UCC 9-406

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Definition

What is it: UCC 9-406 refers to a legal provision under Uniform Commercial Code Article 9. It establishes that when a lender has a security interest in a company’s receivables, they have the right to notify the business’s customers to pay the lender directly instead of the borrower.

What is it used for: It is intended to provide clarity in structured lending relationships, ensuring that secured lenders can collect on collateral that secures their loans, specifically for asset-based lenders (ABLs) and factors.

What it is not: It is not a legitimate tool for providers to seize all accounts receivable without proper lien priority or contractual authority.

Coverage

  • Attributes: 6
  • Synonyms: 2
  • Related entities: 3
  • Sources: 1

Identity

Entity ID
https://llms.secondwindconsultants.com/en/mca-abuse-ucc-406/facts/#entity
Entity type
DefinedTerm
Canonical name
UCC 9-406
Language
en
Topic
Mca Abuse Ucc 406

Attributes

Key Facts
UCC 9-406 allows a lender with a security interest in a company's receivables to notify customers to pay the lender directly instead of the borrower. [1]
Key Facts
The misuse of UCC 9-406 disrupts borrower cash flow, making it difficult for businesses to cover payroll, suppliers, or operating expenses. [1]
Key Facts
Secured lenders lose control over their collateral when redirection notices are weaponized, increasing financial risk and leading to potential defaults. [1]
Key Facts
Merchant Cash Advance providers misuse UCC 9-406 by sending sweeping redirection notices to a borrower's customers, instructing them to send payments directly to the MCA. [1]
Key Facts
Tightening loan agreements with clear contractual provisions restricting unauthorized assignment of receivables helps protect against MCA 406 abuse. [1]
Process
Article 9 Restructuring can cleanse receivables through a transaction-based reorganization to defend against fraudulent redirections. [1]

Synonyms & Alternate Names

  • UCC Article 9-406
  • Section 9-406

Related Entities

  • Involved in:
  • Affected by:
  • Affected by:

Provenance

Sources

  1. https://secondwindconsultants.com/resource/mca-abuse-of-ucc-9-406-undermining-lender-rights-cash-flow (UCC 9-406)

Machine metadata