The Small Business Enterprise and Employment Act received Royal Assent on 26 March and, when implemented, is expected to produce a huge boost in SME receivables finance.
Sections 1 and 2 of the Act allow the Secretary of State to introduce regulations overriding anti-assignment clauses in contracts:
- for the provision of goods, services or intangible assets (including intellectual property);
- where at least one of the parties has entered into the contract in connection with carrying on of a business; and
- which are not excluded financial services contracts (such as for the provision of life assurance, banking or financial services).
Once introduced, the regulations should make it simpler for SMEs to sell their debts.
The Government consulted on a first draft of the regulations earlier this year. That consultation was expected to lead to a new draft of the regulations in March 2015. But, the general election campaign has begun and the second draft has not appeared. So it is not clear when we will see that document. However, this aspect of the Act appears to have bipartisan support, so we may not have an indefinite wait.
That said, the first draft regulations were very much an outline draft, leaving many issues to be thought through. Unresolved questions included, whether:
- despite the Government's previously expressed intention to remove blocks to assignment in favour of SMEs seeking finance, the regulations would remove those blocks in wider circumstances (which would be possible under section 1 of the Act);
- the regulations would apply to all relevant contracts governed by English law even if they involved debtors incorporated outside the United Kingdom;
- blocks to assignment would only be overridden in favour of receivables financiers;
- there were any circumstances in which a debtor might validly object to having to deal with a receivables financier rather than its original creditor; and
- the law on when a debtor can raise set-offs it has against its supplier against a receivables financier might be strengthened or reformed.
Thin though the first draft regulations are, two of its provisions are of particular interest. The first provides that the regulations will not override terms that give rise to a duty of confidentiality. A basic confidentiality clause is not necessarily an insurmountable barrier to a receivables purchase. But SME debtors, who can no longer rely on anti-assignment provisions, might start insisting on more elaborate clauses that make it impractical to finance the receivables they owe.
The second provision is aimed at exempting clauses that only permit selling receivables into buyer-led supply chain finance programmes. The Government's view at the time of the first draft was that, without this protection, pre-existing buyer-led programmes would no longer be viable.