assignor whose receivables are so discounted receives immediate cash to the extent of the purchase price. The financier deducts an administration charge in addition to the ‘discount’, which, by being calculated on a daily yield basis, produces a sum equivalent to interest on the amount advanced to the assignor.40 The company thus receives a cash sum earlier than would have been the case had it waited for its debtors to settle their accounts.

As will be discussed below, however, it is not easy to characterise many quasi-security arrangements and the courts may face difficulties in deciding whether a transaction is, for legal and insolvency purposes, a loan secured by a mortgage or charge, a sale or an outright assignment.41

Third-party guarantees

Often a loan from a creditor such as a bank will be ‘guaranteed’42 by a third party – which may be an individual director of the debtor company but could also be a parent or subsidiary company within a group. The Government itself may also act as a guarantor and the UK offers a good deal of credit insurance to exporters through the Export Credits Guarantee Department, which, inter alia, guarantees bills of exchange purchased by banks. Guarantees may relate to specific transactions or operate on a continuing basis and relate to a flow of transactions.43

The guarantor undertakes to answer for the default of the principal but guarantors can only be sued after the principal debtor’s default. Usually the undertaking of the guarantor is to meet the monetary liability arising out of the default, but a guarantor may also assume a secondary liability for performance as stipulated in the contract agreed by the principal. The guarantor is not liable for any amount in excess of that recoverable from the principal debtor and, if the guarantee is given at the request of the debtor, the guarantor has an implied contractual right to be indemnified by the debtor against all liabilities incurred.44

40 See Oditah, Legal Aspects, p. 34. 41 Ibid., pp. 35–40.

42If A owes B a financial obligation, then instead of, or in addition to, taking a charge on A’s property, B may take a contract with a third party, C, under which C promises to meet A’s obligation to B if A fails to do so (C being the ‘guarantor’). See further R. M. Goode, Legal Problems of Credit and Security (3rd edn, Sweet & Maxwell, London, 2003).

43See Fuller, Corporate Borrowing, ch. 11.

44In an insurance arrangement, in contrast, the insurer protects the covered party and there is no right of indemnity against the defaulter: see R. M. Goode, ‘Surety and OnDemand Performance Bonds’ [1988] JBL 87, 88–9.