May 2, 2025

Legal developments on the regulation of factoring agreements

The Republic of Uzbekistan, in light of its commitment to support medium and small businesses, has adopted several amendments to certain provisions of the Civil Code concerning factoring agreements.

The new edition of Article 749 of the Civil Code provides a more precise and better-structured definition of factoring agreements. It used to be defined as a contract of financing under assignment of monetary claim, one party (financial agent) transfers or undertakes to transfer to the other party (client) monetary funds on account of monetary claim of the client (creditor) to a third party (debtor) arising from the provision of goods, works or services by the client to a third party, and the client assigns or undertakes to assign this monetary claim to the financial agent. The new edition of this article specifies who can be a “debtor”. In the context of factoring agreements, legal persons or other entrepreneurial subjects are considered debtors. It further elucidates that the following situations give rise to a monetary claim:

1) the supply of goods, including the lease thereof;

2) the completion of tasks or the supply of services;

3) the assignment of intellectual property rights.

The Civil Code, on a number of occasions, also included factoring organizations as financial agents, mirroring the developments in banking and finance law. Besides, the new edition of the Civil Code stipulates the right of the financial agent to a monetary claim for all income arising therefrom.

The obligations of the client owed to the financial agent have also been updated. The client used to be responsible only for the validity monetary claim that is being assigned, but now is obliged to provide information about the actual existence of that monetary claim. It has also been included that the client must assign the right to a monetary claim free from the rights of third parties.

One of the major changes can be found in the rules on invalidity of the prohibition on the assignment of a monetary claim. The client was responsible for arising out breach of the agreement on the prohibition on the assignment of a monetary claim vis-à-vis the debtor. By doing so, it protected only the financial agent from the consequences of such prohibitions. The new edition of the Civil Code now exempts the client from such responsibility, ensuring complete invalidity of the prohibition of this kind.

Additionally, amendments also took the interests of the debtor into consideration. It is now established that the currency of a monetary obligation and the country of its fulfillment cannot be changed without the consent of the debtor. When a financial agent demands a payment, the debtor has the right to present for offset its monetary claims based on the agreement with the client, which the debtor already had at the time when it received written notice of the assignment of the monetary claim.

Finally, the Civil Code requires the registration of the notice of assignment of monetary claim in the pledge register for the assignment to enter into force. The time of this registration will be a determinative factor in deciding the priority in case of competing payment demands of multiple financial agents in respect of the same monetary claim of the same client.