Many businesses assign or charge their receivables in order to obtain finance, and in many cases, to improve cashflow. Following the financial crisis of 2008, alternatives to bank-led finance have been sought by businesses, with the government making efforts to facilitate access to alternative finance.

Commercial contracts often contain provisions prohibiting the assignment of payment obligations, for example, preventing a business from assigning the debts owed to it by another party without the consent of that party. Such terms will often prevent, or make it much more expensive and time-consuming to achieve, the assignment or granting of a charge over the debt.

The Impact of the Small Business, Enterprise and Employment Act 2015

Certain provisions of the (the “Act”) came into force on 26 May 2015, section 1 grants powers to the Secretary of State to enact regulations for the purpose of securing that any non-assignment of receivables term of a relevant contract (a) has no effect; (b) has no effect in relation to persons of a prescribed description; or (c) has effect in relation to persons of a prescribed description only for such purposes as may be prescribed. A “relevant contract” includes contracts for goods, services or intangible assets but which are not “excluded financial services contracts”.

“Financial services contracts” are defined as (i) contracts for financial services (an extensive list is incorporated by reference to section 2 of the Act, which includes insurance or banking activities including retail, trading and investment), (ii) any regulated agreement under the Consumer Credit Act 1974 or (iii) any prescribed by the regulations made under the Act.

Much of the detail as to the impact of the provisions therefore remains subject to the wording of the regulations, which are currently in draft form.

Regulations: Consultation and Response

The government published draft regulations with a consultation on 6 December 2014. The consultation indicated that any changes will apply automatically to contracts entered into after the relevant legislation comes into force and will not apply retrospectively to existing contracts.

In the government’s response to proposals of 9 August 2015, it was confirmed that the provisions will only affect business-to-business contracts (regardless of the size of the business), and will exclude contracts with interests in land (including tenancy agreements) and/or financial services contracts. The government also clarified that the changes are not proposed to create any special provisions relating to supply chain finance contracts. Revised draft legislation is awaited.

The government also confirmed that the regulations would only apply where the parties are subject to an English law governed contract and one of them carries on business within the UK.

It is worth noting that the regulations should permit debtors to take action against suppliers if they breach commercial confidentiality. However, rights of set-off do not appear to be addressed by the regulations except to the extent that certain derivative products are excluded on the basis that a ban on assignment for these types of contracts may compromise mutuality for set off purposes.

Watch This Space

Revised draft regulations are anticipated after Parliament returns from its summer recess and BIS issued a press release on 10 August 2015, indicating that a ‘ban on anti-invoice finance terms in contracts’ would take effect ‘early next year’ (i.e. 2016). It is hoped that the revised drafts provide clarity and detail as to the scope and impact of the changes.

Further information and the draft legislation and consultation documents are available here.