The draft Business Contract Terms (Assignment of Receivables) Regulations (the “Regulations”), which were expected to facilitate the assignment of receivables, have been withdrawn.
The draft Regulations were published pursuant to the Small Business, Enterprise and Employment Act 2015 (the “Act”). The Act provides for regulations to be made to provide that any terms in commercial contracts for goods, services or intangible assets (other than certain financial services contracts) which prohibit or impose a condition or restriction on the assignment of receivables would be ineffective. The intention was to improve access to finance for businesses by allowing them to assign the right to payment under their invoices to a finance provider. A number of other countries have similar so-called “legal override” provisions with respect to commercial contracts, for example, in the New York Uniform Commercial Code, the French Commercial Code and the German Commercial Code.
The first draft of the Regulations was published in December 2014, together with a consultation paper. Following the submission of responses to the proposals from interested parties, the Department for Business, Innovation & Skills published a Government response to the consultation in August 2015. Contrary to the original expectation that the Regulations would become effective early in 2016, a revised draft of the Regulations did not appear until September 2017.
Although not the subject of a formal consultation at this stage, the revised draft of the Regulations attracted a number of comments from various different bodies and firms, including Mayer Brown, the LMA, the City of London Law Society and the Financial Markets Law Committee.
These comments primarily resulted from changes in wording from the previous draft of the Regulations, since certain provisions now appeared to be insufficient, create uncertainty, or go beyond the wording of the Act and could therefore have been considered to be ultra vires.
The specific concerns which were raised included the following:
- the failure to include the wording from the Act with respect to nullifying conditions or restrictions on assignment, such as requirements for consent from the debtor, as well as outright prohibitions;
- the Regulations would not necessarily have applied to contracts with English choice of law clauses, unless English law would have applied irrespective of the choice of law clause, and they also allowed the possibility for foreign choice of law clauses to be disregarded if the intent appeared to have been to evade the operation of the Regulations;
- lack of clarity on the face of the Regulations as to whether they would extend to existing contracts (although the Government response indicated that they would not apply retrospectively); and
- the risk that the wording could inadvertently have resulted in negative pledges or non-disposals provisions in financing documents, unrelated to the receivables contract, becoming unenforceable.
It is not yet clear when a revised version of the Regulations will be published but given the delays so far and the demands of the Brexit timetable it may take some time. In the meantime, companies and finance providers will have to make do with the current methods of dealing with prohibitions and restrictions on assignment. It is hoped that an amended version of the Regulations will address the concerns that were expressed.