Third Party Debt Orders Ineffective

We were rather surprised recently to see a commercial law firm attempt to impose Third Party Debt Orders (“TPDOs”) both on an invoice financier and on debtors whose debts had been assigned to it, in each case in favour of a claimant who had secured a court judgment against the assignor.

TPDOs were formerly known as Garnishee orders, and are governed by Rule 72 of the Civil Procedure Rules which provides:

“(1) Upon the application of a judgment creditor, the court may make an order (a ‘final third party debt order’) requiring a third party to pay to the judgment creditor –

(a) the amount of any debt due or accruing due to the judgment debtor from the third party; or

(b) so much of that debt as is sufficient to satisfy the judgment debt and the judgment creditor’s costs of the application”.

Claim against the invoice financier

It should be relatively straightforward for an invoice financier to point to the relevant provisions in its invoice finance agreement relieving it of any contractual liability to make a payment to a client, certainly in circumstances where a judgment creditor has obtained a court judgement against that client.

Of course in any event by the time judgment creditors appear on the scene it is highly unlikely that there would in any event be any availability owing to the client under the invoice finance agreement, so a TPDO is most unlikely to be available as against an invoice financier certainly where the client has ceased trading.

Debtors

Irrespective of the question of notice of assignment, it is difficult to see how in the case of a whole turnover invoice finance agreement, which automatically assigns each debt to the funder at the point of its creation, there is any room for argument that the debt is in fact owed not to the funder but to the assignor.

In the claim with which we were presented the judgment creditor sought to overcome this minor inconvenience by arguing that there was a prohibition against assignment in the contract between the assignor and the debtors, and that this meant that whereas the assignment may take effect as between assignor and funder, it was not effective as between debtor and funder.

Of course this argument overlooks the entry into force of The Business Contract Terms (Assignment of Receivables) Regulations 2018 (“the Regulations”), paragraph 2 (1) of which provides:

“a term in a contract has no effect to the extent that it prohibits or imposes a condition, or other restriction, on the assignment of a receivable arising under that contract or any other contract between the same parties”.

This must mean exactly what it says, so a purported ban on assignment is wholly ineffective not only as between assignor and assignee as has always been the case, but also as between debtor and assignee since 2018.

To quote from Salinger on Factoring (emphasis added):

“9-68

In broad terms, this means that any sort of clause that purports to prevent a party from assigning the benefit of a payment obligation for the supply of goods, services or intangible assets to a non-party, will have no effect.

There are other technical arguments which would have defeated this bold attempt to nullify the invoice finance agreement in relation to the debtors involved, but we need to look no further than the Regulations to definitively secure this result.

Contact our Invoice Finance team.