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The Business Contract Terms (Assignment of Receivables) Regulations 2018: Are Asset-Based Lenders and SMEs really benefitting?

View profile for Chris Willison
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The Business Contract Terms (Assignment of Receivables) Regulations 2018 (the “Regulations”) are a positive benefit for both Asset-Based Lenders and SMEs as it will make working capital available to more SMEs through receivables financing. However, there are a number of instances where they do not apply and several points for ABLs to consider.

What is the purpose of the Regulations?

The Regulations came into effect on 24 November 2018 with the primary objective of making invoice financing more readily available to SMEs by nullifying any term in an applicable contract 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.

When do they (and when don’t they) apply?

The Regulations apply to any relevant term in an applicable contract entered into on or after 31 December 2018. They are not retrospective: non-assignment clauses in contracts which were entered into prior to this date will still be enforceable.

The Regulations contain various exceptions. They do not apply to the assignment of receivables if at the time of assignment the supplier is a large enterprise or a special purpose vehicle. In order to benefit from the Regulations, the supplier must be:

  • an individual, a partnership (other than an LLP or limited partnership) or an unincorporated association;
  • a company or LLP to which the small companies or small LLPs regime applied in the relevant financial year; or
  • a company or LLP which qualified as medium-sized in respect of the relevant financial year. To qualify as medium-sized, the company or LLP must not be a PLC, an insurance company or a subsidiary or associated company of a company listed on the LSE and must meet at least two of the following criteria:
    • > sales less than £36 million;
    • > balance sheet total less than £18 million; and
    • > fewer than 250 employees.

Even if a supplier qualifies under the above criteria, a non-assignment clause will still be effective if the supplier is part of a “large group” (a group that is not a small or medium-sized group) in the relevant financial year.

Additionally, the Regulations do not apply to terms in certain types of contracts, including contracts:

  • for prescribed financial services (including regulated Consumer Credit Agreements and operating leases of equipment);
  • concerning any interest in land;
  • where one of the parties is not acting in the course of a trade, business or profession;
  • where none of the parties are carrying on business in the UK;
  • concerning national security interests;
  • which confer a petroleum licence; and
  • for the sale of a business.

The Regulations currently only apply to contracts governed by English or Northern Irish law, but it is anticipated that similar regulations will be implemented in Scotland in the near future.

Fortunately, many clients of Asset-Based Lenders will meet the relevant criteria to enable them to benefit from the Regulations. The criteria must be satisfied at the time the receivable is assigned, namely when it comes into existence, so if assignability is critical to a receivables finance facility, due diligence of the client’s status will need to be undertaken on a regular basis. For many clients, a check of their filed accounts in the last financial year before any receivables are assigned and annually during the continuance of the facility will determine if they qualify.

Whilst Asset-Based Lenders previously used various workarounds to avoid the impact of non-assignment provisions, the Regulations will make Asset-Based Lenders more comfortable in funding qualifying SMEs’ receivables arising under contracts that incorporate non-assignment provisions, as they will be able to enforce the receivables against the client’s customers as an assignee in their own name. In particular, the funding of receivables due by customers in sectors where contracts invariably contain non-assignment provisions, such as the construction industry, should increase.

Key considerations for asset-based lenders

The option to deliver notice of the assignment to the customer may limit defences that the customer may have been entitled to raise against the supplier in respect of claims that are unrelated to the contract giving rise to the assigned receivable. Additionally, the set-off rules that are mandatory in the event of a supplier’s insolvency do not apply to receivables assigned to a discounter.

Warranties or undertakings in discounting agreements stipulating that contracts giving rise to debts purchased by the Discounter do not contain a clause prohibiting the assignment of receivables may need to be amended to accommodate the effect of the Regulations.

The Regulations do not apply to receivables arising under the excluded contracts and contracts made with certain categories of customer so Discounters will need to be alert to these exceptions in their structuring of facilities impacted by non-assignment provisions.

Contacts

For further information about the Business Contract Terms (Assignment of Receivables) Regulations 2018, contact partner Chris Willison or your usual adviser at Francis Wilks & Jones.

This article represents our understanding of the law in England and Wales as at 8 October 2019. Its contents are not intended to serve as legal advice and should not be considered as a substitute for taking legal advice.