The Government has introduced legislation to remove assignment restrictions within contracts which have the effect of preventing access to receivables finance.
Receivables (rights to future payments) are often viewed as an asset that can be used to raise finance whether through an assignment by way of security or the outright sale of the receivable(s) under a factoring or invoice discounting facility.
In December 2014, the Government published a consultation paper entitled, 'Nullification of Ban on Invoice Assignment Clauses', as a result of the credit crunch and a need to help small and medium sized enterprises (SMEs) raise finance through alternative means than the usual working capital and/or term loan facilities. The intention was, among other things, to void provisions that prevent the assignment of receivables as a method to raise finance.
The effect of non-assignment provisions
Often the rights of parties to commercial contracts, including the right to receive payment, are restricted from being assigned by the terms of the contract. These restrictions, whether specific to the right to receive a payment or in respect of the entire contract, will prevent the receivable from being assigned (either legally or in equity) and will often also prevent a charge being granted in respect of that underlying receivable. This may prevent SMEs from raising finance using such receivables as security or through their sale or reduce the amount of finance available to SMEs through invoice finance.
Where there are prohibitions on assignment under commercial contracts, a funder will have a concern that it may be difficult for them (as assignee) of a receivable to collect it if the business assigning the receivable (as assignor) is in financial difficulty. Under the terms of the underlying contract through which the receivable arises, the debtor would be under no obligation to pay the finance provider directly. As such the receivable would remain an asset of the 'assignor' and on administration, to the extent a debenture is granted to the funder, the receivable may constitute a floating charge asset with all the inherent issues surrounding such assets.
The New Legislation
The Government's proposals to increase the availability of finance to SMEs are set out in the following:
- section 1 of the Small Business, Enterprise and Employment Act 2015 (the Act), in force from May 2015, which enables regulations to be made to introduce a ban on certain assignment restrictions
- The Business Contract Terms (Restrictions on Assignment of Receivables) Regulations 2015 (the Regulations), currently in draft form, which will bring the ban into effect
Essentially, in certain circumstances, clauses which prevent assignment of a receivable in a contract between businesses will be unenforceable. The prohibition on assignment would still be valid in the context of the assignability of other rights but, simply, not in respect of the right to receive payment.
This will provide a welcome solution to SMEs looking to raise finance through the sale of such receivables.
The Act
Section 1 of the Act, not specifically limited to SMEs, addresses restrictions in contracts which prevent the assignment of debts.
It provides that the appropriate authority (which, in the case of England and Wales, is the Secretary of State) may make regulations to ensure that any non-assignment of receivables term of a relevant contract would either:
- have no effect
- have no effect in relation to certain parties
- have effect in relation to certain parties only for specific purposes
The Act further provides that a 'relevant contract' includes:
- contracts for goods, services or intangible assets (including intellectual property) but which are not excluded financial services contracts (see below)
- contracts where at least one of the parties has entered into it in connection with the carrying on of a business
'Financial services contracts' are defined as:
- contracts for financial services (broadly, incorporating a comprehensive list of insurance or banking activities, including retail, trading and investment activity)
- a regulated agreement within the meaning of the Consumer Credit Act 1974
- any prescribed by the regulations made under the Act
Ambiguity in the legislation
There are many ambiguities in the Act, including the following:
- It does not refer to security over receivables but only 'assignments'
- The title of the legislation itself is aimed at SMEs although the legislation does not specifically consider the size of the business. It does exclude contracts with consumers and, since the Act came into force, the Secretary of State has confirmed that section 1 will apply to any size of business. However, it is still unclear whether it would apply to a business contract between non corporate entities
- The Government has now confirmed that section 1 of the Act will only apply to business contracts governed by English law and where one of the businesses trade within the UK
- One would assume that, whilst the underlying debt of a contract may now be assignable, the debtor will retain their right to apply set off albeit that the Act is silent on this
Effect on receivable finance providers
Unless the ambiguity in the legislation is clarified by the final form of the Regulations, it is likely that receivable finance providers will continue to rely on their lawyers to advise them on the implications of funding receivables arising under certain contracts.
In particular, with set off provisions remaining as a valid right of a debtor, a funder will need to consider carefully the implications of this when purchasing a debt or advancing funds against a debt as security. Similarly, where the contract under which the debt arises is with a party based overseas it is still advisable that local advice from a suitably qualified advisor in the relevant jurisdiction is taken.
The prohibition will not be retrospective and as such will not save a funder where a contract containing a ban on assignment clause pre-dates the commencement of the Regulations.