Factoring Agreements, Sale and Assignment of Book Debts and Special Managers

May 2005

31.1.38 Factoring agreements/invoice discounting

Where a business has a factoring agreement its sales invoices are sent to the factoring company as soon as they are raised and the factoring company advances a percentage of the debt to the business immediately. This means that the business gets cash instantly rather than having to wait for the customer to pay. The factoring company collect the debt and remit the balance due, less a standard rate of commission charged, to the business. Many factoring companies deal with the whole of a business's sales ledger and credit control functions.

Another similar type of agreement is invoice discounting where more limited action is taken by the factoring company usually only collecting selected debts on behalf of the business.

Factoring agreements and invoice discounting are governed by the Factors Act 1889. The insolvency order will have no effect on these agreements, which will remain valid notwithstanding the insolvency order (see paragraph 31.1.40 and 31.1.41). The official receiver should request a copy of any factoring agreement and should make no attempt to realise factored book debts or to instruct the contractors.

The factoring company may wish to reassign the debts to the original owner i.e. the insolvent but this is only likely to occur where the debt has proved uncollectable or the factoring company has been paid in full from other book debts. In these cases the official receiver should instruct the contractor (See Part 2 of this chapter) to realise those debts.

31.1.39 Sale of book debts

The official receiver may sell book debts to the purchaser of a business sold as a going concern, but the debts should not be sold by the official receiver through the contractor as his/her agent, as this would be against the general principle that book debts should not be sold by the official receiver through the agency of the contractor. If the official receiver considers that there are special circumstances justifying the sale of the book debts, he/she should first seek the sanction of Technical Section. The special circumstances should be fully explained in any minute to Technical Section.

31.1.40 Assignments of book debts in liquidation

In the case of a limited company, an assignment by way of a charge over the book debts must be registered within 21 days of creation with the Registrar of Companies if it is to be valid. For further details on dealing with book debts subject to fixed or floating charges see paragraphs 31.1.43 to 31.1.47.

Assignments of book debts made after the commencement of a winding up may also be void [note 1].

31.1.41 Assignments of book debts in bankruptcy

Where a bankrupt has made a general assignment to another person of his/her existing and future book debts the assignment is void against the trustee, as regards the book debts that were not paid before the presentation of the bankruptcy petition, unless the assignment has been registered under the Bill of Sale Act 1878.

A general assignment does not include-

  • an assignment of book debts due at the date of the assignment from specified debtors or of debts becoming due under specified contracts [note 2], or
  • an assignment of book debts included in a transfer of a business made in good faith and for value or in an assignment of assets for the benefit of creditors generally [note 3].

A factoring agreement is generally an assignment of specific debts as specified in section 344(3)(b)(i), Hills v Alex Lawrie Factors [2001] B.P.I.R. 1038.

Assignments of debts made after the presentation of the bankruptcy petition may also be void as a disposition of property under the provisions of section 284 (see paragraph 31.4.171).

31.1.42 Collection of book debts by special manager

Where a special manager is to be appointed his/her power to collect any book debts should be set out in the order of his/her appointment or otherwise sanctioned by the court [note 4]. (See Chapter 32.4 -Special Managers for further details of when and how to appoint a special manager).

Where the special manager realises book debts in existence at the date of the insolvency order under powers set out in his/her appointment these should be recorded separately from other trading receipts.

Where the special manager has no power to collect book debts the official receiver must draw this to his/her attention in writing stating that it is not his/her duty to deal with the collection of book debts. At the same time the official receiver should inform the special manager of any instruction given to the contractor. The contractor (See Part 2 of this chapter) will be instructed as usual but he/she should be informed, in writing, of the appointment and role of the special manager.

The special manager is not precluded from accepting payment on account of book debts as the agent of the official receiver during the normal course of carrying on business. These funds should be forwarded to the official receiver for banking as usual and the official receiver’s fees charged if the contractor has not yet been instructed. The official receiver must take steps to ensure that any instruction to the contractor does not then include the debt(s) which have already been paid. If the contractor has already been instructed, they should be notified of the remittance received by the official receiver . The contractor will not be entitled to the usual commission if the remittance to the official receiver does not result from any action on their part. Where the receipt is the direct result of action taken by the contractor the special manager should forward the payment to the contractor who will be entitled to commission on the payment in the usual way.

 

[Back to Part 4 - Insolvency practitioners and the contractor] [On to Part 6 - Book debts subject to a fixed or floating charge]