Receivables Finance: are we any closer to banning the prohibition of the assignment of receivablesPrint publication
The ninth of August 2007 will go down in history as the day the banks ran out of money. It is also the day that the term ‘credit crunch’ became part of the English language. Although the roots of the problem can be traced back to the sub-prime mortgage market in the US, the credit crunch started with BNP Paribas investment bank telling investors that they could not take money out of two of its funds because of a ‘complete evaporation of liquidity’.
That statement was followed by the remarkable sight for three days in the middle of September 2007 of queues of customers outside branches of Northern Rock waiting to withdraw their money. Money was haemorrhaging out of the former building society, it was the first run on a UK high street bank since the 1860s. Mervyn King, the governor of the Bank of England at the time, said that the bank “literally ran out of money”.
The credit crunch of 2007 then developed into the global financial crisis of 2008 when it became clear that the whole of the banking sector was in difficulties. This in turn led to the UK entering into recession and the rest, as they say, is history.
It was against this backdrop of severely restricted access to bank finance that the UK government looked to facilitate and encourage alternatives to traditional bank-led sources of finance, particularly for SMEs. As part of a general government initiative to improve access to finance, the government published in 2014 draft primary and secondary legislation the aim of which was to, amongst other things, nullify provisions that prevent or restrict the assignment of receivables.
Receivables (i.e. the right to receive payment under a contract), have long been regarded as an asset that is capable of being used to support finance, whether as security for debts or sold under a factoring agreement. Since the case of National Westminster Bank plc v Spectrum Plus Limited in 2005, it has been recognised law that receivables in the form of a company’s book debts are a fluctuating asset and are only capable of being mortgaged (as opposed to assigned outright) by way of a floating charge rather than a fixed charge, without significant restrictions on the manner in which the proceeds are dealt with that can significantly interfere with the working capital cycle.
The Spectrum Plus case was the last in a line of cases that were brought around the turn of the century which, initially, developed the concept of the availability of a fixed charge on book debts (thereby increasing, often significantly, the value of assets available to a company to support overdraft facilities) and then decided that, in the ordinary course, that security did not work as a fixed charge (effectively taking that support away again). It could be argued, therefore, that the combination of the Spectrum Plus case and the financial crisis significantly reduced the availability of working capital finance to SMEs.
Invoice discounting products, under which a company assigns its book debts outright to a financier on terms where the price payable for that assignment depends on how much of each debt is ultimately collected (and which had been widely available before Spectrum Plus, though not heavily utilised) have developed to fill that gap. However, such products depend, if they are to work effectively, on the relevant debts being freely assignable in the first place, and businesses often encounter provisions that ban or restrict the assignment of receivables in commercial contracts, particularly with commercially powerful customers.
Internationally there have been various efforts to introduce prohibitions on restrictive assignment clauses thereby facilitating receivables finance. Prohibitions on assignment are outlawed in the US, Australia, Canada and New Zealand. The French Commercial Code and the German Commercial Code also have similar so-called ‘legal override’ provisions with respect to commercial contracts.
So, where are we in respect of any UK legislation? In 2015 the Small Business, Enterprise and Employment Act (SBEEA) came into force. Its aims were wide ranging but included a provision giving the Secretary of State the power to introduce regulations to make any term in a business contract that prohibits or restricts the assignment of receivables automatically ineffective. Draft regulations were produced a couple of years ago but were then put on the back burner until a further version of the regulations (the Business Contract Terms (Assignment of Receivables) Regulations 2017) were laid before Parliament in September of this year.
Both the Loan Market Association and the City of London Law Society immediately expressed their hope that the regulations would not be approved in the form they were drafted. They declared that a rethink and redraft was necessary to avoid uncertainty in the finance markets. The main areas of concern were:
- the legislation appears to be retrospective therefore catching contracts that are already in place
- the types of assignment which falls within the regulations are not described sufficiently well enough to create certainty
- negative pledge covenants in loan agreements, bond terms and security documents (which are common to most commercial financing arrangements) would appear to be invalidated by the regulations
- the regulations are drafted so widely that there is an argument that they are ultra vires (when compared to the SBEEA)
- there is no protection for the debtor who may have stipulated for a non assignment clause in the expectation that its rights of set off will be preserved.
These concerns clearly had merit (although it is the set off point in the last bullet outlined above that is normally fatal to the availability of invoice discounting and is probably what the original legislation was principally driving at). In any event, the government appears to have listened to them, since it was announced on 21 November 2017 that the regulations have been withdrawn. It would seem that, whilst most interested parties agree that the idea behind the regulations is laudable, we are still no nearer to having any legislation that will work in practice.
No timetable has been given as to when some new regulations will be available. One suspects that the government may be tied up for some time to come with Brexit and therefore regulations such as these may not be a priority. We will of course keep you updated with any developments.