Factoring in Israel

Penn State International Law Review Volume 27 Number 3 Penn State International Law Review Article 13 5-1-2009 Factoring in Israel Shalom Lerner Follow this and additional works at: http://elibrary.law.psu.edu/psilr Part of the International Law Commons Recommended Citation Lerner, Shalom (2009) "Factoring in Israel," Penn State International Law Review: Vol. 27: No. 3, Article 13. Available at: http://elibrary.law.psu.edu/psilr/vol27/iss3/13 This Article is brought to you for free and open access by Penn State Law eLibrary. It has been accepted for inclusion in Penn State International Law Review by an authorized administrator of Penn State Law eLibrary. For more information, please contact . Factoring in Israel Shalom Lemer TABLE OF CONTENTS I. IV . IN TRODU CTION ........................................................................... 79 1 TRUE SALE VS. SECURITY INTEREST .......................................... 794 COMPETITION BETWEEN FLOATING CHARGE AND FACTOR ...... 796 A. General-CompetitionBetween a FloatingCharge and an A ssignee ......................................................................... 796 B. Floating Chargevs. Factorunder English Law ................. 798 C. Floating Charge vs. Factorunder Israeli Law ................... 799 C ON CLU SION .............................................................................. 80 1 I. INTRODUCTION II. III. Factoring is a comprehensive, long-term relationship between a factor and an entity that sells assets or provides services to business customers ("supplier"). The factor provides the supplier with various services: financing, ledgering, collection of receivables and protection against customer default.' The UNIDROIT Convention on International Factoring defines a factor as an entity that performs at least two of the following functions: financing the supplier; maintenance of the receivables; collection of receivables; and guaranty against default by customers. 2 Due to the close legal relationship involved, many factoring agreements provide for exclusivity and prohibit the supplier from assigning its account receivables to any third party. Factoring transactions have many nuances. In some cases, the supplier's customers are notified of the transaction, and are then required 1. PETER M. BISCOE, LAW AND PRACTICE OF CREDIT FACTORING 3 (1975). For SIMON MILLS & NIGEL DAVIDSON, different types of factoring, see NOEL RUDDY, SALINGER ON FACTORING 16-22 (4th ed. 2006). 2. UNIDROIT Convention on International Factoring, May 28, 1988, 27 I.L.M. 922, available at www.unidroit.org/english/conventions/1988factoring/1988factoringe.htm. PENN STATE INTERNATIONAL LAW REVIEW [Vol. 27:3,4 to pay their debt directly to the factor. In other cases, the customers are not supposed to be notified of the transaction; this structure, known as non-notification or invoice discounting factoring, is preferred when the assignment of rights might be construed as financial weakness and adversely affect the supplier's business. In such cases, the supplier collects the debts for the factor, and holds the money in trust until actual transfer.3 Data collected by the World Bank indicates the increasing of the use of factoring. In 2005, about $1 trillion of factoring transactions took place. In certain countries with rapidly emerging economies, such as China, Mexico, Turkey, and Brazil, the scope of factoring transactions increased by more than 50% between 2000 and 2005. In each of these countries, the scope of factoring transactions exceeded $5 billion per year. One of the reasons for this increasing use is probably that factoring is a convenient financing method for new or growing businesses that do not have sufficient tangible assets to offer as collateral. Factoring is also suitable for seasonal traders that require financing for their expenses, before they receive income from customers.4 The factor and the supplier enter into a framework agreement that stipulates the terms for future transactions with respect to the transfer of monetary rights vis-A-vis specific customers. A factoring agreement typically includes a non-recourse provision, namely, that in the event that the factor is unable to collect the debt from the customers, the factor may not claim such debt from the supplier, except if the customer refuses to pay due to a commercial dispute regarding the quality of the product or service. Once the framework agreement is signed, the supplier offers the factor specific debts to be included under the framework agreement. The factor examines the financial position of each specific customer, and decides whether to purchase the rights against him. In a non-recourse agreement, the factor relies on the financial position of the supplier's customer, and therefore thoroughly examines it's financial position. This type of transaction is prevalent mainly in countries that have a developed credit rating system from which the factor can draw information about numerous businesses. 5 If the factor decides to purchase the rights with respect to a certain customer of the supplier, the factor and the supplier enter into an assignment of rights agreement. The assignment of rights 3. ROBERT R. PENNINGTON, BANK FINANCE FOR COMPANIES 42-43 (1987); International Factors v. Rodriguez, [1979] Q.B. 351 (U.K.). 4. Ken L. Lott & Robert G. Meyers, Secured Lending, 28 MERCER L. REV. 699 (1977). 5. See The Role of Factoringfor SME Finance, AccessFinance (The World Bank Group) Dec. 2006, available at http://siteresources.worldbank.org/INTACCESS FINANCE/Resources/AFIssue 15.pdf 2009] FACTORING IN ISRAEL agreements is in accordance with the general terms of the framework agreement. Factoring also plays an important role in international trade. In this arena, two factors are involved instead of one. The exporter sells goods to the importer under a supplier credit arrangement. The exporter contracts with a local factor, which works together with a factor in the country of the importer, and the two factors make all the arrangements necessary for the exporter: they look into the importer's financial position, provide for financing, provide protection against default, collect the debts of the supplier, etc. The exporter receives a line of credit from its local factor for the shipments it is to make to the importer. The factor in the importer's country inquires as to the importer's financial position, and advises the factor on the exporting side of the maximum risk that the importing factor agrees to assume. The factor in the importer's country assumes the credit risks. The factor in country of export pays the exporter, and the factor in the importer's country indemnifies the other factor for this payment. The exporter sends the importer goods under a supplier credit arrangement, transfers the bills to the factor in the country of export, and is thereby released from taking any further steps. The factoring companies guarantee payment b (...truncated)