In Bibby Factors Northwest Limited v HFD Ltd, the Court of Appeal highlighted that asset based lenders should ensure that they carry out due diligence on customer contracts before purchasing debt.

Facts of the case

Bibby Factors Northwest Limited (Bibby) entered into a factoring agreement with Morleys Limited (Morleys) whereby Bibby purchased debts owing to Morleys by HFD Limited and MCD Group Limited (the customers). The contracts between Morleys and the customers permitted the customers to obtain certain rebates on repayments.

Morleys subsequently went into administration and Bibby brought a claim against the customers for unpaid invoices. The customers disputed this and served a defence and counterclaim arguing that they were entitled to set-off against the amounts claimed by Bibby in accordance with the following provisions in the contract:

  • 10% rebate of the price payable by the customers for every supply made in a given calendar year
  • 2.5% discount if all payments were made in accordance with Morley's terms
  • credit in respect of certain debit notes raised for faulty goods

Bibby had sent a take on letter to the customers to advise them that Morleys had entered into a factoring agreement with Bibby, that the debts had been assigned to Bibby and that all payments due by the customers to Morleys should be directed to Bibby. The take on letter also stated that 'any right of set-off in respect of any sale you make to our client is not permitted' and that Bibby 'should be advised immediately of any dispute likely to defer payment.' Bibby argued that because of the inclusion of these provisions in the take on letter the Customers were obliged to notify Bibby of their set-off rights and, as they had failed to do so, they were prevented from exercising such rights.


The Court of Appeal found in favour of the customers and held that the take on letter was not sufficient to require the customers to disclose information to Bibby as to the contractual arrangements it had with Morleys. As there was no contractual relationship between Bibby and the customer, Bibby could not prohibit set-off arrangements by simply including a provision in the take on letter.

The Court of Appeal was satisfied that the customers had met the two-stage test for the equitable right of set-off as set out by Lord Justice Rix in the Geldof case: that the customers cross claim was closely connected with Bibby's claim and that it would be manifestly unjust to allow Bibby to claim for the whole amount.

Surprisingly, the customers had been dealing with Bibby for 13 years and had not once mentioned their set-off rights. However, the Court sided with the customers and held that, as they had not represented that they had no rights of set-off or that they wouldn't rely on such rights, they were not estopped from claiming set-off rights.

Useful tips

Whilst finance providers will certainly welcome the government's proposals to render clauses which prevent assignment of receivables in a contract between businesses unenforceable through The Business Contract Terms (Restrictions on Assignment of Receivables) Regulations 2015 which is yet to come into force, the legislation does not extend to deal with an obligation on clients or customers to disclose information to finance providers.

Below are some useful tips for finance providers to consider before purchasing debts:

  • ensure thorough due diligence is carried out before purchasing debt including looking at the existing contractual arrangements in place to see if there are any provisions dealing with rebates, discounts, credit notes and debit notes
  • ask questions directly to the client and the customers including, but not limited to, whether the contract includes any provisions as to set-off, rebates or discounts
  • include a provision in the agreement between the finance provider and the client obliging the client to provide such information
  • consider entering into a contractual arrangement with the customer to provide information as to any set-off or rebate arrangements in place


  • Bibby Factors Northwest Ltd v HFD Ltd and another [2015] EWCA Civ 1908
  • Geldof Metaalconstructie NV v Simon Carves Limited [2010] EWCA Civ 667