Government consults on nullification of ban on invoice assignment clauses

What effect would proposals to nullify bans on invoice assignment clauses have on companies and suppliers?

Original news

The government is proposing to nullify bans on invoice assignment terms on business-to-business commercial contracts. The proposals are part of its plans to remove barriers to invoice finance. It is seeking views on its proposals, the draft regulations which would implement them and the costs and benefits of the measures on both companies and the invoice finance market. The measure would nullify any bans on assignment of receivables included in contracts (with certain exceptions) after the regulations have come into force. It would bring the law in England and Wales more in line with the position under the US Uniform Commercial Code and under the UNCITRAL (United Nations Commission on International Trade Law) Convention on the Assignment of Receivables in International Trade. Comments should be submitted by 11 February 2015.

What is invoice financing?

Invoice financing is where a supplier sells the right to future payment of an invoice by its customer to a finance provider in exchange for a loan. When the customer pays the relevant invoice, the supplier will remit the amount due in respect of the invoice to the finance provider in repayment of the loan. By allowing the supplier to receive money in respect of an invoice before the customer has paid it, invoice financing effectively accelerates payment terms and smooths a company's cash-flow. It is therefore a useful financing technique, particularly for SMEs—use of which the government wishes to encourage.

What is the current law on assignment and bans on assignment?

Under English law, 'in the absence of the clearest words' prohibiting assignment, a party to a contract is entitled to assign its rights under that contract (see Don King Productions Inc v Warren and others [1998] All ER (D) 114). If the assignment is notified in writing to the other party to the contract, then a legal assignment will have been created (and the assignee will be entitled to issue proceedings directly against that other party for payment). If it is not notified, the assignment will take place in equity only.

However, the courts will equally uphold an appropriately drafted ban on an assignment of rights included in a contract (on the ground of parties' general freedom to contract). If such a clause is included in a contract between a supplier and a customer for the supply of goods and services, the supplier will not be entitled to assign its right to payment in respect of an invoice issued under the contract to a finance provider. If such a prohibition on assignment is included in a contract, finance providers and suppliers would have to either:

  • persuade the customer to consent to the assignment (with the risk it could simply refuse), or
  • set up a work-around—typically, the supplier would set up an account into which the customer is requested to pay the money due and over which the finance provider would have control

It is considered that this adds unnecessary cost and inconvenience to businesses' operations. Further, the ban on invoice assignment is often merely the consequence of a generic ban on assignment intended to ensure a supplier does not sub-contract its services. In these cases, a business’s access to invoice finance is curtailed unintentionally and unnecessarily.

What is the scope of the proposed legislation?

The proposal is to introduce legislation which will render null any contractual ban on the assignment of receivables in contracts to which it applies. The legislation would apply to any contract for the supply of goods, services or intangible assets other than an 'excluded contract'.

A contract is excluded if:

  • it is for 'prescribed financial services', being:
    • a regulated agreement within the meaning of the Consumer Credit Act 1974, and
    • any financial service within the meaning of the Small Business, Enterprise and Employment Act 2015, s 2
  • it creates any interest in land or is an agreement for a tenancy, or
  • one or more parties is acting for purposes which are outside his trade business or profession (ie it would apply to so-called business-to-business contracts but not apply to consumer contracts)

Companies that may benefit from the legislation include any company that provides goods, intangible assets (such as intellectual property) and services (other than pursuant to an excluded contract) and can benefit from trade receivables financing. It would seem that the legislation will also facilitate trade receivables securitisations, but not other types of securitisations where the receivables do not arise under supply contracts.

What is the focus of the consultation?

The paper requests input on a number of areas including the following:

  • whether the nullification route is the most effective way to introduce the measure
  • whether it is appropriate to limit the proposal to business-to-business contracts, and to exclude its application to financial service contracts, contracts creating interests in land and supply chain finance contracts
  • the impact of contractual confidentiality clauses on the nullification proposal
  • how contractual set-off provisions should be dealt with
  • whether the proposed measure will have the desired economic effect
  • whether the nullification should extend to linked contracts (being contracts where the ban on invoice assignment may be contained in a master contract rather than a specific contract for goods and services)
  • whether it is appropriate not to expressly limit the application of the measure to finance providers
  • whether, if the customer withholds part or all of the payment to the invoice finance provider because of a contractual dispute with the supplier, the invoice finance provider should take up the dispute with the supplier rather than the debtor

Who should respond?

Firms involved in advising finance providers and companies that use or would benefit from using invoice financing may wish to comment. The deadline for comments is 11 February 2015 and further details are set out in the consultation document.

Fraser Wood, solicitor in the Lexis®PSL Banking & Finance team.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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