managing payment risks in commercial transactions
TRANSCRIPT
Managing payment risks in commercial transactions
Managing payment risks in commercial transactions
SELLER’S EXPECTATIONS AND RISK FACTORS
Not fully conversant with the financial status of the buyer To receive payment as early as possible without disturbing his
funds flow If required, to avail credit facilities with financial institutions at
the cheapest interest rates against the receivables If it is an export - Not fully aware about the legal formalities
prevailing in buyer’s country If it is a service provider – delayed settlement of receivables To receive correct amount - in the desired currency - in his
own place at the right time
Buyers expectations and risk factors
To receive the same consignment at the right place Not to pay until the consignment is received at his
end to defer the payment as far as possible to avail cheapest credit facility from any financial
institution at concessional rate of interest for the payables…
UNCERTAINITIES AT BOTH THE ENDS…..
With all these risks and uncertainties, trade is continuously growing with no boundaries
Who takes the risk .. the buyer, the seller or both or the intermediaries ?
How do they manage the receivables and the outstanding ?
At what cost….
METHODS OF MANAGING THE RECEIVABLES
Documentary collectionClean collectionDirect collection
Documentary credit / letters of creditGuaranteesPost Dated ChequesFactoring / ForfaitingAdvance Payment
seller buyerCommercial contractual terms
Features of a commercial contract…
Sale / purchase contract is a document recording the terms of delivery and terms of payment
Who will bear the expenses / risk factors up to which stage Whether transport charges will be for the buyer or
seller’s account Transit risk will be covered by marine insurance at
whose expense At which stage transfer of title of the goods will
take place
2
Remitting Bank Collecting bank
1
Submission of
documents
Documents forwarded
3
Documents Presented
COMMERCIAL CONTRACT
Seller buyer
2
Remitting Bank Collecting Bank
1
Submission of
documents
Documents forwarded
3
Documents Presented
4
Payment made
5
6
Payment Transferred
Payment made to Exporter
SALE CONTRACTseller Buyer
RISK FACTORS
If the buyer refuses to accept the documents and not paying – Seller To offer discount To search for an alternate buyer offering the goods with or
without discount If alternate buyer not found, goods are to be re-booked Expenses – transport charges, freight charges, bank
charges….Cost of funds Or abandon the goods….. Documents are safe but payment not assured
Goods consigned directly
1
SALE CONTRACT
seller buyer
3
Sellers Bank Buyers Bank
2Submission
of Draft / Bill of
Exchange
Documents forwarded
4
Documents Presented
Goods consigned directly
1
SALE CONTRACTSeller buyer
3
Sellers Bank Buyers Bank
2Submission
of Draft / Bill of
Exchange
Documents forwarded
4
Documents Presented
5
Payment made
6
7
Payment Transferred
Payment made to Exporter
Goods consigned directly
1
SALE CONTRACTseller buyer
CLEAN COLLECTION.. RISK FACTORS
Seller should have absolute faith and confidence on the buyer… since goods are directly consigned.
Payment on due date by buyer If defaulted…. No assurance Has to resort to legal procedures
Sellers Bank buyersBank
2
Payment made on the
agreed date
3
4
Payment Transferred
Payment made to Exporter
Goods consigned directly with documents
1
SALE CONTRACTseller buyer
DIRECT COLLECTION.. RISK FACTORS
No control on the goods since it is directly consigned to buyer
Documents are also forwarded directly to the buyer … Only if the Seller has absolute confidence on the
buyer’s capacity to pay..this method will be suitable; Otherwise… this will be more risky
Legal aspects of credit collection
Transaction is covered under Indian Contract Act 1872.
Bank is appointed as an agent for collection by the seller
Bank does not assume any responsibility for credit protection
Seller has to proceed against the buyer for non-fulfillment of contractual obligations under civil suit.
In case of exports – no legal support except ICC Paris guidelines on collection documents
Commercial contract
Payment made in advance through the bank
Goods consigned
seller buyer
Advance payment
ADVANCE PAYMENTS…
Buyer remits the payment in advance Receiving the consignment or getting back
the payment if shipment never takes place will be the risk for the buyer
Seller enjoys buyer’s funds
Letter of credit and guarantees
To manage the receivables with lesser risks corporate may opt for any of these payment methods: Letter of Credit / Documentary Credit
Inland / Foreign Guarantees / Standby credits
Inland / Foreign
Establishing Letter of Credit
SALE CONTRACT
1 2 3
1. LC application submitted by the applicant to the issuing bank
2. LC established by issuing bank through their correspondent
bank with a request to pay on their behalf against submission
of prescribed documents by the beneficiary
3. LC advised- with /without confirmation
ISSUING BANK
CONFIRMING /ADVISING
BANK
buyer seller
NEGOTIATION OF DOCUMENTS UNDER CONFIRMED CREDIT
ISSUING BANK
CONFIRMING BANK
1
2
35
6 4buyer seller
NEGOTIATION OF DOCUMENTS IN UNCONFIRMED CREDITS
ISSUING BANK
NEGOTIATING BANK
1
2
35
6 4buyer seller
DOCUMENTARY CREDIT…..
An arrangement whereby a bank acting at the request and on instructions of a customer i.e., the applicant / buyer
To make payment to a third party (the beneficiary) by themselves or authorize other bank to pay or negotiate
Against stipulated documents
Provided Terms and conditions of the credit are complied
with
Inland letter of credit - discounting
Issuing bank Sellers Bank
1
235
6 4buyerseller
Documents under LC
Bill of Exchange Commercial Invoice Transport document Inspection certificate Insurance Certificate of origin (in foreign trade)
4
Exporter’s Bank Issuing Bank
2
Submission of
Draft / Bill of
Exchange
Documents forwarded
7
Documents Presented
8
Payment made
5
6
Payment made
Payment made to Exporter
Goods consigned directly
1
Payment demanded on due date and defaulted by importer
3Standby credit
seller buyer
STANDBY CREDITS
Promise to honour beneficiary’s presentation of a document indicating the default of the applicant
Act as a standby arrangement in case the obligation is not fulfilled by the applicant
STANDBY CREDITS
MORE USEFUL IN COLLECTION INSTRUMENTS.
TO PRESENT A COPY OF COMMERCIAL INVOICE & UNPAID BILL OF EXCHANGE
STANDBY CREDITS..
In respect of any debt,obligation or any liability by the overseas party in connection with bonafide trade transaction
As a back up instrument for collection ICC 500 & ISP 98 are the governing
guidelines
guarantees
Issuing bank
buyer seller
contract
appl
icat
ion
Guarantee issued
Guarantee invocation
Issuing bank
buyer sellerNon performanceDefault stage i
Stage 2 - invocationRecoveryStage 3
GUARANTEESINLAND/FOREIGN
FINANCIAL / PERFORMANCE /DPG DIFFERENCE BETWEEN FIN/PERF
GUARANTEES TYPES OF GUARANTEES –RECEIVABLES
AND PAYABLES CHECK POINTS
GUARANTEES - CHECK POINTS
PURPOSE – SPECIFIC VALIDITY PERIOD CLAIM PERIOD VALUE LIMITATION CLAUSE REASONS FOR INVOKING – SPECIFIC HOW TO EXTINGUISH THE LIABLITY
INLAND GUARANTEES
TYPE STATUS OF THE IB DOCUMENTARY CONDITIONS DOCUMENTS TO BE SPECIFIED REINSTATEMENT CLAUSE CHARGES INTEREST FACTOR
Post dated Cheques
Advantages Wrongful dishonour Rightful dishonour Implications of dishonour
Criminal N I law (Amendment) Act 1988
CRIMINAL LIABLITY
IPC 415 CHEATING IPC 417 PUNISHMENT FOR CHEATING IPC 420 CHEATING AND DISHONESTLY
INDUCING FOR DELY OF PROPERTY – 7YEARS
SEC 2 & 11 DEFINES ‘PERSONS’ – CO, ASSNS, BODY OR PERSONS WHETHER INCORPORATED OR NOT
CRIMINAL LIABLITY
Sec 138 – dishonour of cheques For insufficient balance Exceeds arrangement Account closed Payment stopped by drawer
Issuing notice by the drawer to the payee not to present the cheque – but the payee presents the cheque – dishonoured – can the drawer prosecuted?
Modi cements vs Kuchil kumar -1998 Drawer can easily get rid of the consequences.. Hence stop
payment will not preclude action under Sec 138
Non cognizable offence
CONDITIONS
Cheque to be presented within 6 months or expiry date whichever is earlier
Payee or holder in due course makes a demand to drawer within 30 days from date of receipt of the returned instrument
Drawer’s failure to pay within 15 days of receipt of notice Non-payment leads to ‘cause of action’ Complaint to be registered within one month of the ‘cause of
action’ Period of one month should be from the day immediately following
the day on which the period of 15 days from the date of receipt of the notice by the drawer expired.. Supreme Court judgement in Prem Chand Vs Yashpal Singh
No court lower to that of Metropolitan Magistrate or Judicial Magistrate of I class will try the offence
GUIDELINES
Complaint in writing
With dishonoured cheque / return memo / copy of notice / evidence for receipt of notice by the drawer
Sec 146 conveys ‘Bank’s slip prima facie evidence of certain facts – court will presume the fact of dishonour of such cheques until such fact is disproved’
Sec 147 – every offence punishable under this act is compoundable
To be filed either where cheque is issued / dishonoured
With metropolitan magistrate/ judicial magistrate/ I class magistrate
Cause of action
Drawer can be punished only if he could not pay during the notice period
Not for dishonour of cheque Punishment
Twice the cheque value Two years imprisonment
Liability of Directors…
Sec 141 of NI Act – every person of a company in charge of and responsible for business shall be deemed guilty
Recent Supreme Court judgment by Arun Kumai in Appeal by SMS Pharmaceuticals Only directors responsible for the particular deal would be
liable under NI Act No universal rule that a director of a company is in charge
of its every day affairs… Depends upon the respective roles assigned to the officers
in a company