Financing Fiasco – Fortune or Folly?
Professor Walton’s recent empirical projects carried out on behalf of, respectively, the Insolvency Service and the insolvency practitioner profession have shown that SMEs are increasingly being financed by receivables financiers who take an absolute assignment of an SME’s book debts.
The receivables finance industry is estimated to be worth £9bn. In the event that the SME goes bust, the assigned book debts are swept away by the financier, as legal owner. The financier will either give notice to the debtor at the time of taking the assignment (a practice known as “debt factoring”) or delay such notice until sometime later, often post formal insolvency (a practice known as invoice discounting).
This latter type of arrangement (invoice discounting) is, arguably, particularly objectionable as the financier takes title to (usually) the whole debt ledger by way of a secret agreement which only comes to light on the company’s insolvency. The accepted wisdom is that such agreements are absolute assignments and not security interests which would require registration under the Companies Act 2006.
The seminar presentation will be based upon a consideration of the history of assignments of book debts and will suggest that an equitable assignment of a debt (that is, an assignment without notice to the debtor) is not an out-and-out transfer of the debt but operates by way of charge. Such agreements are therefore securities which are void against other creditors without registration.
Due to the restrictions placed upon dealing with the book debts by the invoice discounter, such charges are likely to be fixed charges rather than floating charges, but will nevertheless require registration under the Companies Act 2006. Although the invoice discounter may make the equitable assignment into a legal assignment by giving notice to the debtor, if that notice is subsequent to the commencement of a winding up, it will, prima facie, be void under s.127 Insolvency Act 1986. The ostensibly unassailable position of the invoice discounter on the insolvency of its client may not therefore be as secure as is commonly believed.
Attendance is free for this event and there is no requirement to pre-book. Light refreshments will be available after the seminar.
The Liberty Building is number 16 on the campus map.