In Bibby Factors Northwest Limited v HFD Limited and MCD Group Limited the Court of Appeal held that a company whose debt has been purchased (the “Debtor”) is under no obligation to inform the purchasing party (the “Funder”) of any pre-existing contractual arrangements it has with the company that sold the debt (the “Assignor”).
Facts and decision
The Funder had entered into a factoring agreement with the Assignor pursuant to which the Funder purchased debts owing to the Assignor by the Debtors. The Assignor and the Debtors had entered into contractual arrangements entitling the Debtors to certain rebates and to set-off those rebates against the sums owed under unpaid invoices.
When the Funder brought a claim against the Debtors for unpaid invoices the Funder had purchased, the Debtors argued that they were entitled to exercise their rebate and set-off rights. The Funder contended that, since it had sent a “take-on” letter to the Debtors, advising them of the debt purchase and stating that “… any right of set-off in respect of any sale you make to our client is not permitted…”, the Debtors were under an obligation to inform it of the set-off and rebate arrangements. The “take-on” letter also stated that the Debtors should advise the Funder of any dispute likely to defer payment.
The Court of Appeal rejected the Funder’s argument, holding that the fact that the “take-on” letter sought to prevent set-off did not impose an obligation on the Debtors to disclose information in respect of the set-off and rebate arrangements. Neither did the Funder have the power to prevent the exercise of set-off by the Debtors, as it was a stranger to the contract between the Debtor and Assignors.
This case highlights the importance to Funders of carrying out due diligence before purchasing debt. If a Funder wants to be informed of rebates or set-off arrangements prior to purchasing debt, it should ask direct questions of the Assignor or Debtor. Due diligence should not be focused solely on enquiries about potential disputes (as is common market practice). Funders would also be well advised to contract on terms with the Assignor that require the Assignor to provide information in respect of set-off or rebate arrangements.