The end of prohibition - Quick reads - Gateley
Quick read

The end of prohibition

Gateley Legal

We’re not talking about illegal liquor, speakeasies and Bugsy Malone. We mean the end of restrictions on the assignment of a receivable.

The Government has recently laid before Parliament the long-awaited draft Contract Terms (Assignment of Receivables) Regulations 2017 (CTARR).  These regulations invalidate clauses that prohibit the assignment of a receivable.  It is expected that the new regulations will come into force before the end of this year.

This marks the latest stage in a long process which the Government began following the 2008 financial crisis with the intention of making it easier for SMEs to source financing.  We’ve blogged about the background to the new regulations in the past here.

Good intentions

Historically, smaller businesses have sometimes struggled to obtain invoice discounting facilities as they are often unable to negotiate the removal of non-assignment clauses in key contracts. This has often resulted in increased due diligence, delays and higher transaction costs for SMEs.

The intention behind the new regulations is to remove problems associated with clauses prohibiting or restricting assignment of receivables. The draft CTARR provide that a term of a contract has no effect to the extent that it –

(a)   prohibits the assignment of a receivable arising under that contract or any other contract,

(b)   prevents a person to whom a receivable is assigned (“the assignee”) from determining its validity or value (including determining their ability to enforce the receivable), or

(c)    hinders the assignee’s ability to enforce the receivable.

Everyone’s a critic

This is great news for SMEs and other borrowers, you might think. However, there are likely to be both winners and losers as a result of the new regulations.  In addition, the reaction to the draft regulations has, in some quarters, been less than enthusiastic.  Legal experts have raised a number of concerns about uncertainties arising as a result of how the regulations have been drafted and a lack of consultation to some significant changes to the earlier proposals.

The City of London Law Society (CLLS), which includes some of the largest international firms in its membership, has been particularly critical, recently publishing a paper in which it stated that the new regulations “will create substantial uncertainty and may adversely affect access to finance for UK businesses if they are adopted” – i.e. the very opposite of what they are intended to do!

The CLLS expressed specific concerns regarding the following issues:

Assignment: The new regulations do not define what is meant by “assignment”.  This means is not clear whether the intention is to cover assignments by way of security or trusts as well as assignment by outright sale. 
Prohibition: It is not entirely clear what the regulations are intended to cover.  In practice, clauses are drafted in a variety of ways and are rarely simple prohibitions on assignment. 
Confidentiality: The regulations could have the effect of making confidentiality clauses unlawful if they relate to receivables.  That may produce the unintended effect of parties choosing a foreign law rather than English law. 
Negative pledges: The regulations could potentially invalidate a negative pledge in a loan or bond document intended to prevent a borrower granting security over its receivables or otherwise prohibiting it from disposing of them.  The drafting attempt to exclude such agreements but it is not entirely clear and so this is a possible unintended consequence. 
Cross-border contracts: The draft regulations are expressed to cover contracts which are governed by English law but it does not apply where English law has been chosen by the parties and, apart from that choice, the governing law would be the law of another jurisdiction.   This could result in uncertainty as to governing law, particularly where there is a cross-border element as the rules covering which law would apply if the parties had not selected English law are complex and not always clear.  It muddies the waters around freedom of parties to choose governing law. 
Protecting the payer: There are good reasons why a debtor under a contract may want a non- assignment clause (e.g. assignment deprives the debtor of certain set-off rights which it would otherwise have). Outlawing bans on assignment denies businesses the freedom to choose their own contract terms – this could lead the disadvantaged party to take action to mitigate the unwanted effects of the ban.  This produces uncertainty. 

Don’t look back

The new regulations apply to all companies (i.e. not just SMEs).  They are quite different to the past draft regulations consulted upon.  Surprisingly, they will also apply retrospectively – so when they come into force they will apply to all contracts in existence at that time.  This is very unusual and may have unforeseen consequences.  The CLLS has also raised concerns that the uncertainty arising from the drafting could lead to a wider interpretation of the regulations that they are legally permitted to have.

For the reasons outlined above, it is likely also that lenders will still look to seek express consents and waivers to clauses restricting assignment as well as continuing to carry out relevant due diligence.

Also, given the strong reaction to the draft regulations from the CLLS and other players in the market, it may not be last orders at the bar for prohibitions on assignment just yet…

Stop press: the draft Regulations have since been withdrawn. See our update blog here.


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