Government proposes restriction on scope of non-assignment clauses

Posted: 08/01/2015

What is happening?

The Government is consulting on a proposal to render ineffective contractual clauses which prevent businesses from assigning their trade receivables (ie their rights to future payment under invoices) to finance providers. This would affect not only clauses which explicitly restrict this practice, but also assignment clauses which are commonly included in the boilerplate sections of contracts, and which prohibit a contracting party from assigning its rights under an agreement without the consent of the other party.

Why is it happening?

Many businesses, particularly small and medium-sized businesses (SMEs), struggle with cashflow, particularly when their invoices are not paid promptly. One way for businesses to improve their cashflow is to assign their trade receivables to a third party finance provider, in return for a payment up to the value of the invoice. 

The problem is that businesses may be prevented from accessing finance in this way by contractual prohibitions on the assignment of contractual rights and obligations. The prohibition is often set out in a boilerplate clause which restricts both assignment and sub-contracting. In many cases, the objective with such a clause is simply to ensure that the original contracting parties remain responsible to perform the contract, rather than any concern about the assignment of trade receivables. 

In December 2014, the Department for Business, Innovation & Skills (BIS) published a consultation on a proposal to nullify clauses which prohibit the assignment of invoices, together with draft Regulations (The Business Contract Terms (Restrictions on Assignment of Receivables) Regulations 2015).

The consultation and draft Regulations follow the publication of a discussion paper entitled Building a Responsible Payment Culture which queried whether removing contractual barriers to selling invoices would help SMEs by improving their access to finance and the culture of prompt payment. It had previously been announced as a measure in the Small Business, Enterprise and Employment Bill (currently working its way through parliament).

How will it work?

The Regulations would apply to business to business contracts only and would render ineffective any clause to the extent that it prohibits the assignment of receivables, or imposes a condition or restriction on such assignment. Therefore, the clause would be nullified to the extent that it has this effect, rather than making it unlawful to include the clause in the first place.  

What are the issues on which BIS is seeking views?

The consultation seeks views on how the proposal should be achieved, including comments on the draft Regulations. Some of the specific questions raised are set out below. 

Scope of the Regulations

The draft Regulations apply to all contracts, apart from certain excluded contracts. For instance, the draft Regulations do not apply to certain financial services contracts. This, BIS says, is because: 

"We have no evidence to indicate that the problems encountered by small and medium sized enterprises accessing invoice-based finance extend to contracts for financial services. In fact we understand that some financial products would not be able to function without a ban." 

Nor is it intended that the Regulations should extend to consumer contracts, tenancy agreements and contracts creating interests in land. In addition, the nullification would not apply to exclusivity clauses in agreements with supply chain finance providers, whereby a business is prevented from assigning its receivables to anyone other than that provider. 

BIS is seeking views on whether the contracts and clauses outlined above should be excluded.

Debtors and commercial confidentiality

BIS has suggested that debtors should be able to maintain contractual freedom, including the right to preserve commercial confidentiality (which could prevent an assignment, as it would disclose details of the contractual relationship to the finance provider). The draft Regulations provide that the nullification will not apply to confidentiality clauses, notwithstanding that they may have the effect of preventing invoice assignment. 

BIS is seeking views on whether commercial confidentiality is a sufficiently important contractual freedom for debtors, such that it warrants the prevention of invoice assignment.

Linked contracts

BIS has also suggested that in circumstances where there is a master or framework contract agreed by the parties which sets out overarching terms and conditions for business, the nullification should automatically extend to linked contracts (except in cases where specific exemptions already apply). It is seeking views on whether the nullification of clauses which prohibit the assignment of invoices should extend to linked contracts. 

The consultation closes on 11 February 2015. A summary of the responses received will be provided by BIS within three months of that date. 

Séamas Gray, restructuring and insolvency partner at Penningtons Manches, commented: “This proposal is part of the Government’s ongoing initiative to improve the odds of survival for small and medium sized businesses in the UK, which includes 30 day payment obligations through the public sector supply chain, increasing transparency of payment practices and strengthening the Prompt Payment Code. All proposals are helpful in generating debate on the best way to protect businesses. SMEs are the lifeblood of UK plc and all too often cashflow problems are the cause of business failure.”

Return to news headlines