A recent high-profile case relating to collection fees charged by an invoice financier on the termination of an agreement was successfully challenged in the High Court last summer, opening the doors for further recoveries by office holders, Administrators and Liquidators to recover “excessive” collection fees.

The ground-breaking conclusion indicates that the courts appear increasingly willing to scrutinise discretionary powers in commercial contracts, implying that the lender must act reasonably and base costs on a rational basis. In fact, the clauses have been subject to much controversy for some time, with critics having claimed that they are a way of obtaining profits instead of recouping the actual expense of collections.

In the case of BHL v Leumi ABL Ltd (Leumi), Leumi’s argument was that it had made a sensible pre-estimate of its costs of collection, which allowed Leumi to charge up to 15% of the sums collected. This was based allegedly on the exercise of its contractual rights to take over collections in certain circumstances. The collections amounted to £8 million, and the 15% fee charged would equate to approximately £1.2m plus VAT.

The Court found that there was a lack of integrity practiced by Leumi as they had automatically charged the maximum 15% without any proper exercise of a discretion once BHL (the company behind the well-known Cobra beer brand) went in to Administration. The Court then rejected Leumi’s claim that they had made a diligent and sensible case for a pre-estimate of its cost of collection.

BHL paid Leumi its initial demand of £950,000 for its collection fee, but complications arose following a further request of £490,000. BHL’s refusal to pay the additional sum culminated in a claim that Leumi was not entitled to charge a collection fee of 15% at all. Furthermore, it was argued BHL had paid the initial sum of £950,000 under mistake of law and as a result, Leumi should pay the amount back to them. BHL then set about challenging the collection fee on 3 grounds consisting of a Penalty Argument, Construction Argument and Discretion Argument. The arguments put in front of a judge were:

  • The collection fee was deemed a penalty to BHL and therefore under English Law, could not be enforced on them.
  • Leumi was only entitled to charge a fee based on its actual costs and expenses (calculated at the end of the collection process), subject to a ceiling of 15% of the amount collected.
  • There was a failure to exercise correctly the discretion to charge up to 15% of the amounts collected.

In relation to the Penalty and Construction Arguments, BHL’s case was rejected. However, significantly, their case regarding the Discretion Argument succeeded - applying the so-called Braganza Duty which depicted that a contractual discretion must be exercised in a way which is not “arbitrary, capricious or irrational in the public law sense”. The Court therefore found Leumi to have failed to consider properly the correct percentage for the fee.

The repercussions of this case are significant to financiers and clients alike, as many finance agreements are now likely to be closely scrutinised. Whilst the “worst case scenario” is something most business owners don’t like to think about, if you make use of an invoice finance facility, you may wish to review its terms and seek advice if the provisions appear onerous; remember, costs charged on termination may create or increase a shortfall to the financier who may then look to rely on personal guarantees. Whilst the BHL case may be persuasive, it does not rewrite the terms of your agreement and seeking advice now could save you from having to hope you can rely on it.

In addition, we may see historic fees challenged, whilst creditors, administrators and liquidators will need to consider what action they should take when taking appointments.

Ahmed Ali

Marketing & Practice Development Executive 

 

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