The Bangladesh Bank (BB) has recently circulated a draft policy on "Export under open account and repatriation of export proceeds by factoring on non-recourse basis" seeking opinions from stakeholders. The central bank is expected to issue the final circular in a few months, on completion of the process.
The BB is formulating the rule applicable for factoring in international arena. Factoring is transfer of ownership of process of sale -- both domestic and international trade -- to get advance payment from the factor (who takes ownership of invoice and pays in advance).
Factoring is of two kinds: recourse and non-recourse. While following non-recourse factoring, a company sells their accounts receivable to a factor, who then supplies cash needed to cover the invoices. In recourse factoring, the company has no liability with any uncollected invoices since the factor absorbs all the risks. The central bank is focusing on non-recourse factoring for export trade.
Certain concern was raised by one of the stakeholders, the Factoring Chain International (FCI) based The Netherlands, over whether 'actionable claim' after transfer of invoice/bill receivable is allowed in the law of Bangladesh and whether the right of factoring companies is secured. In fact, success of factoring depends on enforcement of 'actionable claim' by the law of Bangladesh.
Actionable claim is a claim against an unsecured debt or a claim against any beneficial interest in movable property not in possession of the claimant. Section 3 of Transfer of Property Act says, "Actionable claim" means a claim to any debt, other than a debt secured by mortgage of immoveable property or by hypothecation or pledge of moveable property, or to any beneficial interest in moveable property not in the possession, either actual or constructive, of the claimant, which the Civil Courts recognise as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent.
Actionable claim is transferable and inheritable in most of the jurisdictions. It is considered to be a property in the hands of a person who has the claim. An actionable claim includes two conditions to be fulfilled for a claim to be actionable -- unsecured money debt and a claim to a beneficial interest in moveable property not in possession of the claimant.
Section 130 of the same act reads, the transfer of an actionable claim whether with or without consideration shall be effected only by the execution of an instrument in writing signed by the transferor or his duly authorised agent, shall be complete and effectual upon the execution of such instrument, and thereupon all the rights and remedies of the transferor, whether by way of damages or otherwise, shall vest in the transferee, whether such notice of the transfer as in hereinafter provided be given or not.
An unsecured money debt is an obligation to pay certain amount of money and such a debt may be existent, accruing, contingent or conditional. A debt is existent when an amount of money has become due in the past and is payable at present. A debt is accruing when an amount of money has become due at present but it is payable on a future date.
As per section 3 of the Transfer of Property Act, 1882, an actionable claim includes a claim to an unsecured debt. A question is arising whether bill receivable or invoice falls under any category of actionable claim and right on actionable claim is transferable to a factor.
On the other hand, transfer of property means handover of the property either by the parties or by operation of law. Section 5 of the Transfer of Property Act, 1882 states that "transfer of property" means an act by which a living person conveys property, in present or in future, to one or more other living persons, or to himself, or to himself and one or more other living persons; and "to transfer property" is to perform such act. In this section "living person" includes "a company or associations or body of individuals, whether incorporated or not, but nothing herein contained shall affect any law for the time being in force relating to transfer of property to or by companies, associations or bodies of individuals."
MOVABLE PROPERTY: There is no definition of movable property in Transfer of Property Act, 1882. Section 2 of the Bangladesh Transfer of Immovable Property (Temporary Provisions) Order, 1972 states that "In this Order, unless there is anything repugnant in the subject or context, "transfer" includes transfer by sale, exchange, gift, heba, will, mortgage, lease, sub lease or any other manner of transfer or any agreement for such transfer or change of management through a power of attorney or otherwise, but does not include (i) a mortgage to the Government or to a local authority or to a Scheduled Bank or to a statutory Corporation or to a Co-operative Society, and (ii) any transfer by the Government or any local authority."
Section-2 (11) of the Sale of Goods Act, 1930 states that "Property" means general property in goods, and not merely a special property. However, there is no reference of movable property that includes invoice or bill receivable in international trade.
The Constitution has widely defined movable property. Article 152 of the constitution states that," property" includes property of every description movable or immovable corporeal or incorporeal, and commercial and industrial undertakings, and any right or interest in any such property or undertaking;
Primarily, property can be divided into two types (1) Corporeal and (ii) Incorporeal. Corporeal property can then be divided into two types: (a) movable and (b) immovable property. Sometimes, corporeal property is being divided into real and personal property. (2) Incorporeal property is of two kinds: the right of enjoyment that is incident to full ownership of property; and the encumbrances. An encumbrance is a right to, interest in, or legal liability on real property that does not prohibit passing title to the property but that may diminish its value. Encumbrances can be classified in several ways. They may be financial (for example, liens) or non-financial (for example, easements, private restrictions). Incorporeal property is a legal right in property having no physical existence. Example include patent rights, lease or mortgage. They have value but lack physical substance.
Therefore, transfer of property such as right on movable property like invoice in case of factoring is transferable and secured by constitutional provision-the constitution of Bangladesh guarantees transfer and ownership as an incorporeal property. Such a protection is much more effective than any provision in any other law.
Actionable claim of bill receivable is considered as incorporeal property and transferable under the Transfer of Property Act, 1882. The law can be applied for any transfer of right of bill receivable/invoice to the factor.
MS Siddiqui is a legal economist.