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Factoring under Polish law

Borys D Sawicki
Times of economic slowdown create additional challenges for businesses. Limited availability of external financing and delays in payments from contractors prompt entrepreneurs to seek tools that could improve their financial position. Factoring is certainly one of the instruments at which it is worth taking a closer look.

In Poland, factoring is an unregulated agreement as opposed to typical agreements regulated by the Civil Code, such as sale, donation or construction contracts. The parties are, therefore, free to structure their legal relationship as they see it fit, provided that its substance and/or purpose is not contradictory to the nature of the relationship, the law or the principles of community life. Usually, they will model the arrangement in accordance with the prevailing market practice and taking into account views expressed by legal commentators.

Similar to most other jurisdictions, factoring arrangements may provide for non-recourse transfer (sale) of receivables or, to the contrary, for a recourse structure. In non-recourse factoring, the risk of non-payment will be on the factor. Thus, the factor will pay particular attention to the creditworthiness of the debtors of the receivables being transferred and the factoring agreement will provide for strict and extensive eligibility criteria. While non-recourse factoring brings about obvious benefits for the seller (in particular, steady cash flow), it does have downsides, too. These are costs (factor will charge extra for the additional risk) and possible limitations as to the number of receivables being sold (factor often turns away even average credit quality debtors). Obviously, variations to the model are possible; typically, one may expect partial non-recourse arrangements, where the factor's assumption of the credit risk is limited by time, and partial recourse, where the factor and the seller share the credit risk.

It is worth noting that, notwithstanding which credit risk option the parties choose, factors will not assume quality risk. In other words, even in non-recourse factoring, the seller will be required to re-purchase receivables which have not been paid for for reasons other than (in)solvency of the debtor; for example, because the quality of work of the seller has been contested by the debtor.

Pursuant to applicable provisions of the Polish Civil Code, the debtor of the transferred receivable may validly perform to the seller notwithstanding the transfer until he/she/it has been notified about the transfer. The requirement of notification to the debtor of the transfer of the receivable often poses a sensitive point for the sellers. Namely, many entrepreneurs remain very concerned about notification of their clients; there are industries where a business that factors its debts is perceived as being in financial distress. On the other hand, factors are reluctant to accept any compromise in this regard and insist on the notification to the debtors to ensure they can validly claim payment from them.

Polish law does not allow for a so-called global transfer of receivables. Instead, each receivable must be properly identified in order for it to be validly and effectively transferred onto the factor. The identification is effected by specification of (at least) the name and other relevant data of the debtor and the description of the underlying relationship. Since the data of the debtor(s) has to be transmitted to the factor, data protection issues could arise if natural persons were among the debtors. For that reason, the parties to a factoring arrangement may either exclude receivables from natural persons from the transfer or, in businesses where most debtors are natural persons, seek alternative solutions such as data encryption.

Borys D Sawicki

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