Another draft of the receivables regulations published

The Department for Business, Energy and Industrial Strategy (BEIS) has published yet another draft of the regulations designed to nullify contract clauses that stop a party from assigning its right to payment.

BEIS first published draft regulations in December 2014. The purpose of the regulations was to open up invoice finance to smaller businesses by removing contractual obstacles. However, the original draft regulations were perceived as having various flaws, and BEIS has since been working on successive drafts to produce a final, workable version.

The latest draft regulations, if approved by Parliament, would provide as follows:

  • General prohibition. A contract term would be of no effect to the extent it prohibits a party from assigning a receivable (i.e. a right to payment) under that contract or any other contract, or if it imposes a condition or restriction on a party’s ability to assign a receivable.
  • Anti-avoidance. In addition, a contract term would be of no effect if it prevents an assignee from valuing a receivable or determining whether the receivable is valid or enforceable. This is designed to prevent businesses from circumventing the prohibition. The draft regulations now set out 13 categories of information that are relevant in this regard. If the contract prevents the assignee from obtaining any of these details, it will be regarded as preventing the assignee from valuing or assessing the receivable. These details include (among other things) the names of the contract parties, the contract goods or services and the date on which they are to be supplied, the amount of any discount, the total amount of VAT chargeable, and the credit period for payment. In essence, this means that it will be difficult to keep certain, core information about the contract confidential, as it must be available to a potential assignee.  
  • Exemption for large enterprises. The regulations now state that the prohibition will not apply if the supplier (i.e. creditor) is a large enterprise. In other words, this would allow small businesses to continue to include prohibitions on assignment when dealing with large businesses. Broadly speaking, for these purposes, a company or limited liability partnership (LLP) would be a “large enterprise” unless it is small or medium-sized and does not form part of a large group. There is also an exemption where the supplier is a special-purpose vehicle (SPV) that meets certain criteria.  
  • Exempt contracts. The draft regulations continue to exempt certain financial services contracts, real estate contracts, consumer contracts, petroleum licences, contracts under the low-carbon contracts for difference (CfD) regime, and contracts with a national security dimension. However, the new regulations also exempt contracts to acquire a business or an interest in a firm; securities options, forwards, swaps and other derivatives; certain infrastructure contracts; and lease contracts for assets other than land. In particular, this removes previous uncertainty over whether the prohibition would apply to restrictions on assignment in share and business sale agreements. It will not.   
  • Territorial scope. As before, the regulations would only apply to contracts governed by the law of England and Wales or by Northern Irish law, but there are deeming provisions to prevent parties from “contracting out” of the regulations by choosing Scottish law or some other law.

The draft regulations have been laid before Parliament, but we await a date for them to be approved. If approved, they would apply to contracts entered into on or after 31 December 2018.