Prohibiting the assignment of receivables: new Regulations

Summary

A piece of legislation that aims to increase small and medium sized businesses' ability to raise finance based on money owed to them has made its way through Parliament for the second time. Although The Business Contract Terms (Assignment of Receivables) Regulations 2018 (the Regulations) made their parliamentary debut in 2017, they were subsequently withdrawn in November of that year as a result of considerable criticism from the market. Following further representations from the market, revised proposals for the Regulations were published in July 2018.

The Regulations have been laid before Parliament and approved; they come into force on 24 November, the last stages of this process having been delayed for some time , presumably by the Brexit 'storm'. The Regulations will apply to any term in a contract entered into on or after 31 December 2018.

The Regulations

The Regulations, which only apply in England, Wales and Northern Ireland, propose to facilitate access to invoice finance by invalidating contractual terms that prohibit the assignment of receivables.

Receivables are defined within the Regulations as "a right (whether or not earned by performance) to be paid any amount under a contract (other than a contract mentioned in regulation 4) for the supply of goods, services or intangible assets…".

The Regulations remove the effect of contractual terms that prohibit (or impose a condition or restriction on) the assignment of a receivable arising under that contract or any other contract.

This includes terms that prevent a person to whom a receivable is assigned from determining its validity or value or their ability to enforce the receivable. For example, the following will have no effect:

• a term preventing that person from obtaining the names and addresses of the parties to the contract; or
• any terms which prevent that person from obtaining a description sufficient to identify the goods.

Whilst the potential reach of these provisions may seem vast, the Regulations exclude a number of types of contracts. The more significant of these include:

• any assignment by a large enterprise (which is explored in more detail below);
• any assignment by a special purpose vehicle (pertaining to a liability of at least £10 million);
• contracts for prescribed financial services;
• operating leases;
• derivative contracts;
• commodities/project finance contracts;
• business/share sales;
• contracts concerning an interest in land; and
• contracts that concern national security interests.

One of the most notable criticisms of the 2017 Regulations was that they demonstrated no recognition of the fact that this legislation was intended to benefit SMEs and they treated SMEs and big business in the same way. The amended Regulations address this by excluding large enterprises. For these purposes, large enterprises exclude:

• sole traders;
• partnerships;
• unincorporated associations;
• companies/LLPs qualifying as small or medium-sized under the Companies Act 2006 and related legislation;
• companies/LLPs that have not filed accounts since incorporation; and
• bodies incorporated overseas which would so qualify if incorporated in the UK.

The aims

A key policy objective of the Government is to diversify finance markets and encourage competition. The Regulations aim to further this by making the asset finance market more accessible and enabling businesses to obtain finance more easily and cheaply.

Businesses are dependent on healthy cash flow, which is often achieved through external financing. Invoice finance, in particular, allows smaller businesses to obtain finance by assigning their receivables, or rights to future payments, to a finance provider. A finance provider of this type will typically lend an amount equal to 80% of the value of the receivables.

In recent years, it has become more and more common to see clauses in contracts which prohibit the assignment of invoices. Businesses that need to obtain finance using their receivables therefore have to find ways to bypass these provisions, such as using powers of attorney, which increases cost and time commitments.

It is currently estimated that only 10% of the businesses that could benefit from invoice finance are currently making use of it. Once in operation, the Regulations are expected to boost this number significantly.

The impact

The expected reduction in the cost of invoice finance and the increase in its accessibility is likely to have a positive impact on small businesses, charities and voluntary bodies. Whilst lenders in the invoice finance market may presently feel disadvantaged, if the volume of these financings expand in the way predicted by the Government, they will soon benefit from the increased demand and the expansion of the market.

It is important to note that this latest iteration of the Regulations has a much more restricted ambit than its precursor. Property investment companies, for example, for whom rental income is a significant receivable, will not be affected, as the new Regulations expressly exclude any contracts that relate to an interest in land. Indeed, the list of excluded contracts has been greatly expanded.

Most significantly, the Regulations now apply to only SMEs rather than across the board.