Collection Fees – you must show that discretion has been exercised when calculating how much to charge

Stacks of coins and a graph Print publication


It is common practice for a receivables finance agreement to allow the lender to charge a collection fee in the event that the lender takes over the collection of debts on behalf of the borrower. In a recent case, BHL v Leumi ABL Ltd [2017], which concerned a collect-out situation, Leumi ABL Ltd was required by the court to reimburse collection fees which the court considered to be excessive. Collection fee clauses have been a subject of controversy for many years within the Receivables Finance Industry and this case illustrates the willingness of the courts to intervene. This judgment may materially change the way in which collection fees and other fees are charged to clients.


In 2008, Cobra Beer Limited (Cobra) entered into a Receivables Finance Agreement (RFA) with Leumi ABL Limited (Leumi) (a subsidiary of Bank Leumi (UK) Plc). The RFA included a clause which gave Leumi the right to charge a collection fee of up to 15% of the sums collected by it if it enforced its contractual right to take over the collection of debts.

The RFA also included a provision that Cobra expressly acknowledged that the collection fee constituted a fair and reasonable pre-estimate of the cost to Leumi of providing the collection service.

By 2009, Cobra had got into financial trouble and subsequently entered administration. Substantial sums were due to it by its customers but it, in turn, also owed substantial sums to Leumi under the RFA.

During the course of the administration, the Cobra business was sold and as part of that deal the buyer’s shareholder, BHL, provided an indemnity which included a commitment to indemnify Leumi in respect of any sums due under the Cobra receivables facility agreement (RFA).

Following Cobra’s administration, Leumi took over the collection of Cobra’s receivables on its sales ledger and charged a collection fee at the full rate of 15%. Leumi collected just over £8 million, which yielded a fee of some £1.2 million which it duly demanded from BHL under the indemnity.

BHL made payments of £400,000 and £550,000 respectively to Leumi in respect of the outstanding collection fees. When Leumi demanded the final payment of £490,000, BHL challenged the amount of the collection fee, claimed that the payments it had already made had been paid by mistake and that Leumi was only entitled to the actual costs of collection.

Legal issues

The Court was required to consider the true construction of the collection fee clause which read as follows:

“… Leumi will be entitled to charge the Client an additional collection fee at up to 15% of amounts collected by Leumi thereafter. … The Client expressly acknowledges that such fee constitutes a fair and reasonable pre-estimate of Leumi’s likely costs and expenses in providing such service to the Client”.

BHL argued that Leumi was entitled merely to its actual costs and expenses of collections, to be calculated after the collection process had ended and subject to a ceiling of 15% of the receivables. BHL further argued that the clause was a penalty clause.

Leumi argued that it could charge any fee it wished and without reference to any anticipated or actual costs, subject only to a maximum of 15%. Alternatively, if the court didn’t agree with that interpretation, Leumi argued that it had a discretion to charge a fee which was to be based on estimated or actual costs but which could go no higher than 15% of the receivables.


The court accepted that the clause was not a penalty clause. Leumi had the right to set in advance a percentage collection fee which would apply to all later recoveries. It did not necessarily matter if the fee charged was greater than the actual costs and expenses subsequently incurred. A margin of flexibility had to be given to the lender in determining the appropriate rate since, by definition, it could not know in advance what the costs would be. However, the percentage must be determined by reference to something, otherwise the fee would always be 15%.

The court found that Leumi had simply charged 15% without considering what the actual or likely costs of collection would be, and without even considering charging less than the maximum. Leumi had manifestly failed to take into account important relevant factors such as the size of the ledger, its exposures and the time needed to collect the amounts due.

It was nevertheless still entitled to costs under the RFA. The court took expert evidence and entered into a detailed calculation based on the hourly rates of relevant employees to determine what the maximum rational estimate of Leumi’s costs would be. The court concluded that 4% was the absolute maximum that Leumi could have charged. Therefore the collection fee should have been a mere £320,000.

Since BHL had paid the fees of £950,000 in the sincere belief that they were due under the RFA, the payments were made by a mistake of law. BHL was therefore entitled to recover any fees paid to Leumi that were in excess of those fees calculated by the court as being due.

WM Comment

The decision is an important reminder that the courts are increasingly willing to scrutinise the exercise of discretionary powers in commercial agreements. Where fees are set by one party, then that party must, at the very least, be able to demonstrate that those fees have been properly considered in the relevant context and are not arbitrary amounts. If a collection fee is found to be an arbitrary figure, rather than an actual or estimated cost of collection, then lenders are at risk of being asked to pay money back to the borrower.

As a result of this case, lenders should be aware of the potential risk of challenge to the level of collection fees charged where the fees include some element of discretion. If you think this decision could affect a finance agreement or potential collect-out situation that you are involved with, please contact us.