Ban on Assignment clauses should no longer be an issue for businesses that are looking to assign an invoice when using invoice finance. The ban on assignment clauses has caused a problem for invoice finance providers as the receivable or outstanding invoices could not be assigned.
Regulations have been passed that mean that ban on assignment clauses that are within contracts signed after 31 December 2018 cannot, in most instances, prevent debts being assigned to a lender.
What is a ban on assignment?
The ban on assignment is known as Assignment of Receivables Regulations 2018 (the “Regulations“) this is now are in force. The Regulations are intended to make it easier for small businesses to access receivables-based finance by making ineffective any prohibitions, conditions and restrictions on the assignment of receivables arising under contracts for the supply of goods, services or intangible assets
Draft legislation finally appeared in 2017, but was withdrawn following criticism by the Loan Market Association and others. The final form of the Regulations addresses some of the criticisms, but adds complexity in what is already a complex area of the law.
Some contracts for the supply of goods or services by small businesses include a clause banning assignment of the receivables arising under the contracts: we call these ‘ban on assignment clauses’. If receivables arising from such a contract are the subject of an assignment to a receivables financier, it may be difficult for an assignee to enforce collection of those receivables if the assignor experiences financial difficulties, and the debtor can refuse to pay the financier directly.
The concern which arises is whether these difficulties mean that finance of such receivables is refused, or that steps have to be taken which increase the cost of financing.
What will change?
The Regulations apply to specific contracts entered on or after 31 December 2018 and apply to clauses contained within such contracts that seek to prohibit or restrict the assignment of a receivable under the contract, which is a right to be paid for goods, services or other intangible assets.
The Regulations are limited and only apply to contracts, where the supplier or seller, is a small or medium sized enterprise (SMEs), as defined by legislation.
The key provision to the Regulation is that any clause that bans the transfer of a right to another party is now unenforceable. This extends to other terms that impose conditions on the ability of one party to determine the validity or value of the receivable i.e. the goods, services, the debt, or their ability to enforce payment. Indeed, there are now 13 categories, which contracts cannot now restrict
Exemption from the Regulations
- Contracts for the provision of financial services.
- Contracts for energy, land and certain other commodities
- Contracts to acquire a business or an interest in a firm
- Contract for differences or other derivative contracts
- Any contracts where the business the subject of the contract is not being carried out in the UK
Types of contracts do the Regulations apply to?
The Regulations apply to contracts for the supply of goods, services or intangible assets under which the supplier is entitled to be paid money. But there are a number of important exclusions from their application, including the following:
- They only apply to contracts entered into on or after 31 December 2018.
- They only apply where the person who supplies the goods, services or intangible assets concerned, and is therefore entitled to the receivable, is a small or medium-sized enterprise which is not a special purpose vehicle. Whether or not an entity qualifies in any particular case requires a detailed examination of the precise wording of the
- Regulations. Counter-intuitively, the test is not applied at the time the contract is entered into, but at the time the assignment takes place.
- There is a specific exemption for contracts “for, or entered into in connection with, prescribed financial services”: These are widely defined to include “any service of a financial nature”.
- There are specific exclusions for particular types of contract, including certain commodities, project finance, energy, land, share purchase and business purchase contracts and operating leases.
- As a general rule, it would seem that the Regulations only apply to contracts governed by English law or the law of Northern Ireland, but they prevent the parties from choosing a foreign law if it can be established that the purpose of doing so was to evade the Regulations.
- The Regulations do not apply if none of the parties to the contract has entered into it in the course of carrying on a business in the United Kingdom.
Frequently asked questions
What is a ban on assignment?
A ban on assignment is a term which prohibits or imposes a condition, or other restriction, on the assignment by a party to the contract of the right to be paid any amount under the contract or any other contract between the parties.
Conclusion
A Ban on Assignment is a legal provision that prevents businesses from assigning or transferring their invoices to a third party. This means that if a business wants to use invoice finance, they may not be able to sell their outstanding invoices to a finance provider. This can create a challenge for businesses that rely on invoice finance to manage their cash flow because they cannot leverage their outstanding invoices as collateral to obtain financing.
However, some invoice finance providers offer a workaround by providing a type of invoice finance known as “disclosed invoice finance,” where the debtor is informed that the invoice has been assigned to a finance provider. While a Ban on Assignment may limit the options available for businesses using invoice finance, there are still alternatives available to help them manage their cash flow needs.
Seasoned professional with a strong passion for the world of business finance. With over twenty years of dedicated experience in the field, my journey into the world of business finance began with a relentless curiosity for understanding the intricate workings of financial systems.