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New UNIDROIT Model Factoring Law

UNIDROIT is a respected international organisation dedicated to the improvement of commercial law across its 65 member nations and beyond, and will be recognised by more established members of the invoice finance community (ie. older readers!) for its Convention on International Factoring which was adopted in 1988.

Factors Chain International with the able assistance of Freddie Salinger were heavily involved in that project, but that Convention has only been ratified by 9 States so in practice has been of limited use.

In 2018 the World Bank pointed out that international factoring represents approximately 20% of global factoring volume, whereas domestic factoring accounts for 80%, and despite the growing importance of factoring, no inter-governmental organisation had adopted a factoring model law to assist States in undertaking reforms to improve their domestic legal frameworks.

It was therefore agreed that UNIDROIT would develop a Model Law on Factoring. The World Bank proposal highlighted three reasons why a UNIDROIT Model Law on Factoring should be developed:

  1. The use of factoring as an important form of financing increasing access to credit;
  2. Ongoing constraints in access to credit as a limit on economic growth, particularly in developing countries and emerging markets; and
  3. The gap that currently exists in international rules and standards regarding factoring.

Over the past three years a great deal of work has been done on the domestic project by a team of legal experts. The UK representative was Professor Louise Gullifer of Cambridge University, with whom we worked for some years on the Secured Transactions Law Reform Project, which resulted in a comprehensive Report and set of proposals to simplify and codify English law relating amongst other things to the assignment of receivables, including the perfection, notification and registration of assignments.

The result of the UNIDROIT work is the new Model Factoring Law (“MLF”), which is described by it as follows:

“The draft MLF is a complete, self-standing legal regime to facilitate factoring transactions. It is designed to provide a set of black-letter law rules for States that have not yet implemented a modern, comprehensive secured transactions registry. For States that have undertaken a secured transactions reform, the MLF provides additional rules that could further strengthen their legal framework and encourage factoring, the assignment of receivables, and trade finance”.

Of course the UK has not yet implemented a modern, comprehensive secured transactions registry, but there is no chance of the UK Government adopting the MLF. Nevertheless there is much to admire in the relative simplicity with which the MLF sets out an easily comprehensible code for all aspects of the law relating to invoice finance, and it is worth reflecting on the overall approach which can be summarised as follows:

Formal requirements for a transfer

The draft MLF requires very few formal requirements for the transfer of a receivable by an agreement. For a transfer agreement to be effective, it must (i) be in writing and signed by the transferor, (ii) identify the transferor and the transferee, and (iii) describe the receivable in a manner than reasonably allows its identification.

Anti-assignment clauses

The draft MLF provides for a complete override of anti-assignment clauses. The anti-assignment clause override also applies to any restriction on transfers of supporting rights, such as guarantees.

Registration and priority

The draft MLF provides for a transferor-based registry for the listing of notices of transfers (including security transfers). Once a notice is registered, a transfer of a receivable is effective against third parties and priority between competing transfers is determined by order of registration. The priority of a transfer is not affected by any knowledge that the transferee may have of another transfer. In some States, a registry might have already been established under that State’s secured transactions law. In those cases, the MLF does not contemplate the establishment of a separate registry for factoring transactions.


The draft MLF provides that the right of a transferee of a receivable extends to its identifiable proceeds. “Proceeds” are defined as money, negotiable instruments or the rights to funds credited to a bank account that are received in respect of a receivable, including proceeds of proceeds. Third party effectiveness of a transfer and a transferee’s priority as established by registration also extend to proceeds.

Rights and obligations of the parties

The draft MLF provides a set of rules regarding the rights and obligations of the transferor and transferee and the rights and obligations of the debtor. To provide sufficient protection for debtors, it is provided that a transfer does not affect the rights and obligations of the debtor, including payment terms, and cannot change the currency of the payment specified in the contract giving rights to the receivable or the State in which the payment is to be made. Notifications and payment instructions must be provided to the debtor in writing. Where a debtor receives a notification of a transfer, the debtor is discharged by paying the transferee or as otherwise instructed in the notification, subject to any payment instruction subsequently received by the debtor from the transferee.

It is worth setting out an example of the simplicity of the approach adopted by the MLF on a key issue which continues to bedevil even the most experienced lawyers specialising in invoice finance, namely the availability or otherwise of set-off to a debtor:

“Article 27 — Defences and rights of set-off of the debtor

  1. In a claim by the transferee against the debtor for payment of a receivable, the debtor may raise against the transferee all defences and rights of set-off arising from the contract giving rise to the receivable, or any other contract that was part of the same transaction, of which the debtor could avail itself as if the transfer had not been made and the claim were made by the transferor.
  2. The debtor may raise against the transferee any other right of set-off, provided that was available to the debtor at the time it received notification of the transfer”.


Whilst at this stage the MLF is primarily only of academic interest, we do envisage that it may become relevant as lawyers supporting the invoice finance industry continue to attempt to develop a body of case law based on principle and sound reasoning. For example, the approach adopted in the MLF may be cited as persuasive authority for the suggested approach to be adopted by an English court where the path forward is not already prescribed by previous case law.

The other point worth considering is that the existence of the MLF may perhaps provide a further incentive for Government to eventually adopt the sensible reforms proposed by the Secured Transactions Law Reform Project in its final Report.

Contact our Invoice Finance team.