Restrictions on assigning certain contracts can be a frustrating bar to small businesses who seek to raise finance through invoice financing.
The Business Contract Terms (Assignment of Receivables) Regulations 2018 (“the Regulations”) which came into force on 23 November 2018, seeks to lower this bar.
Impact of the Regulations
An express term in a contract that would otherwise prohibit an assignment of a receivable has no legal effect. This means that a party to a contract cannot prevent the other party from choosing who should receive the right to be paid under the contract. It therefore opens the door to businesses assigning (or selling) more of their contracts to invoice financing companies or debt recovery agencies to improve their cash flow.
What contracts and companies are excluded under the Regulations?
The Regulations apply to contracts for goods, services or intangible assets under which the supplier is entitled to be paid money. The main exceptions include:
- Contracts entered before 31 December 2018
- Suppliers who are a large enterprise or a special purpose vehicle (e.g. with assets of £10 million or more)
- Contracts relating to: land, national security, prescribed financial services or petroleum licences as well as consumer contracts
A full list of exceptions is set out in the Regulations.
What is an assignment?
An assignment is a transfer of rights from one party (the assignor) to another (the assignee) in relation to the assignor’s underlying contract with, typically, their customer (third party). An assignment can be a legal or equitable assignment. If a legal assignment is required, the assignment must comply with section 136 of the Law of Property Act 1925, which includes the requirement to give notice to the contract counterparty.
How do I get a Legal Assignment?
To ensure a legal assignment, notice of assignment must be given to the third party by either the assignor or the assignee. Notice should be sufficiently clear and unambiguous otherwise notice will be defective and there will only be an equitable assignment.
Equitable assignments have two key limitations:
- An equitable assignee will be unable to vary the terms of the underlying contract with the customer. This can cause problems further down the line should the assignee wish to change their relationship with the customer or, for example, vary the contract price or the agreed timeframe for delivering their goods or services.
- An equitable assignee generally can’t sue in its own name but must join the assignor to the action. This can cause significant problems should the assignor refuse to engage in the proceedings or if they no longer exist (because they are dissolved) or have entered into some form of insolvency process.
The Regulations should offer help to small businesses and start-ups to raise finance. However, care should be taken to ensure that assignments are done in accordance with the Regulations and do not fail the legal assignment test.