Financial trading companies operating in Bangladesh used to deal with transactions relating to foreign trade without any explicit law or policy on legality of transfer of right over invoice. The country's foreign exchange law put indirect restriction on many transactions in foreign currency.
The Bangladesh Bank (BB) has filled up this legal gap by issuing a circular (no. 43 dated November 17, 2019) titled "Discounting of direct or deemed export bills - transfer of right". It has granted general permission for assigning rights to dues at maturity of a usage bill of export from Bangladesh in favour of a license bank/financial institution abroad by paying usage bill in full, final and without recourse.
The circular was issued in the context of silence of Bangladesh laws and policies in relation to such transfer of ownership on invoice. There is no interpretation of whether invoice or bill receivables is considered actionable claim although under section 3 of the Transfer of Property Act, 1882, an actionable claim includes a claim to an unsecured debt.
In fact, in international trade, two important transfers of ownership facilitate cross-border trade. One transfer is for consignment and another for payment or consideration of the contract for export. Cross-border sales contract involves certain specific points of products, origin, price, form and date of payment, delivery period, etc.
Another contract, between the exporter and the shipping (transport) company is reflected in the bill of lading (B/L) issued by shipping company or its agent. International bill of lading includes air waybill, ocean bill of lading, rail bill of loading or truck bill of loading considering the mode of transport. Such documents include invoice, certificate of origin, and packing list as per contract.
In case of shipment by sea, there are two types of bills: a straight bill of lading, which is non-negotiable, and a negotiable or shipper's order bill of lading (B/L). The ownership of consignment is also transferable through transfer of ownership of B/L. The negotiable B/L can be bought, sold, or traded while the goods are in transit. In the event of total or partial loss and damage to or destruction of goods, transfer of title affects the parties' rights.
The other part of the sales contract is consideration or payment for the consignment. The payment is to be made by cash in advance against documents, or letter of credit, and revolving letter of credit. The right over payment is also transferable. In all export transactions, risk is a major consideration which needs to be minimised in all business dealings.
Some exporters, particularly smaller ones, need immediate cash after export/sale. They are supported with invoice discounting or sale of invoice to any financial institution or financing company. The best solution is bill discounting or invoice sale. The financial institution provides collection service or purchase/discount export bills under L/C for allowing exporters to use the money before actually receiving payment from an overseas buyer.
The financial institution and third-party financial company act as collector from the buyer of goods/services ?- ?when the invoice is due. The option enables the business owners to finance immediate working capital needs or raise cash flow by availing of credit based on bill discounting/account receivables. Such a short-term loan is unlike traditional bank loan.
In case of bill discounting, the financial institutions facilitate services to recover bill from the overseas buyers since Bangladesh's Foreign Exchange regulating act 1947 makes the exporter liable for recovery of foreign exchange of all exports.
There are different methods of invoice discounting. Most of the financial institutions are providing discount of invoice to their customers. Many overseas institutions also pay in advance to exporters and take responsibility of collection of payment on non-recourse basis. In that case the ownership of invoice is transferred to the financing company.
Such transaction is a modern financial product of banks, non-bank financial institutions and international trade financing companies. The companies may even take legal action against buyer/importer for enforcement of original sale contract between exporter and importer for payment.
The BB circular has referred to instruction at paragraph 25, Chapter 8 of Foreign Exchange Transactions (GFET), 2018, which also allowed the overseas correspondent institutions under subsection (b) stating that the authorised dealers may arrange fund against the discounting of usage bills in foreign exchange through their own offshore banking units/correspondent banks, financial institutions abroad or international financing institutions. The overseas correspondent should include international financial trading companies that are playing an important role in global export trade finance.
It is hoped that the central bank's latest policy will facilitate export finance and easy collection of outstanding export bill and thus help boost the country's exports.
MS Siddiqui is a legal economist.