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Insolvency News: Invoice Discounter’s Collection Fees Successfully Challenged


In the case of BHL v Leumi ABL Ltd [2017] EWHC 1871 (QB) the High Court required an invoice discounter to refund excessive collection fees charged after the administration of Cobra Beers Limited.


On 11 April 2008, Cobra entered into a receivables financing agreement (RFA) with Leumi ABL Limited.

On 29 May 2009, Cobra went into administration.

In order to enable Cobra to continue trading, BHL, a Cayman Islands company with the same shareholder and director as Cobra’s founding shareholder, provided an indemnity to Leumi for any sums due under the RFA.

Prior to the administration, Cobra invoiced its customers and collected its debts as agent for Leumi. Following Cobra’s insolvency, Leumi served notice that unless Cobra repurchased the receivables it would terminate the agency and take over collections in order to obtain repayment of the £7.75m owed to Leumi by Cobra. It notified Cobra that it would be charging a fee of 15% on all receivables collected.

The relevant clause in the RFA read:

Consequences of Termination:

(b) “if Leumi requires the Client to repurchase any Receivables and the Client fails to do so within 7 days of such demand, Leumi will be entitled to charge the Client an additional collection fee at up to 15% of amounts collected by Leumi thereafter. This collection fee is in addition to any other fee payable by the Client to Leumi under this Agreement. The Client expressly acknowledges that such fee constitutes a fair and reasonable pre-estimate of Leumi’s likely costs and expenses in providing such service to the Client”.

Leumi collected £8.1m, £7 m of which was collected in the first 4 months. The collection fees were £1.2 million.

But for the collection fees, Leumi would have collected enough money to discharge Cobra’s debt but it demanded further sums of £950,000 from BHL under the indemnity.
BHL complained that the fees were excessive and extortionate but, believing the payment to be due under the RFA, paid them. Leumi claimed this still left a further sum of £271,382.69 outstanding.

BHL issued proceedings against Leumi claiming that Leumi was not entitled to charge a 15% collection fee , that it had paid the £950k by mistake and Leumi should pay it back . Leumi contended that it was entitled to the 15% collection fee and that there had been no mistake when BHL paid it £950k. It counterclaimed the outstanding balance of £271k.

The issues

The issues the court had to decide were:

  • Was the clause a penalty clause?
  • If Leumi had discretion to charge a collection fee, could it charge any fee it liked, regardless of its actual costs, subject only to the 15% limit or was it only entitled under the clause to the actual or estimated costs of collections up to a ceiling of 15%?
  • If Leumi had failed to exercise its discretion properly did it have no claim at all to costs?
  • Could the court fix an alternative fee based on what Leumi could lawfully have charged at the time?
  • Did BHL pay the fees under a mistake of law so they were therefore recoverable?


Penalty clause

The clause was not a penalty for two reasons:

  • It was a primary not a secondary obligation. It was not akin to a sum payable instead of damages.
  • It was not a fixed sum or even a particular formula but rather a fee to be arrived at by exercising a discretion that could not be exercised irrationally . It was not penal or extortionate, and Leumi had a legitimate commercial interest in being compensated for its costs.

Exercise of discretion

The court found on the facts that Leumi had simply charged 15% without even considering what the actual or likely costs of collection would be, and had not even considered charging less than the maximum. Leumi had manifestly failed to take into account important relevant factors, and this meant that it was in breach of its duty to exercise its discretion properly.
It was nevertheless still entitled to some collection costs under the relevant clause of the RFA.

The court heard expert evidence and entered into a detailed calculation based on the hourly rates of relevant employees to determine what the maximum rational estimate of Leumi’s costs would be, if that estimate were made without breaching its duty to exercise its discretion rationally The court concluded that 4% was the absolute maximum that Leumi could have charged.


The court also found on the facts that BHL paid the fees of £950,000 in the genuine belief that they were due under the RFA. The fact that they complained that the fees were excessive and unfair did not change that mistaken belief. The payments were therefore caused by a mistake of law made (in this case) by both Leumi and BHL.

BHL were therefore entitled to recover any fees paid to Leumi that were in excess of those fees that Leumi was entitled to charge having properly calculated the estimated fees (ie at 4%).
The Court gave judgment for a sum of £735,000 plus interest and the costs of the action including an interim payment on account of costs of £780,000.


The decision will no doubt have invoice financiers reviewing their agreements and internal procedures and may mean a rethink of when it is appropriate to terminate the customer’s agency.

Some customers ( or their liquidators or administrators) may see an opportunity to recover collection fees levied prior to this decision.