Finance and Security (I)

Question 1

What is title-based financing?

Answer 1

Arrangements whereby finance provider (i.e. a company that specialises in supporting businesses’ financial needs), supports businesses by acquiring ownership title over property.

Question 2

What are the two parts of title based financing?

Answer 2

Part 1: Assignment of debts by way of sale

Part 2: Finance lease agreements

Question 3

What is an example of assignment of debts by way of sale?

Answer 3

Example 1
• Business that sells computers = owed £100,000 by customers (debtors)
• Business needs a cash flow injection: can’t wait to
collect debts + doesn’t want to borrow money from
bank
• Business sells debt to finance provider for £85,000
– ‘Debt’ = personal property: can be sold + traded
• Benefits of this operation:
– Business gets immediate injection of cash
– Finance provider will try to make profit: e.g. if
collect £100,000 from debtors => profit of £15,000

Question 4

What is the analysis of example 1 regarding assignment of debts by way of sale?

Answer 4

Example 1: Analysis
• Contract(s) 1: There are contracts b/w business + its customers (debtors) which give rise to debt of £100,000 => the underlying contract(s)
• Contract 2: There is assignment of debts (sale)
contract: the business (assignor) sells the debts to a
finance provider (assignee)
• Ownership – finance provider (assignee) acquires
ownership title over debts: debtors will have to pay
the assignee
• Price – Purchase price is always less than face
value of total amount owed to business
E.g. a business sells debt amounting to £100,000 to the
finance provider for £85,000.

Question 5

What are trade debts?

Answer 5

Trade debts are personal property: receivables – they belong to the category of things in action and can be sold and traded

Question 6

What are the categories of personal property in English law?

Answer 6

1 Things in possession: (tangible things), i.e. goods
2 Things in action: (intangible things), (i) documentary
intangibles (bills of lading, etc.), & (ii) pure intangibles (e.g. debts, shares, etc.

Question 7

What are the two types of assignments?

Answer 7

• By way of sale (i.e. ownership of the debts passes to assignee) – Intention of the parties (George Inglefield Ltd)
• By way of security (i.e. ownership of debts stays with
assignor)

Question 8

What is each parties specific name in regards to assignment of debt by way of sales?

Answer 8

Business - assignor
Financer - assignee
Customer -debtors

Question 9

Why does assignment of debts by way of sale belongs to category of titled-based financing?

Answer 9

An assignment of debts by way of sale belongs to category of titled-based financing because financier (assignee) acquires ownership title over debts.

Question 10

What are the 3 points regarding the elements of the agreement?

Answer 10

A. Recourse or non-recourse sale?
B. Facultative
C. Are debtors notified of the assignment?

Question 11

Explain A. Recourse or non-recourse sale in regards to the elements of the agreement

Answer 11

An assignment of debts by way of sale can be recourse or non-recourse:
- A recourse is legal agreement that gives lender the right to pledged collateral if borrower is unable to satisfy debt obligation.
Example of this: A business (assignor) is owed £100,000 by customers (debtors) and a finance provider (assignee) agrees to buy debts. Assignor + assignee agree that finance provider has right to call on business to repurchase “bad” debts. Purchase price agreed on is likely to be high, e.g. £90,000
-Non-recourse example:
Business (assignor) owed £100,000 by
customers (debtors) and a finance provider (assignee) agrees to buy debts. Finance provider agrees to bear risk of the operation (i.e. if debtors do not pay, financier
provider will assume loss).
Purchase price agreed is likely to be low, e.g. £60,000

Question 12

What is an explanation of the 2)Facultative elements of agreement?

Answer 12

Business submits batch of existing debts to finance
provider, who is not obliged to buy all debts =>
referred to as a block discounting agreement.
• Recourse-based agreements are often facultative.

Question 13

What is an explanation of the 3) C. Are debtors notified of the assignment, element of agreement?

Answer 13

• If notified, debtors must pay debt to financier =>
they won’t get discharged if they pay the business
• Not notified: referred to as invoice discounting
agreement => debtors get discharged by paying
business.

Question 14

What are the Difficulties that the assignee (financier) may encounter when it collets the debts?

Answer 14

A. Bans on assignments

B. Set-off scenarios

Question 15

What is an example of bans on assignments?

Answer 15

• Company A sold equipment to Company B, which gives rise to debt of £40,000, i.e. Company A owed £40,000 by Company B
• Company A (assignor) assigns debt to financier (assignee)
• However, the contract between Company A and Company B contained clause prohibiting Company A from assigning debts
Issue: Does financier (assignee) have right to claim payment from Company B (debtor)?

Question 16

What are the legal principles regarding ban on assignments?

Answer 16

• General principle: if the contract giving rise to the debt bans Company A from assigning debt, then assignment = ineffective b/w financier +debtor
(Helstan Securities Ltd v Hertforshire)
• Bans on assignments are harsh on SMEs: legislation passed in 2018 prohibiting bans on assignments for SMEs
Business Contract Terms (Assignment of Receivables) Regulations 2018/1254 , Reg 2(1)2.

Question 17

What is an example of Set-off scenarios?

Answer 17

Company A has sold 4 grand pianos to Company B for £40,000, i.e. Company A = owed £40,000 by Company B => contract 1
•Another contract b/w same parties, under terms of
which Company A owes Company B £5,000 => contract 2
•Company A (assignor) assigns debt of £40,000 arising out of contract 1 to financier (assignee) => contract 3
•When the financier tries to collect debt from Company B (debtor), Company B claims it entitled to set off against financier, i.e. it claims that only required to pay £35,000
Issue: Is Company B (debtor) entitled to set off against financier (assignee)?

Question 18

What are the legal principles regarding set-off scenarios?

Answer 18

1.Debtors are entitled to set off against a financier
any debts with the assignor which accrued
before notice of the assignment (Business
Computers Ltd)
2.If the contracts between Company A and
Company B are closely connected: debtor
always entitled to set off in equity against
financier (Bibby Factors)

Question 19

What are finance lease agreements? (give example)

Answer 19

• Business is expanding + needs to buy expensive
computer. B has no cash + doesn’t want to take out loan from bank to buy computer.
• B instructed lease company (finance provider) to purchase computer from a supplier
• B + lease company agree to celebrate 4-year finance lease agreement: B will use computer that lease company has purchased in exchange for rental payments
• Commercial value of computer likely to be very low
at end of lease contract

Question 20

What is the analysis of the example of finance lease agreements?

Answer 20

1. Contract 1: Contract of sale b/w lease company (the finance provider) and supplier => this is the underlying contract
2. Contract 2: Finance lease agreement b/w lease company (lessor), which owns computer +
   business (lessee) which acquires right to use computer for rental payments
   NB: B (lessee) + supplier = not contractually connected
   In finance lease agreement, value of the asset is low at
   end of lease period
   Ownership: finance provider (lessor) acquires
   ownership title over computer and the lessee acquires
   right to use it.

Question 21

Why do finance lease agreements belong to the category of titled-based financing?

Answer 21

NB: NB: finance lease agreements belong to the category of titled-based financing bc finance provider (lessor) acquires ownership title over property

Question 22

Explain the contract of sale b/w the lessor and supplier?

Answer 22

Lease company (lessor) + supplier enter into a
contract for the sale of goods => under the SGA 1979
• NB: business (lessee) is not a party to the contract of
sale; however, it may have selected the goods

Issue: if goods supplied are defective, can lessor bring
claim against supplier under the contract of sale?
NO => Although lessor is granted rights under SGA
if goods defective (implied terms), claimant can only
recover loss that they have themselves suffered under a contract (privity rule): Beswick v Beswick.

Question 23

Explain the lease contract b/w the lessor and the lessee?

Answer 23

Lease contract b/w finance provider (lessor) + business (lessee) is contract of hire under Supply of Goods
and Services Act 1982 (SGSA 1982).

Issue: If goods supplied are defective, can lessee bring
claim against lessor under SGSA 1982?
NO =>
(i) Lease agreement will typically exempt lessor
from liability towards lessee arising out of breaches by
supplier
(NB: clause can be struck down if unreasonable, Lobster Group Limited v Heidelberg Graphic Equipment
Limited).
(ii) Even if there is no exemption clause, it will be very difficult for lessee to rely upon implied terms under the SGSA
– Goods fit for purpose s 4(5) SGSA: difficult for lessee to apply bc lessor’s judgement not relied upon
– Goods of satisfactory quality s 4(2): difficult to prove as lessor not involved in selection of goods.

Question 24

Explain the situation b/w lessee and supplier in regards to finance lease agreements?

Answer 24

Issue so far: if goods supplied by supplier are defective
i. Lessor cannot bring claim against supplier under the
SGA because lessor has suffered no loss (Bestwick v
Beswick)
ii. Lessee cannot bring claim against lessor under
lease contract (bc either contract includes an
exemption clause / options available to the lessee under Supply of Goods and Services Act 1982 are not suitable)
iii. Can lessee bring a claim against the supplier?
NO => bc lessee and supplier are not contractually
bound

Question 25

How does the the situation b/w lessee and supplier creates a legal black hole for the lessee?

Answer 25

• The person with right to sue (i.e. the lessor) suffers no loss
• The person who suffers loss (the lessee) has no right to sue

Question 26

What are the 4 ways in which the problem between the lessee and supplier solved?

Answer 26

There are 4 options to consider:
A. Lessor sues supplier for benefit of 
lessee
B. Lessee sues supplier 
C. Contracts (Right of Third Parties Act) 1999
D. Collateral contract b/w supplier and 
lessee

Question 27

How does A. The lessor sues the supplier for the benefit of the lessee work?

Answer 27

• Under privity rule, NOT possible for lessor to recover damages based on lessee’s loss (Beswick v Beswick)
• Exception (Albazero) applied in context of contract for carriage of goods by sea
– if contract b/w “A” & “B” is for benefit of “C”
– “A” can bring a claim against “B” for breaches sustained by “C” provided that this was intention of “A” & “B”

• Applied In Linden Gardens Trust v Lenestra Sludge in the context of a construction contract
– Referred to as principle of transferred loss (narrow ground)
– Could be applied to lease contracts: claim by lessor against supplier bc their contract is for benefit of lessee
—Principle of performance loss (minority view - broad ground) => claim by lessor against supplier for its own loss, i.e. because supplier had failed to perform as agreed

• Principle of transferred loss revisited in Lowick Rose LLP v Swynson Limited

Question 28

How does B. Lessee sues the supplier work?

Answer 28

• Lessor could assign lessors’ rights (against supplier under contract of sale) to lessee
under lease agreement; Darlington Borough Council v Wiltshier Northern Ltd (construction contract)
– Would allow the lessee to sue the supplier

Question 29

How does C. Lessee acquires rights under the Contracts (Right of Third Parties Act) 1999 work?

Answer 29

• 1st option: lessor & supplier can agree in sale contract that lessee has right to bring a claim
against supplier, s 1(1)(a).
• 2nd option: lessee may enforce term of contract b/w lessor & supplier which purports to confer a benefit on him, unless lessor + supplier intended term not to be enforceable by him, s 1(1)(b).
• These options = uncommon in practice: sale contracts between lessor & supplier, under general
terms of the supplier
– Requires active negotiation by the lessee

Question 30

How does D. Collateral contract between supplier & lessee work?

Answer 30

• Lessee induced to enter into a lease agreement by false statement by supplier => actionable by
lessee.

Question 31

What is the elation to ownership title in both arrangements of assignments of debts by way of sale and title-based financing?

Answer 31

In relation to ownership title: in both arrangements, the
finance provider has ownership title over the relevant
property:
• Assignment of debts by way of sale: the financier
(assignee) acquires ownership title over the debts
• Finance lease agreement: the financier (lessor)
acquires ownership title over the relevant good(s)