If rumours are to be believed we should soon see an end to the ban on assignment.
Since the credit crisis the Government has been keen to encourage the alternative finance market, including asset-based finance, for SMEs, and in March 2015 the newly enacted Small Business, Enterprise and Employment Act 2015 granted the Secretary of State powers to make regulations to invalidate or restrict the effect of any “non-assignment of receivables term” of a “relevant contract”.
A “non-assignment of receivables term” is a term which prohibits or imposes a condition, or other restriction, on the assignment by a party to the contract of the right to be paid any amount under the contract or any other contract between the parties. A “relevant contract” is a contract for goods, services or intangible assets (including intellectual property) which is not an excluded financial services contract, and at least one of the parties has entered into it in connection with the carrying on of a business.
In December 2014, in advance of the Act coming into force, the Department for Business, Innovation & Skills published draft regulations which, after consultation, have become The Business Contract Terms (Assignment of Receivables) Regulations 2017. At the time of writing it seems likely that it is these regulations that in some form will come into force during 2018.
Whilst the new regulations are to be welcomed it’s worth reflecting on the techniques currently employed by factors to mitigate the effect of non-assignment clauses. Factors may do any of the following:
- request that the debtor allow assignment by waiving the non-assignment clause; or
- ensure the factoring agreement contains an express declaration of trust in respect of the proceeds of debts that are subject to a ban; and/or
- use the power of attorney in his agreement to enforce the debt in the name of the client.
For many years these techniques have enabled factors to fund clients without having to vet each and every contract between the client and his customers. In truth, factors have come to regard the prohibition on assignment as more of a practical hindrance to collection than a bar to funding. However, the ability of the debtor to ignore the factor and the additional complications a ban causes in debt recovery proceedings will not be missed.
If the regulations are made as currently envisaged, an assignment by a client to a factor of his right to payment under a contract will effectively trump any non-assignment clause contained in the contract. Despite the Act’s title, it is envisaged that the new law will apply to all businesses, whatever their size. This is to be welcomed and should have a number of effects.
First, the proposed reform will go some way to enable clients obtain invoice finance without either them or the factor incurring the administrative cost of seeking a waiver from the debtor, and thereby disclosing the existence of the financing arrangement.
Secondly, factors should not be forced to reduce pre-payment percentages or increase retentions to mitigate the risk of loss arising out of non-assignment clauses.
Thirdly, it should reduce the cost of collecting debts, and it’s even possible that the cost of invoice finance may reduce for the duration of the agreement.
That said, even though the new regulations will benefit factors it is still advisable to check for terms restricting assignment in client’s sale contracts because, although the regulation will become effective for all new sales contracts entered into by suppliers, restrictions in existing contacts will remain effective. There is also the possibility that some contracts may be excluded from the scope of the regulation, and the potentially selective effect of the legislation means that some factors may prefer to continue to obtain express consents and waivers, or an acknowledgement that the relevant assignment restriction has no effect at law.
Our view is that it will remain best practice for factors to continue to carry out their usual due diligence to understand the contractual terms which impact on the client’s ability to assign its right to payment to a factor. A factor will in any event want to know whether the underlying contract contains rights of set-off, counterclaim or deduction as the new regulations don’t touch these issues.