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Receivables Finance: the prohibition on assignment is now in force

18th January 2019

The Business Contract Terms (Assignment of Receivables) Regulations 2018 came into force on 31 December 2018 meaning that parties to a contract in the UK may no longer be able to prohibit the assignment of receivables arising in respect of supplies made under it, even if it is a long term supply contract providing for multiple deliveries.

As we reported in December 2017 , draft regulations were laid before Parliament in September of that year which proposed to make any term in a business contract that prohibited or restricted the assignment of receivables automatically ineffective. Those draft regulations were subsequently withdrawn amid concerns that they would create uncertainty in the finance markets.

The main areas of concern were that:

• the legislation appeared to be retrospective therefore catching contracts that were already in place;
• the types of assignment which fell within the regulations were not described sufficiently well enough to create certainty; and
• there was no protection for the debtor who may have stipulated for a non-assignment clause in the expectation that its rights of set off would be preserved.

However, the government has since revisited the legislation and on 24 November 2018 the Business Contract Terms (Assignment of Receivables) Regulations 2018 (the Regulations ) came into force. The Regulations apply to contracts (with a few exceptions described below) created after 31 December 2018 and mean that parties will no longer be able to prohibit the assignment of receivables in the UK. The Regulations make it clear that the prohibition is not retrospective and so the Regulations only apply to new contracts. In effect, this means that one party to a contract cannot prevent the other party from choosing who should receive payments under a contract for the supply of goods, services or intangible assets.

The Regulations also render unenforceable any terms which prevent a person who has been assigned the receivable from being able to enforce the contract, or determine its validity or value (for example by preventing the disclosure of the information required to commence court proceedings for its collection).

The Regulations are aimed at improving access to invoice financing for small and medium-sized enterprises and the government speculates that this will provide a £1 billion, long-term, boost to the economy. Invoice financing allows businesses to assign their right to be paid by a customer to a finance provider. In return the finance provider provides the business with up-front funds, thereby speeding up the business’ working capital cycle (provided the debtor ultimately pays the assigned invoice). Before 1 January 2019, smaller businesses would usually be forced to engage with larger customers on those customers’ standard terms, which often contained non-assignment clauses. As a result, some smaller businesses were restricted from engaging with invoice financing opportunities. This should now change.

The Regulations apply to contracts for the supply of goods, services or intangible assets where the supplier has the right to be paid under the contract. There are, however, a number of exceptions including:

• a large enterprise or part of a large group (as defined by the Companies Act 2006); or
• a special purpose vehicle, set up to hold assets or finance commercial transactions involving it incurring a liability under an agreement of £10 million or more.
• The Regulations also do not apply to services of a financial nature. The definition of ‘financial nature’ is construed widely and includes, amongst other things, leasing, loan relationships and all types of securitisation and derivative transactions.
• The Regulations do not apply to contracts which have as their purpose the acquiring, disposing or transferring of ownership in a firm (as defined in the Companies Act 2006) whether incorporated or established, or of a business or undertaking. However, for this exemption to apply, the contract must include a statement to that effect.
• The Regulations generally do not apply to contracts that relate to non-UK businesses. However, parties cannot contract out of the Regulations by changing the contract’s governing law, if the only reason for doing so is to circumvent the regulations.
• There are also a number of other types of contracts which the Regulations do not apply to, including consumer contracts, real estate contracts, public-private partnership contracts and rental contracts. Interestingly, the Regulations will apply to building contracts which, up to now have been impossible to finance, in practice, through an invoice discounting arrangement.

Practical application

The Regulations will lead to the need for certain changes to the drafting and implementation of commercial contracts:

• No assignment clauses –  An eligible supplier will be able to assign their receivables to a debt purchaser without having to seek their customers’ prior consent. This means a blanket non-assignment clause will no longer work for on its own to preserve rights of set off;
• Confidentiality provisions –  Confidentiality obligations can still be imposed on suppliers, except for any “essential information” that enables the identification of the receivables following assignment. This means information that enables the identification of receivables (so as to facilitate their collection) may be disclosed by a supplier to a third party purchaser for the purpose of receivables assignment or transfer without constituting a breach of confidentiality.
• Set-off –  The Explanatory Note to the Regulations clarifies that a contractual right to set-off is not considered as a restriction on transfer of receivables for the purpose of the Regulations. Although the right to set-off is maintained, businesses may want to consider the practical impact of the Regulations on the mechanism to exercise the right to set-off, such as how cash flow will be affected if you are no longer able to consolidate future transactions to set-off against one original invoice that has already been assigned to a third party.

Many commercial arrangements will be unaffected by this change in legislation. However this will depend, in relation to contracts entered into this year and beyond, on the terms of the contract and the nature of what is being supplied under it. A key point to note is that the Regulations will not nullify the contract as a whole or, indeed, the whole of the clause restricting assignment, but only to the extent applicable to receivables.

Providers of invoice finance will still need to carry out due diligence, at least for now, on taking on any new invoice discounting client to ascertain the extent to which the debtor book may still contain debts which are subject to restrictions on assignment or are otherwise subject to rights of set off.

Small and medium sized companies seeking to avail themselves of the new rules should seek advice before doing so. Invoice discounting products can be an extremely effective way of assisting a growing business meet its working capital needs. However, lumpy cash flow, or bad debt experience (including habitual slow payers in the customer base) can lead to disaster if not properly managed.

If you need advice on how the Regulations may affect your business please get in touch.

Late Payment Regulation: the European Parliament introduces amendments as it adopts its first reading position

On 23 April 2024, 1 the European Parliament ( EP ) adopted its first-reading position and, in doing so, introduced amendments to the European Commission's ( EC ) proposal for a Regulation on late payment. 2 In our update 3 from last October, we discussed the EC's proposal and some of the issues that we felt needed further clarification. In this follow-up update, we look at some of the EP's amendments to the EC's proposal and areas where we think gaps remain.

WHAT ARE SOME OF THE MAIN AMENDMENTS PROPOSED BY THE EUROPEAN PARLIAMENT?

Adding some flexibility into the 30-day maximum payment period.

The EP's adopted provisions allow for the proposed 30-day deadline to be extended up to a maximum of 60 days by contract. The maximum payment deadline for government-to-business (G2B) transactions (where the public authority is the debtor) remains 30 days.

The EP propose allowing for payment terms of up to 120 days for slow-moving or seasonal products acquired by a debtor and the EC will be required to publish technical guidance in relation to this. Also, the EP has recommended that the proposed Regulation not apply to payments related to the distribution and manufacture of books or their "printing, binding or publishing".

These changes recognise the need for balance between limiting the 'fear factor' that small businesses can suffer when they are the creditor in a relationship with a larger entity, and a need to allow for freedom of contract and an ability to negotiate a longer payment period where it is mutually beneficial.

The EP has clarified via the Recitals that the Regulation does not restrict parties from using consignment contracts.

PROHIBITING BAN ON ASSIGNMENT PROVISIONS 4

To make it easier for creditors to access receivables-based finance, the EP has added provisions banning the assignment of receivables to the list of provisions that would be null and void under the proposed Regulation – this has been added to the list in Article 9(1). This would mean a debtor would not be able to prohibit, exclude or limit the right of the creditor to assign receivables to third parties for the purposes of accessing financing services. It is not clear whether the reference to "assignment" is intended to only cover the absolute transfer of receivables or also the grant of a security interest over receivables, which we expect will create some confusion as to the applicability of this Article.

In relation to this, we again draw attention to the fact that it is not clear whether the provisions of the Regulation apply to parties of EU-governed contracts only, or if it applies to any EU person or entity selling or purchasing goods or services irrespective of the governing law of the contract. If the latter, the Regulation would in effect attempt to override the laws of non-EU Member States and would be in direct conflict with Article 14(2) of Rome I. 5 We must therefore assume that the Regulation only applies to parties of EU-governed contracts, which in our view should be the case but which needs to be clarified in the Regulation.

CREDITOR'S ABILITY TO WAIVE ITS RIGHT TO INTEREST

The EP's proposed position is that a creditor will not be able to waive its right to obtain interest for late payment or the flat fee compensation (discussed in the following paragraph) when the debtor is a public authority or a large undertaking, 6 whereas the EC's proposal includes a complete restriction on a creditor waiving its right to receive interest for late payment, no matter what size the debtor is.

HOW IS THE NEW MAXIMUM 30-DAY PAYMENT TERM CALCULATED?

As discussed in our prior update, the point at which late payment interest is calculated is quite confused in the Regulation. The EP has suggested an amendment which seeks to clarify how the payment period for late payment interest is calculated and which makes much more sense. The amendment means that interest for late payment will accrue from the day following the expiry of the contractual or statutory payment period. Where the date of the receipt of the invoice or the equivalent request for payment is uncertain, the payment period shall not exceed 30 calendar days from the date of receipt of the goods or services. In addition, the EC's proposed Regulation includes an additional flat fee compensation of EUR 50 for each late payment and the EP has introduced a ratchet which increases that flat fee up to EUR 150 for late payments in excess of EUR 15,000.

MORE CLARIFICATION NEEDED

There are still questions around the proposed Regulation's application. As mentioned above, these include whether it applies to parties of EU-governed contracts, or if it applies to any EU person or entity selling or purchasing goods or services irrespective of the governing law of the contract. It is also unclear if and how the proposed Regulation would apply to an assignee of a creditor of a payment obligation.

The issues that we raised in our update 7 from last October related to payments by way of instalments, retention of title and remission of statutory interest all appear to be unresolved for now.

As there is no provisional agreement on the final text of the proposed Regulation, the file will be followed up by the new EP after the European elections on 6-9 June 2024. The European Council is carrying out its preparatory work in parallel to agree on its position.

The proposed Regulation is being adopted under the ordinary legislative procedure, which means that the EP and the Council, as co-legislators, have to agree on the same final text before the legislation can be published in the Official Journal of the European Union and enter into force. We think there is still work to do to clarify how the proposed Regulation will work in practice.

1 Press release: Combatting late payments in commercial transactions , 23 April 2024.

2 Proposal for a Regulation of the European Parliament and of the Council on combating late payment in commercial transactions (procedure 2023/0323(COD)).

3 The European Commission proposes an updated late payment regime for the EU , 11 October 2023.

4 A ban on assignment is a prohibition contained in a contract of sale or supply ( Contract ) between a customer and its debtor restricting one or both parties from assigning (whether by way of outright disposal or by way of security) certain or all of their rights (including any rights to receivables) under that Contract.

5 Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations.

6 "Large undertaking" is as defined in Article 3(4) of Directive 2013/34/EU, which reads as follows: "[…] undertakings which on their balance sheet dates exceed at least two of the three following criteria: (a) balance sheet total: EUR 20,000,000; (b) net turnover: EUR 40,000,000; (c) average number of employees during the financial year: 250."

7 The European Commission proposes an updated late payment regime for the EU , 11 October 2023.

[ View source .]

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Prohibitions and restrictions on the assignment of receivables - what employers and main contractors need to know.

11 March 2019

By John Garland

The Business Contract Terms (Assignment of Receivables) Regulations 2018 (the Regulations) came into force on 31 December 2018. The Regulations apply to any term in a contract entered into on or after this date; including any contracts which are novated. A receivable is a right to be paid under a contract for the supply of goods, services or intangible assets.

The purpose of the Regulations is to void any term in a contract which prohibits or imposes a condition or other restriction on the assignment of a receivable arising under any contract. The imposition of a condition or other restriction includes any term which prevents the assignee from determining the validity or value of the receivable or their ability to enforce the receivable.

There are specific exemptions to the Regulations, the first of which is where the supplier is a large enterprise or a special purpose vehicle. A large enterprise is, broadly speaking, a company which is not an individual, an unregistered partnership, an incorporated company or limited liability partnership which qualifies as a small or medium sized company under the Companies Act 2006. A medium sized company is one that satisfies 2 or more of the following criteria:

•  Turnover is not more than £25.9m
•  Balance sheet total is not more than £12.9m
•  Number of employees not more than 250

The second exclusion to the Regulations is various types of contracts, such as prescribed financial services, interests in land and contracts for the sale of shares in a business. The reference to land contracts being excluded is very interesting, and indicates that the Regulations are unlikely to apply to development agreements being procured as turnkey deals, which may be of particular interest to local authorities and registered providers.

The explanatory note to the Regulations states that a debtor's existing contractual rights of set off are not fettered by the Regulations. This upholds the long standing legal principle that existing rights are not extinguished by an assignment and that the assignee cannot be placed in a better position than the assignor would have been in.

It has become increasingly common for Small and Medium Enterprises (SME) to, where permitted, assign the receivables payments to a finance company for immediate payment, subject to a reduction in the percentage of the receivables owed. This is sometimes referred to as factoring or invoice discounting. Whilst uncommon in the construction industry, there are niche providers who do offer this solution in this market.

The Regulations have been implemented in an attempt to combat poor payment practices within businesses, to improve cash flow for SMEs and to prevent large companies prohibiting factoring or invoice discounting by SMEs as a way of improving cash flow.

This is of particular importance to the construction industry, where it is extremely common for contracting parties to either impose an absolute prohibition on assignment on all or part of a contract, or to impose restrictions on assignment.

Employers and main contractors will typically wish to restrict assignments so that they know the entity that they are dealing with at all times, and have control over which entity that might change to on any assignment. A common example of a restriction on assignment is requiring the written consent of the employer/main contractor prior to any assignment being effected.

A primary issue of the implementation of the Regulations on parties is the fettering of their rights to freely negotiate their own contractual terms. This raises the further question of whether or not the current drafting of assignment clauses needs to be amended to reflect the changes in the Regulations.

The Regulations provide that a term in a contract '...has no effect to the extent that...' it prohibits or imposes a condition or other restriction. As a result of the drafting, our view is that existing assignment clauses need not be amended, as where the Regulations are applicable the prohibition or restriction on assignment in respect of the receivables will not have effect, whereas the prohibition or restriction will have effect in respect of non-receivables.

However, to avoid any potential arguments over the construction of a clause which prohibits assignment of any part of a contract, it may be prudent for businesses who deal with SMEs on a regular basis to expressly carve out receivables from any prohibition or restriction on assignment clauses in your standard contracts or terms and conditions.

Ultimately, if your supply chain comprises a large number of SMEs, there will be nothing your organisation can do to prevent factoring arrangements being put in place. Therefore quality assurance and management may need to be implemented for works which comprise of interim payments.

In particular, queries on invoices or the value of the works actually completed should be challenged at the earliest opportunity. This will ensure that you will prevent over payments to the factoring company, and prevent being required to go through a lengthy process to reclaim any monies overpaid.

This article is taken from Building Interest - Winter 2019 .

John Garland

Senior Associate

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Ban the ban: prohibiting restrictions on the assignment of receivables

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Regulations banning the prohibition on assignment of receivables come into force

Controversial regulations that nullify contractual clauses restricting the assignment of receivables came into force on 24 November 2018.

The Small Business, Enterprise and Employment Act 2015 allows regulations to be made invalidating contractual restrictions on the assignment of receivables in particular types of contracts. The Government’s stated intention behind this provision was to remove barriers inhibiting small businesses from gaining access to invoice finance.

Initial draft regulations, (the Business Contract Terms (Restrictions on Assignment of Receivables) Regulations 2015) were published for consultation in 2014, with a revised version published in September 2017. These 2017 draft regulations were withdrawn, however, two months after their publication. This followed wide-ranging feedback from, among others, the City of London Law Society and the Financial Markets Law Committee.

Among the criticism directed at the draft regulations was that they were too wide ranging and did not sufficiently identify the supply of goods and services by SMEs as the particular finance sector to which the regulations should apply. There was also significant concern that the wider finance markets, which make use of receivables finance, should not be caught by the regulations.

In July 2018, the government published a further revised draft of the regulations - the draft Business Contract Terms (Assignment of Receivables) Regulations 2018. These contained several modifications from the 2017 version, including specifying that the restrictions do not apply where the person to whom the receivable is owed is a large enterprise or a special purpose vehicle and adding to the list of types of contract that are exempt (e.g. a contract to acquire a business or an ownership interest in a firm.)

The Regulations were finally published on 30 November 2018 with no substantive changes from the draft version published in July. They were made on 23 November 2018 and came into force on 24 November 2018.

What is the effect of the Regulations?

Under the Regulations, any term in a contract entered into on or after 31 December 2018, “has no effect 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” (Regulation 2).

A receivable is broadly defined as a right to be paid any amount under a contract for the supply of goods, services or intangible assets. There is no definition of “assignment” in the Regulations, which has caused some uncertainty over what types of transaction this term will cover.

As well as nullifying terms that prohibit the assignment of receivables, the Regulations also make ineffective any term that imposes a condition or other restriction on their assignment. This would include a term which prevents an assignee from determining the validity or value of the receivable or their ability to enforce it. These provisions should prevent devices such as confidentiality clauses from being used to circumvent the legislation.

The Regulations list categories of information which are relevant to these anti-avoidance provisions and if a contract restricts an assignee from obtaining this information, that restriction will be void. The categories of information include the identity of the parties, the goods or services that gave rise to the receivable and the date on which they were supplied, the amount payable (including VAT) and the credit period for paying the receivable.

Exemptions for “large” suppliers or SPVs

Regulation 2 does not apply to contracts where the supplier of the goods or services (i.e. the person entitled to the receivable) was, at the time of the assignment, a “large” enterprise or a “special purpose vehicle”. This means that contractual prohibitions or restrictions on assignment will continue to be valid where the supplier falls into one of these categories at the time of the assignment.

Broadly speaking, a supplier will be “large” unless:

• it is an individual, an unincorporated association or a partnership (excluding LLPs or limited partnerships)
• it falls within the small companies or small LLPs regime in the relevant financial year (as set out in ss 381-384 Companies Act 2006) and it was not a member of a large group in that year, or
• it qualifies as a medium-sized company or LLP (as defined in ss 465-467 Companies Act 2006) in the relevant financial year and was not a member of a large group in that year.

A firm will be a “special purpose vehicle” (wherever it is incorporated or established) if its primary purpose is to hold assets (other than trading stock) or to finance commercial transactions and in either case, it incurs a contractual liability of £10m or more.

Exempt contracts

Regulation 2 also does not apply to several types of specified contract. These include:

• a contract for, or entered into, in connection with prescribed financial services (which includes any service of a financial nature)
• a contract for or in connection with the transfer of any ownership interest in a firm or a business (including transitional services agreements) and which includes a statement to that effect
• a contract which concerns any interest in land, and
• a contract where none of the parties has entered into it in the course of carrying on a business in the UK.

Other exemptions exist for certain project finance contracts, petroleum licenses, contracts concerning national security, securities options, swaps and other derivatives.

Applicable law

The Regulations apply to terms in a contract to which the law of England and Wales or the law of Northern Ireland applies, and at least one of the parties has entered into it in the course of carrying on business in the UK.

Although the Regulations will not generally apply to contracts governed by foreign laws, they do include deeming provisions to prevent parties from choosing Scottish, or another non-UK governing law, in order to avoid their operation.

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This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.

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Secured Transactions Law Reform Project

Considering the need and shape of future reform, ban on assignment clauses.

Receivables financing is a very important source of finance for small businesses.  Anything which limits the availability of this type of financing, or which increases its costs, requires examination.   Receivables financiers take an assignment or a charge over the receivables they finance.

Some contracts for the supply of goods or services by small businesses include a clause banning assignment of the receivables arising under the contracts: we call these ‘ban on assignment clauses’.   If receivables arising from such a contract are the subject of an assignment to a receivables financier, it may be difficult  for an assignee to enforce collection of those receivables if the assignor experiences financial difficulties, and the debtor can refuse to pay the financier directly.   The concern which arises is whether these difficulties  mean that finance of such receivables is refused, or that steps have to be taken which increase the cost of financing.

Statutory controls on the effect of ban on assignment clauses have been introduced in a number of jurisdictions as well as in the 1988 UNIDROIT Convention on International Factoring, the 2001 UN Convention on the Assignment of Receivables in International Trade, the 2007 UNCITRAL Legislative Guide on Secured Transactions and, more recently, have been included in the UNCITRAL draft Model Law on Secured Transactions. The draft regulations in the Law Commission Consultation Paper 176 and Report 296 also included a limited override of such clauses.    The project is considering whether a limited override should be introduced into English law, and, if so, what the limits should be.

Detailed arguments for and against a limited override are set out in presentations delivered at a recent seminar for receivables financiers . 

It is reasonably clear that outside the context of trade receivables financing, ban on assignment clauses perform a useful and important function, and should not be overridden.   The important debate focuses on whether a limited override would improve access to financing for small businesses.

In order to inform this debate, we are very keen to find out the views of anyone who is interested in this area.    We have drafted a short survey for those financing against receivables, looking at whether ban on assignment clauses cause problems and increase costs, methods used to overcome difficulties in enforcement and frequency of the use of such clauses.

If you are involved in the receivables financing industry, please take a few moments to fill in the  survey and send a scanned copy to [email protected]

Nullification of a ban on invoice assignment clauses was proposed in the form of a power of a Secretary of State to make Regulations in clause 1 of the Small Business, Enterprise and Employment Bill (SMEE Bill). At the beginning of the year BIS conducted consultation on the Bill, which closed in February 2015. The summary of responses along with draft regulations are available here . On 26th March the SMEE Bill ill received royal assent.

The text of the Small Business, Enterprise and Employment Act 2015 can be found  here .

On 9 August 2015, the Government responded to its consultation and announced that a ban on anti-assignment clauses would be brought in under the Act early next year . The Asset Based Finance Association and the National Federation for Small Businesses have spoken in support of the move.

As of the 31st December 2018, the Business Contract Terms (Assignment of Receivables) Regulations 2018  will nullify the effect of terms in contracts that impose conditions or restrictions on the assignment of receivables in contracts with SMEs.

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• Banking & Financial Services

Tue 06 Oct 2015

Prohibiting ban on assignment of receivables

Following the credit crisis, the UK Government has been looking for ways to encourage non-bank lending as a means for businesses to raise finance on the open market in order to improve cashflow and reduce the risk of financial difficulties arising in UK businesses.  As part of that process, BIS has recently published the UK Government's response to its consultation on the proposal to nullify contractual terms which ban assignment of receivables.

An invoice finance agreement will typically include a generic assignment (or, in Scotland, an assignation) of all book debts of the invoice financier's client in existence at that time and which come into existence in the future.  The book debts being assigned to the funder arise under contracts between the invoice financer's client and third party debtors in the ordinary course of the client's business.  The biggest implication of any provision in a contract which prohibits assignment, whether or not assignable with consent of the debtor, is that customers of invoice financiers are unable to use invoices they have issued to their own debtors as a means of obtaining finance without first obtaining approval of their debtors to that financing.  Typically, funders are concerned that such a prohibition may restrict the ability of a funder to enforce and collect in receivables if the client starts to struggle financially, unless the debtor has expressly consented to the arrangements.

The enactment of the Small Business, Enterprise and Employment Act 2015 (the "Act") saw the Government set the tone for the prohibition on assignment of the rights to receive payment under contracts by providing for the passing, by way of secondary legislation, of regulations making clear what effect, if any, such a provision in a contract would have.  That resulted in a draft of The Business Contract Terms (Restrictions on Assignment of Receivables) Regulations 2015 (the "Regulations") being published.  The draft Regulations make clear that any clause of a contract which is not an "excepted term" will have no effect "to the extent that it prohibits or imposes a condition or other restriction on the assignment of a receivable by a party to the contract".  If passed, the Regulations would not apply to:

• any consumer contract
• supply chain finance arrangements
• financial services contracts or
• interests concerning land

and would not apply on a retrospective basis.  The Regulations would only apply to a business to business transaction which is governed by English law and where one party has a business in the UK.  The Act does provide that Scottish ministers may make equivalent regulations in respect of contracts governed by Scots law but it is not yet clear what, if anything, will happen in Scotland.

Clearly, any prohibition on assignment should make obtaining finance more straightforward for debtors, without the need to incur costs associated with amending their standard form documentation to remove any prohibitions on assignment or to obtain waivers and/or consents from debtors.  However, it is not yet clear what the industry will make of the Regulations or whether the Regulations will change anything at all in practice.  At first, and assuming the Regulations come into force in their current form, I would expect most funders to maintain the status quo and continue conducting the same degree of due diligence on their clients before funding debts.  I'd be surprised if funders do not seek written consents or waivers from the relevant debtors or express acknowledgements from them confirming that any prohibition on assignment does not have any effect as a result of the Regulations, particularly if the transaction is one with a cross-border element pending any Scottish Regulations coming into force, at least until such time as a market standard practice on the point emerges.

It is expected that the provisions, either in the form of the draft Regulations or in a revised form, will come into force sometime during 2016.  Until then, invoice financiers should continue to undertake due diligence on the proposed client's contracts and terms of business giving rise to the invoices which are to be assigned to the financier and obtain express written waivers and consents from the debtors in respect of the ban on assignment and, if appropriate, confirmation from the debtors that they won't exercise any right of set off they may have in respect of any debts which are acquired by the invoice financier pursuant to the receivables financing agreement.

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Ban on assignment clauses: views from the coalface

Beale, Hugh , Gullifer, Louise and Paterson, Sarah (2015) Ban on assignment clauses: views from the coalface. Butterworths Journal of International Banking and Financial Law, 30 (8). pp. 463-466. ISSN 0269-2694

Summarises the findings of two qualitative studies assessing the effect of ban on assignment (BoA) clauses in trade receivables financing. Reviews the law applicable to the assignment of receivables to a financier, noting uncertainty over the effect of a BoA clause. Considers whether BoAs in supply contracts adversely affect the availability of finance to small businesses and result in the use of workarounds, thereby increasing the cost of finance

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The Government restricts bans on assignment

United Kingdom |  Publication |  November 2018

Legislation now in force preventing parties from prohibiting the assignment of receivables under certain contracts.

At the moment, a contract can prohibit or restrict the parties’ ability to assign or transfer rights created under the contract. The extent of the restriction is a matter of interpretation of the clause concerned. If one of the parties to the contract attempts to assign the benefit of the contract in breach of the restriction, the purported assignment is ineffective.

One of the key assets of any business is its receivables, and restrictions on assignment can prevent the parties from factoring receivables or otherwise raising finance on them. The Government has decided that it should be easier for businesses to raise finance on their receivables. Accordingly the Small Business, Enterprise and Employment Act 2015 allows regulations to be made to invalidate restrictions on the assignment of receivables in particular types of contract. The regulations have now been made. They are contained in The Business Contract Terms (Assignment of Receivables) Regulations 2018. Draft regulations published in July, have been approved by both Houses of Parliament and are now in force.

What types of contracts do the Regulations apply to?

The Regulations apply to contracts for the supply of goods, services or intangible assets under which the supplier is entitled to be paid money. But there are a number of important exclusions from their application, including the following:

• They only apply to contracts entered into on or after 31 December 2018.
• They only apply where the person who supplies the goods, services or intangible assets concerned, and is therefore entitled to the receivable, is a small or medium-sized enterprise which is not a special purpose vehicle. Whether or not an entity qualifies in any particular case requires a detailed examination of the precise wording of the
• Regulations. Counter-intuitively, the test is not applied at the time the contract is entered into, but at the time the assignment takes place.
• There is a specific exemption for contracts “for, or entered into in connection with, prescribed financial services”: These are widely defined to include “any service of a financial nature”.
• There are specific exclusions for particular types of contract, including certain commodities, project finance, energy, land, share purchase and business purchase contracts and operating leases.
• As a general rule, it would seem that the Regulations only apply to contracts governed by English law or the law of Northern Ireland, but they prevent the parties from choosing a foreign law if it can be established that the purpose of doing so was to evade the Regulations.
• The Regulations do not apply if none of the parties to the contract has entered into it in the course of carrying on a business in the United Kingdom.

What is the effect of the Regulations?

The Regulations provide that “a term in a contract has no effect 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.”

A receivable is the right to be paid any amount under a contract for the supply of goods, services, or intangible assets. The Regulations do not prevent the parties from restricting the assignment of other contract rights.

More difficult is to establish what is meant by assignment. Receivables are transferred in various ways in practice. Sometimes the transfer is outright (for instance by way of sale); and sometimes it is by way of security (for instance to secure a loan). The transfer may be effected by a statutory assignment, an equitable assignment, a charge or a trust. “Assignment” is not defined in the Regulations, and so there is some doubt as to which of these transactions are covered.

Although charges are not expressly referred to, they might be covered by the expression “assignment” if it is given a broad interpretation. But because of the uncertainty, the best course is to take an assignment by way of security over a receivable where there is, or might be, a restriction. That way, it is clear that the Regulations do apply.

Non-assignment clauses come in a variety of forms. They will be covered by the Regulations if they prohibit or impose a condition , or other restriction on the assignment of a receivable. The Regulations expressly invalidate terms which prevent the assignee from determining the validity or value of the receivable or their ability to enforce it. Whether or not the Regulations apply in any particular case will require an analysis of the precise terms of the restriction.

The Regulations will be of particular importance to businesses involved in the financing of receivables. And they will also be of concern to buyers because they will override their contractual protections.

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• Business and industry

Invoice finance: nullifying the ban on invoice assignment contract clauses

Download the full outcome, government response: nullification of ban on invoice assignment clauses.

Ref: BIS/15/441

PDF , 209 KB , 3 pages

Detail of outcome

We plan to stop bans on invoice assignment clauses in business to business contracts. These powers are granted to us through the Small Business, Employment and Enterprise Act 2015 .

Feedback received

Summary of responses to the nullification of ban on invoice assignment clauses.

PDF , 201 KB , 13 pages

Detail of feedback received

We received 20 responses to the consultation. These mainly came from:

• business representative bodies
• invoice financiers and law practitioners

We also had some responses from large businesses in the retail and construction industry. A full list of respondents is available in Annex A of the summary of responses.

Original consultation

We’re asking for views on our proposals to nullify bans on invoice assignment terms in business to business commercial contracts.

This consultation ran from 9am on 6 December 2014 to 11:45pm on 11 February 2015

Consultation description

Invoice finance allows a business to give the right to future payment to a finance provider in exchange for a loan up to the full value of the invoice. It can provide a vital source of finance if a business has to wait a long time between completing a job and receiving payment.

The ban on invoice assignment is often part of a more general ban on an assignment clause in the contract to stop a supplier from sub-contracting. As a result, a business’ access to invoice finance is often unintentionally restricted.

In December 2013, we published our discussion paper Building a responsible payment culture . This asked whether removing contractual barriers to selling invoices would be helpful to small businesses by increasing their access to different finance options. The majority of respondents agreed that it would be helpful.

We announced in the government response that we would legislate to remove these barriers to financing. Clauses 1 and 2 of the Small Business, Enterprise and Employment Bill provide the broad legislative power to do this.

We propose to introduce a regulation that would nullify any bans on invoice assignment terms in business to business commercial contracts. We want to know your views on our proposals, the draft regulations and the costs and benefits of the measure on both companies and the invoice finance market.

Small Business, Enterprise and Employment Bill: nullification of ban on invoice assignment clauses

Ref: BIS/14/1232

PDF , 240 KB , 19 pages

Draft Statutory Instrument: Business Contract Terms (Restrictions on Assignment of Receivables) Regulations 2015

Ref: BIS/14/1232/AN1

PDF , 181 KB , 2 pages

Measure to nullify ban on assignment clauses in a debtors terms of sale: impact assessment

Ref: BIS/14/1233

PDF , 982 KB , 47 pages

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Added government response.

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Consultation closing date corrected (from 16 to 11 Feb 2015).

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Ban on Assignment when using Invoice Finance

Regulations have been passed that mean that ban on assignment clauses that are within contracts signed after 31 December 2018 cannot, in most instances, prevent debts being assigned to a lender.

Table of Contents

What is a ban on assignment?

The ban on assignment is known as Assignment of Receivables Regulations 2018 (the “Regulations“) this is now are in force. The Regulations are intended to make it easier for small businesses to access receivables -based finance by making ineffective any prohibitions, conditions and restrictions on the assignment of receivables arising under contracts for the supply of goods, services or intangible assets

Draft legislation finally appeared in 2017, but was withdrawn following criticism by the Loan Market Association and others. The final form of the Regulations addresses some of the criticisms, but adds complexity in what is already a complex area of the law.

Some contracts for the supply of goods or services by small businesses include a clause banning assignment of the receivables arising under the contracts: we call these ‘ban on assignment clauses’. If receivables arising from such a contract are the subject of an assignment to a receivables financier, it may be difficult for an assignee to enforce collection of those receivables if the assignor experiences financial difficulties, and the debtor can refuse to pay the financier directly.

The concern which arises is whether these difficulties mean that finance of such receivables is refused, or that steps have to be taken which increase the cost of financing.

What will change?

The Regulations apply to specific contracts entered on or after 31 December 2018 and apply to clauses contained within such contracts that seek to prohibit or restrict the assignment of a receivable under the contract, which is a right to be paid for goods, services or other intangible assets.

The Regulations are limited and only apply to contracts, where the supplier or seller, is a small or medium sized enterprise (SMEs), as defined by legislation.

The key provision to the Regulation is that any clause that bans the transfer of a right to another party is now unenforceable. This extends to other terms that impose conditions on the ability of one party to determine the validity or value of the receivable i.e. the goods, services, the debt, or their ability to enforce payment. Indeed, there are now 13 categories, which contracts cannot now restrict

Exemption from the Regulations

• Contracts for the provision of financial services.
• Contracts for energy, land and certain other commodities
• Contracts to acquire a business or an interest in a firm
• Contract for differences or other derivative contracts
• Any contracts where the business the subject of the contract is not being carried out in the UK

Types of contracts do the Regulations apply to?

The Regulations apply to contracts for the supply of goods, services or intangible assets under which the supplier is entitled to be paid money. But there are a number of important exclusions from their application, including the following:

• They only apply to contracts entered into on or after 31 December 2018.
• They only apply where the person who supplies the goods, services or intangible assets concerned, and is therefore entitled to the receivable, is a small or medium-sized enterprise which is not a special purpose vehicle . Whether or not an entity qualifies in any particular case requires a detailed examination of the precise wording of the
• Regulations. Counter-intuitively, the test is not applied at the time the contract is entered into, but at the time the assignment takes place.
• There is a specific exemption for contracts “for, or entered into in connection with, prescribed financial services”: These are widely defined to include “any service of a financial nature”.
• There are specific exclusions for particular types of contract, including certain commodities, project finance, energy, land, share purchase and business purchase contracts and operating leases.
• As a general rule, it would seem that the Regulations only apply to contracts governed by English law or the law of Northern Ireland, but they prevent the parties from choosing a foreign law if it can be established that the purpose of doing so was to evade the Regulations.
• The Regulations do not apply if none of the parties to the contract has entered into it in the course of carrying on a business in the United Kingdom.

Frequently asked questions

A ban on assignment is a term which prohibits or imposes a condition, or other restriction, on the assignment by a party to the contract of the right to be paid any amount under the contract or any other contract between the parties.

A Ban on Assignment is a legal provision that prevents businesses from assigning or transferring their invoices to a third party. This means that if a business wants to use invoice finance, they may not be able to sell their outstanding invoices to a finance provider. This can create a challenge for businesses that rely on invoice finance to manage their cash flow because they cannot leverage their outstanding invoices as collateral to obtain financing.

However, some invoice finance providers offer a workaround by providing a type of invoice finance known as “disclosed invoice finance,” where the debtor is informed that the invoice has been assigned to a finance provider. While a Ban on Assignment may limit the options available for businesses using invoice finance, there are still alternatives available to help them manage their cash flow needs.

Seasoned professional with a strong passion for the world of business finance. With over twenty years of dedicated experience in the field, my journey into the world of business finance began with a relentless curiosity for understanding the intricate workings of financial systems.

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