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Prohibitions on assignment finally outlawed
As long ago as late 2014 the Government indicated its intention to outlaw prohibitions of assignment in commercial contracts in an attempt to support the invoice finance industry as a key provider of alternative finance to UK SMEs.
Following this initial proposal provision was made in the Small Business, Enterprise and Employment Act 2015 for Regulations to be made to “invalidate certain restrictive terms of business contracts”.
The legislative road since then has been torturous to say the least, and not only as a result of the smothering effects of Brexit. There have been at least five iterations of the Regulations before the finally approved version was published, and which are now expected to shortly receive final Parliamentary approval before their implementation as from 31 December 2018.
Early victories
The ABFA and subsequently the IFABL product board of UK Finance have been intricately involved with Government and others during the consultation process, and this resulted in two very significant early victories in relation to the Government’s initial proposal.
The first version of the draft Regulations from early 2015 were unsatisfactory in two respects: –
(1) there was a carveout for supply chain financiers; and
(2) the Regulations did not apply to “a term giving rise to a duty of confidence”.
The Government was persuaded that it would be inappropriate to give priority to supply chain financiers so that carveout was quietly dropped.
Duty of confidence
More importantly, we and others successfully persuaded the Government that the confidentiality point was misconceived. Government’s initial thinking was as follows:
“Commercial confidentiality can be important to some debtors who may wish to remain anonymous to third parties in a transaction with suppliers. The disclosure of the debtor to the invoice financer compromises that confidentiality. We believe that in cases of commercial confidentiality, debtors should be able to maintain the contractual freedom, including the right to reserve commercial confidentiality, which could prevent an assignment”.
We pointed out that this argument misunderstood the difference between (1) confidential terms within a contract, and (2) confidentiality as to the existence of a contract. We explained that the first issue is in our view dealt with by the fact that an invoice financier is subject to the banker’s implied duty of confidentiality at common law, though in any event it was difficult to see circumstances in which an invoice financier would wish to disclose truly confidential information whether to other suppliers, debtors or other invoice financiers.
However, confidentiality as to the existence of the supply contract was quite another matter: in our submission we pointed out that the debtor should have no legitimate right to impose confidentiality about the fact that it is a debtor of a supplier:
“Indeed giving debtors the ability to prevent suppliers from revealing the existence of contracts to financiers would be a radical and very significant new development in English law. Most overdraft finance involves some degree of examination of sales ledgers by banks, and this is little different from the examination of sales contracts by an invoice financier whether in deciding whether to offer a facility or during the operation of that facility”.
We pointed out that there was a very real danger that contract terms seeking to prevent suppliers from revealing the existence of a supply contract or its details to an invoice financier would become commonplace as a deliberate device to exclude the Regulations.
Although it took some time for the Government to fully appreciate these points, we are pleased to see that the last few drafts of the Regulations have abandoned any reference to commercial confidentiality, and indeed there are now anti-avoidance provisions built into the text of the Regulations dealing with matters such as information which would prevent an assignee from determining the validity or value of a receivable or its ability to enforce a receivable (see paragraph 2(3) of the Regulations).
Entry of the big battalions
However, just as matters seemed to be progressing nicely there was something of a rearguard action from a lobby of senior commercial lawyers from the City of London. They forcefully objected to the principle espoused in the Regulations and seemed to predict the end of freedom of contract and the subsequent collapse of the pre-eminence of English commercial law, but after much injection of energy on their part the main result of these efforts has been: –
(1) a carveout of various highly specialised areas of City type financial services;
and
(2) the exemption from the Regulations of medium and large companies as defined by the accounting regimes applicable to SMEs under the Companies Act 2006.
This last point is something of a disappointment and in our view adds unnecessary complexity to the Regulations, but if it is a trade-off for maintaining the deletion of the “commercial confidentiality” exemption then this is still a significant victory for the invoice finance industry.
Effect of the Regulations
Assuming there are no further last-minute revisions, the Regulations will apply to business contracts entered into on or after 31 December 2018 and the key provisions provide: –
“2(1)…a term in a contract has no effect to the extent that it prohibits or imposes a condition, or other restriction, on the assignment of a receivable arising under that contract or any other contract between the same parties.
(2) A term in a contract which imposes a condition or other restriction on the assignment of a receivable includes a term which prevents a person to whom a receivable is assigned from determining the validity or value of the receivable or their ability to enforce the receivable”.
As mentioned above there are anti-avoidance provisions to prevent a debtor from inserting contractual provisions which would make it difficult or impossible for an assignee to assess or enforce a receivable, for example by imposing a duty of confidentiality on financial particulars or names and addresses.
There are various sensible exemptions from the Regulations relating to matters such as agreements regulated by the Consumer Credit Act, interests in land, and sales of businesses.
As for the territorial reach of the Regulations, they only apply to contracts governed by English or Northern Irish law, though it is hoped that Scotland will follow suit with similar Regulations in the foreseeable future.
We are pleased to see that an attempt to bring into consideration the enormously complex concept of set-off did not survive into the final version of the Regulations, though the Explanatory Note rather simplistically states that:
“A contractual right of set-off which the debtor could have exercised against the assignor prior to the assignment or but for the assignment is not a term that imposes a condition or other restriction on the assignment of a receivable for the purposes of these Regulations”.
Comment
Of course invoice financiers and their lawyers have for many years developed effective workarounds to deal with prohibitions against assignment, and these will remain important where the Regulations do not apply. Although these Regulations are not confined to invoice financiers, there is no doubt that the invoice finance industry is intended to be their main beneficiary and in a sense the main impact of the Regulations may be to assist further in the development of invoice finance and asset based lending as credible alternatives to bank lending for SMEs.
This was after all the original intention of the Government in legislating, and it is perhaps interesting to note the ferocious response of some of the City of London lawyers who did not seem to share the Government’s objective in this regard.
The Regulations can be found here.