The draft Business Contract Terms (Assignment of Receivables) Regulations 2018 (the regulations) are likely to promote receivables finance to UK SMEs, while being of limited concern to financiers operating outside that market. This is in contrast to their 2017 predecessor regulations, which were withdrawn given serious concerns in the UK finance sector, and among those concerned with the reputation of English contract law.
So English contract law and the City of London are safe – at any rate from any threat the regulations might have posed them – and invoice finance providers to the UK SME sector have much to welcome in the regulations.
No retrospective effect
The UK government published the regulations in early July and aims to bring them into law in England and Wales in late autumn 2018. Once in force, they will only affect contracts "entered into" on or after 31 December 2018. Unless this includes contracts made before that date, but so extensively amended on or after that date as, in effect, to become new contracts, the regulations will not have retrospective effect.
Overriding blocks to assignment, evaluation and collection of receivables
The regulations override terms which prohibit, restrict or impose a condition on:
an SME assigning receivables arising under a contract for the supply of goods, services or intangibles; or
an SME assignee's ability to determine a receivable's validity, value or enforceability (i.e. ability to collect). The regulations make it clear that this would, for example, include clauses that prevent the assignee from obtaining parties' contact or VAT details, or details of relevant supplies, invoices, discounts, payment periods, credit notes and set-offs.
The overridden terms must be in the supply contract generating the receivable or another contract between the same parties.
Negative pledges not overridden
The scope of the override noted above, the ambit of the regulations' enabling legislation (the Small Business Enterprise and Employment Act 2105) and the financial services exception noted below should mean the regulations do not affect negative pledges in credit or security documents.
As the regulations only apply to SME supplier/assignors, and given the SPV exception noted below, the regulations are unlikely to facilitate a securitisation boom.
Receivables arising out of UK business
The regulations only apply to contracts entered into in the course of a business in the UK.
Although the regulations do not expressly say this, the government has said its intention was only to override offending terms in English law contracts. However, if a contract contains a governing law clause selecting the law of Scotland, or of a non-UK country, the regulations may still apply. But this will only be so if all other requirements in the regulations are satisfied and the governing law clause was included wholly or mainly to avoid the regulations.
Among other exceptions, the regulations do not apply:
if the supplier assigning the receivable(s) is not an SME, but is a large enterprise or part of a large group – these terms being extensively defined in the regulations;
if the assigning supplier is an SPV, as defined in the regulations, "incurring a liability under an agreement of £10 million or more";
if the relevant contract was made for or in connection with either a regulated agreement for the purposes of the Consumer Credit Act 1974 or with other "prescribed financial services". These "financial services" are widely defined to mean "any service of a financial nature", including a long list of banking, lending, payment, financial trading, securities issuance, asset and fund management and insurance-related services;
to certain projects and project financings (mainly defined by reference to the project finance exception introduced by the Enterprise Act 2002 into the Insolvency Act 1986);
to equipment leases (including operating leases);
to derivatives (and related contracts) relating to (among other things) commodities, energy, emissions allowances or official economic statistics and which are either traded on a regulated market or via a multilateral or organised trading facility or (if not so traded) are documented under a "market agreement providing for close-out netting";
to certain other energy-related contracts;
to contracts concerning interests in land or national security or which are (and expressly state they are) entered into in connection with acquiring, disposing or transferring an ownership interest in a firm (wherever incorporated or established) or a business or undertaking.
No buyer-led supply chain finance exemption
To protect the investment of parties setting up large-scale supply chain finance programmes, the government had discussed exempting participants in such programmes from the regulations. It has not done so.
Northern Irish law
The regulations are also to be introduced into Northern Irish law this autumn. This note does not deal with their effects under that law.