In this article you will read about the legal significance of the notice of assignment (transfer) of receivables, its content, form, and legal disputes related to the content of this document.
Notice of Assignment (Transfer) of Claims (hereinafter referred to as: "ZOC") from a legal perspective is one of the most important documents for factoring. It is a frequent subject of dispute between debtor and factor, and also appears as an important evidentiary document in disputes over the assignment of receivables. Economically strong players in the market (especially large retail chains) use their own ZOC templates. So why such an important role for a usually one-page document? Find the answers in this article.
Legal significance of ZOC.
Polish law does not require for the effectiveness of an assignment of receivables to notify the debtor of the assignment. However, it is obvious that it is in the interest of the new creditor (assignee/factor) to inform the debtor of the assignment as soon as possible.
The legal significance of the ZOC is determined primarily by Article 512 of the Civil Code, which provides that: as long as the transferor has not notified the debtor of the transfer, the fulfillment of performance to the previous creditor has effect against the transferee, unless at the time of performance the debtor knew of the transfer. This provision applies mutatis mutandis to other legal transactions between the debtor and the previous creditor.
The primary legal effect of the ZOC is therefore that From the date of its signing, the debtor should pay the new i.e. current creditor (assignee/factor). He cannot pay into the bank account of the former creditor (e.g., the factor) and explain his lack of knowledge. Such payment will be ineffective against the assignee (factor), who can sue the debtor for payment, treating the invoice in question as unpaid. Most often, such a dispute should not occur, since factoring agreements stipulate in such a situation that the factor must promptly return the transfer to the factor's account. On the other hand, however, in this short period of time the factor may become insolvent (I have encountered such situations in practice). Then a claim against the counterparty (debtor) will be at a premium. The debtor, who received the ZOC, and nevertheless, after receiving it, fulfilled the benefit to the assignor (factor), also cannot defend himself with the allegation that, in his opinion, the notice was false or he did not understand its content.
From Articles 512 and 6 of the Civil Code, it should be inferred that proof of the transferor's notification of the transfer to the debtor is charged to the buyer of the claim (assignee/factor). In the event of a dispute between the debtor and the purchaser of the claim (assignee/factor), the debtor should prove that it made the payment, and the assignee/factor disputing the effectiveness of the payment should prove that the payment was already made after the ZOC was maintained or after the debtor obtained knowledge of the transfer from another source. The assignee/factor will then win such a dispute.
Why it is the transferor who notifies the debtor of the assignment? Because it is directly required by the content of Article 512 of the Civil Code, from which it can be deduced that only the notice made by the transferor of the claim (assignor/factor) leads to the rebuttal of the good faith of the debtor already from the moment the assignee proves the fact of the debtor's notice. Notice by the assignee, on the other hand, is to be treated as another circumstance allowing the assumption that the debtor knew of the transfer at the time of performance.
ZOC form.
The regulations do not explicitly provide for the form of the ZOC document. For evidentiary reasons, the practice has developed as a rule the use of written form. This is because in the case of a written notice, the debtor cannot defend himself with the allegation that he did not know about the transfer, even if he had not read the contents of the notice. Therefore, the rule is to prepare the ZOC with a written acknowledgment of receipt by persons undoubtedly authorized to represent the debtor according to the KRS or CEiDG. There are also situations in the market where the debtor signs the ZOC in the presence of an employee of the factor. This eliminates in its entirety a possible dispute as to the date of receipt of the ZOC. A similar and even stronger evidentiary effect will be produced by a written ZOC with a notarized signature (I have encountered this practice). This situation may seem strange from a commercial point of view, but for factoring entities, security is a priority.
ZOC Content.
Here, too, there is a lack of guidance from regulations and practice plays a major role. The content of the ZOC mostly consists of:
- Data of the debtor, data of the creditor (assignor), data of the assignee,
- Information on the notice of assignment of receivables with reference to the description of specific receivables directly (e.g., specific invoices) or the legal relationship from which the receivables arise (e.g., all VAT invoices issued based on the commercial contract of xxxx No. yyyy due as of zzz);
- Bank account number of the new creditor to make payments;
- Clause prohibiting change of bank account without consent of assignee/invoice;
- Other information and clauses.
Most often, the ZOC also contains an instruction on the obligation to make payments to the new bank account. It often includes a mention of the legal consequences of non-payment to the new account number, as well as a legally detailed description of the claim (which is particularly important for future claims). It may also contain an authorization (power of attorney) for the assignee/factor with a specific scope, e.g., including authorization to contact and confirm the balance. The ZOC also 'smuggles in' additional information, e.g. regarding the prohibition of set-off and warranty issues. Personally, I use an elaborate ZOC that fits on a single sheet of A4. It took me several years of practice with more than one lawsuit along the way to work out the optimal legal content of this document.
Disputes over the content of the ZOC.
In the case of cooperation with large entities, a potential dispute over the content of the ZOC document between the debtor and the assignee (factor) is a circumstance that sooner or later must be reckoned with. The rule is that the factor applies its formula. However, from time to time there is a situation when the debtor is an entity with an established position in the market - for example, a large retail chain, which 'can do a lot but doesn't have to do anything'. Such entities are reluctant to agree to factoring, and when they do - they negotiate the content of the ZOC. Most often they use their own templates.
What is the most common thing a debtor tries to 'smuggle' into his ZOC formula?
- The right of deduction in the debtor-creditor (factor) relationship;
- Exclusion from transfer of stand-alone claims related to transferred receivables (e.g., compensation for recovery costs referred to in Article 10(1) of the Law of March 8, 2013 on payment terms in commercial transactions);
- Consider the date of payment as the date of debiting the debtor's account;
- Exclusion of debit and interest notes against the debtor;
- Reservation of the right to change the commercial terms and conditions without the consent of the factor;
- Authorization of the factor to transfer undue amounts to the creditor's account with the effect of releasing the debtor;
- et al.
ZOC negotiation is a normal process. The evaluation of the permissibility of ZOC after changes must always be done on a case-by-case basis. This is because it increases the legal risk for the factoring transaction on a given counterparty. Each such situation requires individual legal analysis and an appropriate sound recommendation. There are also ways to reduce factoring risk despite the unfavorable ZOC formula - however, I will not reveal them in this article.
