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Bills of Sale Reform

On 12 September 2016 the Law Commission published its final report containing proposals to modernise the archaic Bills of Sale regime. The driver for reform was the increased use of logbook loans in the consumer vehicle finance market, but the registration of whole turnover invoice finance agreements with sole traders and partnerships as Bills of Sale also fell to be considered.

The Law Commission noted that:

“The registration regime under the 1878 Act is even more cumbersome than that for logbook loans. It normally requires three sets of solicitors: one to prepare the paperwork for the invoice financier; a second to advise the unincorporated business; and a third to administer an affidavit from the unincorporated business’s solicitor. It can cost between £480 and £1,735.
Even when carried out promptly, registration takes three to five working days. For unincorporated businesses, a delay in funding, even by a matter of days, may have serious consequences”.

Recent statistics demonstrate that as a result of these complications registration of general assignments of book debts declined from 221 in 2010 to only 68 in 2015. The Report then noted that the long-term aim of ABFA is “to achieve a unified register for general assignments of book debts made by both unincorporated and incorporated businesses”, and set out its recommendations as follows:

“In the long-term, the solution is to establish an electronic register. In the short-term, we recommend simplifications to the High Court registration regime. Our recommendations include the following:

(1) the business would sign the assignment document in the presence of a witness, but the witness would no longer need to be a solicitor;

(2) an affidavit would no longer be required;

(3) the invoice financier would be able to email documents to the High Court;

(4) the time limit for registration would be abolished; and

(5) re-registration would be required every 10 years, rather than every five years as under the current law.”

These proposals are now in the hands of government, and the Law Commission has expressed the hope that they can be the subject of a short non-contentious Act of Parliament in the near future.

Is registration really necessary?

These proposals are undoubtedly welcome, but even under the present law does an invoice financier really need to register invoice finance agreements with sole traders and partnerships as Bills of Sale?

In our view the need for registration can easily be overcome by the simple device of ensuring that invoice notifications contain the language of specific assignments.
We can say this with confidence because of a key decision of the High Court in which we were involved in 2000, but which unfortunately still appears to be little known or understood even within the invoice finance industry.

Background

Section 344 (1) of the Insolvency Act 1986 renders “a general assignment to another person of …existing or future book debts, or any class of them” void against a trustee in bankruptcy as regards book debts earned in a business which were not paid before the presentation of the Bankruptcy Petition, unless the assignment has been registered under the Bills of Sale Act 1878. The intention is to discourage secret transfers of personal property which are then relied upon to defeat the interests of general creditors.
A whole turnover type of invoice finance agreement falls within the definition of a “general assignment of book debts” in section 344, and on the face of it is therefore liable to be avoided by a trustee in bankruptcy in the case of a sole trader or partnership client.

The Alex Lawrie case

We and some other industry lawyers saw a way of circumventing section 344 without the need to go to the delay and expense of registration of the invoice finance agreement as a Bill of Sale. This involves the device of using a whole turnover agreement to effect an immediate assignment of debts as they come into existence, but providing wording in the nature of specific subsequent assignments in the notifications from the client to the invoice financier.

The point was tested as a result of an attack by insolvency practitioners in Hill (As Trustee in Bankruptcy of Burfoot and Haynes) v Alex Lawrie Factors Limited , in which a trustee in bankruptcy sought a declaration in reliance on s.344 that the assignment effected by the whole turnover factoring agreement was void for want of registration under the 1878 Bills of Sale Act.
Alex Lawrie (now Lloyds Bank Commercial Finance) and Bermans instructed leading insolvency counsel Gabriel Moss QC, and we accepted that the initial assignment effected by the factoring agreement itself was caught by Section 344 (1). However, we sought to rely on the fact that the agreement required the submission of regular invoice notification schedules by the client and which stated:

Pursuant to the Factoring Agreement we have made with you we assign each of the Debts to which the invoices attached relate”.

Since Section 344 (3) (i) of the 1986 Act expressly provides that the definition of “general assignment” does not include “an assignment of book debts due at the date of the assignment from specified debtors or of debts becoming due under specified contracts”, the invoice schedules effected specific assignments which were perfectly valid against the trustee.

In his judgment Jacob J ruled comprehensively in favour of Alex Lawrie:

“So the system as actually operated works on the basis of specific assignments rather than the general assignment. Only notice of the specific assignments is given to the debtor. Moreover the payments to the client are for value and are specifically related to each assigned debt. There is no question of payment at an undervalue or the like-the sort of thing that might be concealed by a general assignment. Under the scheme, the payments made or to be made by the factor go to the client’s estate, either before or after the bankruptcy Of course the value of the payments is reduced by the factor’s turn, but no-one suggests this turn is extortionate or otherwise improper”.

The judge went on to find that the intention behind the specific assignments was to convey anything that was not effectively conveyed by the general assignment, including an assignment effective as against a possible future trustee in bankruptcy:

What is not conveyed by the Factoring Agreement is an assignment effective as against a possible future trustee in bankruptcy. I see no reason in contract or equity why the parties should not create an assignment effective against such a contingency. The specific assignment can operate on anything not already conveyed. It operates to assign the specific debts if and to the extent the general assignment is ineffective. As for the statute, its policy is aimed at mere general assignments. Specific assignments are valid as against the trustee. If the order of the assignments had been reversed, no-one questions that the specific assignment would be valid as against the trustee. Why should the policy be different for a different order of assignments?

The judge also pointed out that because notice of the specific assignment was given to the debtors, the specific assignment was a valid legal assignment within Section 136 of the Law of Property Act 1925.

The judge concluded by saying:

So I think the specific assignments have legal effect and can be relied upon by Alex Lawrie against the trustee. I am gratified to reach this result because it also accords with common justice. Alex Lawrie paid (or committed to pay) for the specific debts. If they were deprived of their benefit they would have lost their money completely even though their clients had had the money.”

At the time of this decision in 2000 not all invoice financiers were widely using electronic transmission systems, but in this day and age it is a very straightforward matter for an invoice financier to ensure that the language of specific assignment is used during the notification process. Therefore, provided that the invoice finance agreement requires notification and that the notifications contain language of assignment which is sufficiently clear, it is difficult to see how an insolvency practitioner or anyone else could challenge a whole turnover agreement with a sole trader or partnership on the grounds that it was not registered as a Bill of Sale.

Although only 68 registrations of general assignments of book debts took place in 2015 (the last year for which figures are available), at the cost of between £480 and £1,735 noted by the Law Commission this represents unnecessary expenditure on lawyers of between £32,640 and £117,980.

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