Today on the blog about a much disliked aspect of factoring - that is, the set-off between the debtor and the factor (assignee).
From the moment of assignment (transfer) of a claim, along with the claim itself, all rights and obligations are transferred to the new creditor (assignee/factor). Therefore, it would seem that from that moment the assigned claim cannot be a set-off in the debtor-assignor (former creditor) relationship with effect against the assignee (factor), i.e. the new creditor. However, the Civil Code provides a detailed regulation in this regard. It has a significant impact on the documents used by factoring companies and on the factoring risk itself. The regulation stems from the principle of not aggravating the situation of the debtor by assignment, which will appear on the blog many times.
According to Article 513 § 2 of the Civil Code the debtor may deduct from the transferred claim the claim to which he is entitled against the transferor, even if it became due only after the debtor received notice of the transfer. However, this does not apply if the claim owed to the transferor became due later than the transferred claim.
The provision undoubtedly needs a pictorial explanation.
The debtor (e.g., the purchaser of the steel) is entitled to submit to the assignee (factor) a statement of set-off of another claim owed by the debtor to the former creditor - assignor (e.g., the seller of this steel). If the debtor is also engaged, for example, in the rental of premises, then this claim in the debtor-assignor relationship can be, for example, rent (unpaid invoice). In this way, the debtor will lead to the extinction of the debt owed to the assignee (factor) against him, despite the fact that the debtor has no other business relationship with the factor. Such a situation is undoubtedly difficult for the factor - because he does not get the receivable from the purchased receivable, or he gets it only in part (depending on the extent of the offset).
However, the deduction is subject to time limitations which arise from the provision and the case law of the courts
The claim against the transferor (assignor/factor) must be due earlier than the transferred claim. Complicated? So let's go back to the example. On June 1, 2017, our steel seller (the assignor/invoicee) made an assignment with the factor (the assignee) of a receivable in the gross amount of PLN 20,000 owed to the debtor (the one who purchases the steel and rents the premises) documented by an invoice due as of July 20, 2017. However, on June 3, 2017, the debtor rents the premises to the assignor and acquires a claim against him in the amount of PLN 20,000, due on June 11, 2017 (as it is rent - payable by the 10th). It is not until June 6, 2017 that the assignee (factor) notifies the debtor of the assignment. On July 18, 2017, the debtor submits a statement to the assignee that it is deducting from the assigned receivable the debt owed to the assignor. Thus, both receivables expire (offset) on 20.07.2017. (because on this date both became due). This is possible because the claim owed to the transferor (assignor/factor) was due earlier (June 11, 2017) than the transferred claim (July 20, 2017).
This is not the end of the restrictions. The debtor may not set off against the assigned claim a claim against the assignor acquired after becoming aware (e.g., from a notice of assignment - the so-called ZOC) that the assignment has been made. This follows from the decisions of the Supreme Court which are approved in practice due to the so-called security of trade (see: judgment of the Supreme Court of 9.05.2003 ref: V CKN 218/01 which concerned factoring; judgment of the Supreme Court of 27.07.2006 ref: III CZP 59/06; resolution of the Supreme Court of 6.07.1999 ref: II CKN 394/98). It would be very easy for the debtor and the assignor to "create" doubtful claims in order to set them off against the assignee's claim. This would be a particularly risky phenomenon for factoring companies, which can be observed even despite the above-mentioned rulings. Returning to our example - if the debtor had received the notice of assignment on June 2, 2017. - then he would not be able to make the offset. This is why it is so important to give immediate notice of assignment.
It should also be remembered that it follows from the general rules of deduction (Article 498 of the Civil Code) that:
- As long as the claim is unmatured, it cannot be set off against claims already due;
- The debtor may set off the assigned claim against the claim against the assignor as long as the assigned claim exists. Payment to the assignee excludes the possibility of a set-off;
- The debtor's statement of set-off of the transferred claim against the debtor's claim against the assignor should be made to the assignee, not to the assignor.
How do factoring companies handle offset risk?
As a rule, prior to the initiation of factoring, the factoring company makes declarations that, to the best of its knowledge, its counterparty has no matured or unmatured receivables that can be subject to set-off. Appropriate protective provisions in the factoring agreement and in the notice of assignment of receivables document, including a waiver of the right to set-off, also apply.
If a deduction is made despite the above, the factor will be entitled to claims for damages against the factor, arising either from the statements made or from the rules of contractual liability (Article 471 et seq. of the Civil Code). Since the factor may have become insolvent at this time - it is also crucial to adequately secure the claim against the generally solvent counterparty (debtor). For this purpose, appropriate provisions are used in the factoring documentation (notice of assignment, document confirming the existence of the claim and others).
