The Interrelationship Between Set-off and Assignment


Louise Gullifer QC (Hon)
Rouse Ball Professor of English Law, University of Cambridge


Time to read

9 Minutes

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Commercial Law

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A recent decision in the Court of Appeal, Bibby Factors Northwest Ltd v HFD Ltd [2015] EWCA Civ 1908, concerns the extent to which an assignee of debts is bound by set-offs arising between the assignor and the debtor. 

The law in this area is reasonably clear, but somewhat complicated, and was summarised succinctly and accurately by the Court of Appeal in paragraphs [30] to [32] of the decision:

‘First the debtor may show that the money claimed is not due, in whole or in part, either because of some substantive defence or some right of abatement.

Second, the debtor may have a contractual right of set off.

Third, the debtor may have a cross claim which equity will regard him as entitled to set off against the debt such that only the balance may be claimed. If so, and subject to any question of estoppel, the factor, as assignee, can be in no better position than his assignor, whether the assignment takes effect as a statutory assignment or in equity. It is no matter that the cross claim had not accrued due before the debtor had notice of the assignment.

Fourth, the debtor may have a cross claim which is independent of the claim against him in the sense that it does not fall into the category of a claim which forms the subject of an equitable set off. In such a case the factor/assignee cannot successfully be met by a cross claim which arose after the Customer/debtor had notice of the assignment.’

Bibby deals with one matter of possible uncertainty in this area, but others remain, some of which were raised but not decided in Bibby.  One such matter is discussed later in this blog, and other matters, such as the interaction with insolvency set-off, will be discussed in a later blog.'

The Bibby case concerned a factoring agreement, which provided for the sale of all present and future debts.  The assignor, who had for many years supplied goods to the debtor, was in administration and the factor (Bibby) sued the debtor on outstanding invoices.  The debtor claimed to set off, inter alia, rebates to which it was entitled under its contracts with the assignor, which, it said, constituted equitable set-off, and therefore could be relied upon whether or not they accrued before notice of assignment (under the third principle set out above).    

The chief ground on which Bibby challenged this allegation was to argue that the degree of closeness between the claim (on the invoices) and the cross-claim (the rebates) was insufficient to establish equitable set-off (according to the test set out by Rix LJ in Geldof Metaalconstructie NV v Simon Carves Limited [2010] EWCA Civ 667).  This was because the debtor should have informed the factor about the rebates once they realised that the claims were assigned, and, therefore, it was not ‘manifestly unjust to allow [the factor] to enforce payment without taking into account the cross-claim’, despite the fact that the claims and cross-claims were otherwise closely connected.

The Court of Appeal upheld the judge’s decision that the test for equitable set-off was satisfied.  There was no duty on the debtor to inform the factor about the rebates, nor was there a sufficiently clear representation as to the absence of rebates to give rise to an estoppel.  The court confirmed what had been made clear in the Geldof case: that there was only one test, which had two elements:

  • the ‘close connection’ part was the formal element to the test, which was ‘to ensure that the doctrine of equitable set-off is based on principle and not discretion’; and
  • the ‘unjust’ part was the functional element and was ‘to remind litigants and courts that the ultimate rationality of the regime is equity’ (Geldof [43]).  

In very many cases it will be the closeness of the connection which gives rise to the manifest injustice, but there are some situations in which this can be rebutted by other matters.  One (at least where the court is deciding whether to award summary judgment on the claim) is the strength and calculability of the cross-claim.  For example, in Star Rider Ltd v Inntrepreneur Pub Co [1998] 1 EGLR 53, the speculative quantum of the cross-claim was one reason for holding that it was just to award summary judgment on the claim.  Another is the conduct of the cross-claimant, who cannot rely on his own wrongful conduct to manufacture a cross-claim (Bluestorm Ltd v Portvale Holdings Ltd [2004] EWCA Civ 289).   

This analysis shows that the relevant question is whether it is manifestly unjust as between the claimant and the cross-claimant not to allow the cross-claim to be set off.   The assignee, since he can be in no better position than the assignor, takes subject to any set-off.  The conduct of the debtor vis a vis the assignee is irrelevant, unless it gives rise to an estoppel.  The decision of the Court of Appeal in Bibby confirms this reasoning (see paragraphs [38] and [48]. 

As a result, sensible receivables financiers who wish to know about potential cross-claims will both make enquiries themselves before making their advances and will make sure that their contracts with assignors include an obligation to inform them of such.  In the absence of a separate agreement, a factor assignee cannot oblige a debtor to pass on information about cross-claims.  While the assignment, once notice is given, creates a relationship between the assignee and the debtor in that the debtor must pay the assignee to obtain a good discharge, it cannot, of itself, impose any further obligations on the debtor.

Having come to this conclusion, there was no need for the Court of Appeal to consider independent set-off.  Tantalisingly, a point on this type of set-off that had been raised and considered at first instance is one on which there is little authority and considerable academic debate.  This rest of this blog is devoted to discussion of this point.

Under the fourth principle listed above, an assignee is not bound by an independent set-off between the assignor and the debtor which arises after notice of assignment has been given to the debtor.  The rationale for this rule is that once the debtor knows about the assignment he should not be able to erode the assignee’s rights by allowing further set-offs to accrue.  Bibby made the argument that the debtor had been notified ‘of the assignment’ at the time of the initial factoring agreement, and that all independent set-offs arising after that time could not be relied upon by the debtor.   

This raises the contentious question of whether a notice of assignment given in relation to future debts can prevent the debtor relying on independent set-offs which arise after the date of the notice but before the debt arises.  An assignment of a future debt takes effect immediately as a contract to assign, but the assignment does not take place until the debt comes into existence.  There is remarkably little modern authority on the effect of a notice of such an assignment which is given before the debt actually arises.  

It seems that such a notice will not be sufficient to make the assignment a statutory one, on the grounds that the section itself does not refer to agreements to assign, but only assignments.  Further, there are a number of (mainly nineteenth century) cases which establish that a notice given of a ‘mere expectancy’ is ineffective to establish priority under Dearle v Hall, so that another notice must be given after the debt arises to protect the priority position of the assignee.  Many of these cases were in the context of an army officer’s expectancy of a fund were he to be gazetted out of the army: the fund was a mere expectancy until the day the notice in the Gazette appeared, at which point it was held on trust for the officer by the army.  Not surprisingly, army officers often raised money on the strength of this expectancy, but the incumbrancer(s) had to keep serving notices daily on the army agents to try and be the first to give notice on the day of the Gazette (see Re Dallas [1904] 2 Ch 385)!     

The only case to mention the effectiveness of a notice of an assignment of a future debt in the context of set-off is also an army officer case (Roxburgh v Cox (1881) LR 17 Ch D 520).  Here, the set-off arose the moment the Gazette notice appeared, and the notice of assignment was not given until the next day, so the point was not in issue (the assignee clearly took subject to the set-off).   Thus, Baggally LJ’s dictum that ‘any notice given by [the assignee] before the money came into the possession of [the army agents asserting the set-off] would have been ineffectual’ was obiter.    

The point is therefore an open one.  Opinion is divided.  Oditah (at 8.3 of Legal Aspects of Receivables Financing) supports the view of Baggally LJ, as did the judge in Bibby at first instance.  However, Derham (at 17.29 of his magisterial book on set-off) and Philip Wood (at 16-119 of English and International Law of Set-Off, where he describes the view of Baggally LJ as ‘arbitrary and out of accord with realities’) support the view that notice given of an assignment of future debts marks the moment after which the accrual of independent set-offs do not bind the assignee.

There are also some obiter judicial remarks: Andrew Smith J at first instance in Dry Bulk Handy Holding Inc v Fayette International [2012] EWHC 2107 (Comm) [66] firmly supports Philip Wood’s view.  Mance J in Marathon Electrical Manufacturing Corp v Mashreqbank PSC [1997] 2 BCLC 460 at 466-467 appears to implicitly accept the Oditah’s view in relation to true future receivables (where the contract under which the receivable arises has not yet been entered into), but his discussion is focused on the fact that English law has a wide interpretation of ‘present receivables’ which includes any debts arising from existing contracts, even though they have not yet accrued.

The view that notice of an assignment of future debts is enough to prevent further independent set-offs being asserted against an assignee certainly accords with common sense, given the rationale for the rule mentioned earlier (that it is unconscionable for the debtor to reduce the assignee’s rights once he knows about the assignment).  It also accords with the practice of taking an assignment or a security interest over present and future debts: any notice would normally not differentiate between the two categories.

Further, as mentioned, the category of present debts is very wide, including debts which are payable, but also unearned rights to payment arising out of present obligations.  To distinguish between these and debts arising under future contracts seems perverse.  There is one qualification: the notice has to be of an ‘assignment’ (albeit inchoate, under the principle in Holroyd v Marshall) rather than of a general agreement to assign, or of a floating charge.   There is authority establishing that it is only after the floating charge has crystallised (and notice given) that the debtor can no longer set off independent set-offs against the charge (Biggerstaff v Rowatt’s Wharf Ltd [1896] 2 Ch 93).

The position argued for is also that which pertains under UCC Article 9 (9-404(a)(2), the Canadian and New Zealand PPSAs, and the UNCITRAL draft Model law.  Under those instruments, notice (or knowledge) is of the ‘assignment’ or ‘security interest’ which can be given over future property.  Only under the Australian PPSA is the position potentially different, since section 80(1) provides that the cut-off point is ‘before the first time when payment by an account debtor to the transferor no longer discharges the obligation of the account debtor under subsection (8) to the extent of the payment’.  Presumably this point cannot arise until the relevant account has accrued, since only at that point can payment be made.

While it is a shame that the Bibby case did not prove a vehicle for deciding this point, the fact that it has not arisen directly for decision in an English law case shows that it does not cause all that many problems in practice.  This is, probably, partly because of the wider definition of ‘present debts’ and also partly because many set-offs relied upon in are equitable set-offs, which can be asserted against an assignee irrespective of the timing of notice.

In the context of notification receivables financing, notice of a facultative master agreement is unlikely to have any effect on set-off, as this would be merely a general agreement to assign (if that: it may be unilateral and therefore only binding if under seal) and not an assignment of future debts, that is, it would not have immediate effect once a debt came into existence.

Notice of a ‘whole turnover’ agreement, however, is more likely to raise the issue discussed above, as this agreement would be seen as an assignment in equity, taking effect as soon as the debts come into existence.  Of course, the terms of the contract are likely to be determinative.

Where financing is based on a fixed charge over receivables, this is likely to cover future debts, but notice to the debtors is unlikely to be given, except as a prelude to enforcement.

The issue discussed, therefore, is not an everyday problem, but a definitive answer (as provided in the codified systems mentioned) would improve certainty for assignees of debts (in whatever context) who wish to protect their value from future set-offs.

This article was first posted on the Commercial Law Centre blog. The original post can be found here.


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