The Business Contract Terms (Assignment of Receivables) Regulations 2018 (the "Regulations") are now 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. The Law Commission advocated legislation to limit the effectiveness of anti-assignment clauses in 2005, however, the proposal failed to gain momentum and lay dormant for more than a decade.Aside from the practical difficulty in determining whether the choice of law was imposed for this purpose, the effect of this provision is not entirely clear.
In response, some debtors include specific prohibitions on the creation of trusts over receivables in their contracts.
However, assignees will try to circumvent the practical effect of even the most widely drafted prohibition by taking a power of attorney enabling them to bring an action against the debtor in the name of the supplier.
The Regulations add an additional layer of complexity to the law.
In practice, the question that assignees ask their lawyers is very simple: what action can they take to recover?
This has led some to argue that the common law should recognise all assignments of receivables notwithstanding prohibitions on assignment, at least as between the assignor and the assignee.
Arguably, this approach would balance the legitimate interests of all parties. Where they apply, the Regulations will make it easier for SMEs to assign their receivables and to raise finance.Therefore, at the time the supplier and the debtor enter into a contract, they will not necessarily know whether a contractual prohibition on the assignment of receivables will be effective.The definition of a "large enterprise" may be difficult to apply in some circumstances and to some entities.The law is still developing in response to this escalating arms race between assignees and debtors.In part this is due to an inevitable tension between the interest of the assignee in having its proprietary interest in the receivable recognised and the interest of the debtor in choosing whether it deals with anyone other than its original contractual counterparty.Prohibitions of this type will remain effective to prevent an assignment of the right to performance, even if they are ineffective to prevent the assignment of receivables arising under the contract.The Regulations provide that a term which prevents an assignee from determining the validity or the value of the receivable or restricts its ability to enforce the receivable will be deemed to be a condition or other restriction on assignment.For example, they would not restrict the effectiveness of a negative pledge or a restriction on the disposal of receivables contained in a financing document with a third party lender.The term "assignment" is not defined in the Regulations and, assuming it has its normal legal meaning, does not include the creation of a charge or trust.Therefore, the fundamental question of whether the debtor should pay the supplier or the assignee remains determined by the governing law of the contract, but subject it seems (at least as far as the English courts are concerned) to the mandatory provisions of the Regulations.The Regulations only affect prohibitions, restrictions and conditions on assignment contained in the contract under which the receivable arises or another contract between the same parties.