Prohibiting the prohibitions against invoice finance
In December 2014, the Government published its latest consultation paper entitled, ‘Nullification of Ban on Invoice Assignment Clauses’. This paper raises the question of whether prohibitions on invoice assignment clauses should be removed as a contractual barrier to obtaining finance and follows a line of discussion that began in December 2013, when a more general review was instigated in relation to building a responsible payment culture. The result of this initial paper highlighted how many businesses believed that they would benefit from the removal of clauses prohibiting the assignment of receivables and in turn, this triggered the current, more specific inquiry. On 11 February 2015, the period for businesses to file their opinions on the issue of invoice assignment clauses closed and in the summary of responses published in March 2015, it is indicated that the Government’s substantive reply to the issues raised by the paper will be published after this year’s election. Although much of the discussion has focussed on this issue from the perspective of those seeking to obtain finance, it is also topical for those parties involved in providing it. Questions surround what the reforms may entail; how far reaching they could be and what the impact of any changes are likely to be.
What the reforms entail
For financial institutions, the provision of finance in return for the benefit of assigned receivables is an important feature of many finance products. Many sales contracts contain provisions stating that assignment is prohibited or subject to certain conditions. The usual purpose is to retain knowledge of respective counterparties and preserve confidential dealings between commercial parties. From a finance perspective, one of the effects of this is that a seller is unable to assign its invoices to a discounting or factoring institution and, therefore, may be restricted from financing such receivables. Additionally, higher transaction costs are usually incurred for such financings due to the need for more thorough credit checks and due diligence on contracts to check for such restrictive terms.
With the intention of facilitating the availability of finance, proposed new legislation has been drafted in the form of a statutory instrument entitled, ‘The Business Contract Terms (Restrictions on Assignment of Receivables) Regulations 2015’. This provides that in certain circumstances, clauses which act as a prohibition against assignment will be nullified. It has been suggested that nullification of the effect of any prohibition clauses rather than an outright ban is more compliant with the principle of freedom of contract; a key concept of English contract law that promotes the parties freedom to decide the terms of their agreements. Whilst the parties may benefit from the freedom of being able to include a prohibition clause in their agreement, they may then find that in the context of a seller’s financing arrangement, that purchasers are restricted from placing any reliance on it as the law treats it as nullified.
The latest consultation paper raised various questions on the proposed wording of the legislation and the responses to these will need to be analysed and reported on. It is unknown exactly when this legislation will come into effect. However, the Government’s summary of responses provides that the amended regulations will be published along with their response, following the election.
How far reaching will the reforms be?
The proposed legislative changes are to apply in business to business contracts but only in certain circumstances. They will not apply to Financial Service contracts, a list of which is defined in s.40 of the Terrorist Asset-Freezing etc. Act 2010, and includes contracts such as insurance-related services as well as banking and other financial services consisting of lending, financial leasing and participating in issues of any kind of securities, amongst others. Moreover, the nullification will not extend to bans on invoice assignments in tenancy agreements and contracts creating interests in land nor is it intended to affect clauses providing for Buyer’s exclusivity in supply chain finance. These clauses ensure that the Buyer will exclusively receive the benefit under the contract and this in turn provides increased protection to the supply chain finance providers. These clauses work in a similar way to those prohibiting assignment but will not be subject to any nullification as finance providers have indicated that to introduce such a measure would make it uneconomic for them to provide finance along a supply chain.
Impact of any changes?
The intention is that the nullification of prohibition on invoice assignment clauses will provide businesses with easier access to finance. It is hoped that it will avoid the need for the supplier to obtain waivers and negotiate with the buyer in order to assign its invoices. For finance providers, it may bring greater certainty in relation to those contracts which are included within the scope of the legislation and reduce the amount of due diligence required.
This will only be the case if the underlying contract is based on English law. Assignment of invoices can often involve international parties and finance providers will still need to exercise caution to check the governing law of the contract and seek appropriate legal advice.
It seems that the changes will be limited as the scope of the legislation is restricted by the exclusion of many types of contracts. Interestingly, a change in the law in this area has been suggested and rejected before by the UK as they did not ratify the United Nations Convention on the Assignment of Receivables in International Trade 2001. By way of comparison, the US has already brought in legislation providing that terms restricting assignment are generally ineffective. Under Article 9-406 of the US Uniform Commercial Code, not only does this extend to invalidating any bans on assignment clauses but also clauses requiring the debtor’s consent for assignment. Similarly, Australia and Canada have also already introduced provisions of this nature. Perhaps, the current financial climate has created a stronger need for change in this area and this has driven the UK Government to reopen this issue.