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 no longer be necessary and the security assignment will effectively "trump" any prohibition or restriction on assignment. This will go some way to allowing borrowers to access debt finance without the need for them to incur the administrative cost or deal with potentially sensitive commercial arrangements with debtors. It will also allow lenders to have fully perfected security over the relevant contractual rights (subject to other perfection requirements such as registration at Companies House).
Given the consultation period has just ended and that the detail of what this will look like is not yet clear, it is important to note that:
- In order to protect consumers, the scope of the nullification is proposed to cover business to business contracts only, and is unlikely to cover assignment clauses in business to consumer contracts.
- The nullification will not likely apply to certain types of arrangements, such as tenancy agreements and other contracts creating interest in land, certain supply chain finance contracts and contracts containing strict commercial confidentiality provisions.
How this will look in practice remains to be seen but overall, we consider that the legislation (and regulations likely to be made pursuant to it) should allow a wider range of borrowers access to debt financing. It will also assist banks and other financial institutions to more easily satisfy internal requirements for security, allow them access to a burgeoning non-traditional customer base and stimulate business activity in the market more generally – always a welcome outcome.