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Receivables Finance: the prohibition on assignment is now in force

18th January 2019

The Business Contract Terms (Assignment of Receivables) Regulations 2018 came into force on 31 December 2018 meaning that parties to a contract in the UK may no longer be able to prohibit the assignment of receivables arising in respect of supplies made under it, even if it is a long term supply contract providing for multiple deliveries.

As we reported in December 2017 , draft regulations were laid before Parliament in September of that year which proposed to make any term in a business contract that prohibited or restricted the assignment of receivables automatically ineffective. Those draft regulations were subsequently withdrawn amid concerns that they would create uncertainty in the finance markets.

The main areas of concern were that:

  • the legislation appeared to be retrospective therefore catching contracts that were already in place;
  • the types of assignment which fell within the regulations were not described sufficiently well enough to create certainty; and
  • there was no protection for the debtor who may have stipulated for a non-assignment clause in the expectation that its rights of set off would be preserved.

However, the government has since revisited the legislation and on 24 November 2018 the Business Contract Terms (Assignment of Receivables) Regulations 2018 (the Regulations ) came into force. The Regulations apply to contracts (with a few exceptions described below) created after 31 December 2018 and mean that parties will no longer be able to prohibit the assignment of receivables in the UK. The Regulations make it clear that the prohibition is not retrospective and so the Regulations only apply to new contracts. In effect, this means that one party to a contract cannot prevent the other party from choosing who should receive payments under a contract for the supply of goods, services or intangible assets.

The Regulations also render unenforceable any terms which prevent a person who has been assigned the receivable from being able to enforce the contract, or determine its validity or value (for example by preventing the disclosure of the information required to commence court proceedings for its collection).

The Regulations are aimed at improving access to invoice financing for small and medium-sized enterprises and the government speculates that this will provide a £1 billion, long-term, boost to the economy. Invoice financing allows businesses to assign their right to be paid by a customer to a finance provider. In return the finance provider provides the business with up-front funds, thereby speeding up the business’ working capital cycle (provided the debtor ultimately pays the assigned invoice). Before 1 January 2019, smaller businesses would usually be forced to engage with larger customers on those customers’ standard terms, which often contained non-assignment clauses. As a result, some smaller businesses were restricted from engaging with invoice financing opportunities. This should now change.

The Regulations apply to contracts for the supply of goods, services or intangible assets where the supplier has the right to be paid under the contract. There are, however, a number of exceptions including:

  • a large enterprise or part of a large group (as defined by the Companies Act 2006); or
  • a special purpose vehicle, set up to hold assets or finance commercial transactions involving it incurring a liability under an agreement of £10 million or more.
  • The Regulations also do not apply to services of a financial nature. The definition of ‘financial nature’ is construed widely and includes, amongst other things, leasing, loan relationships and all types of securitisation and derivative transactions.
  • The Regulations do not apply to contracts which have as their purpose the acquiring, disposing or transferring of ownership in a firm (as defined in the Companies Act 2006) whether incorporated or established, or of a business or undertaking. However, for this exemption to apply, the contract must include a statement to that effect.
  • The Regulations generally do not apply to contracts that relate to non-UK businesses. However, parties cannot contract out of the Regulations by changing the contract’s governing law, if the only reason for doing so is to circumvent the regulations.
  • There are also a number of other types of contracts which the Regulations do not apply to, including consumer contracts, real estate contracts, public-private partnership contracts and rental contracts. Interestingly, the Regulations will apply to building contracts which, up to now have been impossible to finance, in practice, through an invoice discounting arrangement.

Practical application

The Regulations will lead to the need for certain changes to the drafting and implementation of commercial contracts:

  • No assignment clauses –  An eligible supplier will be able to assign their receivables to a debt purchaser without having to seek their customers’ prior consent. This means a blanket non-assignment clause will no longer work for on its own to preserve rights of set off;
  • Confidentiality provisions –  Confidentiality obligations can still be imposed on suppliers, except for any “essential information” that enables the identification of the receivables following assignment. This means information that enables the identification of receivables (so as to facilitate their collection) may be disclosed by a supplier to a third party purchaser for the purpose of receivables assignment or transfer without constituting a breach of confidentiality.
  • Set-off –  The Explanatory Note to the Regulations clarifies that a contractual right to set-off is not considered as a restriction on transfer of receivables for the purpose of the Regulations. Although the right to set-off is maintained, businesses may want to consider the practical impact of the Regulations on the mechanism to exercise the right to set-off, such as how cash flow will be affected if you are no longer able to consolidate future transactions to set-off against one original invoice that has already been assigned to a third party.

Many commercial arrangements will be unaffected by this change in legislation. However this will depend, in relation to contracts entered into this year and beyond, on the terms of the contract and the nature of what is being supplied under it. A key point to note is that the Regulations will not nullify the contract as a whole or, indeed, the whole of the clause restricting assignment, but only to the extent applicable to receivables.

Providers of invoice finance will still need to carry out due diligence, at least for now, on taking on any new invoice discounting client to ascertain the extent to which the debtor book may still contain debts which are subject to restrictions on assignment or are otherwise subject to rights of set off.

Small and medium sized companies seeking to avail themselves of the new rules should seek advice before doing so. Invoice discounting products can be an extremely effective way of assisting a growing business meet its working capital needs. However, lumpy cash flow, or bad debt experience (including habitual slow payers in the customer base) can lead to disaster if not properly managed.

If you need advice on how the Regulations may affect your business please get in touch.

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Receivables Finance And The Assignment Of Receivables

Tfg legal trade finance hub, receivables finance and the assignment of receivables.

A receivable represents money that is owed to a company and is expected to be paid in the future. Receivables finance, also known as accounts receivable financing, is a form of asset-based financing where a company leverages its outstanding receivables as collateral to secure short-term loans and obtain financing.

In case of default, the lender has a right to collect associated receivables from the company’s debtors. In brief, it is the process by which a company raises cash against its own book’s debts.

The company actually receives an amount equal to a reduced value of the pledged receivables, the age of the receivables impacting the amount of financing received. The company can get up to 90% of the amount of its receivables advanced.

This form of financing assists companies in unlocking funds that would otherwise remain tied up in accounts receivable, providing them with access to capital that is not immediately realised from outstanding debts.

Account Receivables Financing Diagram

FIG. 1: Accounts receivable financing operates by leveraging a company’s receivables to obtain financing.  Source: https://fhcadvisory.com/images/account-receivable-financing.jpg

Restrictions on the assignment of receivables – New legislation

Invoice  discounting  products under which a company assigns its receivables have been used by small and medium enterprises (SMEs) to raise capital. However, such products depend on the related receivables to be assignable at first.

Businesses have faced provisions that ban or restrict the assignment of receivables in commercial contracts by imposing a condition or other restrictions, which prevents them from being able to use their receivables to raise funds.

In 2015, the UK Government enacted the Small Business, Enterprise and Employment Act (SBEEA) by which raising finance on receivables is facilitated. Pursuant to this Act, regulations can be made to invalidate restrictions on the assignment of receivables in certain types of contract.

In other words, in certain circumstances, clauses which prevent assignment of a receivable in a contract between businesses is unenforceable. Especially, in its section 1(1), the Act provides that the authorised authority can, by regulations “make provision for the purpose of securing that any non-assignment of receivables term of a relevant contract:

  • has no effect;
  • has no effect in relation to persons of a prescribed description;
  • has effect in relation to persons of a prescribed description only for such purposes as may be prescribed.”

The underlying aim is to enable SMEs to use their receivables as financing to raise capital, through the possibility of assigning such receivables to another entity.

The aforementioned regulations, which allow invalidations of such restrictions on the assignment of receivables, are contained in the Business Contract Terms (Assignment of Receivables) Regulations 2018, which will apply to any term in a contract entered into force on or after 31 December 2018.

By virtue of its section 2(1) “Subject to regulations 3 and 4, a term in a contract 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.”

Such regulations apply to contracts for the supply of goods, services or intangible assets under which the supplier is entitled to be paid money. However, there are several exclusions to this rule.

In section 3, an exception exists where the supplier is a large enterprise or a special purpose vehicle (SPV). In section 4, there are listed exclusions for various contracts such as “for, or entered into in connection with, prescribed financial services”, contracts “where one or more of the parties to the contract is acting for purposes which are outside a trade, business or profession” or contracts “where none of the parties to the contract has entered into it in the course of carrying on a business in the United Kingdom”. Also, specific exclusions relate to contracts in energy, land, share purchase and business purchase.

Effects of the 2018 Regulations

As mentioned above, any contract terms that prevent, set conditions for, or place restrictions on transferring a receivable are considered invalid and cannot be legally enforced.

In light of this, the assignment of the right to be paid under a contract for the supply of goods (receivables) cannot be restricted or prohibited. However, parties are not prevented from restricting other contracts rights.

Non-assignment clauses can have varying forms. Such clauses are covered by the regulations when terms prevent the assignee from determining the validity or value of the receivable or their ability to enforce it.

Overall, these legislations have had an important impact for businesses involved in the financing of receivables, by facilitating such processes for SMEs.

Digital platforms and fintech solutions: The assignment of receivables has been significantly impacted by the digitisation of financial services. Fintech platforms and online marketplaces have been developed to make the financing and assignment of receivables easier.

These platforms employ tech to assess debtor creditworthiness and provide efficient investor and seller matching, including data analytics and artificial intelligence. They provide businesses more autonomy, transparency, and access to a wider range of possible investors.

Securitisation is an essential part of receivables financing. Asset-backed securities (ABS), a type of financial instrument made up of receivables, are then sold to investors.

Businesses are able to turn their receivables into fast cash by transferring the credit risk and cash flow rights to investors. Investors gain from diversification and potentially greater yields through securitisation, while businesses profit from increased liquidity and risk-reduction capabilities.

References:

https://www.tradefinanceglobal.com/finance-products/accounts-receivables-finance/  – 28/10/2018

https://www.legislation.gov.uk/ukpga/2015/26/section/1/enacted  – 28/10/2018

https://www.legislation.gov.uk/ukdsi/2018/9780111171080  – 28/10/2018

https://www.bis.org/publ/bppdf/bispap117.pdf  – Accessed 14/06/2023

https://www.investopedia.com/terms/a/asset-backedsecurity.asp  – Accessed 14/06/2023

https://www.imf.org/external/pubs/ft/fandd/2008/09/pdf/basics.pdf  – Accessed 14/06/2023

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International Trade Law

1 | Introduction to International Trade Law 2 | Legal Trade Finance 3 | Standard Legal Charges 4 | Borrowing Base Facilities 5 | Governing law in trade finance transactions 6 | SPV Financing 7 | Guarantees and Indemnities 8 | Taking security over assets 9 | Receivables finance and the assignment of receivables 10 | Force Majeure 11 | Arbitration 12 | Master Participation Agreements 13 | Digital Negotiable Instruments 14 | Generative AI in Trade Law

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The Business Contract Terms (Assignment of Receivables) Regulations 2018

Published on 08 April 2019

How does the Business Contract Terms (Assignment of Receivables) Regulation prohibit restrictions on the assignment of receivables under commercial agreements?

The background

Following a number of drafts (which we considered in a Winter 2018 Snapshot), the Business Contract Terms (Assignment of Receivables) Regulations 2018 (the Regulations ), came into force at the end of 2018. 

The Regulations aim to ensure that SMEs’ access to receivables financing (eg invoice-based financing) is not restricted, offering another option to improve liquidity.

The Regulations apply to relevant contracts entered into on or after 31 December 2018.  They render ineffective contract terms which prohibit, impose a condition or otherwise restrict a party’s right to assign receivables (a right to be paid any amount under a contract for the supply of goods, services or intangible assets) arising under the contract.  The contract must be governed by English or Northern Irish law (although opting for foreign law purely to avoid the Regulations will not work).  At least one of the parties to the contract must have entered into it in the course of carrying on business in the UK.

The development

The Regulations are designed to benefit SMEs only, as they are primarily affected by restrictions on access to receivables financing.  The Regulations therefore do not apply to assignments where the supplier/assignor is a “large enterprise” (defined by reference to the company’s latest filed accounts and applicable rules under the Companies Act 2006) or “special purpose vehicle” (a firm of which the primary purpose is to hold assets other than trading stock, or to finance commercial transactions, which involve it incurring a liability under an agreement of at least £10m).

The analysis of whether or not a company is an SME, and can benefit from the Regulations, takes place at the time of the (purported) assignment, rather than at the time the company entered into the contract giving rise to the receivable.

Is there anything to watch out for?

Even if the supplier is an SME, beware also that the Regulations do not apply to certain types of contract, such as those which concern the sale of a business; the provision of financial services; or any interest in land.  

Any practical tips? Beware of the potential unpredictability of whether the Regulations apply to your business at the time of assignment.  At the time of contracting, consider the importance of contract terms which may be said to restrict assignment of receivables, and the impact of those terms being unenforceable.  Note in particular that the Regulations may render invalid confidentiality clauses seeking to prevent assignees from obtaining possible sensitive details, such as the nature and price of the goods or services in respect of which the receivables arose.

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The Business Contract Terms (Assignment of Receivables) Regulations 2018 - back for good?

High Court decision highlights contractual termination pitfalls

In an illustration that if at first you don’t succeed, you should try and try again, the UK government has published a revised draft of the regulations designed to prohibit contractual clauses which prevent one party from assigning its right to payment to a third party.

The first iteration of these regulations, designed to open up invoice finance to smaller businesses by removing contractual restrictions, was published back in December 2014. However they were viewed as having various flaws and the government went back to the drawing board. Last September saw the publication of The Business Contract Terms (Assignment of Receivables) Regulations 2017 only for the same to be withdrawn before year-end because of a perception that they still required further work.

Below we provide a summary of the key features of The Business Contract Terms (Assignment of Receivables) Regulations 2018. However before we continue it’s worth highlighting two specific exemptions from the draft legislation.

Two key exemptions

Firstly, the regulations do not apply to contracts to acquire a business or an interest in a firm. This removes the previous uncertainty as to whether or not the general prohibition outlined below would apply to restrictions on assignment contained in share and business sale agreements. Under the draft of the regulations, it will not.

Secondly, contracts entered into by a project company of a project which is a public-private partnership project, a utility project or a financed project are also exempt from the draft regulations. This may be in response to previous feedback on the earlier draft of the regulations. In particular, in its response to The Business Contract Terms (Assignment of Receivables) Regulations 2017, The City of London Law Society (CLLS) noted that prohibitions and restrictions on assignment (including assignment of receivables) are common in construction contracts, such as the JCT suite of contracts, because developers wish to ensure that the money they spend goes to the subcontractors and suppliers undertaking the work on a given project.

The CLLS expressed the view that the previous draft of the regulations had the potential to create uncertainty and market disruption in a wide range of transactions in the building infrastructure and energy construction markets in the UK. Whether the revised draft of the regulations adequately address such concerns remains to be seen (as at the date of this alert, the CLLS has not yet published any response to the latest regulations). 

Overview of The Business Contract Terms (Assignment of Receivables) Regulations 2018

If approved by Parliament, the regulations would provide as follows:

  • General prohibition : regulation 2 of the draft regulations sets out a general prohibition which says that “ a term in a contract 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 ”. In broad terms, this means that a term contained in a contract between parties A and B, under which party A pays sums to party B in return for the supply of goods or services by party B to party A, but which prevents party B from assigning that payment right to non-party C, will have no effect.
  • Anti-avoidance : the draft regulations also include provisions which are designed to prevent contract parties from circumventing the general prohibition outlined above by preventing an assignee of a payment right from determining the validity or value of the receivable or their ability to enforce the receivable. To this end, the draft regulations list 13 different categories of information which, if the assignee is unable to obtain such information by reason of a restriction in a contract, then such contractual restriction will also be of no effect. These categories of information include (among other things) the names of the contract parties, the relevant goods, services or other assets which give rise to the receivable, the amount payable (including any VAT chargeable), any applicable discount and the credit period applicable to the receivable. So, using the previous example, if a contract entitled party B to assign its receivable to non-party C but did not allow party B to disclose any of the foregoing details regarding such receivable to non-party C, then under the draft regulations such contractual restriction would also be of no effect.
  • Exception for suppliers which are large enterprises or SPVs : regulation 3 of the draft regulations provides that the general prohibition outlined above does not apply, and accordingly contractual restrictions which prevent the assignment of a receivable shall continue to have effect, if at the time of the assignment the supplier (i.e. the creditor) is a large enterprise or a special purpose vehicle. In practice, this will allow smaller businesses to continue to impose restrictions on assignment when contracting with large businesses. The regulations go on to clarify what is meant by a “large enterprise” which, in broad terms, includes any company or limited liability partnership unless it is a small or medium-sized business and is not a member of a large group. So, the regulations would apply if, using our previous example, party B (the supplier) is a company to which the small companies regime (within the meaning of sections 381-384 of the Companies Act 2006) applied in the last financial year (before the date on which the receivable is assigned) in respect of which the supplier filed accounts. The opposite would be true if party B failed to satisfy any one or more of the conditions which mark out a small or medium-sized business from a large one in regulation 3 of the draft regulations.   
  • Exempt contracts : as with previous iterations of the proposed regulations, the draft regulations continue to exempt certain kinds of contracts from their scope. As well as those highlighted under the first heading above, the regulations do not apply to contracts for prescribed financial services, contracts concerning any interest in land, consumer contracts, petroleum licences, contracts concerning a matter of national security, securities options, forwards, swaps and other derivatives.
  • Territorial application : the draft regulations would only apply to contracts governed by English law. There are deeming provisions which provide that the regulations would still apply where parties deliberately adopt the governing law of a country outside of the United Kingdom in order to evade the operation of the regulations.      

If the draft Business Contract Terms (Assignment of Receivables) Regulations 2018 do receive Parliamentary approval, they would apply to contracts entered into on or after 31 December 2018. Watch this space to see if they do finally make it past the finishing post in their latest guise. 

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Business Contract Terms (Assignment of Receivables) Regulations 2018

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Despite some controversy, the new legislation prevents the prohibition or restriction of assignment of receivables under certain contracts. Our team at EM Law can help you understand how the new Regulations may impact on your business.

What are the Business Contract Terms (Assignment of Receivables) Regulations 2018?

Under English law, parties are generally free to provide for the terms and conditions that will govern their relationship. This concept is known as freedom of contract. Commercial contracts, for example, routinely contain provisions that prohibit or restrict the ability to assign or transfer rights created under a contract. Parties limit assignments by the other party for various legitimate reasons. Such reasons include preserving business relationships, preventing receivables coming into the hands of an aggressively hostile party or competitor, ensuring that an incoming party is bound by obligations, or preserving confidentiality.

Under the new Business Contract Terms Regulations, any terms that prohibit or restrict the assignment of receivables shall have no effect. A receivable, effectively, is a right to be paid. Regulation 2(1) states that “a term in a contract 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.” In theory, this means that parties to contracts will be able to freely assign rights to the receivables of a contract to a third party without consulting the other contracting party or parties.

What types of contract do the Regulations apply to?

Broadly speaking, the Business Contract Terms Regulations will apply to business contracts entered into on or after 31 December 2018. However, there are several types of contract to which the Regulations will not apply.

Regulation 3 states that the Regulations will not apply if at the time of the assignment the supplier is a large enterprise or special purpose vehicle. A supplier is a large enterprise if it satisfies one of the conditions in Regulation 3(3), such as being a company which qualifies as medium-sized within the meaning given by sections 465 to 467 of the Companies Act 2006. A supplier is a special purpose vehicle if it carries out a primary purpose in relation to the holding of assets or the financing of commercial transactions and in either case involved incurring a liability of £10 million or more.

Regulation 4 sets out various other situations in which the Regulations will not apply. In these situations the government has recognised that some contracts rely on non-assignment for sound commercial reasons and that freedom of contract in these instances should be preserved. Such situations include where the contract concerns any interest in land, where the contract is for prescribed financial services and where the contract is entered into for the purpose of, or in connection with, the acquisition, disposal or transfer of an ownership interest in a firm. For the latter exclusion to apply, the corporate acquisition contract must include a statement to that effect.

assignment of receivables uk

Why have these changes been made?

According to the Department for Business, Energy and industrial Strategy, the main objective of the Business Contract Terms Regulations is to facilitate access to finance for businesses.

Businesses depend upon having adequate cash flow to meet their liabilities and often need access to external finance in order to invest and grow. For growing businesses, invoice finance is an important way of securing the working capital that they need. Invoice finance is particularly valuable in those sectors where businesses have to wait a long time between issuing an invoice and receiving payment because it allows businesses to borrow money against the amounts due from customers.

Where assignment has been prohibited or restricted by a term in a contract, finance providers have to use other means to offer finance, such as requesting the debtor to allow assignment or using a work around such as a separate trust account or power of attorney. This increases the cost of providing invoice finance and may lead to a refusal of invoice financing. Under the Regulations, such terms will have no effect. According to the government, this will enable more businesses to access invoice finance and in turn diversify finance markets and encourage competition.

Do I need to amend my current contracts?

Although uncertain at the moment, it is unlikely that major changes will need to be made to current standard documents. In relation to corporate share purchase and asset purchase agreements, and transitional service agreements, it should not be necessary to make any amendments to benefit from the exception for corporate acquisition contracts.

In relation to supply contracts, the government has said that businesses do not need to incur costs redrafting their standard contractual terms, as the Regulations do not make bans on assigning invoices illegal, they simply make them unenforceable. Where there is term prohibiting or restricting assignment, the Regulations will simply override the contractual provision.

Despite this, where practicable, it would be sensible to reflect the underlying law in new contracts. Over time, it is likely that contracts will expressly refer to the Business Contract Terms Regulations in order to do this.

If you have any questions around the new Business Contract Terms Regulations or you would like advice on how they may impact your business please contact Neil Williamson .

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The Government restricts bans on assignment

United Kingdom |  Publication |  November 2018

Legislation now in force preventing parties from prohibiting the assignment of receivables under certain contracts.

At the moment, a contract can prohibit or restrict the parties’ ability to assign or transfer rights created under the contract. The extent of the restriction is a matter of interpretation of the clause concerned. If one of the parties to the contract attempts to assign the benefit of the contract in breach of the restriction, the purported assignment is ineffective.

One of the key assets of any business is its receivables, and restrictions on assignment can prevent the parties from factoring receivables or otherwise raising finance on them. The Government has decided that it should be easier for businesses to raise finance on their receivables. Accordingly the Small Business, Enterprise and Employment Act 2015 allows regulations to be made to invalidate restrictions on the assignment of receivables in particular types of contract. The regulations have now been made. They are contained in The Business Contract Terms (Assignment of Receivables) Regulations 2018. Draft regulations published in July, have been approved by both Houses of Parliament and are now in force.

What types of contracts do the Regulations apply to?

The Regulations apply to contracts for the supply of goods, services or intangible assets under which the supplier is entitled to be paid money. But there are a number of important exclusions from their application, including the following:

  • They only apply to contracts entered into on or after 31 December 2018.
  • They only apply where the person who supplies the goods, services or intangible assets concerned, and is therefore entitled to the receivable, is a small or medium-sized enterprise which is not a special purpose vehicle. Whether or not an entity qualifies in any particular case requires a detailed examination of the precise wording of the
  • Regulations. Counter-intuitively, the test is not applied at the time the contract is entered into, but at the time the assignment takes place.
  • There is a specific exemption for contracts “for, or entered into in connection with, prescribed financial services”: These are widely defined to include “any service of a financial nature”.
  • There are specific exclusions for particular types of contract, including certain commodities, project finance, energy, land, share purchase and business purchase contracts and operating leases.
  • As a general rule, it would seem that the Regulations only apply to contracts governed by English law or the law of Northern Ireland, but they prevent the parties from choosing a foreign law if it can be established that the purpose of doing so was to evade the Regulations.
  • The Regulations do not apply if none of the parties to the contract has entered into it in the course of carrying on a business in the United Kingdom.

What is the effect of the Regulations?

The Regulations provide that “a term in a contract 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.”

A receivable is the right to be paid any amount under a contract for the supply of goods, services, or intangible assets. The Regulations do not prevent the parties from restricting the assignment of other contract rights.

More difficult is to establish what is meant by assignment. Receivables are transferred in various ways in practice. Sometimes the transfer is outright (for instance by way of sale); and sometimes it is by way of security (for instance to secure a loan). The transfer may be effected by a statutory assignment, an equitable assignment, a charge or a trust. “Assignment” is not defined in the Regulations, and so there is some doubt as to which of these transactions are covered.

Although charges are not expressly referred to, they might be covered by the expression “assignment” if it is given a broad interpretation. But because of the uncertainty, the best course is to take an assignment by way of security over a receivable where there is, or might be, a restriction. That way, it is clear that the Regulations do apply.

Non-assignment clauses come in a variety of forms. They will be covered by the Regulations if they prohibit or impose a condition , or other restriction on the assignment of a receivable. The Regulations expressly invalidate terms which prevent the assignee from determining the validity or value of the receivable or their ability to enforce it. Whether or not the Regulations apply in any particular case will require an analysis of the precise terms of the restriction.

The Regulations will be of particular importance to businesses involved in the financing of receivables. And they will also be of concern to buyers because they will override their contractual protections.

Richard Calnan

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Assignment of Receivables

assignment of receivables uk

The draft Business Contract Terms (Assignment of Receivables) Regulations 2017 (the “ Draft Regulations ”) are currently before Parliament. If approved, these would contain provisions to nullify contract terms which attempt to restrict the ability of a party to assign a receivable.

In December 2014, the Department for Business, Innovation & Skills (BIS) consulted on an earlier version of the Draft Regulations. These earlier regulations contained a provision that allowed a party to rely on a confidentiality clause to prevent assignment of a receivable. This was included in the event that a debtor is unwilling for a receivable to be assigned because the disclosure of the debt to a third party compromises the debtor’s confidentiality. In August 2015, BIS published a response to the consultation.

Businesses often have to wait for a considerable length of time to be paid, which can cause cash flow issues. As a way of raising finance, a business may choose to assign an unpaid invoice to a third party, such as an invoice finance provider. This works by the finance provider lending the money to the business on the basis that the invoice is assigned to the finance provider. The finance provider will then pursue the debtor for the unpaid amount which will cover the earlier loans to the business.

Most contracts contain boilerplate provisions preventing the assignment of any rights under the contract unless the other party consents. A receivable is a right to be paid and a boilerplate non-assignment clause is broad enough to prevent invoices from being assigned.

Certain contracts are excluded from these rules. These include contracts for: an interest in land; for financial services; consumers where one or more of the parties is acting for purposes which are outside a trade, business or profession; for national security; and for certain energy and petroleum contracts.

Noticeably, the Draft Regulations do not include the confidentiality clause that was included in the earlier version.

Controversially, “assignment” is not defined. It is clear that this law would apply to outright assignments of receivables, but it is unclear the extent which it will apply to security interests. On the face of it, the new law will extend to security assignments but not charges or trusts. This may have the result that the parties cannot prevent a security assignment but can prevent a lesser interest such as a charge.

One of the reasons why restrictions on assignment are included in contracts is to protect the payer from having to pay more to an assignee than it would have to pay to the assignor. However, there is nothing in the Draft Regulations to protect the payer. It can only rely on its rights under the general law, which are extensive but not as good as an effective prohibition on assignment.

If approved, the Draft Regulations will not only apply to small companies. It will also read so that it covers all contracts, including those in existence at the time the new law comes into effect, which is expected to be in November or December 2017.

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About the Author

Tim littler, partner.

Tim Littler is a Cheltenham solicitor , specialising in banking and finance .

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  • Practical Law

In taking security over all the receivables owing to a company from its debtors would you use an assignment of receivables or a charge over book debts?

Practical law resource id a-009-3320  (approx. 4 pages).

  • Security and Quasi Security

Banning some restrictions on Assignment – The UK Government tries

Posted by Mark Daley on 12 July 2018 Tagged to ABL , CLLS , FMLC , Unfair Contract Terms Act

The Business Contract Terms (Assignment of Receivables) Regulations 2018  were published on 4th July. They provide in principle (and subject to many exclusions) that as from 31st December 2018 a contract term will have  no effect  to the extent that it prohibits the assignment of a receivable. These are the successor to the 2017 version which was withdrawn after it was legally savaged by the CLLS and the FMLC on the grounds that there were defects in the drafting, that any interference with freedom of contract would be detrimental to the global popularity of English law, and that the Regulations were  ultra vires  because they went beyond the ambit of the  Small Business, Enterprise and Employment Act 2015  (which is the principal legislation), and even that they might avoid negative pledge clauses.  The 2018 version has several changes from the ill-fated 2017 one, many adding further detail about things previously rather unclear or to create new exempt categories of contract or contract party, but we wait to see what the CLLS and FMLC make of them.  Some significant changes are:

  • They now only apply to contracts entered into on or after 31st December 2018;
  • They will expressly not apply to (a) M&A contracts, (b)  contracts for any financial service  – very widely defined (loans, leases, swaps, etc) – amongst many other types of excluded contracts, (c) contracts where the supplier is a “large enterprise” or a “special purposes vehicle” (both as defined in detail), and (d) contracts where none of the parties has entered into it in the course of a business carried on in the UK.

The intention is to make it easier for suppliers to factor book debts, and for financial firms, they are not bad news, and will be relevant to ABL, English law trade receivables securitisations, and so on.  There is no substitute for reading the detail of these sadly, and judging from the outcry last in 2017, we have probably not heard the last of them, but the UK government seems determined to bring something in.

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IMAGES

  1. Assignment of Accounts Receivable Form

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  2. Assignment Of Accounts Receivable

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  3. Assignment of receivables agreement template: Fill out & sign online

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  4. Receivables Finance And The Assignment Of Receivables

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  5. Sale Transfer and Assignment of Receivables Agreement

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  6. Assignment of Accounts Receivable Forms

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  4. Nitijela Standing Committee on Public Account (PAC)

  5. Receivables Overview

  6. Aging of trade receivables MCQ Question Answer

COMMENTS

  1. The Business Contract Terms (Assignment of Receivables) Regulations 2018

    1. — (1) These Regulations may be cited as the Business Contract Terms (Assignment of Receivables) Regulations 2018 and shall come into force on the day after the day on which they are made. (2)...

  2. Receivables Finance: the prohibition on assignment is now in force

    The Business Contract Terms (Assignment of Receivables) Regulations 2018 came into force on 31 December 2018 meaning that parties to a contract in the UK may no longer be able to prohibit the assignment of receivables arising in respect of supplies made under it, even if it is a long term supply contract providing for multiple deliveries.

  3. Business Contract Terms (Assignment of Receivables ...

    Practical Law UK Legal Update w-017-8524 (Approx. 4 pages) ... The Business Contract Terms (Assignment of Receivables) Regulations 2018 (SI 2018/1254) were made on 23 November 2018 and came into force on 24 November 2018. Free Practical Law trial. To access this resource, sign up for a free trial of Practical Law. Free trial.

  4. Receivables Finance And The Assignment Of Receivables

    Receivables finance, also known as accounts receivable financing, is a form of asset-based financing where a company leverages its outstanding receivables as collateral to secure short-term loans and obtain financing. In case of default, the lender has a right to collect associated receivables from the company's debtors.

  5. FAQs on assignments in finance transactions

    However, whether an assignment of receivables expressed as an outright sale is re-characterised as a secured loan does not depend on whether the sale is a legal assignment of existing receivables or an equitable assignment of future receivables. (Assignments of future receivables are not possible under the laws of some states.) 10.

  6. The Business Contract Terms (Assignment of Receivables) Regulations 2017

    1. — (1) These Regulations may be cited as the Business Contract Terms (Assignment of Receivables) Regulations 2017 and shall come into force on the day after the day on which they are made. (2) In these Regulations—. "excluded contract" means-. (a) a contract for prescribed financial services; (b) a contract which concerns any interest ...

  7. PDF The Business Contract Terms (Assignment of Receivables) Regulations 2018

    The assignment of receivables (i.e. invoices and other rights to be paid money under a contract) is a mechanism by which businesses are able to raise finance based on money owed to them.

  8. Assignment of receivables: a step forward for UK PLC and a step towards

    The draft Business Contract Terms (Assignment of Receivables) Regulations 2017 (the "draft Regs") have been published. Gone is the complexity of the original draft, and now we have a straightforward piece of legislation which will be warmly welcomed by receivables financiers, block discounters and, in turn, their customers.

  9. The Business Contract Terms (Assignment of Receivables ...

    The background. Following a number of drafts (which we considered in a Winter 2018 Snapshot), the Business Contract Terms (Assignment of Receivables) Regulations 2018 (the Regulations), came into force at the end of 2018. The Regulations aim to ensure that SMEs' access to receivables financing (eg invoice-based financing) is not restricted ...

  10. The Business Contract Terms (Assignment of Receivables) Regulations

    Last September saw the publication of The Business Contract Terms (Assignment of Receivables) Regulations 2017 only for the same to be withdrawn before year-end because of a perception that they still required further work. Below we provide a summary of the key features of The Business Contract Terms (Assignment of Receivables) Regulations 2018.

  11. Notice of Assignment of Accounts Receivable (Assignee to Non ...

    A form letter from an assignee providing notice to the non-assigning party (typically a buyer of goods) that the seller (assignor) has assigned its right to receive payment for the goods (accounts receivable) to the assignee. This Standard Document has integrated notes with important explanations and drafting tips.

  12. Receivables finance: prohibiting restrictions on the assignment of

    Practical Law UK Practice Note Overview 2-613-0546 (Approx. 11 pages) Ask a question Receivables finance: prohibiting restrictions on the assignment of receivables

  13. PDF Prohibitions on Assignment of Receivables

    in the UK use invoice finance. This is estimated to be only 10% of the number of businesses that could potentially make use of it1. Currently £311 billion2 (14% of UK's GDP) is supported through invoice finance. Assignments of receivables are an essential feature of factoring and invoice discounting. Commercial contracts routinely contain

  14. Business Contract Terms (Assignment of Receivables)

    Under the new Business Contract Terms Regulations, any terms that prohibit or restrict the assignment of receivables shall have no effect. A receivable, effectively, is a right to be paid. Regulation 2 (1) states that "a term in a contract has no effect to the extent that it prohibits or imposes a condition, or other restriction, on the ...

  15. PDF What Is a Ban on Assignment? the Business Contract Terms (Assignment of

    A ban on assignment is a prohibition contained in a contract of sale or supply (Contract) between a customer and its debtor restricting one or both parties from assigning (whether by way of outright disposal or by way of security) certain or all of their rights (including any rights to receivables) under that Contract.

  16. PDF The Business Contract Terms (Assignment of Receivables) Regulations 2017

    The assignment of receivables (i.e. invoices and other rights to be paid money under a contract) is a mechanism by which businesses are able to raise finance based on money owed to them.

  17. PDF Ban the ban: prohibiting restrictions on the assignment of receivables

    Take, for instance, a simple contract under which a payer has an obligation to pay money to the payee as consideration for goods or services supplied by the payee from time to time. If the contract prohibits the assignment of the receivables without the consent of the payer, then no valid assignment can be created unless the payer consents.

  18. New UK regulations will affect non-assignment of receivables provisions

    It has taken quite a while 1 but the Business Contract Terms (Assignment of Receivables) Regulations 2018 (the Regulations) 2 were made on 23 November 2018. The intention of the Regulations is to make it easier for small businesses to access invoice finance.

  19. The Government restricts bans on assignment

    Legislation now in force preventing parties from prohibiting the assignment of receivables under certain contracts. At the moment, a contract can prohibit or restrict the parties' ability to assign or transfer rights created under the contract. The extent of the restriction is a matter of interpretation of the clause concerned.

  20. Assignment of Receivables

    A receivable is a right to be paid and a boilerplate non-assignment clause is broad enough to prevent invoices from being assigned. Certain contracts are excluded from these rules.

  21. In taking security over all the receivables owing to a company from its

    Can you use an Assignment of Receivables (as opposed to a Charge of Book Debts) for all receivables owing to a company from all its debtors? If not, when would you use an Assignment and when would you use a Charge? Is there a fundamental difference between the two as opposed to the security created thereby? Do you have a template for a Charge over Book Debts?

  22. Prohibitions on assignment of receivables outlawed

    In 2014 the government recognised the benefit of outlawing prohibitions on the assignment of receivables and set about establishing the legal framework. ... around 40,000 firms in the UK use ...

  23. Banning some restrictions on Assignment

    The Business Contract Terms (Assignment of Receivables) Regulations 2018 were published on 4th July.They provide in principle (and subject to many exclusions) that as from 31st December 2018 a contract term will have no effect to the extent that it prohibits the assignment of a receivable.These are the successor to the 2017 version which was withdrawn after it was legally savaged by the CLLS ...