The government has published draft regulations which, if brought into force, are likely to promote receivables finance to UK SMEs by nullifying terms in supply contracts which purport to prevent SMEs from assigning receivables.
The draft Business Contracts Terms (Assignment of Receivables) Regulations 2018 are currently before Parliament and, if approved, will apply to the terms of any qualifying contract (in broad terms, contracts with an SME supplier save for various categories of excluded contract – see below) entered into on or after 31 December 2018.
If approved, the regulations should facilitate access to finance for businesses by nullifying terms in business contracts to the extent that they prohibit or restrict the assignment of receivables. This includes terms (such as confidentiality provisions) which might otherwise prevent a potential assignee of such receivable from enforcing it or determining its validity or value. "Receivable" means a right (whether or not earned by performance) to be paid any amount under a contract (other than an excluded contract – follow the link below for more information) for the supply of goods, services or intangible assets.
The regulations do not apply if the person to whom the receivable is owed is a large enterprise (or part of a large group) or a special purpose vehicle (such terms being defined in the regulations), and various types of contract are also excluded.
You can find more detail on the scope of the regulations here.
From a corporate perspective it is worth noting in particular that the regulations will not apply to a term in (1) equipment leases (including operating leases) or (2) a contract which is entered into for the purposes of, or 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), and which includes a statement to that effect. The explanatory notes to the draft regulations state that this exclusion extends to transitional services agreements which are agreements for one party to provide services to the other after completion of the sale in order to facilitate the transaction.
If the regulations come into force, when reviewing contracts for due diligence or other purposes businesses will need to consider whether any non-assignment (of receivables) provisions are caught and nullified by the regulations, and what impact this might have on their commercial objectives.
Draft Business Contracts Terms (Assignment of Receivables) Regulations 2018
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