Finance team in the London office. She specialises in advising a broad range of clients on structured and unstructured trade finance across mainland Europe, CIS, Africa and Asia. Her experience also includes advising on the impact of regulatory changes in respect of trade finance. Prior to joining the firm, Ms. Umicini-Clark spent the majority of her training contract in banking with a focus on export credit finance (particularly buyer credit) and energy project finance. She also spent time in the corporate department of her training firm working on public and private mergers and acquisitions.

Sullivan & Worcester UK LLP Tower 42 25 Old Broad Street London EC2N 1HQ

T +44 (0)20 7448 1037 F +44 (0)20 7900 3472 fumiciniclark@sandw.com

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Awards & Recognition TFR “Best Law Firm in Trade Finance”

Trade & Forfaiting Review (TFR) named Sullivan & Worcester "Best Law Firm in Trade Finance" in its 2014, 2015 and 2016 TFR Excellence Awards GTR “Best Law Firm”

Sullivan & Worcester UK LLP was top ranked firm in the Global Trade Review (GTR) Best Law Firm 2015 and 2016 polls The Legal 500 UK 2016

Geoffrey Wynne and Simon Cook are listed as Leading Lawyers and Sullivan & Worcester UK LLP was ranked in the following category in The Legal 500 UK:

› Trade Finance (Tier 1) Chambers UK 2017

Chambers UK ranked Sullivan & Worcester UK LLP, along with Geoffrey Wynne and Simon Cook, in the following area:

› Commodities: Trade Finance (UK-wide)

TFR Fellowship Award 2017

Trade & Forfaiting Review (TFR) honoured Geoffrey Wynne with the TFR Fellowship Award in its 2017 TFR Excellence Awards

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Future breakfast seminars Thursday 21 June

Thursday 19 July

No event in August

Thursday 20 September

Thursday 18 October

Thursday 22 November

Thursday 13 December

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www.sandw.com

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