Easing The Barriers To Invoice Financing - An Override In The Face Of Prohibitions And Restrictions On Assignment In Commercial Contracts

The most recent Government measure aimed to increase access to alternative finance options for SMEs can be found in The Small Business, Enterprise and Employment Act 2015 ("Act") which received royal asset on 26 March 2015. The part of the Act which we are focussing on here relates to its potential to widen the scope of invoice financing by making it easier to assign invoices to a lender which on their face are expressed to be non-assignable. This will make it much easier to obtain financing of this sort.

Broadly, amongst other things, the Act grants the Secretary of State the power to make regulations to "nullify" the effect of restrictions or prohibitions in commercial contracts in connection with a security assignment. Currently, to get round this, the borrower (or lender) usually approaches the third party debtor and requests their consent to the grant of such security. This can be problematic where the third party debtor does not agree to the assignment or simply does not respond to the request - a contract explicitly expressed to be non-assignable without payer consent simply cannot be assigned at law. Various workarounds have emerged to deal with this including causing monies to be paid to a trust account or establishing a power of attorney to pursue debtors - but this adds to the time taken to complete a deal, to the costs involved in doing it and even, in some instances as to whether or not a financing deal can be done.

In conjunction with the passage of the Act through Parliament and in anticipation of the regulations thereunder, the Department for Business Innovation & Skills published a consultation and draft regulations (Business Contract Terms (Restrictions on Assignment of Receivables) Regulations 2015 (Assignment Regulations)) in respect of this on 6 December 2014. The consultation process closed on 11 February 2015 and publication of the responses to the consultation are expected soon.

If the regulations are made by the Secretary of State as currently envisaged then obtaining debtor consent in an invoice financing arrangement will...