Vol 11 (2014) - Issue 6

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Transfer of Credits: Highlights on Insolvency-Related Issues

Background
This article aims to analyse the main features of the transfer of credits under Portuguese insolvency law and its connection, inter alia, with the relevant complex Portuguese insolvency regime on clawback. It seeks to address some of the concerns that both sellers and buyers may have and some points that they may want to consider including in their 'check lists' before signing and closing a transaction.
Further to novation ('novação'), the act of replacing an obligation to perform with a new obligation and the assignment of a contractual position ('cessão de posição contractual') as a way of selling credits under Portuguese law, the assignment of credit rights ('cessão de créditos') nowadays constitutes a typical and common transaction. In fact, through an assignment of credits the seller (originator) may obtain a source of funding by means of converting future receivables into cash, being entitled to receive an amount as opposed to receiving the respective receivables as they become due, with the advantage of being released from both the risk and the underlying collection cost. The main advantages arising, prima facie, from the so-called 'true sale' are: for the seller it naturally improves cash flows, maximising the recovery of the respective receivables; for the purchaser, as an investor he aims at buying receivables at a discount (haircut) and be vested with the full benefits of ownership of the receivables (right, title and interest) in strict reliance upon the warranties, representations and covenants of the seller, while never neglecting the eligibility of such credits according to certain contractually agreed criteria.

Eligibility criteria
The 'cherry-picking' process related to the receivables implies an understanding of the nature of the receivables whenever the purchase of a pool of assets is at stake and assessing whether they are (ultimately) eligible for the sale.
From a commercial standpoint, it is important to assess the net value of such receivables for the purpose of determining the relevant purchase price (valuation process of the receivables).
The nature and quality of the assets must be duly considered, i.e., the buyer should evaluate the assets and the future streams of flow, including all matters in connection with the collection of the credit (e.g. the existence of an arbitration convention, a jurisdiction clause and an enforcement title). A credit shall only be deemed an 'eligible receivable' to the extent that it is inter alia legally and contractually freely saleable, assignable and transferable by its holder and its sale, assignment and transfer to the buyer does not in any way contravene or conflict with any agreements or applicable laws.
The conduct of due diligence will make possible (to a certain extent) to determine whether the credits to be assigned meet the above-mentioned requirements and the receivables are free and clear of any adverse claim by third parties.
Careful due diligence, therefore, plays a significant role.

Transfer of credits
Under the general civil law regime, a creditor may transfer (totally or in part) his credits to a third party, irrespective of the consent of the debtor, provided that the assignment is not prohibited:
(i) by virtue of law;
(ii) by an agreement between the parties; and
(iii) the credit is not intrinsically attached to the assignor by virtue of the specific nature of such credit or identity of the assignor.