Accounts receivable financing: assignment, pledging and factoring

Accounts receivable financing: realizing receivables through assignment or pledging

For enterprises with substantial accounts receivable positions, working capital financing is a recurring theme. Banks have become more reluctant to grant overdraft facilities, while factoring and accounts receivable financing companies have become more aggressive in their acquisition efforts. The legal structuring of such arrangements requires attention, as the choices between assignment, public pledging, silent pledging, and transfer of ownership have far-reaching consequences for the security position, customer relationships, and bankruptcy resistance.

Assignment versus pledging: the legal distinction

In the case of assignment, the creditor transfers his claim against the debtor to another party, the assignee. Pursuant to Article 3:94 of the Dutch Civil Code, assignment is effected by means of a deed drawn up for that purpose and notification to the debtor. After the assignment, the assignee is entitled to the claim, and the debtor can only make a valid payment to the new creditor. In the event of the bankruptcy of the original creditor, the claim falls outside the bankruptcy estate, provided that the assignment took place in a timely and correct manner.

In the case of pledging, the creditor remains the rightful owner but grants a security right to the pledgee. Public pledging pursuant to Article 3:236 of the Dutch Civil Code requires notification to the debtor. Silent pledging pursuant to Article 3:239 of the Dutch Civil Code requires registration of the pledge agreement with the Tax and Customs Administration (a registered private deed) or by notarial deed, without the debtor being notified. Notification is given only when the pledgee wishes to exercise his rights.

In practice, silent pledging is almost always used for bank financing, in the form of a collective pledge deed that is periodically registered with the Tax Authorities. In factoring structures, assignment is often chosen, because the factor actively collects the receivables and takes over the debtor relationship.

Factoring with or without recourse

Factoring has two main forms. In recourse factoring, the debtor risk remains with the company. If the debtor fails to pay, the factor can return the invoiced receivable or offset it against new invoices. In non-recourse factoring, the factor assumes the debtor risk. The price is naturally higher, and the factor will impose strict requirements regarding the quality of the debtors and the underlying contracts.

In both forms, it is important not to include a prohibition on assignment concluded by the factor in the general terms and conditions of the supplier. Article 3:83 paragraph 2 of the Dutch Civil Code stipulates that a contractual prohibition on assignment can indeed have effect under the law of obligations, although legislation came into effect on July 1, 2024, that curbs these restrictions in a B2B context to facilitate factoring. Checking the existing terms and conditions prior to factoring contracts is always advisable.

Bankruptcy risks and pauliana

In the event of the bankruptcy of a supplier who has assigned or pledged receivables, a dispute frequently arises between the pledgee/assignee and the bankruptcy trustee. The trustee may take the position that the security was not validly established, that notification was given too late, or that fraudulent conduct has occurred.

The Faillissementspauliana (Paulian Action for the Depreciation of Bankruptcy) under Articles 42 and 47 of the Bankruptcy Act imposes requirements on transactions carried out to the detriment of creditors with knowledge of impending bankruptcy. The transfer or pledging of claims shortly before bankruptcy may fall under this provision, with the result that the assignee or pledgee is left empty-handed. Anyone entering into a major factoring agreement would be well advised to have an up-to-date overview of the counterparty's financial position.

Customer relationship and commercial consequences

An often underestimated aspect is the signaling effect of factoring. When debtors receive a notice of assignment, they may interpret this as a signal that their supplier is experiencing financial difficulties. Silent pledging prevents this in most cases, but the signal is still conveyed if the pledgee actively exercises their rights. Good communication with key customers, or a choice for selective factoring on a portion of the portfolio, can mitigate this effect.

Follow-up action

Are you considering factoring, debtor financing, or a collective pledge agreement with your bank? Our lawyers assess the agreements, the risk of assignment prohibition in your own terms and conditions, and the legal validity of the security structure. Poorly structured debtor financing can suddenly prove to be an unprotected position at the first sign of trouble.