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New regulations to permit assignment of receivables under commercial contracts now in force

11 January 2019. Published by Edward Colville, Legal Director

After more than four years of consultation, draft regulations and revisions, the Business Contract Terms (Assignment of Receivables) Regulations 2018 (the Regulations) have now taken effect, and apply to all relevant contracts entered into on or after 31 December 2018.

Designed to encourage access for small business to alternative forms of finance following the banking crisis of 2008, the new Regulations seek to prohibit any clause in a contract which restricts the assignment of receivables.  The Regulations are particularly relevant for suppliers under commercial contracts, who might seek to improve their cash flow by raising finance through invoice discounting or factoring.  However, they have a general application for all contracts under which a small or medium sized entity supplies goods, services or intangible assets to another business (subject to exemptions which apply to international contracts, contracts for the supply of financial services, energy, land etc, and to share/asset purchase contracts and operating leases).  The Regulations also do not apply to contracts to supply consumers, or where the supplier is a large business or a special purpose vehicle.  More details on the background to the Regulations can be found in an earlier RPC blog here.

 

The Regulations have been seen as a welcome move by finance providers, and in theory should improve the access of small businesses to different forms of finance.  Receivables under contracts can be a key asset of small businesses supplying goods and services, and an increased ability to assign these receivables by way of security should improve their ability to secure funding.  Under the Regulations, any term in a relevant contract that prohibits or imposes a condition or other restriction on assignment will automatically have no effect in relation to the assignment of receivables under that contract.

 

A key concern for businesses during the consultation phase had been the effect that the Regulations will have on confidentiality clauses (which could be seen as restricting assignment if they prevent the supplier from disclosing details of the underlying contract).  This concern has not been addressed in the Regulations – confidentiality clauses will have no effect for this purpose where they contain any terms which prevent a third party from determining the validity or value of a receivable or the ability of an assignee to enforce it.

 

The new Regulations do not apply retrospectively, but will need to be taken into account when preparing any new supply contract in 2019.