System Receiver
Analyzing Receivables Purchase Agreements
A Receivables Purchase Agreement is a contract for the purchase and sale of a company’s accounts receivable. Accounts receivables is a collection of the accounts that a company reasonably believes, by performance on a contract or history of past performance, will generate income. A company purchasing those accounts receivables is thus purchasing the right to receive the expected payments from those accounts.
A typical Receivables Purchase Agreement will contain six articles covering the following areas: Definitions (of terms used in the Agreement), Conveyance of the Receivables, Representations and Warranties, Covenants of the Seller, Repurchases, and Miscellaneous.
Definitions. This section covers general definitions, specific terms, other definitional provisions, and certain references contained in the agreement. In order to make reading the agreement more understandable, terms such as “conveyance”, “cutoff date”, “purchase date”, “receivables”, “repurchase event”, and “schedule of receivables” should be specifically defined in this section.
Conveyance of the Receivables. This section covers the details of the receivables involved in the purchase and the price being paid for them. Usually this section will refer to an exhibit that will list all accounts receivables that are being purchased, information including but not limited to the name and address of the payee and the amount of payment owed. If there are any security interests in relation to any of the accounts, these should be listed as well. All rights of the purchaser against the account holders may be addressed, as well as any proceeds and the right to receive proceeds. The purchaser of the accounts receivable should also be given the physical files relating to the accounts and all property that secures each account.
The purchase price should also be listed in this section, be it a certain dollar amount or a percentage of the principal balance of the receivables. Sometimes receivables are purchased for 100% of the principal balance on the accounts, with the idea that the interest on the accounts will serve as the profit for the purchaser. The agreement should recite that both parties intend that each conveyance shall constitute a sale of the seller’s right, title and interest in and to the related Receivables, conveying good title free and clear of any liens, claims, encumbrances, or rights of others.
Representations and Warranties. This section covers the representations and warranties of both the seller and the buyer. Here both the buyer and the seller must make certain representations in respect to the accounts and to their status as corporations duly organized and validly existing in good standing. Seller must also promise that it is authorized to consummate the sale of the accounts, and buyer must promise it is authorized to make the purchase.
Covenants of Seller. This section covers specific covenants (i.e. promises) made by the seller in respect to the accounts, such as a promise not to sell or transfer the security interests involved or any of the conveyed property.
Repurchases. This section covers repurchases of receivables upon breaches of warranty, reassignment of repurchased receivables, and waiver.
Miscellaneous. This section covers miscellaneous topics such as the liability of the seller, amendment to the agreement, governing law, notices, severability, assignment, acknowledgment and agreement of the seller, further assurances, and other contractual issues.
These are the key sections of a Receivables Purchase Agreement. These agreements must be drafted clearly by an experienced transactional attorney.
About the Author
Mark Warner is a Receivables Purchase Agreement Research Analyst for RealDealDocs.com. RealDealDocs gives you insider access to millions of legal documents online drafted by the top law firms in the US that you can download, edit and print. Search For Free at RealDealDocs.com.
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