Small Business, Enterprise and Employment Bill

Written evidence submitted by Dr N. Orkun Akseli (SB 76)

Dr. Orkun Akseli is Senior Lecturer in Commercial Law at Durham University Law School. He has law degrees from Turkey, USA and the UK and teaches in the field of commercial/corporate law. He published on secured transactions law and financial regulation. His relevant publications are 'International Secured Transactions Law: Facilitation of Credit, International Conventions and Instruments' (Routledge, 2011); 'Financial Regulation in Crisis? The Role of Law and the Failure of Northern Rock' (edited with J. Gray) (Edward Elgar, 2011); ‘Availability of Credit and Secured Transactions in a Time of Crisis’ (O. Akseli ed.) (Cambridge University Press, 2013); ‘Vulnerability and Access to Low Cost Credit’ in Consumer Credit, Debt and Investment in Europe’ (M. Kenny & J. Devenney (eds)), Cambridge University Press (2012), pp. 4-21; ‘Contractual Prohibitions on Assignment of Receivables: An English and UN Perspective’ Journal of Business Law [2009] issue 7, pp. 650-678.

Summary

Small businesses’ access to finance needs to be facilitated. A regulation to this end will help reduce their financial vulnerabilities in the face of financial crisis. Recognising the effectiveness of assignments notwithstanding contractual prohibitions (non-assignment clauses/anti-assignment clauses) as part of measures to facilitate access to finance is a welcome initiative. This will align the law with international commercial law initiatives as well as other notable common law jurisdictions that invalidate contract terms prohibiting assignment of receivables.

1. I give this evidence as a Senior Lecturer in Commercial Law, who has taught and published in the field of commercial and corporate law since 2003. It represents my independent view.

2. I will address the specific issue of small businesses’ access to finance. This is a pressing issue for small businesses and the economy as a whole. The financial crisis has highlighted the vulnerability of small businesses in economic downturns, particularly in relation to access to finance. Small businesses account for about 90 percent of businesses worldwide with 50 percent of employment around the world [1]   and 58 percent in the UK by employing 13.5 million people. [2]   Facilitating small businesses’ access to finance may support economic growth [3] and contribute to social mobility and renewal.

3. Asymmetric information is a significant problem in small businesses’ access to finance. It is also one of the reasons why small businesses are refused finance. [4] Unincorporated businesses or small businesses do not release information as large firms do. Large firms release information through their access to stock market, financial statements, ratings conducted by the rating agencies or registration of earlier security interests by previous creditors. [5]   Thus, lenders cannot ascertain small businesses’ ability or willingness to pay. Sometimes the small business purposely keeps this information opaque. In order to ascertain whether the small firm’s project is viable, investors incur transaction costs in due diligence (more so than they would normally incur when dealing with large firms) and this creates reduction in funding causing an ‘equity gap’. These disadvantages are caused by the concept of ‘information asymmetry’. [6] The use and availability of collateral or clear information about the financial strength of the borrower (i.e. small business) encourages lending and reduces the financial vulnerability of lenders. [7]   Financiers lend to small businesses provided there is clear information about their previous transactions. Although financiers have their own reliable information systems (credit card information, exclusive and informal relationships with small businesses etc.), it is important to reduce the effectiveness of information asymmetry as a ground for refusing finance to small businesses.

4. Raising finance through factoring or invoice discounting is important for small businesses. The significant advantage of factoring is that receivables owed to the small business are sold (outright assignment) to a factoring company. The factoring company pays a discounted amount in return, rather than collateralising these receivables. In other words, in collateralisation the financier takes the assets as security to satisfy the claims of creditors. If the receivables are collateralised the title stays with the small business and in the case of bankruptcy, receivables will become part of the bankrupt small business’ estate. The credit risk, thus, stays with the small business. This is a significant point in the decision of credit supplied by the factoring company which is based on the value of the small business’ receivable rather than the creditworthiness of the small business. [8] Thus it is important to encourage small businesses to utilise factoring more often as a method to raise finance.

5. Receivables are significant assets for small businesses. Small businesses, unlike large businesses, are usually only able to borrow on a secured basis rather than unsecured basis. [9] Removing legal barriers before the assignability of receivables is an important step in achieving small businesses’ access to finance. Recognising the effectiveness of assignments notwithstanding anti-assignment clauses will facilitate the use of financing methods, such as factoring, more often by small businesses.

6. Recognising the effectiveness of assignment clauses made in violation of an anti-assignment clause is also an important feature of a number of international instruments prepared by the internationally mandated organs (e.g. the United Nations Commission on International Trade Law-UNCITRAL), international financial institutions (e.g. European Bank for Reconstruction and Development-EBRD) and international institutions (e.g. International Institute for the Unification of Private Law –Unidroit). The UN Convention on the Assignment of Receivables in International Trade article 9 partially invalidates contractual limitations to the assignment of receivables and recognises the effectiveness of an assignment as between the assignor and the assignee and as against the debtor. [10] As in the Small Business, Enterprise and Employment Bill section 1(4), the UN Convention excludes financial receivables and confined to trade receivables.

7. The EBRD Model Law on Secured Transactions article 19.6 also invalidates contractual prohibitions. Unidroit Convention on International Factoring article 6 follows the same idea and recognises the effectiveness of assignment made in violation of an anti-assignment clause. The UNCITRAL Legislative Guide on Secured Transactions (recommendation 24) and the draft UNCITRAL Model Law on Secured Transactions (draft article 10) support the idea that in order to facilitate the flow of credit and access to finance, receivables should be freely assignable.

8. Recognising the effectiveness of an assignment made in violation of an anti-assignment clause is an important reform to the law and may compel a change in judicial attitudes with respect to anti-assignment clauses.

November 2014