Most creditors are familiar with the Late Payment of Commercial Debts (Interest) Act 1998 which entitles them to interest for late payments and the right to claim reasonable debt recovery costs, unless the supplier has acted unreasonably. In addition to the foregoing creditors can also charge compensation for the recovery of a debt. The Late Payment of Commercial Debts Regulations 2013 provides “If the reasonable costs of the supplier in recovering the debt are not met by the fixed sum, the supplier shall be entitled to a sum equivalent to the difference between the fixed sum and those costs”.

The Problem

The difficulty is, of course, in being able to take court action against a debtor and include, as part of the sum sued for, ‘debt recovery costs’ as these actual costs have not yet been incurred. A similar point was raised in the case of BHL V Lenmi ABL Ltd [2017] EW HC 1871 QB which involved debt factoring. The facts of the case were as follows: Leumi ABL Limited (the “Factor”) entered into a factoring agreement with Cobra Beer Limited (“Cobra”). Sadly Cobra had financial problems so their parent company BHL signed an indemnity agreement in favour of the Factor. The terms of this were that BHL agreed to indemnify ABL for all amounts due under the factoring agreement.

The factoring agreement contained clauses permitting ABL to charge a collection fee of up to 15% if ABL required Cobra to repurchase any receivables and Cobra failed to do so within 7 days of such a demand. This collection fee was in addition to any other fee payable by Cobra to ABL which Cobra expressly acknowledged constituted a fair and reasonable pre-estimate of ABL’s costs and expenses in providing such a service to Cobra.

Following ABL’s demand that Cobra repurchase all of the receivables under the agreement which Cobra failed to do so within 7 days, ABL took over the collection of the receivables. They notified Cobra that it would be charging a collection fee of 15% of all receivables collected.

ABL collected Cobra’s receivables in the total amount of £8,000,000 and charged 15% of the amount collected. This resulted in a collection fee of £1,200,000.

Cobra’s Parent BHL initially pad a substantial portion of this collection fee amounting to £950,000.

However BHL has second thoughts and sued ABL arguing that ABL were not entitled to charge a collection fee of 15%, that they had paid this money by mistake, and that ABL should return the amount paid.

The court decided ABL was not entitled to charge a collection fee equal to 15% of the amounts collected and found that their actual collection costs and expenses for the collect-out were £33,260.

The Court held that ABL’s collection fee should be no more than 4% of the amounts collected, which worked out to £320,000. Following adjustment to the court process the Court ordered the Factor to repay £735,000 to the Parent plus interest.

Why did the Court come to this Decision?

The court held that the purpose of the clause was to enable ABL to recover future costs and expenses to be incurred by them if they had to collect the receivables. As such these costs, by their nature, had to be an estimate. However the agreement provided that this fee could be incurred prior to ABL actually incurring those costs. As such the court would allow ABL a degree of flexibility because they would be unaware what the collection costs would be.

Of course the obvious issue was that the agreement allowed ABL to set the recovery fee in respect of future recoveries. As such the court were of the opinion that ABL’s discretion had to be qualified to prevent their discretion being abused. In the court’s opinion ABLS were required to identify the likely collection costs and to attribute such costs as a percentage of the sum to be collected.

Because ABL had always charged the maximum of 15% automatically, in the court’s view ABL had not exercised any discretion. In passing judgment the court said what they needed to do was not to establish the actual costs of collection but what these might be if what that percentage would amount to if ABC were acting reasonably. After hearing expert evidence in the court’s opinion 4% was the maximum which ABC could have charged if they had exercised their discretion reasonably.


If the same reasoning is applicable to the Late Payment 2013 Regulation it is clear that whilst there may be an entitlement to charge compensation in terms of the Regulation the actual amount will have to be reasonable. The creditor may well have to demonstrate this to the Court. The practical difficulty is that the actual amount could become the issue in itself in debt recovery litigation with the claimant having to justify that the estimated compensation is reasonable. So it may be advisable for claimants to select a realistic estimate for compensation and be prepared to justify this to the court rather that selecting an exorbitant amount which will not be tolerated.


For more information please email Stephen Cowan on or call him on 0141 572 4251 and he'll be happy to help