Representations and warranties as to the receivables: Overview, definition, and example
What are representations and warranties as to the receivables?
Representations and warranties as to the receivables are statements or assurances made by a seller or lender regarding the status and quality of the receivables (e.g., accounts receivable, loans, or invoices) that are being transferred or financed. These representations and warranties typically include declarations about the existence, validity, and collectability of the receivables. The seller guarantees that the receivables are accurate, not overdue, free from disputes, and enforceable.
In the context of a financial transaction, such as a sale of receivables or a securitization, the buyer or lender relies on these representations and warranties to assess the risk and value of the receivables they are purchasing or financing. If any of the representations or warranties are breached, the buyer may have the right to take legal action, such as requiring the seller to repurchase the affected receivables or provide indemnification.
Why are representations and warranties as to the receivables important?
Representations and warranties as to the receivables are important because they provide assurance to the buyer or lender that the receivables being sold or financed are legitimate, collectible, and free of significant risks. For businesses, ensuring that these representations are accurate helps avoid disputes and ensures that the transaction is based on reliable information.
For buyers or lenders, these representations and warranties are critical for managing the risk associated with purchasing or financing receivables. If the representations turn out to be false or misleading, it could result in financial losses, and the buyer or lender may seek compensation or the return of funds.
Understanding representations and warranties as to the receivables through an example
Imagine a company that is selling a portfolio of receivables to a factoring company. The company provides representations and warranties that all of the receivables are valid, not past due, and not subject to any disputes. If, after the transaction, the factoring company finds that several receivables are overdue or have been disputed by customers, the factoring company may have the right to require the company to repurchase those receivables or provide compensation.
In another example, a lender is providing a loan secured by a company’s accounts receivable. The company represents and warrants that all receivables are collectable and that there are no known disputes. If the lender later discovers that some of the receivables were improperly represented or are uncollectable, the lender may seek to recover the loan amount by taking legal action or demanding repayment.
An example of a representations and warranties as to the receivables clause
Here’s how a representation and warranty clause as to the receivables might appear in a sale agreement:
"The Seller represents and warrants to the Buyer that: (i) all receivables being transferred are valid and enforceable, (ii) no receivables are past due by more than 30 days, (iii) there are no disputes, claims, or defenses related to the receivables, and (iv) the receivables are free from any liens or encumbrances. The Seller agrees to indemnify the Buyer for any loss arising from a breach of these representations and warranties."
Conclusion
Representations and warranties as to the receivables are essential tools in transactions involving the sale or financing of receivables. They help ensure that both parties are aware of the quality and status of the receivables being transferred or financed, and provide a basis for resolving any disputes that arise if the representations are found to be inaccurate. For businesses, understanding and adhering to these representations is key to ensuring a smooth transaction and protecting against future liabilities.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.