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Receivables Finance: the prohibition on assignment is now in force

The Business Contract Terms (Assignment of Receivables) Regulations 2018 came into force on 31 December 2018 meaning that parties to a contract in the UK may no longer be able to prohibit the assignment of receivables arising in respect of supplies made under it, even if it is a long term supply contract providing for multiple deliveries.

As we reported in December 2017, draft regulations were laid before Parliament in September of that year which proposed to make any term in a business contract that prohibited or restricted the assignment of receivables automatically ineffective. Those draft regulations were subsequently withdrawn amid concerns that they would create uncertainty in the finance markets.

The main areas of concern were that:

  • the legislation appeared to be retrospective therefore catching contracts that were already in place;
  • the types of assignment which fell within the regulations were not described sufficiently well enough to create certainty; and
  • there was no protection for the debtor who may have stipulated for a non-assignment clause in the expectation that its rights of set off would be preserved.

However, the government has since revisited the legislation and on 24 November 2018 the Business Contract Terms (Assignment of Receivables) Regulations 2018 (the Regulations) came into force. The Regulations apply to contracts (with a few exceptions described below) created after 31 December 2018 and mean that parties will no longer be able to prohibit the assignment of receivables in the UK. The Regulations make it clear that the prohibition is not retrospective and so the Regulations only apply to new contracts. In effect, this means that one party to a contract cannot prevent the other party from choosing who should receive payments under a contract for the supply of goods, services or intangible assets.

The Regulations also render unenforceable any terms which prevent a person who has been assigned the receivable from being able to enforce the contract, or determine its validity or value (for example by preventing the disclosure of the information required to commence court proceedings for its collection).

The Regulations are aimed at improving access to invoice financing for small and medium-sized enterprises and the government speculates that this will provide a £1 billion, long-term, boost to the economy. Invoice financing allows businesses to assign their right to be paid by a customer to a finance provider. In return the finance provider provides the business with up-front funds, thereby speeding up the business’ working capital cycle (provided the debtor ultimately pays the assigned invoice). Before 1 January 2019, smaller businesses would usually be forced to engage with larger customers on those customers’ standard terms, which often contained non-assignment clauses. As a result, some smaller businesses were restricted from engaging with invoice financing opportunities. This should now change.

The Regulations apply to contracts for the supply of goods, services or intangible assets where the supplier has the right to be paid under the contract. There are, however, a number of exceptions including:

  • The Regulations do not apply if the person assigning the receivable is:
    • a large enterprise or part of a large group (as defined by the Companies Act 2006); or
    • a special purpose vehicle, set up to hold assets or finance commercial transactions involving it incurring a liability under an agreement of £10 million or more.
  • The Regulations also do not apply to services of a financial nature. The definition of ‘financial nature’ is construed widely and includes, amongst other things, leasing, loan relationships and all types of securitisation and derivative transactions.
  • The Regulations do not apply to contracts which have as their purpose the acquiring, disposing or transferring of ownership in a firm (as defined in the Companies Act 2006) whether incorporated or established, or of a business or undertaking. However, for this exemption to apply, the contract must include a statement to that effect.
  • The Regulations generally do not apply to contracts that relate to non-UK businesses. However, parties cannot contract out of the Regulations by changing the contract’s governing law, if the only reason for doing so is to circumvent the regulations.
  • There are also a number of other types of contracts which the Regulations do not apply to, including consumer contracts, real estate contracts, public-private partnership contracts and rental contracts. Interestingly, the Regulations will apply to building contracts which, up to now have been impossible to finance, in practice, through an invoice discounting arrangement.

Practical application

The Regulations will lead to the need for certain changes to the drafting and implementation of commercial contracts:

  • No assignment clauses – An eligible supplier will be able to assign their receivables to a debt purchaser without having to seek their customers’ prior consent. This means a blanket non-assignment clause will no longer work for on its own to preserve rights of set off;
  • Confidentiality provisions – Confidentiality obligations can still be imposed on suppliers, except for any “essential information” that enables the identification of the receivables following assignment. This means information that enables the identification of receivables (so as to facilitate their collection) may be disclosed by a supplier to a third party purchaser for the purpose of receivables assignment or transfer without constituting a breach of confidentiality.
  • Set-off – The Explanatory Note to the Regulations clarifies that a contractual right to set-off is not considered as a restriction on transfer of receivables for the purpose of the Regulations. Although the right to set-off is maintained, businesses may want to consider the practical impact of the Regulations on the mechanism to exercise the right to set-off, such as how cash flow will be affected if you are no longer able to consolidate future transactions to set-off against one original invoice that has already been assigned to a third party.

WM Comment

Many commercial arrangements will be unaffected by this change in legislation. However this will depend, in relation to contracts entered into this year and beyond, on the terms of the contract and the nature of what is being supplied under it. A key point to note is that the Regulations will not nullify the contract as a whole or, indeed, the whole of the clause restricting assignment, but only to the extent applicable to receivables.

Providers of invoice finance will still need to carry out due diligence, at least for now, on taking on any new invoice discounting client to ascertain the extent to which the debtor book may still contain debts which are subject to restrictions on assignment or are otherwise subject to rights of set off.

Small and medium sized companies seeking to avail themselves of the new rules should seek advice before doing so. Invoice discounting products can be an extremely effective way of assisting a growing business meet its working capital needs. However, lumpy cash flow, or bad debt experience (including habitual slow payers in the customer base) can lead to disaster if not properly managed.

If you need advice on how the Regulations may affect your business please get in touch.

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