Insolvency lawyers – or as many now prefer to be called, 'turnaround specialists' – are once again in the spotlight. Headlines talk of recession on a global scale, with UK banks increasing bad provisions by £1.5bn by the end of the year.
The changing role of insolvency lawyers over recent years has been well chronicled. Less well chronicled is how financing, especially to the small-medium enterprise market, has evolved, with phenomenal growth in receivables financing and asset-based lending.
The receivables financing industry was given a further boost in June this year, when the Privy Council delivered its judgment in the case of Brumark Investments.
The case now provides the leading authority on the question of whether and when a valid fixed charge can be created over uncollected book debts and their proceeds. The charging clause in Brumark was similar to that approved as a fixed charge in Re New Bullas Trading. In New Bullas, the charge dealt with the outstanding book debts separately from their collection proceeds and reserved to the lender a right to require the collection proceeds to be paid into a separate blocked account. In practice, lenders did not exercise the right. In Brumark, the preferential creditors argued that the purported charge on book debts was a floating charge, and as such relied upon their preferential status to be paid the proceeds ahead of the bank. The Privy Council agreed with the preferential creditors, and in so doing expressly overruled New Bullas.
The banks must now ensure that they exercise the requisite level of control. They must now operate blocked accounts. The mere establishment and nomination of a blocked account will not be sufficient unless in practice the account operates as such. The company must not have freedom to deal with the book debts proceeds, which must at all times remain in the chargeholder's control. But such procedures will not only prove costly for the banks, they are also an administrative headache. It is for these reasons, among others, that the banks are turning to their factoring/invoice discounting subsidiaries, which can, by the outright purchase of the debt, avoid the control problems.
The effect of Brumark is enormous; as one commentator put it: “The effect of [the Brumark] decision, particularly on non-clearers, will almost certainly signal the rise in factoring and invoice discounting and the demise of overdraft financing for working capital purposes.” While I do not subscribe wholly to this view, at least in the short term, I do believe that the funding landscape in the UK will continue to change markedly.
The view of a factor as a lender of the last resort is dead. There are those (some of whom should know better) who hold the view that receivables financing is small beer and deals with the bottom end of the market. Figures from the Factors & Discounters Association (which counts the majority of the industry as members) show industry members funding a turnover of more than £77bn in 2000, which was over double the £33bn figure posted in 1995.
The growth in the industry is not confined to the expansion of the receivables financiers, but also reflects the growth in asset-based lending. Asset-based lenders see receivables as only one string to their bow. They look to the client's assets as a whole, and, among other things, are prepared to fund against stock, plant and machinery, intellectual property and real property.
As with so much of our way of life, the concept of asset-based lending has been imported from the US. With fixed charges over book debts increasingly out of favour and the proposed changes to the insolvency regime, receivables financing and asset-based lending will continue to grow from strength to strength.