UK: Risk Of Challenge To Fees Charged In Finance Agreements

It is common practice for a receivables finance agreement to allow the lender to charge a collection fee in the event that they step in to collect debts on behalf of the borrower client. In a recent case concerning a collect-out situation, a lender was required to reimburse collection fees to the extent that they were considered to be excessive.

This judgment may materially change the way in which collection fees and other fees are charged to clients. As such, it is of interest to lenders, borrowers, and insolvency practitioners. Below, we set out the key points from the case and give guidance on how to address the risk of a lender being required to repay fees to a client.

The case - BHL v Leumi ABL Limited

Leumi ABL Limited (Leumi) provided a receivables finance facility to Cobra Beer Limited (Cobra). Following a downturn in sales, Cobra entered administration owing substantial sums to Leumi. During the course of the administration, the Cobra business was sold and as part of that deal the buyer's shareholder, BHL, provided an indemnity which included a commitment to indemnify Leumi in respect of any sums due under the Cobra receivables facility agreement (RFA).

Leumi served notice on Cobra demanding repayment of the loan or repurchase of the outstanding debts. The letter stated that, if neither event happened within seven days, then Leumi would go ahead and collect the receivables itself and charge collection fees to Cobra pursuant to the RFA. Cobra was unable to repay Leumi and, accordingly, they took over collection of the receivables.

The RFA included the usual ability to recover costs and expenses incurred in collecting, enforcing, securing or protecting Leumi's rights. In addition, it also included a separate right for Leumi to be able to charge a collection fee for the collection of receivables in the event that the client failed to repurchase debts when they were required to do so. The clause in question entitled Leumi to charge "up to 15% of amounts collected by Leumi…in addition to any other fee payable by the client to Leumi" under the RFA (the Collection Fee). It also included an acknowledgment from Cobra that the fee was a "fair and reasonable pre-estimate of Leumi's likely costs and expenses in providing such service to the client".

The Collection Fees charged to Cobra as a result of this clause totalled around £1.2 million. Following a demand made under the indemnity, BHL paid most of this amount but then raised a challenge to Leumi on the grounds that Leumi was not entitled to charge the Collection Fee at 15%, that BHL had made the payment to Leumi by mistake and that, accordingly, Leumi should now repay that sum to BHL.

What did the case decide?

The judge concluded that it had been common practice for Leumi to charge the maximum amount to a client where an RFA provided for a fee which could be 'up to ' a certain percentage of debts collected. In a sharp correction to this practice, the High Court decided that:

  • Purpose of the Collection Fee: The purpose of the Collection Fee was to recover costs and expenses incurred by Leumi as collector of the receivables.
  • Flexibility given to lender: The provision gave Leumi the power to set the percentage Collection Fee in advance of making the collections. It did not necessarily matter if the Collection Fee charged was greater than the actual costs and expenses subsequently incurred. A margin of flexibility had to be given to the lender in determining the appropriate rate since, by definition, it could not know in advance what the costs would be. However, the percentage must be determined by reference to something, otherwise the Collection Fee would always be 15%. Having considered expert evidence as to the complexities of collection and likely timeframe for recovery of the debts, the judge suggested that 4% would be appropriate in this case.
  • Requirements when exercising discretion: The lender was required to exercise discretion in setting the Collection Fee rate. In doing so, the lender must act in a way that was not arbitrary, capricious or irrational in the public law sense. The outcome could not be outside what any reasonable decision maker could decide.
  • No double recovery: The RFA stated that the Collection Fee would be charged in addition to other costs and expenses. Despite this, the judge found that the reference in the relevant clause to "likely costs and expenses" meant that they were conceptually tied to the costs and expenses charged elsewhere in the agreement. The lender would not be permitted to charge the client twice for these costs and expenses.
  • Not a penalty: The Collection Fee was not a penalty.
  • Repayment of excess fees: The part payment of the Collection Fee by BHL to Leumi had been a mistake. BHL was therefore able to recover those sums which had been paid in excess of the amount which should have been charged.

Could other costs and expenses be affected by this decision?

The judgment does not look beyond the Collection Fee context and it is unusual for a case concerning contractual rights to invoke a public law duty for a party to exercise its discretion in a way that is not arbitrary, capricious or irrational. It remains to be seen whether the courts have the appetite to apply this decision in other contexts. However, if this is the case, the impact could be significant as it would give grounds for borrowers or insolvency practitioners to challenge and potentially recover fees already paid.

Does this necessarily mean a change for lenders? Well, that depends on the circumstances and the lender's existing business practices. It is worth remembering that the requirements imposed in this case are akin to the existing requirement for all lenders to act rationally when exercising powers granted to them under loan agreements. Accordingly, it should only necessitate a change in behaviour in circumstances where a lender is not already complying with those requirements, for example if:

  1. a lender has the scope to exercise a discretion; and
  2. the lender imposes a set response or rate without considering the context of a particular transaction.

The risk of challenge will be most relevant in circumstances where a lender is able or required to exercise its discretion to change a term in an agreement that has a financial impact on the client, for example, the setting or variation of a fee or the giving of consent.

The risks increase in an enforcement scenario where the lender typically benefits from a broader suite of discretionary rights compared with the pre-default situation. The rights are designed to enable a lender to protect its interest and preserve its rights. Inevitably, the exercise of rights at this stage of a transaction come with a greater risk of challenge where resources are more scarce and there are more interested parties who might raise a challenge, such as insolvency practitioners and powerful shareholders or guarantors. This case reminds us that powers such as these must be exercised with care and responsibly.

How to minimise the risk of challenge

There are three steps that we recommend a lender takes where they need to exercise their discretion and set a fee rate for a client:

  1. Include the appropriate rights. If a discretionary fee has been agreed, it benefits both parties to make it clear when the discretion can be exercised, by who, and to stipulate any applicable benchmarks that have been agreed. Clear terms agreed at inception of a deal can streamline action in an enforcement situation and can pay dividends in improving recovery and minimising the risk of challenge. Alternatively, if a flat fee is more appropriate, speak to your advisers who can help you to avoid the risks associated with penalties.
  2. Look out for those rights which require the exercise of discretion by the lender. Be aware that there is a distinction to be made between rights that arise automatically or upon some specific trigger event (for example, giving notice of prepayment or a change to the base rate) and those which require the lender to exercise some discretion or reach a decision before taking action (such as a lender's option to vary a dilution percentage if it considers it necessary to do so).
  3. Document the discretionary decision-making process. In this case, the Court found no satisfactory evidence of the discretion having been exercised and the 15% charge being decided upon as a result of the exercise of that discretion. A lender that is able to provide contemporaneous records demonstrating their decision-making process would be in a considerably stronger position. A 'good' decision making process could take many forms, but might include a calculation of likely costs and expenses, the use of data from a previous collect-out exercise, or considering a short delay before setting the appropriate rate in order to assess the likely collect-out period and degree of complexity (among other things).

In setting discretionary collections costs, be aware that:

  • Double recovery will not be permitted.
  • Costs charged should reflect predicted actual costs. There is no stipulated process for calculating these costs. The flexibility allows the costs to be estimated, taking into account the business model of the lender. By way of example, this may include direct costs for specific collections staff plus some management time, external agency costs or even an element of 'opportunity cost' if collections staff are in roles which would be profit-making if they had not been working on collections.
  • Assumptions should be carefully made. It is not sufficient to make an assumption that a collect-out will be complex and immediately apply the highest available percentage tariff.

One thing to remember

As a result of this case, lenders should be aware of the risk of challenge to the fees charged where they include some element of discretion. While the fees charged can sometimes be significant, the income received could quickly be undermined by the time and cost of a successful challenge. If there is any doubt as to whether this decision could affect a finance agreement or potential collect-out situation that you are working on, please contact one of our experts who would be happy to assist.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
3 Oct 2017, Seminar, London, UK

Join us over breakfast for our third retail-focused seminar.

10 Oct 2017, Other, London, UK

Join us for our Real Estate Sector Next Generation networking drinks evening.

12 Oct 2017, Webinar, Birmingham, UK

Join us for an interactive evening exploring the possibilities of implementing digital construction in real life projects.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.