July Webinar 2022 - The value and problems of using an IPU (Irrevocable/Independent Payment Undertaking) in Trade Receivables Transactions

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[co-author; Yana Greenwood, Sullivan Trainee Solicitor]

At the latest Trade & Export Finance webinar, partner Geoffrey Wynne delved into the topic of Irrevocable/Independent Payment Undertaking commonly referred to as an IPU. An IPU is a payment obligation usually given by the buyer of goods and services to the Seller, and not by a third party (e.g. guarantor) and not given to a third party (e.g. a financer).

Nature of an IPU

There are various ways in which an IPU can be achieved such as through a promissory note/bill of exchange or through an unconditional promise to pay a certain sum. It is important to note that IPUs are not to replace promissory notes, they are an irrevocable promise to pay without withholding/deduction/set off/ counterclaim that is separate from but often connected to another transaction.

An IPU was formerly used only in forfaiting, but it is becoming more popular in use mainly in receivables and payables finance transactions albeit their use may be limited to receivables arising under sale and services contracts and perhaps other commercial contracts. IPUs may serve as security or quasi security in commodity self-liquidating transactions for trade finance facilities. An IPU is a bankable undertaking classified as a trade debt but not a bank debt which seeks to avoid any recharacterisation risk and it could be issued by a bank to replace the buyer’s IPU as discussed below.

Issues to be considered

  • applicable law of the IPU;
  • the commerciality of having the buyer sign the IPU;
  • the reclassification between trade debt and bank debt; and
  • the assignability of IPUs.

Disclosure objective and requirements

Proposals by the accounting practices bodies-IAS and IFRS want to ensure that an entity discloses information in the notes about its supply chain arrangements that enables users of financial statements to assess the effects of those arrangements on an entity’s liabilities and cash flows. To meet that objective it proposes that the entity be required to disclose a number of requirements which are not necessarily practical or make sense if, for example, the buyer is not a party to the financing agreement between the bank and the supplier. For example, for a financing to be considered a payables financing program it must fit into certain parameters. Generally, this means that tenors do not exceed 180 days and the payment terms are subject to negotiation between the trading parties. This is all under discussion.

Bank Payment Undertaking (BPU)

A BPU is provided under a buyer-led programme whereby the buyer’s bank becomes the primary obligor to make the payment to sellers under an irrevocable payment undertaking to pay accepted invoice(s) on the due date. A BPU allows a seller to substitute the buyer’s payment risk with that of the buyer’s bank. It provides a seller of goods or services with the option of receiving early payment of outstanding invoices prior to their actual due date and typically at a discount from the buyer’s bank. Unlike in a payables finance programme, a BPU programme does not require any receivables purchase arrangements between the buyer’s bank and the seller, but may require the seller to confirm the buyer’s bank’s right to receive buyer payment and/or acceptance of early payment as full payment of the approved invoice amount.

The Electronic Payment Undertaking (ePU)

The ePU has been launched as part of ITFA’s Digital Negotiable Instruments Initiative in September 2019 to fulfil all requirements of a traditional negotiable instrument subject to contract law. However as with all technological changes, they move faster than legal changes and whilst Singapore and the US are leading in this space, English law can be flexible, but it is not always the case as demonstrated by electronic promissory notes and bills of exchange. Until the law is changed, contractual solutions can work. For example, Marco Polo are using a legal framework for the creation of digital payment obligations.

UNCITRAL – Model law on Electronic Transferable Records (2017) (MLETR)

MLETR has provided a response for Singapore, Bahrain, Abu Dhabi Capital Markets with a very broad definition of “Electronic Record”, however the Law Commission of England & Wales is not considering MLETR as the initial solution. A valid electronic signature under MLETR may not meet the higher standard of an AES/QES and it does not address issues such as possession. Therefore, it does not provide a complete solution but is a step in the right direction.

Law Commission on Digital Trade

The draft Electronic Trade Documents Bill is focussing is on removing the key blocker to electronic trade documents in English law by recommending a new definition of “possession” where intangible trade documents can also be “possessed” under English law. The legislation is expected to be passed this year or early 2023 by Parliament.

ITFA

ITFA is working on uniform rules for digital payment obligations (URTEPO) which are aimed to be launched in September. It is neutral as to how a payment obligation is created other that it is to be digital. It sets out timing for inspection of records and the rights and obligation of sellers and buyers of the transferable electronic payment obligation.

ITFA’s Whitepaper on making Trade an Investible Asset Class launched in May 2022 and it makes proposal on uniform principles, digital infrastructure, legal framework and proposed market survey.

The way forward

IPUs have a strong place in expanding supply chain options and trade bodies are actively looking to make them more usable and functional whether using a paper option or a digital one. As Geoffrey Wynne suggested, we should wait and see how English law is catching up on the technological changes in this evolving area of trade but in the meantime deal with what is required under contract law.

Please click here for a link to a video of the seminar to find out more about IPUs.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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