1. Managing payment risks in commercial transactions

2. 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

3. 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…

4. 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….

5. METHODS OF MANAGING THE RECEIVABLES
Documentary collection
Clean collection
Direct collection
Documentary credit / letters of credit
Guarantees
Post Dated Cheques
Factoring / Forfaiting
Advance Payment

6. Commercial contractual terms
seller
Commercial contractual terms
buyer

7. 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

8. COMMERCIAL CONTRACT buyer Seller Remitting Bank Collecting bank 1 3
Submission of
documents
Documents
Presented 2
Documents forwarded
Remitting Bank
Collecting bank

9. SALE CONTRACT Remitting Bank Collecting Bank seller Buyer 1 6 4 3
Submission of
documents
Payment
made to
Exporter
Payment
made
Documents
Presented 5
Payment Transferred 2
Remitting Bank
Documents forwarded
Collecting Bank

10. RISK FACTORS To offer discount
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

11. 1
Goods consigned directly
seller
buyer
SALE CONTRACT

12. SALE CONTRACT 2 Buyers Bank Sellers Bank 1 Goods consigned directly4
Submission of
Draft /
Bill of
Exchange
Documents
Presented
Documents forwarded 3
Sellers Bank
Buyers Bank

13. SALE CONTRACT 2 Buyers Bank Sellers Bank 1 Goods consigned directly7 5 4
Submission of
Draft /
Bill of
Exchange
Payment
made to
Exporter
Payment
made
Documents
Presented 6
Payment Transferred 3
Documents forwarded
Buyers Bank
Sellers Bank

14. 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

15. SALE CONTRACT buyers Sellers Bank Bank 1 seller
Goods consigned directly with documents
buyer
SALE CONTRACT 4 2
Payment
made to
Exporter
Payment
made
on the
agreed date 3
Payment Transferred
buyers
Bank
Sellers Bank

16. 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

17. 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

18. Advance payment Payment made in advance through the bank
seller
buyer
Commercial contract
Goods consigned

19. 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

20. 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

21. Establishing Letter of Credit
buyer
seller 1 2 3
ISSUING
BANK
CONFIRMING /
ADVISING
BANK
SALE CONTRACT
LC application submitted by the applicant to the issuing bank
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
LC advised- with /without confirmation

22. NEGOTIATION OF DOCUMENTS UNDER CONFIRMED CREDIT2
seller
buyer 6 4 3 1 5
CONFIRMING
BANK
ISSUING
BANK

23. NEGOTIATION OF DOCUMENTS IN UNCONFIRMED CREDITS2
seller 6
buyer 4 1 3 5
NEGOTIATING
BANK
ISSUING
BANK

24. 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

25. Inland letter of credit - discounting
buyer 6 4
seller 2 5 3 1
Sellers Bank
Issuing bank

26. Documents under LC Bill of Exchange Commercial Invoice
Transport document
Inspection certificate
Insurance
Certificate of origin (in foreign trade)

27. Payment demanded on due date and defaulted by1
Goods consigned directly
seller
buyer
Payment demanded on due date and defaulted by
importer 2 3 6
Standby credit 8 7
Submission of
Draft /
Bill of
Exchange
Payment
made to
Exporter
Payment
made
Documents
Presented 5
Payment made 4
Documents forwarded
Issuing Bank
Exporter’s Bank

28. 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

29. STANDBY CREDITS MORE USEFUL IN COLLECTION INSTRUMENTS.
TO PRESENT A COPY OF COMMERCIAL INVOICE & UNPAID BILL OF EXCHANGE

30. 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

31. guarantees Guarantee issued Issuing bank application contract buyer
seller
contract

32. Guarantee invocation Issuing bank Stage 2 - invocation Recovery
buyer
seller
Non performance
Default stage i

33. GUARANTEES INLAND/FOREIGN
FINANCIAL / PERFORMANCE /DPG
DIFFERENCE BETWEEN FIN/PERF GUARANTEES
TYPES OF GUARANTEES –RECEIVABLES AND PAYABLES
CHECK POINTS

34. GUARANTEES - CHECK POINTS
PURPOSE – SPECIFIC
VALIDITY PERIOD
CLAIM PERIOD
VALUE
LIMITATION CLAUSE
REASONS FOR INVOKING – SPECIFIC
HOW TO EXTINGUISH THE LIABLITY

35. INLAND GUARANTEES TYPE STATUS OF THE IB DOCUMENTARY CONDITIONS
DOCUMENTS TO BE SPECIFIED
REINSTATEMENT CLAUSE
CHARGES
INTEREST FACTOR

36. Post dated Cheques Advantages Wrongful dishonour Rightful dishonour
Implications of dishonour
Criminal
N I law (Amendment) Act 1988

37. 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

38. 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

39. 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

40. 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

41. 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

42. 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