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Assignment of Receivables - freedom, or red tape?

View profile for David Wisbey
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Assignment of Receivables - freedom, or red tape?

Parliament has passed the Business Contract Terms (Assignment of Receivables) Regulations 2018, to make any term of a relevant contract of no effect if it prohibits the assignment of receivables. The regulations apply to terms in contracts entered into on or after 31 December 2018.

The regulations stem from a view that small businesses struggled to access alternative forms of finance, such as invoice discounting, perhaps as a result of more powerful parties banning assignment of their debts. The idea behind the regulations is to give businesses more freedom to raise funds from their receivables. But the regulations are surprisingly complicated and could add more ‘red tape’ to the relationship between supplier and customer.

Invoice discounting is a way of raising finance by companies that sell assets or provide services. The right to receive payment of the invoice issued to the customer (receivable) is assigned to a finance provider so that the supplier can get immediate payment of the majority of the amount owed under the invoice (the difference between the amount of the invoice and the sum actually received by the supplier being the discount, hence, invoice discounting).

The 2018 regulations are the third attempt to put the principle into practice. Two earlier versions showed how difficult the simple concept is to implement, as their scope extended beyond commercial contracts and receivables typically associated with invoice discounting.

The new regulations deal with this problem by expanding the range of contracts to which the prohibition of clauses restricting the assignment of receivables would not apply. The effect is to make the new freedom more complicated than it first appears, meaning that suppliers and customers might need legal advice to work out what their contracts mean.

If you are a supplier interested in raising funds by invoice discounting, or a customer that has reasons for not wanting to allow your payments to be assigned, please contact us to see how the regulations might affect you. I am based at our Chelmsford office and can be contacted on 01245 453817.

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