Regulations banning the prohibition on assignment of receivables come into force

Controversial regulations that nullify contractual clauses restricting the assignment of receivables came into force on 24 November 2018. The Business Contract Terms (Assignment of Receivables) Regulations 2018 (the Regulations) will apply to any term in a contract entered into on or after 31 December 2018.

Background

The Small Business, Enterprise and Employment Act 2015 allows regulations to be made invalidating contractual restrictions on the assignment of receivables in particular types of contracts. The Government’s stated intention behind this provision was to remove barriers inhibiting small businesses from gaining access to invoice finance.

Initial draft regulations, (the Business Contract Terms (Restrictions on Assignment of Receivables) Regulations 2015) were published for consultation in 2014, with a revised version published in September 2017. These 2017 draft regulations were withdrawn, however, two months after their publication. This followed wide-ranging feedback from, among others, the City of London Law Society and the Financial Markets Law Committee.

Among the criticism directed at the draft regulations was that they were too wide ranging and did not sufficiently identify the supply of goods and services by SMEs as the particular finance sector to which the regulations should apply. There was also significant concern that the wider finance markets, which make use of receivables finance, should not be caught by the regulations.

In July 2018, the government published a further revised draft of the regulations - the draft Business Contract Terms (Assignment of Receivables) Regulations 2018. These contained several modifications from the 2017 version, including specifying that the restrictions do not apply where the person to whom the receivable is owed is a large enterprise or a special purpose vehicle and adding to the list of types of contract that are exempt (e.g. a contract to acquire a business or an ownership interest in a firm.)

The Regulations were finally published on 30 November 2018 with no substantive changes from the draft version published in July. They were made on 23 November 2018 and came into force on 24 November 2018.

What is the effect of the Regulations?

Under the Regulations, any term in a contract entered into on or after 31 December 2018, “has no effect to the extent that it prohibits or imposes a condition, or other restriction, on the assignment of a receivable arising under that contract or any other contract between the same parties” (Regulation 2).

A receivable is broadly defined as a right to be paid any amount under a contract for the supply of goods, services or intangible assets. There is no definition of “assignment” in the Regulations, which has caused some uncertainty over what types of transaction this term will cover.

As well as nullifying terms that prohibit the assignment of receivables, the Regulations also make ineffective any term that imposes a condition or other restriction on their assignment. This would include a term which prevents an assignee from determining the validity or value of the receivable or their ability to enforce it. These provisions should prevent devices such as confidentiality clauses from being used to circumvent the legislation.

The Regulations list categories of information which are relevant to these anti-avoidance provisions and if a contract restricts an assignee from obtaining this information, that restriction will be void. The categories of information include the identity of the parties, the goods or services that gave rise to the receivable and the date on which they were supplied, the amount payable (including VAT) and the credit period for paying the receivable.

Exemptions for “large” suppliers or SPVs

Regulation 2 does not apply to contracts where the supplier of the goods or services (i.e. the person entitled to the receivable) was, at the time of the assignment, a “large” enterprise or a “special purpose vehicle”. This means that contractual prohibitions or restrictions on assignment will continue to be valid where the supplier falls into one of these categories at the time of the assignment.

Broadly speaking, a supplier will be “large” unless:

  • it is an individual, an unincorporated association or a partnership (excluding LLPs or limited partnerships)
  • it falls within the small companies or small LLPs regime in the relevant financial year (as set out in ss 381-384 Companies Act 2006) and it was not a member of a large group in that year, or
  • it qualifies as a medium-sized company or LLP (as defined in ss 465-467 Companies Act 2006) in the relevant financial year and was not a member of a large group in that year.

A firm will be a “special purpose vehicle” (wherever it is incorporated or established) if its primary purpose is to hold assets (other than trading stock) or to finance commercial transactions and in either case, it incurs a contractual liability of £10m or more.

Exempt contracts

Regulation 2 also does not apply to several types of specified contract. These include:

  • a contract for, or entered into, in connection with prescribed financial services (which includes any service of a financial nature)
  • a contract for or in connection with the transfer of any ownership interest in a firm or a business (including transitional services agreements) and which includes a statement to that effect
  • a contract which concerns any interest in land, and
  • a contract where none of the parties has entered into it in the course of carrying on a business in the UK.

Other exemptions exist for certain project finance contracts, petroleum licenses, contracts concerning national security, securities options, swaps and other derivatives.

Applicable law

The Regulations apply to terms in a contract to which the law of England and Wales or the law of Northern Ireland applies, and at least one of the parties has entered into it in the course of carrying on business in the UK.

Although the Regulations will not generally apply to contracts governed by foreign laws, they do include deeming provisions to prevent parties from choosing Scottish, or another non-UK governing law, in order to avoid their operation.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.