The Importance of a Notice of Assignment in Factoring

Greenhalgh Kerr Local Authority Recoveries
Greenhalgh Kerr Local Authority Recoveries

Factoring is a financial transaction where a business sells its accounts receivable to a third party, known as a factor, to improve cash flow and manage credit risks. One critical element in the factoring process is the Notice of Assignment. This document serves as a formal notification to debtors that their debt has been assigned to the factor. Understanding the importance and implications of the Notice of Assignment is essential for the smooth execution of a factoring agreement.

What is a Notice of Assignment?

A Notice of Assignment is a formal document sent to a debtor informing them that their obligation to pay an invoice has been transferred from the original creditor to a factor.

Key Reasons for the Importance of a Notice of Assignment

  1. Legal Clarity and Enforceability
  • The Notice of Assignment legally establishes the factor’s right to collect the receivables. Without this notice, debtors might still consider the original creditor as the entity entitled to payment.
  • Priority in Payment. In the case of multiple claims on the same receivable, the notice helps establish the factor’s priority in receiving payment.
  1. Preventing Double Payments
  • The notice provides clear payment instructions to the debtor, reducing the risk of double payment to the original creditor and to the factor.
  • It minimises confusion by clearly informing the debtor of the change in payment instructions and the new party entitled to receive the payment.
  1. Legal Compliance
  • Regulatory Requirements. Many jurisdictions have specific legal requirements mandating the issuance of a Notice of Assignment for the assignment to be legally effective. Complying with these requirements protects the interests of the factor.
  • Contractual Obligations. Factoring agreements often include clauses that require the client to notify debtors of the assignment. Adhering to these contractual obligations is crucial for maintaining the integrity of the agreement.
  1. Improved Collection Efficiency
  • Direct Communication. By notifying debtors directly, factors can establish a line of communication to manage and streamline the collection process.
  • Early Intervention. If there are any disputes or issues with the receivables, the factor can address them promptly, improving the chances of timely payment.
  1. Mitigating Credit Risk
  • Awareness of Assignment. Debtors who are aware of the assignment and the involvement of a professional factoring company may be more diligent in making payments, reducing the risk of defaults.
  • Legal Recourse. The notice ensures that factors have the legal recourse to take action against debtors in case of non-payment, enhancing their ability to manage credit risk effectively.
  1. Maintaining Professional Relationships
  • Providing a Notice of Assignment maintains transparency between the client, the factor, and the debtor, fostering trust and professionalism.
  • It ensures a smooth transition of responsibilities from the client to the factor, helping maintain positive business relationships.

 

Key Elements of a Notice of Assignment

 Legal Framework: The Law of Property Act 1925

The Law of Property Act 1925 is a key piece of legislation that governs the assignment of receivables, a central aspect of invoice finance. The Act sets out the requirements for a legal assignment, ensuring that the transfer of rights is clear, enforceable, and provides protection to all parties involved.

  1. Legal Assignment
  • For an assignment to be considered enforceable under section 136 of the Law of Property Act 1925, it must meet the following criteria:

In Writing: The assignment must be documented in writing and signed

Absolute: The assignment must be absolute, meaning the entire interest in the receivable is transferred without conditions.

Notification. Written notice of the assignment must be given to the debtor.

  • Failure to meet these criteria results in an equitable assignment, which, while still valid, does not offer the same level of legal protection and enforceability as a legal assignment.

 Best Practice: The contents of the Notice

  • Identification Details

Names and contact information of the original creditor, the factor, and the debtor.

  • Assignment Details

Specific information about the receivables assigned, including invoice numbers, dates, and amounts or confirmation that all present and future invoices will be assigned.

  • Payment Instructions

Clear instructions on how and where to make payments, including bank account details.

  • Contact Information

Contact details for any queries or disputes, ensuring the debtor knows whom to contact for clarification.

 

Take Away Points

The Notice of Assignment is a critical document in the factoring process, ensuring legal clarity, preventing double payments, improving collection efficiency, and mitigating credit risk.

By formally notifying debtors of the assignment, factors can assert their rights, comply with legal and contractual requirements, and maintain professional relationships. Understanding the importance of this notice helps ensure a smooth and effective factoring arrangement, benefiting all parties involved.

 

Joanna Buckley, Associate Director

Greenhalgh Kerr
Olympic House, Beecham Court,
Smithy Brook Rd,
Wigan WN3 6PR

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+44 (0)333 200 5200

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