What do you need to know about the assignment of receivables?

Sometimes, companies can't collect their receivables from debtors on time. They need to use a tool called the assignment of receivables so their cash flow and business performance don't suffer.

In business, there are many specific terms that can cause confusion and mistakes if you don't understand them from the start, and that can affect a company's success. That's why, in this article, we'll talk about the assignment of receivables and what it involves.

What is a receivable?

Before we talk about the assignment of receivables, it's important to clarify what a receivable is. Used mainly in accounting, it is an element that a company's cash flow depends on. More specifically, it refers to the amount to be collected from customers or other debtors for the products or services the company has provided.

What is a receivable used for?

The value of receivables is recorded in the accounting records based on invoices and other documents that show the amounts owed to the company. Those amounts act as estimates of collections. They are treated as estimates because that money does not actually exist in the bank account or in cash.

So, their purpose is to show income that is yet to be collected so the company can cover expenses it has already incurred.

At the same time, you also need to keep the level of liabilities in mind. In essence, receivables need to be higher than liabilities if you want positive cash flow. If you have debts to pay and receivables to collect, you can turn to factoring to get cash and cover your expenses.

If the level of receivables keeps rising, that's a warning sign because your cash flow is out of sync. That means you can't use that money in your current operations and you can't cover your liabilities.

If you can't renegotiate the terms for recovering those amounts, and putting pressure on customers doesn't work either, you have to turn to a company that specializes in this in exchange for a fee.

What is the assignment of receivables?

It refers to the instrument through which a creditor, on their own initiative, transfers their receivable to another person, free of charge or for consideration.

Who are the parties involved in the assignment of receivables?

The creditor (the party that must collect the receivable from the customer) is called the assignor, while the person who receives the receivable is identified as the assignee (the party that must collect the receivable on the creditor's behalf). The latter (the assignee) also becomes a creditor and is required to collect the value of the assigned receivable from the debtor. As a result of the assignment, the debtor becomes the assigned debtor.

So, the parties to the contract are the assignor and the assignee, while the assigned debtor becomes a third party.

What legal framework governs the assignment of receivables?

The assignment of receivables falls under the provisions of the Civil Code, which defines it as a method of transferring obligations under a contract.

What conditions apply to the assignment of receivables?

In addition to the general aspects required for any type of contract, the assignment of receivables also imposes the following conditions:

• Except for wages, maintenance payments, and other personal receivables, any receivable can become the subject of an assignment.
• The debtor is informed that the assignment brings in a new creditor and the related underlying terms.
• The debtor must accept the assignment in an original written document.

What types of assignment of receivables are there?

The assignment of receivables can be:

• Free of charge, this involves the provisions specific to a donation contract;
• For consideration, the applicable provisions are those involved in a sale and purchase contract or another legal act through which a receivable is transferred.
• Partial assignment, a receivable can be assigned in parts. If it involves another performance, it is assigned only if the obligation can be divided. In this case, the value of the assignment must not become more burdensome for the debtor.
• Successive assignments, when the assignor transfers the same receivable to several assignees in succession, the debtor is released from the obligation by paying under the first assignment communicated and accepted in writing with a certified date.

In what situations is the assignment of receivables used?

Receivables can be assigned to third parties, as follows:

• Free of charge, to pay expenses when the receivables have not yet reached their due date;
• For consideration, when the invoices are past due or the chances of collecting those amounts are especially low.

What do you need to know about the contract for the assignment of receivables?

The contract drawn up when the assignment is carried out must contain the following details:

• The nominal value of the assigned receivables;
• The value of the assignment;
• The due date.

Which receivables cannot be assigned?

Not all types of receivables can be assigned. The Civil Code provides that the following receivables cannot be the subject of an assignment:

• Those considered non-transferable by law;
• Those that involve a performance other than the payment of a sum of money. However, they can be transferred only if the assignment does not significantly increase the value of the obligation.

What rights are transferred?

The assignment involves transferring to the assignee:

• all the assignor's rights over the transferred receivable;
• security rights and other ancillary elements attached to that receivable.

The assignor cannot transfer to the assignee, without the mortgagor's consent, the right to possess the mortgaged property. If the mortgagor objects, the property remains in the assignor's possession.

Who bears the additional expenses?

The debtor is not liable for the costs incurred between the assignor and the assignee as a result of the assignment of receivables.

What do you need to know about notification and consent regarding the assignment of receivables?

The debtor is required to pay the assignee when:

• They give their consent in a written document with a certified date;
• They receive a written notice (physical/electronic) stating the assignee's identity, the assigned receivable, and the payment request addressed by the assignee to the debtor. In the case of a partial assignment, the extent of the assignment is also specified.

The debtor can be released from this debt only by paying the amount to the assignor. They can request written proof of this transfer if the notice is made by the assignee. Payment can be withheld if that proof is delayed.

In the event of legal action against the debtor, notice of the assignment does not involve payment of court costs if the debtor pays by the first due date, only if they miss it.

Can the debtor object to the assignment of receivables?

The exceptional situations in which the debtor can object to the assignment of receivables are:

1. when the title is void;
2. those that indisputably result from the content of the assignment;

those that are directed personally against the holder. However, if the latter acquired the title fraudulently to the detriment of the debtor, points 1 and 2 do not apply.