Series Index
Part 1 | Unpaid Corporate Transactions: Liability Behind the Veil
Part 2 | Trade Name Continuity and the Liability of a Successor
Part 3 | Directors’ Liability for Damages
Part 4 | The Person Behind the Company Name
Part 5 | The Limits of Self-Defense in Assault Cases
Part 6 | Criminal Settlement Money: How Much Is Appropriate?
Part 7 | Can Quasi-Rape Be Established If One Has No Memory After Drinking?
Part 8 | Freelancers and Severance Pay: What Courts Really Examine
Part 9 | Assignment of Receivables for Business Financing
By Hong Seung-kwon
Principal Attorney, PAN Law Firm (skh@law-pan.com)
In the course of doing business, companies often transfer money they are entitled to receive to another party, or acquire the right to collect money from someone else. This is known as an assignment of receivables. Put simply, it is the transfer of a legal claim—such as the right to receive payment for goods or services—from one party to another in its entirety. Businesses frequently use this mechanism to secure liquidity by assigning accounts receivable to a third party in exchange for immediate cash.
However, acquiring a receivable does not automatically guarantee payment. Several legal requirements must first be satisfied.
The original holder of the claim is referred to as the assignor, the recipient of the claim as the assignee, and the person obligated to make payment as the debtor. From the debtor’s perspective, it can be unsettling when an unfamiliar person suddenly appears and demands payment. The debtor has no easy way of knowing whether that person is genuinely entitled to collect the debt.
For this reason, the Korean Civil Act requires either that the debtor be notified of the assignment or that the debtor consent to it before the assignee can legally demand payment. As a general rule, the assignor is responsible for providing such notice. In practice, however, the assignor often authorizes the assignee to deliver the notice on its behalf.
Complications arise when competing claims emerge. A common example occurs when one of the assignor’s creditors obtains a provisional attachment over a receivable that has already been assigned. In such cases, it becomes necessary to determine who has priority—the assignee or the attaching creditor. The decisive factor is often whether the assignment notice bears a certified date.
If the assignee merely notifies the debtor of the assignment without securing a certified date, the assignee may demand payment from the debtor but may not prevail against competing claimants. This is one reason why notices of assignment are frequently sent through certified mail or other methods that establish a legally recognized date.
Another issue arises when the assignor later attempts to contradict the assignment. For example, the assignor may tell the debtor not to pay the assignee after having already transferred the claim. Faced with conflicting demands, the debtor may deposit the funds with the court rather than risk paying the wrong party. This procedure is known as a deposit in discharge of obligation.
Once a receivable has been validly assigned, the assignor is no longer the creditor and therefore cannot legitimately demand payment. It is much like a seller who transfers ownership of property and later changes their mind; ownership does not automatically revert simply because the seller wishes it to.
Disputes nevertheless arise because the legal requirements for a valid assignment are often not carefully observed. In some cases, there is no written assignment agreement at all. Instead, the parties may rely only on a power of attorney or other informal documents, raising questions about whether a valid assignment actually occurred.
Even when an assignment agreement exists, problems may arise if it does not expressly authorize the assignee to notify the debtor. Without such authority, the assignee may be unable to provide effective notice.
Additional issues can arise if the notice is delivered orally or if a written notice lacks a certified date. In those circumstances, disputes over priority may emerge between the assignee and other claimants, such as creditors who have obtained provisional attachments.
Particular caution is required when an assignee seeks to strengthen its position by obtaining a payment order against the debtor. The fact that a payment order has become final and binding does not necessarily mean that it will be treated as equivalent to a notice of assignment bearing a certified date. Assignees should therefore avoid assuming that a final payment order automatically resolves all priority issues.
The assignment of receivables is a useful financing tool for businesses. Yet its effectiveness depends on strict compliance with legal requirements. From the moment an assignment agreement is drafted, the parties should carefully ensure that all necessary procedures are properly completed. Otherwise, a business may acquire a perfectly valid claim and still find itself unable to collect the money.
About the Author
Hong Seung-kwon is the managing attorney of Pan Law Office. His practice covers civil and criminal litigation, as well as emerging legal issues in the digital era. He has continued to analyze how technological innovation, property rights and regulatory change affect law, markets and institutional order.
