Using customer payments to ease cashflow just got easier

Why? Because new legislation prevents the prohibition of assignment of receivables under certain contracts.

For many companies, receivables (rights to future payments) are one of the biggest assets on their books. Receivables finance (specific finance backed by those future payments) enables businesses to raise cash through an assignment (by way of security) or the outright sale of the receivables under a factoring or invoice discounting facility. For SME companies, this is extremely helpful when they are suffering from cashflow difficulties or simply because they often have a long time to wait for payments to be settled.

Under English law, the terms and conditions of a contract for supply of goods or services can restrict or prohibit a business supplier from having the ability to transfer and assign their rights created under that contract, meaning it is harder for businesses to raise finance on their receivables.

In order to tackle this issue, the government passed regulations on 11 September 2018: the Business Contract Terms (Assignment of Receivables) Regulations 2018 (the "2018 Regulations") which prohibit a contract from banning the assignment of receivables due under that contract.

Brief background

As picked up in one of our previous articles (here) the government passed the Small Business, Enterprise and Employment Act 2015 (the "Act") in order to increase the availability of finance to SMEs. The Act gives powers to the Secretary of State to make regulations for the purposes of making invoice finance and other receivables financing available to businesses. The Act also addresses restrictions in contracts which prevent the assignment of debts.

There have been two previous attempts at drafting suitable regulations - in 2014 and 2017 - but they were dropped in each case following doubts raised during the respective consultations.

What does this mean going forward?

Although the 2018 Regulations are yet to be published, the latest available wording confirms that a term or clause in certain contracts which restricts the assignment of a receivable will be void and unenforceable.

The 2018 Regulations apply to (provided that the contracts are governed by English law or Northern Irish law):

• all business to business contracts for the supply of goods, services and intangible assets that fall under the laws of England and Wales or of Northern Ireland;
• any contract entered into after 31 December 2018;
• SMEs which are not special purpose vehicles; and
• certain types of contracts relating to project finance, derivatives, energy, land, corporate documentation such as share purchase and business purchase agreements, and qualifying contracts entered into by trusts, funds or other entities with funding decommissioning programmes.

Now that the 2018 Regulations have been passed, businesses should no longer (from the end of this year) need to obtain express consents and waivers from third parties if there are terms and conditions that prevent the supplier from assigning payments due to them, nor use the traditional but slightly cumbersome (and more costly) back-up option of creating a trust over the receivables in question.