The importance of capturing all related rights
In the previous instalment, we looked at the importance of retaining a right to disclose a
transfer of ownership to the seller’s customers. In this instalment, we examine the importance
of capturing all “related rights” when purchasing debts.
Purchasing debts: don’t leave
the extras behind
Debtor financing documentation will include a mechanism for
the transfer of title to receivables from seller to financier once
the seller’s offer to sell the receivable has been accepted by
the financier (usually signified by the payment of a purchase
price). Typically the “receivable” will be described as the seller’s
interest in, and its right to receive, payment from a debtor
under an underlying sale contract.
Typically, the documentation will also seek to capture the
transfer of a range of related rights to the financier. In addition
to the seller’s right to the receivable itself, the “related rights”
should encompass all of the seller’s other rights in connection
with a receivable that the financier would expect to acquire
when acquiring the receivable itself.
The financier should give careful consideration to capturing
the full extent of the seller’s related rights in each transaction,
particularly with respect to its sophisticated customers who
have given the seller the benefit of credit enhancements such
as guarantees and security supporting the debtor’s payment
of the receivable. As a guideline, financiers should consider
including the following seller’s rights as part of the suite of
related rights to be transferred with each purchased receivable:
- the right to the proceeds of the receivables in any form (this
right should always be included);
- the right to the proceeds of any insurance relating to the
receivables;
- the right to all documents of title, books, records and
other documents recording or evidencing the receivables;
- all rights under the underlying sale contracts and related
credit support, including any indemnities, guarantees
and security granted in favour of the seller; and
- rights to all returned goods and the proceeds of the sale
of those goods.
The financier should be careful, however, to ensure that
the facility documentation expressly states that, despite
the transfer of rights described above, the financier will
not adopt or incur any liability or obligation to the debtor,
or any other person, in connection with its purchase of the
receivable or any related rights.
The financier should also check the assignability of
the receivables and related rights when undertaking
its review of the underlying sales contracts: a topic we
considered in Part 3 of this series ‘The importance of
reviewing the underlying contracts’.
