Receivables finance and the assignment of receivables
A receivable is a debt, an incoming money that is owed to a company in the future. Receivables finance or also called accounts-receivable financing is a type of asset-financing whereby a company uses its receivables as collateral in receiving financing such as secured short-term loans. In case of default, the lender has a right to collect associated receivables from the company’s debtors. In brief, it is the process by which a company raises cash against its own book’s debts. The company actually receives an amount equal to a reduced value of the pledged receivables, the age of the receivables impacting the amount of financing received. The company can get up to 90% of the amount of its receivables advanced.
This type of finance helps companies in unlocking funds as such funds will not be paid immediately and are thus stuck in the book’s debts.
FIG. 1: account receivable financing works through the use by a company of its receivables in order to receive financing. Source: https://fhcadvisory.com/images/account-receivable-financing.jpg
Restrictions on the assignment of receivables – New legislation
Invoice discounting products under which a company assigns its receivables have been used by small and medium enterprises (SMEs) to raise capital. However, such products depend on the related receivables to be assignable at first. Businesses have faced provisions that ban or restrict, by imposing a condition or other restrictions, the assignment of receivables in commercial contracts, preventing them from being able to use their receivables to raise funds.
In 2015, the UK Government enacted the Small Business, Enterprise and Employment Act (SBEEA) by which raising finance on receivables is facilitated. Pursuant to this Act, regulations can be made to invalidate restrictions on the assignment of receivables in certain types of contract. In other words, in certain circumstances, clauses which prevent assignment of a receivable in a contract between businesses is unenforceable. Especially, in its section 1(1), the Act provides that the authorized authority can, by regulations “make provision for the purpose of securing that any non-assignment of receivables term of a relevant contract:
- has no effect;
- has no effect in relation to persons of a prescribed description;
- has effect in relation to persons of a prescribed description only for such purposes as may be prescribed.”
The underlying aim is to enable SMEs to use their receivables as financing to raise capital, through the possibility of assigning such receivable to another entity.
The aforementioned regulations, which allow invalidations of such restrictions on the assignment of receivables, are contained in the Business Contract Terms (Assignment of Receivables) Regulations 2018, which will apply to any term in a contract entered into force on or after 31 December 2018. By virtue of its section 2(1) “Subject to regulations 3 and 4, a term in a contract has no effect to the extent that it prohibits or imposes a condition, or other restriction, on the assignment of a receivable arising under that contract or any other contract between the same parties.”
Such regulations apply to contracts for the supply of goods, services or intangible assets under which the supplier is entitled to be paid money. However, there are several exclusions to this rule. In section 3, an exception exists where the supplier is a large enterprise or a special purpose vehicle (SPV). In section 4, are listed exclusions for various contracts such as contracts “for, or entered into in connection with, prescribed financial services”, contracts “where one or more of the parties to the contract is acting for purposes which are outside a trade, business or profession” or contracts “where none of the parties to the contract has entered into it in the course of carrying on a business in the United Kingdom”. Also, specific exclusions relate to contracts in energy, land, share purchase and business purchase.
Effects of the 2018 Regulations
As mentioned above, these regulations will make terms in a contract which prohibits or imposes a condition or other restriction on the assignment of a receivable arising under that contract, void and unenforceable.
In light of this, the assignment of the right to be paid under a contract for the supply of goods (receivables) cannot be restricted or prohibited. However, parties are not prevented from restricting other contracts rights. Non-assignment clauses can have varying forms. Such clauses will be covered by the regulations when terms prevent the assignee from determining the validity or value of the receivable or their ability to enforce it.
Overall, these legislations will have an important impact for businesses involved in the financing of receivables, by facilitating such process for SMEs.
Last updated on February 1st, 2022
Legal Trade Finance Hub
1 | Introduction to Legal Trade Finance
2 | Standard Legal Charges
3 | Borrowing Base Facilities
4 | Governing law in trade finance transactions
5 | SPV Financing
6 | Guarantees and Indemnities
7 | Taking security over assets
8 | Receivables finance and the assignment of receivables
9 | Force Majeure
10 | Arbitration
11 | Master Participation Agreements
12 | Digital Negotiable Instruments
Last updated on February 1st, 2022