Home > Uncategorized > “Collection fees”. Is the end in sight?

“Collection fees”. Is the end in sight?

50f8f4e951d24440bef3a4928cc5115aMore than any other issue, Collection Fees charged when an ABL’s client becomes insolvent have caused controversy in the industry and arguably given invoice financing a poor name

To briefly explain the Collection Fee is a fee levied on the value of the ledger when a client is “insolvent” and the lender collects the sums due from the debtors. All fine but hidden away in the contract these fees can be charged at rates as high as 60% of the value of the debtors

That means that if a smallish business went into administration with debtors of say £200k, the charge for collecting these debts would be £120k

Clearly that is ludicrous and the ugly side to this is that the lender will make far more from a debtor failing than suceeding. Its no secret that certain lenders have engineered this scenario.

A honourable exception here is Metro Bank who dropped all collection fees from their agreements a year or so ago

So what has occured to challenge this arrangement. Read the case below.

Leumi ABL have been a very decent lender but they have horriby overplayed their hand in this case. I wll also be commenting further on other aspects of this case

 

The long-awaited judgment in the case of BHL v Leumi ABL Limited has been delivered in the Mercantile Court. The case concerned a challenge to collection fees amounting to £1.216m plus VAT charged by Leumi under a receivables finance agreement entered into with its client, Cobra Beer. BHL, which had provided an indemnity to Leumi for sums due and payable under the Cobra agreement, had paid £950,000 in part-satisfaction of the amounts Leumi demanded for what it said was the shortfall on the collect-out of the Cobra ledger.

After Leumi had made demand for yet another £490,000, BHL decided that it had had enough and commenced proceedings against Leumi for repayment of the £950,000. BHL argued that the monies were not properly due and payable because, although Leumi had a contractual discretion to determine the amount of the collection fee, it had not exercised that discretion or it had done so improperly. By the first day of the trial, Leumi had corrected other errors in the current account so that the amount claimed had reduced to £271,382, but it maintained that it was still entitled to its full collection fee that amounted to 15% of the amounts collected.

The judge disagreed with Leumi: he held that its actual costs and expenses incurred during the collect-out amounted to £33,260, and he determined that Leumi should have charged a collection fee of no more than 4% of the amounts collected. After the relevant adjustments to Cobra’s current account had been made, the judge held that BHL had overpaid by £735,000. That sum had to be repaid together with interest and the sum of £780,000 on account of costs.

The case is an important example of the extent to which courts appear to be increasingly willing to scrutinise the exercise of discretionary powers in a commercial context. It will be of interest to all those involved in making decisions in the banking and finance sector.

 

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Categories: Uncategorized
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  1. August 15, 2017 at 9:11 am

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