Proposed legislation looks to prohibit or restrict the assignment of receivables
How might the Government’s proposed legislation regarding business contract terms prohibit or restrict the assignment of receivables under commercial agreements?
In December 2014, the Department for Business, Energy and Industrial Strategy (‘BEIS’) published draft regulations, with the aim of challenging the prohibition and restriction of assignment of receivables under commercial agreements.
Following a consultation period, the 2014 draft was replaced with a revised set of regulations, released in September 2017, which were laid before Parliament. However, the September 2017 draft regulations were once again subsequently withdrawn, and eventually replaced with the current Draft Business Contract Terms (Assignment of Receivables) Regulations 2018 (the ‘Draft Regulations’), published on 6 July 2018.
The main purpose of the Draft Regulations is to allow businesses to assign receivables to finance providers under their commercial agreements. This, in turn, is designed to create flexibility for business, and importantly facilitate their access to finance.
The Regulations are drafted to provide that, to the extent that any term in a business contract prohibits or imposes a condition, or other restriction, on the assignment of a receivable arising under that contract, or any other agreement between the same parties, it will be unenforceable under the Regulations.
Under previous drafts of the Regulation, such unenforceability did not extend to include terms which prevent the assignee of the receivable from determining the receivable’s (i) validity; (ii) value; and, or (iii) ability to enforce it. However, such types of provision, such as confidentiality provisions, limit the appeal of assignment of the relevant receivables to a prospective assignee. As such, BEIS has tightened the Draft Regulation in this respect; any such provisions are now also unenforceable.
However, the Draft Regulations also provide for a widened list of excluded contracts, as compared to previous drafts. For example, exclusions to the rule now include contracts entered into, about, or for the purpose of the transfer of all or part of a business (such as transitional services agreements). However, importantly, for such contracts to take advantage of the exclusion, they must include a statement to that effect. Other excluded contracts include contracts for financial services, contracts which concern interests in land, or contracts to which none of the parties to the contract are carrying on business in the UK.
Finally, the Draft Regulations do not apply if the assignor is (i) a large enterprise (as defined broadly in the Draft Regulations); or (ii) an SPV holding assets or financing commercial transactions involving incurred liability of the value of £10million or more.
Why is this important?
BEIS has received criticism from businesses on the basis that the Draft Regulations will nullify confidentiality clauses as between parties to the original contract, and make it difficult for businesses to limit risk, by dictating terms of assignment.
In particular, businesses are concerned such provisions could in turn lead to the disclosure of business critical information to third parties, or lead to receivables coming under control of a hostile third party or competitor. In addition, unfettered assignment could lead to difficulty with regard to preservation of key business relationships.
Any practical tips?
The Draft Regulations are still subject to affirmative procedure; follow their journey through Parliament closely, they may yet be amended!
However, if implemented, businesses can expect the Draft Regulations to apply to any relevant term in an applicable contract entered into on or after 31 December 2018; in other words, these Draft Regulations will apply to all contracts moving forward, unless an exclusion applies.Should the Draft Regulations remain in their current form, check if your business can take advantage of the broadly constructed exclusions, whether on a wholesale basis (by virtue of the nature of your business), or on a contract by contract basis (by virtue of the nature of the relevant contract you intend to enter into). Remember that, to take advantage of the exclusion, it looks like you will need to include a statement to that effect.