7 - Receivables financing

Summary

A large part of the wealth of the economy is locked up in debts or, to use the American expression, ‘receivables’. Unlocking that wealth so that it can be used as a basis for the development of commercial activity is a key task facing business people and policy makers. In both England and the US debts may be used as security and ‘quasi-security’. In this respect the law in the two countries is versatile and flexible and facilitates lending. There are, however, differences of approach between the two countries. This chapter will compare and contrast the treatment of receivables as security and ‘quasi-security’ in England and the US. In England receivables financing may take one of two main forms: either the creation of charges, whether fixed or floating, on receivables; or else the outright assignment of receivables. The latter practice is referred to as factoring, and many of the major financial institutions have factoring subsidiaries. Traditionally, receivables were used as security through the medium of the floating charge but the courts have recognised that it is also possible, at least in theory, to create a fixed charge over receivables including future receivables. Before this can be done, however, the grantee of the security interest must, in some way, be restricted in the manner that he can deal with the debts themselves or debt proceeds. More recently, the Court of Appeal in Re New Bullas Trading Ltd held that it is possible to create a crossover form of security, i.e. a floating charge on book debts while uncollected, coupled with a floating charge on debt collections.