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The hurdles to invoice discounting have been removed

Business People in a Meeting and Working Together Print publication

24/01/2019

The Business Contract Terms (Assignment of Receivables) Regulations 2018 are now in force. These regulations mean that parties entering into a contract on or after 31 December 2018 may no longer be able to prohibit the assignment of sums payable under the contract. 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.

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 Those draft regulations were subsequently withdrawn amid concerns that they would create uncertainty in the finance markets.

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 on or 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.

A term of a contract is ineffective if it prohibits the assignment of receivables, imposes a condition on assignment or prevents a person from valuing or enforcing the receivable. This includes if the term prevents the person wishing to assign from obtaining certain kinds of information. 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 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 for the sale 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.

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.
  • 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

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 the Regulations are applicable to receivables. Small and medium sized companies seeking to take advantage of the new rules should seek advice before doing so. If you need advice on how the Regulations may affect your business please get in touch.

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