Short Term Cash Injections Made Easier

20 December 2018

The Business Contract Terms (Assignment of Receivables) Regulations 2018 (Regulations) are now in force and will apply to all contracts entered into on or after 31 December 2018. The changes will make assigning ‘receivables’ much easier for SMEs and will particularly encourage the invoice financing industry.

What’s happened and why it matters

Receivables are defined in the Regulations as a right to be paid any amount under a contract for the supply of goods, services or intangible assets i.e. the rights to a future payment. It could, therefore, be an amount outstanding under an invoice from a supplier to its customers. In industries, like construction, where payment terms can be lengthy, the access to invoice financing can be a vital way for companies to access cash.

Often, contracts will include a clause prohibiting assignment generally, which would catch the assignment of receivables. Such a clause gives the parties certainty as to who they will be dealing with. The government intends, however, to expunge that provision in contracts where the supplier is an SME (which is not a special purpose vehicle) in relation to the assignment of receivables.

In particular, the Regulations ensure that a contractual provision will be ineffective ‘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’. This is important as clauses prohibiting such an assignment pour cold water on the prospect of third party financing in consideration of the assignment of the receivable. Without access to such finance, balance sheet solvent companies can occasionally struggle to pay their debts as they fall due.

The Regulations not only prohibit restrictions but all terms that impose a condition on the assignment of receivables. This would include a term that makes it impossible for an assignee to determine the validity or value of the receivable, or their ability to enforce the receivable, for example, where the assignee does not know the identity of the customer who owes the debt or the amount of the debt. This provision will ensure confidentiality clauses cannot be used to undermine the Regulations.

There are exceptions. Financial services contracts and corporate acquisition contracts (in both a share sale and an asset sale) are among the most significant of these.

Actions to take and points to note

The change will not have any impact on existing contracts. For clients who are using existing precedents on or after 31 December 2018, any terms which purport to restrict such assignments will be unenforceable, but, importantly, the Regulations do not make any such restrictions illegal and the rest of the contract will remain enforceable.

So, it is worth knowing that as a supplier (as the creditor) you will find it easier to assign any receivables, no longer needing the customer’s consent or waiver to an assignment. As a customer (as the debtor), however, you could be paying a different party to the one you originally contracted with, notwithstanding the provisions of the contract.

By Matthew Devine

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