Court upholds application of set-off contained in the underlying contract

In a recent decision with implications for any party purchasing debt from another, the English Court of Appeal:

  1. confirmed that where the debt of a debtor has been assigned from one party to another, there is ordinarily no duty on the debtor to inform the purchaser of any pre-existing contractual arrangements the debtor has with the seller. If the purchaser wants this information it must request it - from the seller or from the debtor; and
  2. held that the customers were entitled to rely on the right of equitable set off under English law.


  • The case was brought by a factor, F, in respect of sums sought from customers (C) whose debt it had acquired. The debt was in respect of goods supplied to the customers by the seller of the debt (S).
  • Upon initial acquisition of the debt, F had written to C advising that "any right of set-off in respect of any sale you make to [S] is not permitted".
  • F alleged that C had failed to pay almost £300,000 due in respect of supplies received from S.
  • C claimed in their defence and counterclaim that they were entitled to certain rebates, discounts and credits in terms of their contractual arrangements with S.

Court decision

The Court looked at the concept of set-off. Where set-off applies under English law, competing monetary claims are offset, one against the other, to produce a single, balancing amount owed by one party only. As a general rule, both sums must be due and payable. The English law concept of equitable set-off is available to a debtor where his claim for sums due to him arises from the same transaction (or a closely related transaction) as the debt owed by him.

It's worth noting that under Scots law, compensation is the term given to the process of setting off of competing claims by one party against the other. Although broadly comparable to set-off in England, the Scots law concept of compensation focuses on the capacity of each party and the nature of the debt, rather than the transaction itself, requiring that both parties are debtor and creditor in the same capacity and sums owed by each to the other at the same time.

In this case, the Court decided that a right of equitable set-off arose as the customers' cross-claims were so closely connected with the factor's demands that it would be unjust to allow the factor to enforce payment for the whole sum owed to it without taking the customers' cross-claim into account.

More interesting was the Court's discussion of the customers' duties to the factor.

The Court noted that no contract existed between the factor and the customers and confirmed that the customers were under no duty to inform the factor of the rebate arrangements in contracts to which the factor was not a party. The Court also confirmed that the fact that the terms of the letter sent to the customers on the initial acquisition of the debt sought to prohibit set-off did not impose any obligation on the customers to notify the factor of, or to volunteer information about, the rebate. The Court opined that if the factor had wished to be informed of any rebates or other contractual terms of that nature, it could have required the seller provide that information.

Practical implications

This case highlights the paramount importance of all purchasers undertaking full, tailored due diligence prior to a transaction involving the assignation or other acquisition of debt and/or right to payment. With the Asset Based Finance Association (ABFA) reporting that asset based finance now supports businesses representing 15 per cent of the UK's economy (ABFA News, 20 Jan 2016) and Deloitte's annual Deleveraging Europe Report 2015-2016 suggesting that the €44.5bn / £32bn of UK loan portfolio sale deals completed in 2015 will be surpassed in 2016 (Deleveraging Europe 2015-2016) the financial implications for acquirers of passing diligence or of missing key questions could be substantial.

Brodies is experienced in advising on and undertaking legal due diligence in all manner of debt acquisitions. If you would like to discuss any aspect of this decision, or require any advice and/or support in assessing and/or tailoring your usual diligence, please get in touch with your usual Brodies contact.

Bibby Factors Northwest Limited v HFD Limited and another [2015] EWCA Civ 1908 (Westlaw)