Invoice Financing Update

In April 2016, Chris Jones, of our banking & finance team published an article on customer contracts - unlocking financial potential. The article examined the key considerations of invoice financing from the perspective of both the invoice financiers and the company seeking invoice financing.

Chris commented that 'legislation is expected in autumn 2016 that may render non-assignment clauses unenforceable by a customer in invoice financing'; this article serves as a legal update on this position with the government having laid before Parliament draft legislation.

The Department for Business, Energy and Industrial Strategy has laid before Parliament draft legislation titled Business Contracts Terms (Assignment of Receivables) Regulations 2017 (the "Regulations"), in an attempt to tackle current contractual terms which prohibit assignment of receivables. The Regulations are made pursuant to Section 1 of the Small Business, Enterprise and Employment Act 2015 and are expected to come into force by the end of 2017. It is hoped that by removing existing barriers to invoice financing the new law will encourage businesses, and in particular small to medium sized enterprises, to raise finance through alternative means and thereby to promote company growth.

To what contracts and clauses will the Regulations apply?

The Regulations will apply to all contracts, save in respect of certain excluded contracts, with the following contractual terms having no effect:

a term to prohibit the assignment of receivables; a term to prevent the assignee of receivables from determining the validity or value of those receivables; and a term hindering the ability of an assignee of receivables to bring enforcement action to recover those receivables. Under the Regulations receivables are defined as "a right (whether or not earned by performance) to be paid any amount under a contract (other than an excluded contract) for the supply of goods, services or intangible assets".

Excluded contracts under the Regulations are contracts:

where English law has been chosen by the contracting parties and, without that choice, the governing law of the contract would be deemed to be the law of another country; that are business-to-consumer contracts or consumer-to-consumer contracts; relating to prescribed financial services; relating to an interest in land; concerning interests in national security; and concerning energy or petroleum. Potential ambiguity of the new Regulations

The...