finance-law.info

Finance agreements for sale?

There are various commercial reasons why businesses that have entered into finance agreements may want to sell them. For example, it could be (1) the sale of bad or doubtful debts to remove them from a company’s books, or (2) the sale of good or potentially good debts to realise a proportion of their value.

With the first of these, the sale price is likely to be a small proportion of the nominal value. This is because the buyer will be taking the risk on it being able to recover more from the underlying customers than the buyer has had to pay.

The second of these – the sale of good debts – can include a variety of arrangements such as factoring arrangements, block discounting or a sale because of the selling financier exiting the particular market. Unlike the first scenario above, with factoring arrangements, for example, it is not uncommon for the buyer (the factor, in this instance) to have recourse to the seller if debts are bad or disputed. Whether or not the buyer is to have recourse will depend on a number of matters including the risk inherent in the debts and the purchase price being paid for them.

If you are considering selling finance agreements or the rentals payable under them, you need to ensure that they can be “assigned”, without putting you in breach of the finance agreement. Assignment is the legal term used for when one person transfers a right to another person.

When people talk about an agreement being assigned, it is important to note that the general rule is that the buyer acquires the “benefit” of the agreement, but not the “burden”. In other words, under English law, the buyer will not be liable for performing the seller’s ongoing contractual duties under the agreement. So if the parties envisage that the buyer is to perform these, there should be a contractual obligation on the buyer to do this.

Under English law, the current position is that assigning (or transferring) rights under an agreement is generally permitted. There are certain exceptions to this, though (beyond the scope of this article).

It is usually the case for finance agreements to specifically provide for the lender or lessor to be able to assign its rights to a third party. If the finance agreement prohibits the lender or lessor from doing this, it would be a breach if it did assign its rights (and the customer may be able to terminate the agreement as a result).

It is very common to expect that in the sale agreement between the seller and the buyer, the buyer will want a warranty that the finance agreements are capable of assignment. In a future article, we will look further at some of the warranties that buyers may seek from sellers in sale agreements.

This article is a general summary only. If you would like advice on any of the issues raised by it, please contact us. Please bear in mind that the law may change from time to time and this article may not be (or have been) updated to reflect those changes. © afl Solicitors

2011 - the alternative legal review

When looking back at 2011, there are a number of issues on the legal and regulatory front that immediately spring to mind as having received much attention: the new lease accounting rules and the Consumer Credit Directive requirements having gone fully live on 1 February, for example.

But the year also saw a number of other developments, particularly cases.

Leasing

Michael Gerson (Leasing) Ltd v Greatsunny Ltd: Greatsunny (G) let some premises to a tenant, which tenant also took a lease of equipment from Michael Gerson Leasing (MGL). The equipment became fixtures (which would, in law, belong to the landlord). In 2005, the landlord agreed to a waiver in favour of MGL. Under the terms of the waiver, G agreed that in the event it determined the property lease, it would give MGL notice of the termination and after then 28 days in which to remove it.

The tenant became insolvent and the property lease was terminated. On 21 June 2007, there was a telephone conversation between MGL and G, during which G told MGL that the property lease had been terminated. (It was common ground between the parties that the notice could have been given orally and there was no need for it to refer to the waiver). MGL had also terminated its equipment lease and demanded its return. However, it did not take steps to recover the equipment within the 28 day period provided for in the waiver.

In the Court of Appeal MGL sought to argue that the notice given during the telephone conversation was insufficient because it was “casually” given and it had not realised the 28 day period had started to run. The Court of Appeal held that the difficulty with MGL’s submission was that the judge at first instance had accepted that notice had been given and the statement that the lease was terminated had been clearly made.

From a practical perspective, this highlights the significance of requiring written notice in circumstances such as this.

Consumer credit

HSBC Bank plc v Brophy: The Bank sent Mr Brophy an application form for a credit card. The form stated that it was a credit agreement regulated by the Consumer Credit Act 1974 and that he should only sign it if he wanted to be bound. The terms and conditions specified that the credit limit would be determined by the Bank from time to time and notified to him. Mr Brophy signed and returned the form and was issued with a credit card, which he used until the Bank terminated the agreement. He subsequently contended that the debt on the card was unenforceable. Under section 59 of the CCA, an agreement to bind a person to enter into a prospective regulated agreement as debtor is void. Mr Brophy’s position was that the completed application form was such an agreement. In addition, he argued that the agreement did not comply with the requirements of the relevant Regulations under the CCA because it did not contain a term stating the manner in which the credit limit would be determined. He submitted that it failed to identify any of the factors that the Bank would take into account or the manner in which it would evaluate them.

The court held that section 59 of the CCA had no application in this context. By signing the application form and returning it to the Bank, Mr Brophy applied for credit and offered to be bound by the terms and conditions set out in the form.

On the second point, the court’s finding was that the requirement to state the “manner in which the [credit limit] would be determined” was deliberately wide to cover any arrangements for its determination. It held that the clause in the terms and conditions providing for the Bank to determine the credit limit from time to time and notify it to Mr Brophy was covered by this: the manner in which it would be determined was by notification to the debtor.

Interpretation of contracts

ICDL GCC Foundation FZ-LLC v The European Computer Driving Licence Foundation

English law does not define the term “gross negligence”. However, the expression often appears in commercial contracts, particularly in clauses limiting liability. In a case decided by the High Court of Ireland under Irish law (applying principles of interpretation common to both English and Irish law) the court considered whether an alleged breach of contract was “gross negligence” or not.

The case involved a licence to supply computer training in Saudia Arabia. The licence included a limit on the licensor’s liability to €50,000, except for damage “caused by a wilful act or gross negligence”. It was argued that both Irish and English law do not distinguish between “negligence” and “gross negligence”. However, the judge found that as a matter of contract interpretation, in this particular contract, “gross negligence” meant “a degree of negligence where whatever duty of care may be involved that has not been met by a significant margin”.

Although it is sometimes suggested that since English law does not define gross negligence, the courts may have difficulty in giving effect to that expression in a commercial contract, this case lends support to the argument that English courts will give effect to that expression and applying it to determine whether a breach of contract is “gross negligence”.

This article is a general summary only. If you would like advice on any of the issues raised by it, please contact us. Please bear in mind that the law may change from time to time and this article may not be (or have been) updated to reflect those changes. © afl Solicitors

Sign and deliver! Is the person signing bound by the deed?

Under English law, contracts can generally be made without them having to be in writing.  However, there are certain types of contract that are not enforceable unless in writing.  These include guarantees.  Beyond this, there are some contracts that not only have to be written, but must be in the form of a "deed".  With deeds, there are specific formalities that have to be followed. 

The Law of Property (Miscellaneous) Provisions Act 1989 provides that a document is only to be treated as a deed if it makes clear on its face that it is intended to be a deed by the person making it (or, as the case may be, the parties to it).

A deed only becomes binding when it is "delivered".   This does not necessarily mean simply handing over the document.  The courts have held that for "delivery" to take place, the parties must have shown an intention to be bound by the deed. 

The recent case of  Bibby Financial Services and others v Magson and others [2011] EWHC 2495 illustrates this.  This involved a claim against directors of a company in relation to guarantees and warranties signed by them.  Mr Magson and his co-director submitted that although they had signed the guarantees and warranties to which manuscript amendments had been made, they had done so in the expectation that typed versions would subsequently be produced to them for re-signing and dating.  Their position was that they had only signed the documents as a gesture of good faith and their intention to proceed; as corrected documents had not been produced, the guarantees and warranties were not properly executed.

The High Court found that the guarantees and warranties were not enforceable because they were not "delivered":  "On my findings none of the Guarantees, the Warranties or the Bibby ID Agreement was intended to be delivered in a technical sense, when handed to [Bibby's] Mr Darling at the meeting on 27 August 2008 after signature by Mr Magson and Mr Scott...It follows that neither Mr Magson nor Mr Scott was bound by his Guarantee or his Warranty, and so is not liable to [Bibby] in this action". 

The court made clear that signature alone is not enough; nor is it enough that "what looks like a deed has been given to the person who appears to be the beneficiary of it - the issue is not whether the document has been physically handed over to the beneficiary, but whether the person whose deed it is supposed to be intended to be bound by it". 

It is not uncommon for guarantors, for example, to sign a guarantee in anticipation of a finance agreement being entered into with a customer.  This case therefore highlights an important legal and practical issue.

It can be useful to include a statement in a deed indicating when it is treated and delivered and comes into effect, but even more significant, all parties need to be absolutely clear on when it is intended to be delivered and the parties bound by the executed document.

This article is a general summary only.  If you would like advice on any of the issues raised by it, please contact us.  Please bear in mind that the law may change from time to time and this article may not be (or have been) updated to reflect those changes. © afl Solicitors

Debt sale and purchase agreements and the Consumer Credit Act 2006

Whether selling or purchasing live agreements regulated by the Consumer Credit Act (CCA), or debts that have arisen under terminated regulated agreements, the CCA 2006 has undoubtedly had an impact.

Post-contract information:  who is responsible after the debt sale?

When an agreement is assigned, the general rule is that the buyer acquires the “benefit” of the agreement, but not the “burden”.  In other words, under English law, the buyer will not automatically be liable for performing the seller’s ongoing contractual duties under the agreement.  For this reason, where the buyer is to undertake these responsibilities, the debt sale agreement should impose an obligation on the buyer to do this.

However, the CCA imposes various statutory duties on “creditors” and “owners”.  For example, CCA 2006 introduced additional requirements upon creditors to provide debtors and hirers with post-contract information.  These include sending debtors notices of sums in arrears in relation to their accounts, notices of default sums that have become payable (for example, default interest) and some new periodic statements. 

Our customer is in administration: can the administrator sell our goods?

 In certain circumstances, an administrator has the right to sell goods subject to a lease or hire-purchase agreement.  In other situations, the administrator may be personally liable where they have been sold.

Right to sell under the Insolvency Act 1986

 Under the Insolvency Act 1986 (IA 1986), the court may make an order enabling the administrator to dispose of goods which are in the possession of the company under a hire-purchase or lease agreement as if the company had all the rights of the owner under the agreement.  

An order of this kind may only be made on the administrator’s application and where the court thinks that disposal of the goods would be likely to promote the purpose of administration (paragraph 72, Sch B1, IA 1986).  Any such order is subject to the condition that: