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
 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
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
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
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 obligation to volunteer such information about the rebates
and other restrictions in the Contracts, despite knowing their
debts had been assigned, and knowing of Bibby's attempt to
prevent set-off in their letter. It is also worth noting that MCD
and HFD's rights were not extinguished by their silence. The
court noted that Bibby was completely within its power to have
contracted on terms which would have required additional
information to be given over by Morleys about the debts that Bibby
was about to acquire.
The Bibby decision makes it very clear to financiers that the
courts will not be sympathetic to financiers that are affected by
clauses which they should have discovered having engaged proper due
diligence of underlying assets purchased or offered as security.
The principles of "buyer beware" (caveat emptor) must
continue to be borne in mind. Additionally it is important to note
that the decision would suggest third parties do not lose rights
they have merely by being silent in this sort of situation.
Processes will need to be tightened and due diligence broadened to
ensure that all such risks are identified for factored debts and
other types of assets where these sorts of side arrangements may
Following on from the decision in Bibby, purchasers of debts of
financiers taking security over debts should:
ensure that proper due diligence is
conducted on the debts;
include a representation in the sale
contract of security agreement that the debt terms provided to the
financier or purchaser represent the whole relationship between the
debtor and the creditor in respect of such debt
in the notice issues to the debtor
ensure that an acknowledgement provision is included and chase the
debtor until such acknowledgement is agreed
Consideration should also be given to existing debts which have
been sold or subject to security to ensure that appropriate steps
have been taken to avoid a Bibby-like situation arising in respect
of such debts.
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.
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