CL 8- Titled-based financing

1. Definitions
The concept of receivable financing
• “Receivables” refers to a money sum received by a business in return for the goods &
services supplied/provided – money owed to a business
• And so, debts owed to a business by its customers are receivables – beneficial to the
business
- referred to as book debts rather than debts
• Book debts are assets – they can be traded! – intangible = debts, tangible = goods

Why important?
• A trader can convert receivables (book debts) into cash by selling them – Source of
income
• This is called: assignment of debts by way of sale
Re George Inglefield Ltd [1933] Ch 1 (CA)
• Very effective way for businesses to raise money!

Short questions
Toni’s company sells electronic components on credit and is owed £5,000 by its customers. Is
the £5,000 debt ‘receivables?
• Yes – money owed to a business
• No

Can Toni’s company ‘sell’ the £5,000 debt to Bank?

• Yes – Method of trading
• No

Would this operation be an assignment of debts by way of sale?

• Yes – Trade/assigned
• No

2. Assignment of debts by way of sale

• Financing technique used by businesses to convert receivables (book debts) into cash
by ‘selling’ debts owed to them to a finance provider
• The finance provider buys the debt for a discounted value (less money than its usual
value) and provides the relevant business with an immediate cashflow
• The finance provider acquires ownership title over the debt

There are 3 parties!

• The business selling the debts is the assignor
• The finance provider is the assignee (buys the debt)
• The debtors are those whose debts are assigned (i.e. companies that trade with the
assignor)

Example
• Toni’s company has sold equipment on credit to BLT Inc, giving rise to a debt of £10,000
from BLT in favour of Toni’s
• Toni’s company needs money, so she sells the £10,000 debt to Bank, which agrees to pay
£8,000 for the debt.
• Bank gets ownership title over the debt and will try to make a profit when collecting the
debt from BLT

Toni’s company BLT

(assignor) £10,000 debt (debtors)

Bank
(assignee)

What are the benefits of this operation for the parties?

• For Toni’s company: immediate injection of cash (£8,000)
• For the finance provider (BLT): will try to make a profit of £2,000

Short questions
Company A sells furniture that it manufactures and is owed £60,000 by its customers. The
Company sells the debt to Finance Plus Ltd, a finance provider, for £50,000

• Is this an assignment of debt by way of sale? – Yes, debt sold for money
• Who is the assignor and who is the assignee? – Company A, Finance Plus Ltd
• Who has ownership title over the debt after the assignment? Finance Plus Ltd
• How is this assignment beneficial to Company A? – Gains £50,000 immediately
• How is this assignment beneficial to Finance Plus? – Might get £10,000 profit

3. Elements of the agreement

A. Recourse or non-recourse?

Recourse
- The assignor (‘seller’) guarantees that the debts will be paid in full to the assignee (‘buyer’)
• Company A assigns £60,000 to Bank and ensures that the Bank will be able to collect
£60,000 from the debtors
• If the finance provider is not able to collect this amount from the debtors, they can call on
the business (Company A) to repurchase “bad” debts
• The purchase price is likely to be high because the finance provider buys a ‘safe’ debt with
no risks
• As an illustration, assume that the recourse purchase price agreed in our example is £55,000

Non-recourse
• The assignor (business/debt seller) does not guarantee that the debt will be paid in full by
the debtors
• the assignee (finance provider/debt buyer) bears the risk of default by the debtors, i.e.
• E.g.: Company A assigns £60,000 to Bank non-recourse. If Bank only collects £30,000 from
the debtors, it cannot request Company A to fully pay the difference
• A feature of a non-recourse agreement is that the purchase price is likely to be low because
the finance provider bears the financial risk of the operation
- e.g. purchase price agreed in our example could be £20,000

B. Facultative
• The business submits a batch of existing debts (good and bad debts) to the finance provider,
who is not obliged to buy all of them debts
• This is referred to as a block discounting agreement.
• Recourse-based agreements are often facultative.
C. Are debtors notified of the assignment?
• If notified: debtors must pay the debt to the finance provider (assignee/buys the debt) =>
they won’t get discharged if they pay the business (assignor/sells the debt)
• Not notified: referred to as invoice discounting agreement => debtors get discharged by
paying the business (assignor/sells the debt)

Short questions
Toni’s company is owed £100,000 by its customers. He assigns (‘sells’) this debt to Finance Plus
Ltd, a finance provider.

Toni’s company guarantees that the debts will be paid in full. a) Is this a recourse agreement or
a non-recourse agreement? – Recourse

The debtors are notified of the agreement (i.e. they know that Finance Plus has acquired the
debt)
b) One of the debtors pays Toni’s company by mistake. Does this debtor get discharged?

4. Set-off defences

This looks into the relationship between the finance provider (assignee) and the debtor

Example
• Toni’s company sells on credit goods to Peter’s company for £20,000. So, Peter’s company
owes Toni’s £20,000
• Assume that there is a different contract between the same parties under the terms of
which Toni’s company owes Peter’s company £5,000
• As Toni’s company needs a cashflow injection, he assigns the £20,000 debt to a finance
provider (assignee), Finance Plus Ltd.
• When Finance Plus proceeds to collect £20,000 from Peter’s company:
- Is Peter’s entitled to set off against Finance Plus, so he is only required to pay £15,000,
or
- Is Peter’s company required to pay the Finance Plus £20,000, and then claim £5,000
from Toni’s company?

Rule 1: In equity, a debtor is entitled to set off against the finance provider claims arising under
separate contracts provided they are closely connected, regardless of whether the claim arose
after of before notice of the assignment (Bibby Factors Northwest Limited v HFD Limited
[2015] EWCA Civ 1908).

In our example,
• If the contracts between Toni’s company and Peter’s company are closely connected, then
Peter’s company will be entitled to pay the Finance Plus £15,000 rather than £20,000

Rule 2: Debtors are entitled to set off against a finance provider any debts with the assignor
which accrued before notice of the assignment (Business Computers Ltd v Anglo African
Leasing Ltd [1977] 2 All Er 741 (Ch))

In our example,
• If the £5,000 that Toni’s company (assignor) owes Peter’s company (debtor) accrued
(created) before Peter’s company was notified of the assignment, then Peter’s company will
only be required to pay Finance Plus £15,000

5. Bans on assignments
• Economic importance of sale assignments for SMEs – A company with less than 250
employees
• In the past, bans on assignments was the rule!
- Bans included in contracts giving rise to debts and imposed by debtors
• Today, bans on assignments are prohibited: SMEs are allowed to freely assign their
receivables:
- Business Contract Terms (Assignment of Receivables) Regulations 2018/1254, Reg
2(1)
- However, bans on assignments are allowed if the assignor is not a SME
B. Finance lease agreements
• This is when Toni needs new equipment for her business but does not want to buy the new
equipment (because she does not have any cash)
• So, she enters into a finance lease agreement with a leasing company
- She instructs the lease company to buy the new equipment from a vendor (the leasing
company owns the equipment)
- And then she rents the equipment from the lease company in exchange for rental
payments

Definition
• Agreement between a business (lessee) and a leasing company (lessor) for the lease
company to acquire an asset to be leased to the business over a period of time in exchange
for rental payments

There are 3 relevant parties

• Toni’s business is the lessee
• The lease company is the lessor
• And there is a vendor/supplier (who supplies the equipment)

Leasing company (lessor) Supplier/vendor

Business (lessee) – This is Toni’s company

(No direct relationship between supplier and business (lessee)

Short questions
• Toni owns an accounting company and needs to buy an expensive cutting-edge computer
• She instructs a leasing company, LC Ltd, to buy the computer from a vendor
• Toni enters into 5-year finance lease agreement with LC: she can use the computer for
rental payments

• Who are the parties to the lease contract – Toni + LC

• Who are the parties to the sale contract?
• Who owns the computer? - LC
• Is Toni’s company contractually connected to the vendor? -No
Leasing company (lessor) Supplier (vendor)

Business (lessee)
This is Toni’s company

A. Lessor and supplier (vendor)

• Contract of sale between the lessor and supplier under the SGA 1979
• Note that the leasing company is entitled to rights and remedies under the SGA against the
supplier (vendor)
• Note that the business (lessee) is not a party to this contract

Leasing company (lessor) Supplier (vendor)

Business (lessee)

B. Lessor and lessee

• Contract of hire under the Supply of Goods and Services Act 1982
• Lessee granted right to use the asset for rental payments over a period of time
• Will usually exempt the lessor from liability arising out breach by the supplier (vendor) -
Lobster Group Limited v Heidelberg Graphic Equipment Limited

Leasing company (lessor) Supplier (vendor)

Contract of sale

Business (lessee)
This is Toni’s company

C. Lessee and supplier (vendor)

• No contractual relationship between the lessee and the supplier
• Legal problem: If the goods supplied by the vendor are defective, how the lessee enforce
their rights?
• Toni enters into a finance lease agreement with LC (lessor) for LC to acquire a computer
from Vendor. The computer is defective, and Toni (lessee) wants to enforce her rights
- Can Toni sue the vendor? – No, not under the contract according to the SGA 1979
- Can Toni sue the lessor?
• The person offered the remedies under the SGA has not suffered a loss, the person with the
loss does not have a remedy due to no direct relationship

3. How does the law protect a lessee against defective goods supplied by the vendor?

The lessee has three options

• The lessor sues the supplier for the benefit of the lessee
• The lessee sues the supplier
• Contracts (Right of Third Parties Act) 1999

A. The lessor sues the supplier for the benefit of the lessee
(e.g. LC sues the supplier for the benefit of Toni)
• Under the principle of privity, it is not possible for a lessor to recover damages based on
the lessee’s loss (Beswick v Beswick)
• An exception was adopted in the Albazero (carriage of goods by sea)
- If a contract between “A” & “B” is for the benefit of “C”
- “A” can bring a claim against “B” for breaches sustained by “C” if this was the
intention of “A” & “B”
• This became the so-called principle of transferred loss (narrow ground), and was applied in
Linden Gardens Trust v Lenestra Sludge (construction contract)
• Can this be applied to finance lease agreements: so, the lessor brings a claim against the
supplier for the benefit of the lessee? Possibly
• In Linden Gardens, the principle of performance loss (broad ground) was also considered:
the lessor can sue the supplier for his own loss because supplier failed to perform as agreed

B. Lessee sues the supplier directly

(e.g. Toni sues the vendor)
• In the lease contract between lessor and lessee, the lessor assigns his rights against the
vendor (under the contract of sale) to the lessee
• Darlington Borough Council v Wiltshier Northern Ltd (construction contract)

C. Lessee acquires rights under the Contracts (Right of Third Parties Act) 1999
• 1st option: in the sale contract, lessor & supplier grant the lessee the right to sue the
supplier, s 1(1)(a)
• 2nd option: lessee enforces a term of the contract between lessor & supplier which confers a
benefit on him, s 1(1)(b)
• These options are uncommon in practice: sale contracts between lessor and supplier, under
the general terms of the supplier