Invoice finance has dominated the lending landscape in 2014 and has outperformed all other types of business lending in the UK. We examine below many issues which may arise in the restructuring of those businesses funded by invoice discounters.
1. Isn’t invoice discounting just a form of finance like any other?
Yes and no. Invoice discounting provides finance and eases a business’ cashflow by enabling its invoices to be paid immediately as soon as the business notifies them to the discounter. Where invoice discounting differs from other forms of finance is that the invoice discounter is not lending anything to the business. Rather, they are purchasing the receivable from the business and therefore, own the receivable outright.
2. Does the discounter buy all the debts of the business or just some of them?
It is possible to buy specific debts only (known as a facultative facility) or to buy all the debts (known as a whole turnover facility). You would need to check the facility agreement to determine exactly which debts have been purchased, as even with a whole turnover facility some debts may be excluded or may not be capable of being assigned to the discounter.
3. What if I discover that the assignment of some debts has failed (i.e. the debts were not capable of assignment)? Are these debts an asset of the estate?
Most discounting agreements will provide for such debts (often termed “non-vesting debts”) to be held by the business on trust for the discounter. Further, as all debts are usually paid into a trust / blocked account in favour of the discounter and most discounters take fixed charged over non-vesting debts, such debts are likely to be subject to a fixed charge in favour of the discounter.
4. The discounter is seeking to add additional charges as a result of the insolvency. Can they do this?
Yes. Often the insolvency of the business will be an event of default under the terms of the discounting agreement, entitling the discounter to do a number of things including charging additional fees. The fees (often mistakenly referred to as termination fees) are designed to compensate the discounter for the additional risk and management time it will incur following the insolvency of its client in seeking to recover the debts.
5. What if the fees are very high? Can I challenge them?
Fees will commonly range from 2% to 10% of the assigned sales ledger. A discounter will not always seek to enforce all the fees it is entitled to and most reputable discounters will be prepared to negotiate with the administrators to ensure challenges are avoided and its reputation (and that of the discounting industry) is preserved. If you consider the charges are excessive, unreasonable or irregular and you cannot reach agreement with the discounter, legal advice should be sought.
6. Are the debts secured by the discounter’s debenture?
No. The debenture secures the company’s obligations to the discounter by providing security over all other assets and the undertaking of the business. The debts that have been assigned to the discounter cannot be secured by the debenture since such debts are no longer the property of the company. The discounter cannot take security over its own property. As to debts which have not been validly assigned (non-vesting: other debts) see below.
7. Can I sell the WIP in an SPA?
In addition to purchasing the debts of the business, the discounter also purchases ‘related rights’ to ensure it has the ability to collect the debt in should it cease to have the cooperation of the business. Related rights can include the right to step in and complete any WIP in order to collect in the related debt. You should check the terms of the agreement to determine whether WIP vests in the discounter as a related right.
8. Two questions on stock and returned stock – can I sell it?
The comments above regarding WIP may apply to stock, especially where such stock has been allocated to a particular customer order. Where stock has been returned by a customer, such stock will often form part of a related right vested in the discounter enabling the discounter to sell the stock and apply the proceeds in satisfaction of the debt [relating to that stock].
9. Is the debt only assigned to the discounter when an invoice is issued?
Most discounting agreements are drafted to ensure all debts under its agreement are assigned at the earliest opportunity. This is usually upon the creation of the debt being the point at which the debtor incurs a monetary obligation to the discounter’s client. An obligation to pay money in most commercial situations arises prior to an invoice being issued. The invoice prescribes when that obligation is payable.
10. What if the business has granted security to another lender in priority to the discounter?
It is not uncommon for invoice discounting to compliment more traditional types of financing such as overdraft and loan facilities.
If all assets of the business are secured to a prior lender, then in order to purchase any debts of that business free from such security interests, the discounter should have obtained a waiver or release from the prior secured lender. Prior to any distribution and in the course of the insolvency, the existence and terms of such waivers and any deeds of priority should be examined and advice sought where necessary.
11. What if the discounter needs assistance with the collection of the debts?
Whether the business has been sold or is being traded by the administrators, the discounter may require the assistance of the buyer or the administrators to collect in the debts. Sometimes a commission is paid to the collecting party and will be documented in a debt collection agreement. Where the buyer of the business is assisting in collecting the debts, the discounter will be keen to ensure all payments by any common debtors (i.e. debtors of both the buyer and the discounter) will be applied in payment of the discounter’s debts first.
12. I may require the discounter to continue funding in administration. Is this possible?
If collection of the discounter’s debts will be improved by the business continuing to trade, the discounter may agree to continue funding but on amended terms. Care should be taken by the administrators to ensure they have sufficient comfort that adequate funds will be advanced free from any ability of the discounter to set off pre-insolvency liabilities. It is common for a new ledger to be opened post-administration and the pre and post insolvency ledgers are combined and set off at the end of the trading period.
13. Do debts created post-administration still vest in the discounter?
There has been some debate on this issue but the safest assumption to make is that, unless the invoice discounting agreement is terminated (note most agreements will never automatically terminate on insolvency), the debts created by the business will continue automatically to vest in the discounter. Notice provisions are likely to apply to any termination by the company.
14. A buyer wants to buy the debts of the business. How do I deal with this?
As the debts belong to the discounter, any sale will need to be effected by the discounter. Normally this will be achieved by way of a deed of assignment from the discounter to the buyer. Alternatively, the discounter can be made a party to the SPA for the sole purpose of transferring the debts to the buyer.
15. Does the company have any equity or other interest in the debts?
No. There is no equity of redemption entitling the company to have the debts re-assigned to it if it pays all sums owing to the discounter. The only interest the company has is the right to be paid for its debts under the terms of the agreement, which is subject to the discounter’s rights to apply certain charges, discount and set-off claims which may reduce the sum to be paid to the company. In certain circumstances (i.e. fraud) the sum “due” to the business can be a negative balance, which is why a discounter will take security (including guarantees) to secure the company’s obligations under the discounting agreement.
16. Can the discounter claim the bad debt relief on any debts or is this an asset of the estate?
This relief is only available to the supplier of the goods or services the subject of the invoice but the terms of the discounting agreement may provide for any such sums recovered to be held on trust for the discounter. The discounter will need to re-assign the relevant debt to the company first to enable it to qualify for the relief.
17. Is it just the trading debts of the business that are assigned to the discounter?
One would expect most discounting agreements to be limited to trade debts, but you should check the agreement carefully as some have wider scopes than others and may extend to other types of receivables such as insurance claims or refunds, intercompany loans, compensation claims, tax refunds etc. These latter types of receivables, if not caught by the discounting agreement, are likely to be caught by the discounter’s floating charge security in any event.
