Buying Debt - Factoring In More Diligence

Companies purchasing debt must now ensure they undertake even more thorough due diligence of the debt they purchase before going ahead with such transactions.

In Bibby Factors Northwest Limited v HFD Limited and another [2015] EWCA Civ 1908, the Court of Appeal held that ordinarily there is no duty on a company whose debt has been purchased to inform the purchasing company of any pre-existing contractual arrangements it has with the company assigning the debt. If the purchasing company wants this information it must directly request it.

The Case

The facts of the case (illustrated below) are interesting in understanding the court's process in coming to this conclusion, and providing warning for anyone considering buying debt. Bibby Factors ("Bibby") bought a debt owed to Morleys Limited ("Morleys") by debtors HFD Limited ("HFD") and MCD Group Ltd ("MCD").

Morleys went into administration, and Bibby claimed against the debtors HFD and MCD in respect of unpaid invoices. Unknown to Bibby, the two debtors had invoice discounting agreements in place with Morleys, where they were entitled to a 10% rebate on annual sales. The debtors argued they were entitled to this rebate, even against Bibby, and should be allowed to exercise set-off rights against the amounts claimed by Bibby to the value of these discounting agreements.

Bibby had not made any enquiries to either Morleys or the original two debtors HFD and MCD regarding the existence of any such rebate or invoice reduction mechanisms. Bibby merely sent a letter to the debtors at the outset when taking on the debt, 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 letter requested that the debtors inform Bibby if there was any potential dispute with this. Neither HFD nor MCD brought the rebate to Bibby's attention, nor their right of set-off, although the effect of the notice was that they were now very much aware that their debts had been assigned to Bibby.

The Court of Appeal ruled that the debtors were under no obligation to notify Bibby of the rebate arrangement and that it was up to Bibby to make the proper investigations into the debts they were buying. Just because Bibby had tried to prevent set-off in its letter confirming HFD and MCD of its purchase of their debts, did not mean this was effective to negate the effect of the discount arrangement or rights of set-off. MCD and HFD were under no...