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Equitable set-off


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Summary: Customers of a company in administration were entitled, as against a factor, to exercise equitable set-off in respect of entitlements to rebates that had arisen between the customers and the company notwithstanding the assignment of the customer’s debts to the factor.

Bibby Factors Northwest Ltd v HFD Ltd [2015] EWCA Civ 1908 (17 December 2015)


Morleys Limited (the “Supplier”) supplied goods to two of its customers (the “Customers”). Bibby Factors Northwest Limited (“Bibby”) was a factor. By a factoring agreement dated 6 March 2000, the Supplier agreed to sell and Bibby agreed to buy the debts owed by the Customers (present and future). Notice of the assignment was served on the Customers. On 4 July 2013, the Supplier went into administration. Bibby claimed £281,919.35 from the Customers in respect of supplies made by the Supplier. The Customers raised a number of defences, including that they were entitled to set-off a rebate of 10% of the price. The Supplier had been paying such a rebate to the Customers since 2000, but Bibby said they were unaware of this. Bibby asserted that it would be inequitable for the Customers to rely on any set-off in respect of the rebate and that they were estopped from doing so. It argued that it would be unconscionable for the Customers to have the benefit of a set-off of the rebate when they had not mentioned it to Bibby at any time during the preceding 13 years.


Christopher Clark LJ giving the judgement of the Court of Appeal explained that any assignee of debts, such as a factor, may fail to recover the whole of the debt assigned for a number of reasons. One of these was that the debtor may have a cross claim which equity will allow him to set-off against the debt such that only the balance may be claimed. If so, and subject to any question of estoppel, a factor, as assignee, can be in no better position than his assignor, whether the assignment takes effect as a statutory assignment or in equity. The test is whether the “cross-claim is…so closely connected with [the plaintiff's] demands that it would be manifestly unjust to allow him to enforce payment without taking into account the cross-claim”. The rebate did in the court’s view satisfy this test. If Bibby wished to be told of rebates, it could have asked the Customers. In the absence of any grounds to suppose that the Customers knew that Bibby had been deceived, the Customers had no duty to inform Bibby of the rebate arrangements. The notices of assignment did not contain anything to suggest that Bibby had been deceived. Accordingly, the Customers were entitled to set off the rebate.

Jamie Wiseman-Clarke says:

A notice perfecting a legal assignment of a debt does not always prevent rights of set-off accruing to the benefit of a debtor against an assignee (e.g. a factor). For example, it will not prevent the debtor taking advantage of rights of set-off that have accrued before the notice of assignment or (as here) that have accrued after the notice but arose out of the same contract or were closely connected with it. The law is easily stated but is much more difficult to apply. The technical issues that this area of the law throws up might be avoided if the relevant contract prohibited assignment of the receivables relating to it. However that is something the government’s proposed attempt to ban prohibitions on assignments of receivables (the draft Business Contract Terms (Restrictions on Assignment of Receivables) Regulations 2015) would prevent. And one reason why the proposed ban is controversial.

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