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