Since 1 January 2019, the Business Contract Terms (Assignment of Receivables) Regulations 2018 (the “Regulations”) have prevented parties from restricting the assignment of receivables, except in specific circumstances.
Interesting. What are receivables?
These are defined in the Regulations as:
… a right (whether or not earned by performance) to be paid any amount under a contract … for the supply of goods, services or intangible assets (and in relation to a receivable, “supplier” means the supplier of those goods, services or intangible assets to whom that amount is payable and “debtor” means the person liable to pay that amount).
So, it is possible to sell (or assign) the right to receive money to some other person.
Why would I do this?
A key and eternally pressing consideration in business is cashflow. Often a business may be doing very well in terms of orders, clients, etc. but will find that the inflow of money lags behind a more regular flow of payments becoming due.
Such businesses, notwithstanding their good performance, will find themselves in quite vulnerable positions, perhaps being one tardy debtor away from serious cashflow issues.
One solution to this, sometimes known as debt factoring, assigns the right to receive money from future payments, in exchange for receiving a percentage of that money straight away.
It had become reasonably common to restrict this right, as the debtor sought to ensure certainty as to who they would be interacting with in respect of payment, or more importantly, when a dispute was liable to affect payments. This was preferable to having discussions with an assignee whose only interest in the contract would be their entitlement to receive payment.
The Regulations prevent (for any contract concluded after 31 December 2018) any restrictions on assigning the benefit of receivables, rendering them ineffective. Terms aimed at making it difficult for an assignee to enforce their right or determine its value are also voided, including restrictions which prevent an assignee obtaining key details about the contract such as the details of the original parties, and VAT and invoice details.
Does this prohibition apply to all contracts?
No. There are quite a lot of exceptions. The Regulations do not have effect if any exceptions are engaged. For example, the prohibition does not apply if the supplier is a “large enterprise or special purpose vehicle”.
A large enterprise is defined as one which does not meet any of a set of eleven conditions, mostly referring to the Companies Act 2006, and exclude those companies which satisfy Companies Act definitions of medium or small businesses. For many companies, this means if they want to be able to restrict assignments of receivables, they can only trade with large suppliers that do not engage any of these conditions.
A special purpose vehicle (SPV) is a legal entity formed to meet specific, limited objectives, with the advantage of ring-fencing risk. It is often used for property investments.
SPVs are exempt if they have the primary purpose of holding assets or financing commercial transactions, though in the process of either of these purposes, the vehicle must incur liabilities of £10 million or more.
Additionally, the Regulations exempt certain types of contract from being affected such as:
- Certain financial services contracts
- Contracts for interest in land
- Parties acting outside a trade, business or profession
- Contracts where one of the parties is carrying on business outside of the United Kingdom
There are other exemptions, including for contracts for petroleum licences, or engaging matters of national security.
Interestingly, and uniquely, contracts “in connection with, the acquisition, disposal or transfer of an ownership interest in a firm, wherever it is incorporated or established, or of a business or undertaking or part of a business or undertaking” are only exempted where they “include a statement to that effect”. In other words, if parties wish to avail of the exemption, they must expressly refer to the relevant provision of the Regulations. None of the other exemptions require such a statement.
What should we do?
If any of your standard terms contain restrictions of this kind, and you have not done so already since 2019, you should be reviewing your terms to ensure they do not have an ineffective restriction, and either consider whether one of the exemptions are engaged, or rewrite them to remove the ineffective restriction.
If your business is involved in any acquisitions and wants to rely on any restriction on assignment, you must include a statement within the contract that you are relying on Regulation 4(i) of the Business Contract Terms (Assignment of Receivables) Regulations 2018. Otherwise, unless another exception is engaged, the term will be ineffective.
A full version of the Regulations are available here.
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.