An invoice finance agreement will typically include a generic assignment (or, in Scotland, an assignation) of all book debts of the invoice financier's client in existence at that time and which come into existence in the future. The book debts being assigned to the funder arise under contracts between the invoice financer's client and third party debtors in the ordinary course of the client's business. The biggest implication of any provision in a contract which prohibits assignment, whether or not assignable with consent of the debtor, is that customers of invoice financiers are unable to use invoices they have issued to their own debtors as a means of obtaining finance without first obtaining approval of their debtors to that financing. Typically, funders are concerned that such a prohibition may restrict the ability of a funder to enforce and collect in receivables if the client starts to struggle financially, unless the debtor has expressly consented to the arrangements.
The enactment of the Small Business, Enterprise and Employment Act 2015 (the "Act") saw the Government set the tone for the prohibition on assignment of the rights to receive payment under contracts by providing for the passing, by way of secondary legislation, of regulations making clear what effect, if any, such a provision in a contract would have. That resulted in a draft of The Business Contract Terms (Restrictions on Assignment of Receivables) Regulations 2015 (the "Regulations") being published. The draft Regulations make clear that any clause of a contract which is not an "excepted term" will have no effect "to the extent that it prohibits or imposes a condition or other restriction on the assignment of a receivable by a party to the contract". If passed, the Regulations would not apply to:
- any consumer contract
- supply chain finance arrangements
- financial services contracts or
- interests concerning land
and would not apply on a retrospective basis. The Regulations would only apply to a business to business transaction which is governed by English law and where one party has a business in the UK. The Act does provide that Scottish ministers may make equivalent regulations in respect of contracts governed by Scots law but it is not yet clear what, if anything, will happen in Scotland.
Clearly, any prohibition on assignment should make obtaining finance more straightforward for debtors, without the need to incur costs associated with amending their standard form documentation to remove any prohibitions on assignment or to obtain waivers and/or consents from debtors. However, it is not yet clear what the industry will make of the Regulations or whether the Regulations will change anything at all in practice. At first, and assuming the Regulations come into force in their current form, I would expect most funders to maintain the status quo and continue conducting the same degree of due diligence on their clients before funding debts. I'd be surprised if funders do not seek written consents or waivers from the relevant debtors or express acknowledgements from them confirming that any prohibition on assignment does not have any effect as a result of the Regulations, particularly if the transaction is one with a cross-border element pending any Scottish Regulations coming into force, at least until such time as a market standard practice on the point emerges.
It is expected that the provisions, either in the form of the draft Regulations or in a revised form, will come into force sometime during 2016. Until then, invoice financiers should continue to undertake due diligence on the proposed client's contracts and terms of business giving rise to the invoices which are to be assigned to the financier and obtain express written waivers and consents from the debtors in respect of the ban on assignment and, if appropriate, confirmation from the debtors that they won't exercise any right of set off they may have in respect of any debts which are acquired by the invoice financier pursuant to the receivables financing agreement.