Greg Standing looks at the importance of the wording of contract documentation
Finance companies will often enter into debentures to secure funding arrangements without considering whether that may later affect their ability to bring claims against their own debtors in their own right.
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Whether that right is lost or not will depend upon the construction of the terms of the debenture.
This arose in Bexhill UK Ltd v Razzaq (2012), in which Bexhill entered into a facility agreement to provide credit funding to Razzaq’s company (here referred to as ‘X’). Razzaq stood as guarantor, providing a legal charge over a property as security.
Bexhill funded the sums advanced by drawing on a facility agreement with its own bank, which was secured by a debenture.The debenture assigned absolutely all of Bexhill’s rights, interest and benefit in "receivables".
Receivables were defined as being all present and future book and other debts, money claims and other amounts recoverable or receivable by Bexhill.
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By GlobalDataIn addition, they included the benefit of all rights and remedies relating to claims for damages and other remedies for non-payment.
The debenture also provided that Bexhill give notice of the assignment to Razzaq and X, which it had done.
X defaulted and Bexhill sought possession of Razzaq’s property.
Razzaq argued that Bexhill had no right to bring proceedings. Any such right had been assigned to Bexhill’s bank, which had not been joined as a party to the proceedings.
Although the court at first instance agreed with Razzaq, it held that Bexhill could sue as the bank’s agent.
Razzaq appealed. The Court of Appeal held that the sums due from Razzaq fell within the definition of "receivables" and so were
caught by the debenture.
The true construction of all the relevant contractual documentation meant Bexhill’s right to sue on the charge had been assigned to the bank in equity, albeit the legal title remained with Bexhill. That transfer was not contingent on Bexhill defaulting under the finance
agreement with the bank, which it had not done.
Once an equitable assignment has taken place, it is the equitable assignee (the bank) which has the right to sue as the partybeneficially entitled.
Bexhill could not maintain an action on its own and the bank would have to be joined as a party, unless Bexhill was also acting as the bank’s agent in the proceedings.
The court held there was nothing in the wording of the debenture to suggest the bank had given Bexhill authority to commence legal proceedings as its agent. Further, the claim form did not indicate that Bexhill was acting other than as principal.
Bexhill had no right to sue on its own account and the bank would have to be joined to the action if the claim was to be pursued.
Comment
For those involved in arranging a finance company’s own finances, this case serves as a reminder to take care.
The wording of the contract documentation, as always, is key. Here, Bexhill could have sued as the bank’s agent (and avoided the costs of the litigation) if the documentation had specifically provided for it – which it didn’t.
Alternatively, to remedy the situation, it should have joined the bank to the proceedings – but again it didn’t.
Greg Standing is a partner in Wragge & Co’s motor finance litigation team
