Consistent with the PPSA’s treatment of accounts as personal property, and transfers of accounts as security interests, the PPSA takes the opportunity to include various related provisions on the transfer of accounts. The PPSA codifies and partially modifies some of the existing law relating to the assignment of receivables, in sections 80 and 81.
Equities continue to run against a buyer of accounts until notice is given of the assignment
The PPSA (effectively) codifies the existing law that provides that upon an assignment of accounts (receivables) or chattel paper, equities such as rights of set-off, counterclaims and other defences which the account debtor (the person who owes the obligation, for example, the lessee under a lease where the lessor assigns the lease rent receivables) has against the seller, can be asserted against the buyer until the account debtor is given notice of the assignment1.
Continuing with the example of a lease, a lessee under a lease (the account debtor in respect of rent) can continue to assert rights of set-off and other rights under the lease contract against an assignee of the lessor, until the lessee is given notice of the assignment of the lessor’s rights under the lease to that assignee.
Account debtor can waive prior equities
The account debtor (continuing with the example above, the lessee in respect of rent due under a lease) can contract out of their ability to assert equities against a buyer/ assignee of the accounts, which effectively washes the account(s) clean of prior equities and gives the buyer better title than the seller2 (the lessor in the lease example).
Where account debtors are prepared to do this, it will go a long way to facilitate the transfer of accounts, because the buyer does not take “prior-equity” risk such as the account debtor asserting rights of set off against the buyer which arose before notice was given of the assignment.
This is significant because prior equity risk is very difficult to quantify and price, and can inhibit the transfer or alienability of accounts (receivables).
The same position could be achieved before the PPSA, contractually, if careful and comprehensive waivers and releases were able to be negotiated with the account debtor, to waive and release all prior equities against an assignee of accounts. Section 80(2) of the PPSA should make the process more certain and efficient.
Account debtor and seller can modify or substitute the underlying contract under which account(s) arise, in a commercially reasonable manner
It is common in receivables financings for the purchaser of receivables (a factor or invoice financier) to “hard-wire” (require that the contractual terms not be amended without their consent) the underlying contracts that give rise to the accounts they purchase (such as services contracts or inventory sales contracts that give rise to accounts payable). Invoice financiers often do this so they know, and have control over, what they are purchasing.
This can cause difficulty to sellers of receivables, because their ability to alter their trade terms with individual customers is then removed. Take the example of a printing business that has assigned its trade receivables (accounts) generated from providing printing services to an invoice financier. Assume the printing company has standard trade terms which its invoice financier has approved and requires not be amended, but an existing important customer requires some changes to the trade terms to continue contracting for printing business. The printing company has to go back to the invoice financier for consent to amend its trade terms, and risks losing the key customer through either delay, or inability to accommodate the customer’s requested changes to the supply terms.
While it is unclear, it appears that the PPSA may recognise this difficulty. To facilitate invoice financing the PPSA appears to provide that the account debtor (the customer buying printing services in the example) and the seller (the printing company) of accounts, being the parties to the contract under which the account(s) to be assigned arise, may modify or substitute contracts under which accounts arise and have been sold or encumbered to a secured party, without the consent of the secured party, provided that3:
(a) the account debtor and the seller act honestly and the modifications or substitutions are commercially reasonable; and
(b) the modifications or substitutions do not materially adversely affect either:
Contractual restrictions on transferring accounts
Contract parties often seek to impose upon their counterparties contractual restrictions on selling or granting security over the accounts (receivables) that arise under the contract without consent (Negative Pledge). Negative Pledge covenants often exist in supply or service contracts under which accounts arise, in the form of restrictions upon assignment of rights (which would include accounts) under the contract without the consent of the other party to the contract.
The PPSA acknowledges that Negative Pledge covenants can often be very onerous, and close off potential sources of collateral (accounts) and financing to debtors.
The PPSA provides that grantors subject to contractual restrictions on selling accounts such as Negative Pledge covenants can nevertheless sell the whole (but not part only) of accounts that are:
(a) generated from the sale of inventory; or
(b) generated from granting rights or providing services in the ordinary course of the business of the grantor, but excluding construction contracts and financial services contracts; or
(c) chattel paper,
and give good title to the buyer4.
A secured party (often a buyer of accounts) who takes a security interest over accounts subject to a Negative Pledge contractual restriction on assignment or the grant of security, is protected from claims by the person who had the benefit of the Negative Pledge. The grantor (often the seller) is, however, liable to the holder of the Negative Pledge in damages for breach of the contractual restriction on assignment of accounts5.