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Rebates: Set off – some thoughts
There was considerable disappointment amongst invoice financiers who operate factoring facilities when the Court of Appeal rejected the recent attempt to strengthen a funder’s position against a debtor who remained silent about a historical rebate claim which only emerged after the demise of the client.
We acted in the case in which the issue arose, Bibby Factors Northwest Limited v (1) HFD Limited (2) MCD Group Limited , which involved a claim by Bibby against a debtor who had been fully aware of the invoice finance facility and made numerous verifications over a period of 13 years without any reference to a rebate, but had then sought to claim a 10% contractual rebate on annual sales after the insolvency of the client.
The judge in the High Court ruled against Bibby, basically on the ground that the debtor had no “duty to speak”, and that the risk in these circumstances must be taken by the invoice financier.
That decision was then the subject of a Court of Appeal judgment which essentially upheld the reasoning of the judge to the effect that a debtor owes no obligation to an invoice financier in these circumstances: see [2015] EWCA Civ 1908.
There has been quite a bit of ill informed comment about the Bibby case from lawyers and even some academics in the various online legal portals which now exist for all and sundry to express their views. Whilst none of these comments dispute the undoubted fact that Bibby’s conduct was unimpeachable and totally in accordance with industry best practice, some commentators have rather naïvely suggested that Bibby should perhaps have made enquiries with the client as to the existence of a rebate arrangement with the debtor. Of course such enquiries were made in the take on process which had been undertaken by Bibby, and the issue was also covered in specific warranties given in the Receivables Finance Agreement.
It is unfortunate that points such as these and the precarious position in which invoice financiers find themselves when clients conceal the true facts seem to be lost not only on some of the lawyers and academics who commented, but also on the courts who are not always familiar with all the nuances of invoice finance which remains a highly specialised product in the context of UK commercial law.
Distinguishing the case on the facts
What is important moving forward is for lawyers advising invoice financiers to be able to distinguish the narrow decision in the Bibby case from different facts and circumstances. It is one of the strengths of English law that case law decisions are made on the narrow facts of the particular dispute before the court, and this was clear in the Bibby case: all that the Court of Appeal decided was that on the particular facts before them it could not be said that the debtor was under any duty to volunteer to Bibby the fact that it had a rebate arrangement with the client.
One reason for the court’s decision in the Bibby case was that the debtor’s verifications had been made by a series of relatively lowly employees across 17 sites nationwide, who in the court’s view could not be expected to have knowledge of a centralised rebate arrangement. Thus the position might well be different in the more typical situation where the invoice financier’s verifications take place with one point of contact in a central location which could be expected to be well aware of any rebate arrangement with the client.
It may also be possible to distinguish the Bibby case on the grounds that in that case there was no evidence of any knowledge by the debtor that the client had misled the financier as to the existence of the rebate, whereas in many cases there may well be evidence that at the very least the debtor had turned a blind eye to the fact that the financier was being misled by the client.
It is also important for financiers to hold to the position that in any event the Bibby case should not be extended to cover situations beyond the peculiar facts of a rebate arrangement agreed with the client before the inception of the factoring arrangement. Thus we recently settled a case on favourable terms which the financier was prepared to take to trial which had some similarities to the Bibby case and in which the debtor’s lawyers were of the view until a very late stage shortly before trial that the Bibby case provided them with a complete defence. In essence we were able to establish in our detailed legal argument prepared for the trial that the facts were very different and that the financier was not bound by a set-off agreement made between the client and the debtor after notice of assignment of future debts had been given in the usual take on letter.
Review of best practice
In addition, in our view there are a number of ways in which industry procedures could be modernised to improve an invoice financier’s position should a similar issue arise in the future:
(1) Pre-take on audits should specifically search for evidence of rebates, and audit teams should be alive to the existence of rebates in particular industries;
(2) It would also be sensible to require express declaration of rebate arrangements as a continuing contractual obligation on the client;
(3) Take on letters should be reviewed to ensure that they expressly negate any right to a rebate, and electronic copies should always be stored;
(4) Notices of assignment on invoices and statements of account should request debtors to communicate “any reason for non-payment” rather than refer only to “disputes”;
(5) Notices of assignment should also state that payment must (as opposed to “should”) be made to the financier and that these instructions can only be revoked by the financier;
(6) Ongoing audits need to search for possible rebate payments; and
(7) If, despite these precautions, an invoice financier has funded the full purchase price of invoices and is subsequently met with a successful rebate claim, then in addition to any claims under guarantees or indemnities it may be possible to bring successful proceedings against relevant individuals at the client for the tort of knowingly inducing breach of the relevant warranties in the receivables finance agreement.