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Outlawing contract provisions against factoring debts

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Outlawing contract provisions against factoring debts

Outlawing contract provisions against factoring debts

Draft legislation has been laid before Parliament which will outlaw contractual provisions which prevent creditors from factoring debts.

The practice, also known as invoice discounting, enables businesses to raise money against those debts by assigning the receivables (invoices and other rights to be paid money) under a contract. Clauses which prohibit factoring prevent access to finance in this way, which can be a lifeline for businesses with large book debts and cash flow problems.

The draft regulations, which if enacted will be known as the Business Contract Terms (Assignment of Receivables) Regulations 2018, would make ineffective any contract term that prohibited the assignment of receivables. By doing so it is hoped that small and medium-sized enterprises will be able to use all of their customer debts to raise finance through invoice discounting, not just those customer debts arising under contracts which do not contain a prohibition or restriction on such assignment. 

Whilst the proposed regulations won’t apply to large enterprises or special purpose vehicles, and various types of contracts are excluded as well, in construction particularly the proposed changes are to be welcomed.

For more information about this topic, please contact Derryn Rolfe or give us a call on 0345 070 6000.