Prohibition of the assignment of receivables

Beware: certain contractual terms prohibiting the assignment of receivables will have no effect as from 31 December 2018.

Regulations on the prohibition of an assignment of receivables have been under consideration since the Government published a discussion paper in 2013 due to a concern that this practice reduces the availability of alternative forms of finance, including invoice discounting, to many small and medium-sized businesses (as it prevents them from using their account receivables as collateral). A number of consultations, responses and draft regulations have since followed, culminating in the publication on 30 November 2018 of the Business Contract Terms (Assignment of Receivables) Regulations 2018 (the “Regulations”). The Regulations were made on 23 November 2018 and came into force on 24 November 2018, and will apply to any in-scope contract entered into on or after 31 December 2018.

In brief, the Regulations apply to contracts for the supply of goods, services or intangible assets, and the key measures are:

• A contractual term that purports to prohibit an assignment of receivables under that contract or another contract between the parties is of no effect.
• A contractual term that imposes a condition or restriction on an assignment of receivables is also of no effect. This would include a clause preventing the assignee of a receivable from determining the validity or value of the receivable or restricting its ability to enforce it.

Confidentiality clauses in favour of the debtor would still be enforceable, save in respect of information that is essential for the assignee to assess the value of the receivable and its ability to enforce that receivable.

The Regulations will generally apply to contracts subject to the law of England and Wales or the law of Northern Ireland only, and, importantly, only to business to business transactions and where one of the parties is entering into the relevant contract in the course of carrying on a business in the UK. The Regulations include anti-avoidance provisions such that the Regulations would also apply where the law of Scotland or of another country outside the UK is selected if it can be shown this has been done to evade the operation of the Regulations.

The intended scope of the Regulations has been significantly narrowed since their inception. This was principally to address concerns raised as to their potential impact on larger businesses. Consequently, there are a number of significant exclusions, including:

• Contracts where the supplier is a large enterprise – in short, a business that is not an individual, partnership, company or a Limited Liability Partnership (LLP) which is classed as small or medium-sized under relevant legislation
• Contracts where the supplier is a special purpose vehicle (SPV), subject to certain conditions
• Contracts for, or entered into in connection with, prescribed financial services (including all forms of leasing, insurance, banking and securitisations)
• Options, futures, swaps and other derivatives contracts
• Contracts for the sale of a business or undertaking – i.e. a share purchase or asset purchase agreement
• Contracts concerning any interest in land

The Regulations will be reviewed after 5 years to asses their impact.

For further information, please contact Daljit Singh, John Delamere or David Robins