UK: Invoice Financing Update

In April 2016, Chris Jones, of our banking & finance team published an article on customer contracts – unlocking financial potential. The article examined the key considerations of invoice financing from the perspective of both the invoice financiers and the company seeking invoice financing.

Chris commented that 'legislation is expected in autumn 2016 that may render non-assignment clauses unenforceable by a customer in invoice financing'; this article serves as a legal update on this position with the government having laid before Parliament draft legislation.

The Department for Business, Energy and Industrial Strategy has laid before Parliament draft legislation titled Business Contracts Terms (Assignment of Receivables) Regulations 2017 (the "Regulations"), in an attempt to tackle current contractual terms which prohibit assignment of receivables. The Regulations are made pursuant to Section 1 of the Small Business, Enterprise and Employment Act 2015 and are expected to come into force by the end of 2017. It is hoped that by removing existing barriers to invoice financing the new law will encourage businesses, and in particular small to medium sized enterprises, to raise finance through alternative means and thereby to promote company growth.

To what contracts and clauses will the Regulations apply?

The Regulations will apply to all contracts, save in respect of certain excluded contracts, with the following contractual terms having no effect:

• a term to prohibit the assignment of receivables;
• a term to prevent the assignee of receivables from determining the validity or value of those receivables; and
• a term hindering the ability of an assignee of receivables to bring enforcement action to recover those receivables.

Under the Regulations receivables are defined as "a right (whether or not earned by performance) to be paid any amount under a contract (other than an excluded contract) for the supply of goods, services or intangible assets".

Excluded contracts under the Regulations are contracts:

• where English law has been chosen by the contracting parties and, without that choice, the governing law of the contract would be deemed to be the law of another country;
• that are business-to-consumer contracts or consumer-to-consumer contracts;
• relating to prescribed financial services;
• relating to an interest in land;
• concerning interests in national security; and
• concerning energy or petroleum.

Potential ambiguity of the new Regulations

The Regulations create certain ambiguities, which it is hoped will be addressed in the final draft of the legislation:

• The Regulations refer to the undefined concept of an "assignment" of receivables, with ambiguity as to what extent the grant of security interests in receivables is also captured. It is presumed that the drafting should extend to security assignments as well as outright assignments, however this is yet to be confirmed
• There was some uncertainty as to whether the Regulations will apply to businesses of all sizes. The Government has confirmed separately that the Regulations will extend to all businesses, regardless of size, but it is unclear whether this point will be expressly addressed in the final legislation
• There is some ambiguity regarding the territorial scope of the Regulations. The Government has indicated that the Regulations will only apply to parties conducting business-to-business transactions under English law, or where one or more of those parties carries on business in the UK, however this has yet to be reflected.
• Whether the Regulations will apply to existing contracts as well as new contracts entered into after their implementation is another point yet to be determined. It is believed that the Regulations will only apply to new contracts and will not apply retrospectively. However this is not expressly clarified in the Regulations
• There are difficulties reconciling the potential effect of the Regulations with the principle of freedom of contract between parties.
• There are concerns in respect of the customer being disadvantaged in a situation where a term of a contract is overridden. A consequence of this could be that the customer has a reduced ability to claim under the contract, this could arise in a situation where the customer's payment obligation should be reduced or set aside for a reason relating to the supplier, where that payment obligation is now owed to the supplier's invoice financier. The consultation notes that there should be greater protection for customers.

Consultation is ongoing and the extent of any amendments to address these ambiguities is awaited with interest. Until such ambiguities are clarified in the final legislation, providers of invoice financing may be cautious in relying upon the Regulations when taking assignments of contractual receivables. Some may still prefer to obtain express consents and waivers from their borrowers' contractual counterparts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.