The Business Contract Terms (Assignment of Receivables) Regulations 2018
How does the Business Contract Terms (Assignment of Receivables) Regulation prohibit restrictions on the assignment of receivables under commercial agreements?
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 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?
The law in this area is still developing, and uncertainties remain. Despite the Regulations’ different drafts and re-drafts, some of the enduring issues include: (i) the somewhat complicated assessment of whether or not a company is an SME; (ii) the potential uncertainty at the time of entering into the contract as to whether the Regulations will apply at the time of assignment; and (iii) the fact that “assignment” is not actually defined in the Regulations – does it cover, for example, assignment by way of sale as well as by way of security? These could all lead to trouble and even litigation down the line.
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.