The draft Contract Terms (Assignment of Receivables) Regulations 2017 were intended to invalidate clauses which prohibited the assignment of a receivable (a right to payment). Following substantial criticism, the regulations were eventually dropped in November and it appears that the Government went back to the drawing board.
The intention behind the regulations was good: to improve access to finance for small businesses by removing problems associated with clauses prohibiting or restricting the assignment of receivables. But the regulations were ambiguous in places, resulting in a number of uncertainties as to their scope.
Last month new draft Business Contract Terms (Assignment of Receivables) Regulations 2018 (the Regulations) were published.
Why do businesses want to assign receivables?
A ‘Receivable’ is defined as a right to be paid any amount under a contract for the supply of goods, services or intangible assets, and there are a number of reasons a business may want to assign that right. In particular, a business may assign a receivable (such as an invoice or some other right to be paid money under a contract) as a way of raising finance.
Invoice finance can be an important means of securing capital. It allows a business to assign the right to future payment in exchange for funds. This is particularly beneficial in sectors where businesses have to wait a long time between issuing an invoice and receiving payment for that invoice and which do not have substantial fixed assets to leverage.
Currently a contract can (and often will) include a prohibition on assignment, typically to ensure that in the performance of the service contracted for each deals with the party it contracted with. The generally held view is that if the benefit of a contract, which includes a ban on assignment, is assigned to a third party that assignment will be ineffective. As a result, they are not able to be used for this type of finance (regardless of whether that is the intention behind the prohibition).
The aim of the Regulations is to make it easier for businesses to access finance.
What do the Regulations do?
The Regulations provide that a term in a business contract will have no effect to the extent that it prohibits or imposes a condition on the assignment of a receivable (i.e. separates payment from performance) arising under that contract or any other contract between the same parties. Unlike previous drafts of the Regulations, they apply to contractual terms which prevent the assignee of the receivable from determining its validity, value or their ability to enforce it.
A term prevents a person to whom a receivable is assigned from determining the validity or value of the receivable or their ability to enforce the receivable if the condition or other restriction prevents that person from obtaining certain information set out in the Regulations, including names and addresses of parties. This could significantly impact confidentiality provisions in contracts. The Regulations will invalidate clauses of this kind with the hope that this will allow more businesses to access invoice finance. This is intended to increase competition and diversify the invoice finance market making it more accessible. It is viewed as a market that is particularly important to SMEs, in particular, start-ups and entrepreneurs.
One key concern surrounding the previous draft regulations in 2017 was their retrospective nature – however the new regulations only apply to contracts entered into on or after 31 December 2018. It was thought that a retrospective approach to the prohibition could have had an unforeseen effect on existing contracts. Some of the other concerns were highlighted in a previous Talking Finance blog.
Some of these concerns have been dealt with and the redrafted Regulations include a number of new provisions.
There are exceptions to the general rule under the new Regulations, to address many of the concerns raised in the past.
There are exceptions for contracts entered into in connection with prescribed financial services and derivatives (i.e. these can continue to ban assignment).
They will not apply to contracts where the supplier is a large enterprise or special purpose vehicle (SPV) whose primary purpose relates to holding assets or financing commercial deals which involve it incurring liabilities of £10m or more.
Other excluded contracts include those relating to commodities, project finance, energy, land and operating leases.
Of particular note, the Regulations exclude contracts to transfer a business or an interest in a firm. So they will not apply to restrictions on assignment in share and business sale agreements (which was a past concern). However, the relevant contract must include a clear statement to that effect.
Whilst the Regulations are to apply to English (and Northern Irish) law contracts, they can also apply to contracts governed by the laws of other jurisdictions if the parties have chosen that law to evade the Regulations.
The Negative Pledge worry
At one point there was concern that the previous draft regulations might inadvertently invalidate all negative pledge clauses. These are clauses common in security that prevent a borrower from granting security to someone else over the same asset. The Regulations now clearly apply only to contracts where the receivable is owed under that contract or under a contract between the same parties so a standard negative pledge clause in security should not be affected.
As with the previous draft regulations, ‘assignment’ is not defined in the Regulations, and so some doubt remains as to the exact extent of transactions which will be covered. Most notably, as well as an outright transfer, receivables are often charged or assigned by way of security (to secure debt). If choosing between a charge and an assignment then the better course of action for a lender would be to take the assignment as it will be more likely that the Regulations will apply to any prohibition on the assignment of that receivable.
For now, it’s a case of waiting to see if they get Parliamentary approval or if the remaining concerns will be sufficient for them to have to go back to the drawing board…again.
This blog post was written by Elliot Gibson. For further information, please contact:
Elliot Gibson, PSL assistant, Banking & Finance
T: 0161 836 7707
Joanna Belmonte, senior associate and PSL, Banking & Finance
T: 0161 836 7809