“New era for invoice financing? – Government Response to Consultation Paper”
In the Spring issue of Finance Focus, we wrote about the consultation paper “Nullification of Ban on Invoice Assignment Clauses” which was published by the UK Government in 2014. This included the proposed draft of the Business Contract Terms (Restrictions on Assignment of Receivables) Regulations 2015 (the “Regulations”). The Government has concluded that the nullification of ban on invoice assignment clauses within business to business contracts would directly benefit businesses and it is expected that the new Regulations to this effect will be finalised and come into force in early 2016.
As the final draft of the Regulations has not been published yet, it remains to be seen how the issues highlighted by the Government in its response to the consultation paper will be addressed and incorporated. However, it was indicated that the Regulations will:
• apply to business to business contracts only;
• extend to all businesses, regardless of size;
• not apply to financial services contracts (e.g. lending, guarantees, finance leases, derivatives and insurance contracts);
• not apply to contracts related to interests in land;
• not create any special provisions for supply chain finance arrangements;
• permit debtors to take action against suppliers if they breach commercial confidentiality;
• will not apply to contracts retrospectively; and
• apply only to English law contracts under which one of the contractual parties carries on business within the UK.
Consumer contracts will not be affected by the new Regulations.
Financiers will also still need to conduct appropriate due diligence checks in relation to supply contracts in order to establish whether such contracts fall within the scope of the Regulations and, in light of current section 3(2)(b) of the draft Regulations, consider confidentiality arrangements between the parties.
If the Regulations are passed, there is likely to be a positive impact on the accessibility of the invoice financing for the smaller businesses and clarity of the rights acquired by the financiers as a result of the assignment of receivables. However, until the final draft Regulations are published, and possibly for some time after the Regulations come into force, it is suggested that it will be prudent for the financiers to continue including contractual provisions aimed to circumvent prohibitions on assignment (e.g. trust provisions) and/or seek confirmations that the underlying supply contract’s provisions prohibiting assignment of receivables have been waived.