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Corporate Finance
Corporate Debt

Debt Assignment: How They Work, Considerations and Benefits

Daniel Liberto is a journalist with over 10 years of experience working with publications such as the Financial Times, The Independent, and Investors Chronicle.

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

Katrina Ávila Munichiello is an experienced editor, writer, fact-checker, and proofreader with more than fourteen years of experience working with print and online publications.

Investopedia / Ryan Oakley

What Is Debt Assignment?

The term debt assignment refers to a transfer of debt, and all the associated rights and obligations, from a creditor to a third party. The assignment is a legal transfer to the other party, who then becomes the owner of the debt . In most cases, a debt assignment is issued to a debt collector who then assumes responsibility to collect the debt.

Key Takeaways

Debt assignment is a transfer of debt, and all the associated rights and obligations, from a creditor to a third party (often a debt collector).
The company assigning the debt may do so to improve its liquidity and/or to reduce its risk exposure.
The debtor must be notified when a debt is assigned so they know who to make payments to and where to send them.
Third-party debt collectors are subject to the Fair Debt Collection Practices Act (FDCPA), a federal law overseen by the Federal Trade Commission (FTC).

How Debt Assignments Work

When a creditor lends an individual or business money, it does so with the confidence that the capital it lends out—as well as the interest payments charged for the privilege—is repaid in a timely fashion. The lender , or the extender of credit , will wait to recoup all the money owed according to the conditions and timeframe laid out in the contract.

In certain circumstances, the lender may decide it no longer wants to be responsible for servicing the loan and opt to sell the debt to a third party instead. Should that happen, a Notice of Assignment (NOA) is sent out to the debtor , the recipient of the loan, informing them that somebody else is now responsible for collecting any outstanding amount. This is referred to as a debt assignment.

The debtor must be notified when a debt is assigned to a third party so that they know who to make payments to and where to send them. If the debtor sends payments to the old creditor after the debt has been assigned, it is likely that the payments will not be accepted. This could cause the debtor to unintentionally default.

When a debtor receives such a notice, it's also generally a good idea for them to verify that the new creditor has recorded the correct total balance and monthly payment for the debt owed. In some cases, the new owner of the debt might even want to propose changes to the original terms of the loan. Should this path be pursued, the creditor is obligated to immediately notify the debtor and give them adequate time to respond.

The debtor still maintains the same legal rights and protections held with the original creditor after a debt assignment.

Special Considerations

Third-party debt collectors are subject to the Fair Debt Collection Practices Act (FDCPA). The FDCPA, a federal law overseen by the Federal Trade Commission (FTC), restricts the means and methods by which third-party debt collectors can contact debtors, the time of day they can make contact, and the number of times they are allowed to call debtors.

If the FDCPA is violated, a debtor may be able to file suit against the debt collection company and the individual debt collector for damages and attorney fees within one year. The terms of the FDCPA are available for review on the FTC's website .

Benefits of Debt Assignment

There are several reasons why a creditor may decide to assign its debt to someone else. This option is often exercised to improve liquidity and/or to reduce risk exposure. A lender may be urgently in need of a quick injection of capital. Alternatively, it might have accumulated lots of high-risk loans and be wary that many of them could default . In cases like these, creditors may be willing to get rid of them swiftly for pennies on the dollar if it means improving their financial outlook and appeasing worried investors. At other times, the creditor may decide the debt is too old to waste its resources on collections, or selling or assigning it to a third party to pick up the collection activity. In these instances, a company would not assign their debt to a third party.

Criticism of Debt Assignment

The process of assigning debt has drawn a fair bit of criticism, especially over the past few decades. Debt buyers have been accused of engaging in all kinds of unethical practices to get paid, including issuing threats and regularly harassing debtors. In some cases, they have also been charged with chasing up debts that have already been settled.

Federal Trade Commission. " Fair Debt Collection Practices Act ." Accessed June 29, 2021.

Federal Trade Commission. " Debt Collection FAQs ." Accessed June 29, 2021.

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Assigning debts and other contractual claims - not as easy as first thought

Updates to UK Money laundering rules - key changes

Harking back to law school, we had a thirst for new black letter law. Section 136 of the Law of the Property Act 1925 kindly obliged. This lays down the conditions which need to be satisfied for an effective legal assignment of a chose in action (such as a debt). We won’t bore you with the detail, but suffice to say that what’s important is that a legal assignment must be in writing and signed by the assignor, must be absolute (i.e. no conditions attached) and crucially that written notice of the assignment must be given to the debtor.

When assigning debts, it’s worth remembering that you can’t legally assign part of a debt – any attempt to do so will take effect as an equitable assignment. The main practical difference between a legal and an equitable assignment is that the assignor will need to be joined in any legal proceedings in relation to the assigned debt (e.g. an attempt to recover that part of the debt).

Recent cases which tell another story

Why bother telling you the above? Aside from our delight in remembering the joys of debating the merits of legal and equitable assignments (ehem), it’s worth revisiting our textbooks in the context of three recent cases. Although at first blush the statutory conditions for a legal assignment seem quite straightforward, attempts to assign contractual claims such as debts continue to throw up legal disputes:

In Sumitomo Mitsui Banking Corp Europe Ltd v Euler Hermes Europe SA (NV) [2019] EWHC 2250 (Comm), the High Court held that a performance bond issued under a construction contract was not effectively assigned despite the surety acknowledging a notice of assignment of the bond. Sadly, the notice of assignment failed to meet the requirements under the bond instrument that the assignee confirm its acceptance of a provision in the bond that required the employer to repay the surety in the event of an overpayment. This case highlights the importance of ensuring any purported assignment meets any conditions stipulated in the underlying documents.
In Promontoria (Henrico) Ltd v Melton [2019] EWHC 2243 (Ch) (26 June 2019) , the High Court held that an assignment of a facility agreement and legal charges was valid, even though the debt assigned had to be identified by considering external evidence. The deed of assignment in question listed the assets subject to assignment, but was illegible to the extent that the debtor’s name could not be deciphered. The court got comfortable that there had been an effective assignment, given the following factors: (i) the lender had notified the borrower of its intention to assign the loan to the assignee; (ii) following the assignment, the lender had made no demand for repayment; (iii) a manager of the assignee had given a statement that the loan had been assigned and the borrower had accepted in evidence that he was aware of the assignment. Fortunately for the assignee, a second notice of assignment - which was invalid because it contained an incorrect date of assignment - did not invalidate the earlier assignment, which was found to be effective. The court took a practical and commercial view of the circumstances, although we recommend ensuring that your assignment documents clearly reflect what the parties intend!
Finally, in Nicoll v Promontoria (Ram 2) Ltd [2019] EWHC 2410 (Ch), the High Court held that a notice of assignment of a debt given to a debtor was valid, even though the effective date of assignment stated in the notice could not be verified by the debtor. The case concerned a debt assigned by the Co-op Bank to Promontoria and a joint notice given by assignor and assignee to the debtor that the debt had been assigned “on and with effect from 29 July 2016”. A subsequent statutory demand served by Promontoria on the debtor for the outstanding sums was disputed on the basis that the notice of assignment was invalid because it contained an incorrect date of assignment. Whilst accepting that the documentation was incapable of verifying with certainty the date of assignment, the Court held that the joint notice clearly showed that both parties had agreed that an assignment had taken place and was valid. This decision suggests that mistakes as to the date of assignment in a notice of assignment may not necessarily be fatal, if it is otherwise clear that the debt has been assigned.

The conclusion from the above? Maybe it’s not quite as easy as first thought to get an assignment right. Make sure you follow all of the conditions for a legal assignment according to the underlying contract and ensure your assignment documentation is clear.

Contact our experts for further advice

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Assignment of book debts

Published by a lexisnexis banking & finance expert.

This Assignment is made on [ insert day and month ] 20[ insert year ]

[ insert name of Assignor ] , a company incorporated in England and Wales with registered number [ insert company number ] whose Registered office is at [ insert address ] (the Assignor ); and

[ insert name of Lender ] of [ insert address ] (the Lender ).

The Lender has agreed to Make available a loan facility to the Assignor on the terms and conditions set out in the Facility Agreement (as defined below).

It is a condition precedent to the availability of the loan facility that the Assignor enters into this Assignment for the purpose of providing security in favour of the Lender in respect of the Secured Obligations (as defined below).

IT IS AGREED as follows:

Definitions and interpretation

Definitions

In this Assignment, unless otherwise provided:

Assigned Rights

means all of the present and future rights, title and interest which from time to time are the subject of any Security Interest created, or purported to be created, by or pursuant to this Assignment;

means all book and other debts now due, payable or owing or from

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Related legal acts:

Contracts (Rights of Third Parties) Act 1999 (1999 c 31)
Insolvency Act 1986 (1986 c 45)
Law of Property Act 1925 (1925 c 20)

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AVOIDANCE OF GENERAL ASSIGNMENTS OF BOOK DEBTS (BANKRUPTCY ONLY)

February 2010

31.4B.155 Introduction – assignment of book debts

Where a bankrupt has been running a business, book debts may have been assigned in an attempt to raise money. The general idea being that monies from the assignment can be used to finance the business immediately, rather than waiting for the debts to be paid to the business in the normal course of events.

Where the assignment is of all the book debts, or a particular class of book debt it is called a “general assignment”.

31.4B.156 Avoidance of general assignments

Where there has been a general assignment of book debts, the assignment is void against the trustee as regards debts which were not paid prior to the presentation of the bankruptcy petition, unless the assignment was registered under the Bills of Sale Act 1878 [ note 1 ] . The provisions do not have any effect on the assignment of specific book debts (see paragraph 31.4B.169 ).

31.4B.157 Effect of an avoidance of a general assignment

As the avoidance affects only those book debts that were not paid prior to the presentation of the bankruptcy petition [ note 2 ] , the provisions have only partial retrospective effect. The official receiver, as trustee, can recover those book debt payments passed to the assignee where the payment of the debt was after the date of the presentation of the petition and, of course, those book debts that are unpaid would become “free” assets in the estate.

31.4B.158 Reasons for avoidance of general assignments of book debts

The main reasons for the provisions relating to the avoidance of general assignments of book debts are to encourage registration as, without registration, it can be difficult to establish whether a proper price has been paid in respect of the assignment. Registration also gives persons dealing with the debtor opportunity to check the position of his/her book debts. The lack of registration may give a misleading impression that the debtor’s financial position is healthy in that the book debts may appear to be free of assignment.

So far as the official receiver, as trustee, is concerned, an inspection of the registration documents (see paragraph 31.4B.163 ) in conjunction with the bankrupt’s accounting records would give the opportunity to assess whether or not the debts were assigned at their true value and, if not, the matter may be pursued as a transaction at an undervalue (see Part 3 of Chapter 31.4A).

31.4B.159 Action to be taken by the official receiver

Where the official receiver considers that a general assignment of book debts contravenes the provisions of the Act (see paragraph 31.4B.156 ), then he/she should issue a letter to the bankrupt’s book debtors instructing them to make payments to the official receiver, which should be held on the estate suspense account. The advice in paragraph 31.4B.160 (where the likely recovery is in excess of £5,000), or paragraph 31.4B.161 (where the recovery is likely to be less than £5,000) should then be followed.

31.4B.160 Realising voidable general assignments where recoverable amount is over £5,000

As explained in detail in Part 1 of this chapter, all antecedent recoveries where the amount to be recovered is over £5,000 are handled by the Service’s antecedent recovery contractor (see paragraph 31.4B.5 ). The advice and information in this Part of the chapter will assist the official receiver in understanding voidable general assignments and assessing whether there is a matter for recovery to be passed over to the contractor.

The value of the recovery should include both amount to be recovered in respect of debts paid after the presentation of the petition and the value of the remaining, unpaid, book debts.

The following are the areas on which the official receiver should, ideally, obtain information before instructing the contractor:

Any explanations given by the bankrupt for the transaction.

31.4B.161 Realising voidable general assignments where amount to be recovered less than £5,000

The antecedent recovery contractor engaged by the Service (see paragraph 31.4B.5 ) will only accept instructions where the amount to be realised is more than £5,000. Where the amount to be recovered is less than £5,000, the official receiver, as trustee, should write to the assignee and advise him that he considers that the assignment is void, and that he/she will be collecting remaining book debts for the benefit of the bankruptcy estate. The official receiver should also seek to recover from the assignee book debt monies passed to him/her in respect of debts paid after the presentation of the petition. It is unlikely to be worth entering into prolonged correspondence or court action should the assignee dispute this position.

Paragraphs 31.4B.17 to 31.4B.21 give information and advice on the steps to be taken where the recovery is likely to be below £5,000.

31.4B.162 Registration under the Bills of Sale Act 1878

For the purposes of these provisions, the Insolvency Act 1986 treats the general assignment of book debts as if it were a bill of sale (a document that transfers ownership of property from one person to another) and states that the provisions of the Bills of Sale Act 1878 with respect to the registration of bills of sale apply [ note 3 ] .

The Bills of Sale Act 1878 provides that an applicable bill of sale must be registered within seven clear days of its making [ note 4 ] , and must be renewed at least once every five years [ note 5 ] . The method of registering the bill of sale is to send, to the High Court, the original bill of sale, together with a witness statement attested in front of a solicitor stating that the effect of the bill of sale has been explained to the person granting the assignment [ note 6 ] .

31.4B.163 Entry in the register of bills of sale

The register of the Bills of Sale Act 1878 contains the particulars of registered bills of sale and an alphabetical list of the names of guarantors.

Following receipt of the documents detailed in paragraph 31.4B.162 , the High Court will seal a copy of the assignment, or a schedule to the assignment and return this to the applicant. They will also issue a “debt number” which will be notated on the sealed assignment. This number relates to the assignment’s position in the register. The official receiver should seek to obtain this sealed assignment from the bankrupt to confirm registration of the general assignment.

31.4B.164 Searching the register of bills of sale

Where there is doubt as to whether a general assignment of book debts has been registered under the Bills of Sale Act 1878 the official receiver may conduct a search of the register by issuing a letter to the High Court of Justice Enforcement Section. The letter should give details of the persons who may have been party to the assignment, and also such details as are known of the assignment itself (such as the date and the property concerned). The request should be accompanied by a payment of £40 made payable to “HMCS” and should be sent to:

Judgements and Orders Section

Room E15-17

Royal Courts of Justice

Tel no: 020 7947 6221

This office will provide a certificate showing details of the registration (if any) and for a further fee of £5 will provide an office copy of the documents provided in support of the application of registration (see paragraph 31.4B.163 ).

31.4B.165 Provisions apply only to bankrupts engaged in business

The relevant provisions of the Act apply only to those bankrupts engaged in business [ note 7 ] . The Act defines “business” to include “a trade or profession” [ note 8 ] , so the provisions would cover professionals such as doctors, dentists or accountants.

In reality, it is unlikely that a bankrupt who is not a trader would have book debts to assign. Activities carried out purely for pleasure which happen to make a profit would not be considered to be engaging in a business as, under the accepted definition of the term, a business is something capable of making a profit, which is carried out with a view to making a profit [ note 9 ] . The decision as to whether something is a business or not would appear to turn on the original intention of the person carrying on the activity.

31.4B.166 What is a book debt?

The definition of a book debt has been held to mean debts which are “commonly entered in books” [ note 10 ] .

Further, it has been held that a definition of “book debts” includes debts which would or could, in the ordinary course of business, be entered in well-kept books and, therefore, the fact that the debts may not have been entered into a book is irrelevant [ note 11 ] .

Also included in the definition of book debts are future debts and future rents under a hire purchase or rental agreement [ note 12 ] a bank balance is not [ note 13 ] .

31.4B.167 Definition of assignment

“Assignment” is defined in the Act as including “assignment by way of security or charge on book debts”, so is not limited to assignment by way of sale [ note 14 ] .

The granting of a charge over book debts may also be challenged as a preference (see Part 2 of Chapter 31.4A).

31.4B.168 General assignments not covered by the Act

The Act [ note 15 ] aims to avoid only transactions detrimental to creditors and so excludes some assignments which are likely to be beneficial. Therefore, a general assignment of book debts as part of the transfer of a business made in good faith and for value is not voidable under these provisions, nor is an assignment for the benefit of creditors generally [ note 16 ] .

31.4B.169 Specific assignments of book debts

The provisions of the Act cover only general assignments of book debts, so the assignment of a specific book debt would not fall foul of the provisions [ note 17 ] . For a book debt to be considered a specific debt it would be necessary that the debt is identified with clarity and precision in the document of assignment itself [ note 18 ] .

An assignment of a specific book debt, or class of debt (see paragraph 31.4B.170 ), may be challenged as a voidable transaction (see Part 5 of this chapter).

31.4B.170 Assignment of a class of book debts

A general assignment does not have to relate to all book debts to be potentially voidable. The assignment could be of a certain class of book debt which have a common factor. For example, an assignment of all debts due from “ABC Ltd” or all debts due during a certain period could fall foul of the provisions. This would be termed a “class” of book debts.

31.4B.171 Factoring agreements

The assignment of book debts most likely to have occurred in a bankruptcy case would be where the bankrupt has entered into a factoring agreement (see Chapter 31.1, Part 5 ) and, on the face of it, it would appear that this is a general assignment that would fall foul of the provisions of the Act.

Where, however, the agreement with the factoring company requires that each book debt is assigned and approved for payment individually, this would not be a voidable assignment under the provisions as it would be considered that each debt is being assigned specifically (see paragraph 31.4B.169 ) [ note 19 ] . It is likely that all factoring agreements with recognised factoring companies operate in this way but the official receiver, as trustee, should obtain a copy of any factoring agreement entered into by the bankrupt and check the details.

[Back to Part 7 – Transactions defrauding creditors] [On to Part 9 – Recovery of excessive pension contributions]

Further Information

What is an Assignment of Debt?

By Vanessa Swain Senior Lawyer

Updated on February 22, 2023 Reading time: 5 minutes

This article meets our strict editorial principles. Our lawyers, experienced writers and legally trained editorial team put every effort into ensuring the information published on our website is accurate. We encourage you to seek independent legal advice. Learn more .

Perfecting Assignment

Enforcing an Assigned Debt

Recovery of an Assigned Debt

Other Considerations

Key Takeaways

Frequently asked questions.

I t is common for creditors, such as banks and other financiers, to assign their debt to a third party. Usually, an assig nment of debt is done in an effort to minimise the costs of recovery where a debtor has been delinquent for some time. This article looks at:

what it means to ‘assign a debt’;
the legal requirements to perfecting an assignment; and
common problems with enforcing an assigned debt.

Whether you’re a small business owner or the Chief Financial Officer of an ASX-listed company, one fact remains: your customers need to pay you.

This manual aims to help business owners, financial controllers and credit managers best manage and recover their debt.

An assignment of debt, in simple terms, is an agreement that transfers a debt owed to one entity, to another. A creditor does not need the consent of the debtor to assign a debt.

Once a debt is properly assigned, all rights and responsibilities of the original creditor (the assignor ) transfer to the new owner (the assignee ). Once an assignment of debt has been perfected, the assignee can collect the full amount of the debt owed . This includes interest recoverable under the original contract, as if they were the original creditor. A debtor is still responsible for paying the outstanding debt after an assignment. However, now, the debt or must pay the debt to the assignee rather than the original creditor.

Purchasing debt can be a lucrative business. Creditors will generally sell debt at a loss, for example, 20c for each dollar owed. Although, the amount paid will vary depending on factors such as the age of the debt and the likelihood of recovery. This can be a tax write off for the assignor, while the assignee can take steps to recover 100% of the debt owed.

In New South Wales, the requirements for a legally binding assignment of debt are set out in the Conveyancing Act :

the assignment must be in writing. You do this in the form of a deed (deed of assignment) and both the assignor and assignee sign it; and
the assignor must provide notice to the debtor. The requirement for notice must be express and must be in writing. The assignor must notify the debtor advising them of the debt’ s assign ment and to who it has been assigned. The assignee will send a separate notice to the debtor, putting them on notice that the debt is due and payable. They will also provide them with the necessary information to make payment.

The assignor must send the notices to the debtor’s last known address.

Debtor as a Joined Party

In some circumstances, a debtor will be joined as a party to the deed of assignment . There can be a great benefit in this approach . This is because the debtor can provide warranties that the debt is owed and has clear notice of the assignment. However, it is not always practical to do so for a few reasons:

a debtor may not be on speaking terms with the assignor;
a debtor may not be prepared to co-operate or provide appropriate warranties; and
the assignor or the assignee may not want the debtor to be made aware of the sale price . This occurs particularly where the sale price is at a significant discount.

If the debtor is not a party to the deed of assignment, proper notice of the assignment must be provided.

An assignment of debt that has not been properly perfected will not constitute a legal debt owing to the assignee. Rather, the legal right to recover the debt will remain with the assignor. Only an equitable interest in the debt will transfer to the assignee.

Enforcing an Assigned Debt

After validly assigning a debt (in writing and notice has been provided to the debtor’s last known place of residence), the assignee is entitled to take any legal steps available to them to recover the outstanding debt. These recovery options include:

commencing court proceedings;
obtaining a judgment; and
enforcement of that judgment.

Suppose court proceedings have been commenced or judgment already entered in favour of the assignor. In that case, the assignee must take steps to have the proceedings or judgment formally changed into the assignee’s name.

In our experience, recovery of an assigned debt can be problematic because:

debtors often do not understand the concept of debt assignment and may not be aware that their credit contract contains an assignment of debt clause;
disputes can arise as to whether a lawful assignment of debt has arisen. A debtor may claim that the assignor did not provide them with the requisite notice of the assignment, or in some cases, a contract will specifically exclude the creditor from legally assigning a debt;
proper records of the notice of assignment provided to the debtor must be maintained. If proper records have not been kept, it may be difficult to prove that notice has been properly given, which may invalidate the legal assignment; and
the debtor has the right to make an offsetting claim in defence to any recovery action taken by the assignee. A debtor may raise an offsetting claim which has arisen out of a previous arrangement with the assignor (which the assignee may not be aware of). For example, the debtor may have entered into an agreement with the assignor whereby the assignor agreed to accept a lesser amount of the debt owed by way of settlement. Because the assignee acquires the same rights and obligations of the assignor, the terms of that previous settlement agreement will bind the assignee. The court may find that there is no debt owing by the debtor. In this case, the assignee will have been assigned nothing of value.

Other Considerations

When assigning a debt, it is essential that the assignee, in particular, considers relevant statutory limitation periods for commencing proceedings or enforcing a judgment debt . In New South Wales, the time limit:

to file legal proceedings to recover debts is six years from the date of last payment or when the debtor admitted in writing that they owed the debt; and
for enforcing a judgment debt is 12 years from the date of judgment.

An assignment of a debt does not extend these limitation periods.

While there can be benefits to both the assignor and the assignee, an assignment of debt will be unenforceable if done incorrectly. Therefore, if you are considering assigning or being assigned a debt, it is important to seek legal advice. If you need help with drafting or reviewing a deed of assignment or wish to recover a debt that has been assigned to you, contact LegalVision’s debt recovery lawyers on 1300 544 755 or fill out the form on this page.

An assignment of debt is an agreement that transfers a debt owed to one entity, to another. A creditor does not need the consent of the debtor to assign a debt.

Once the assignee has validly assigned a debt, they are entitled to take any legal steps available to them to recover the outstanding debt. This includes commencing court proceedings, obtaining a judgment and enforcement of that judgment.

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9 Avoidance of General Assignments of Book Debts—Bankruptcy (Insolvency Act 1986, Section 344)

Published: March 2018
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In cases where the bankrupt has engaged in business, it may be that the bankrupt has executed a general assignment of book debts, or a class of such debts, in order to raise capital. Under section 344, such an assignment is void against the trustee, in respect of debts that were unpaid at the time when the bankruptcy petition was presented, unless the assignment has been registered under the Bills of Sale Act 1878. It is only the assignment that is void and not the whole instrument containing it, so that the debt owed by the bankrupt, other covenants, and other assignments remain valid. The provision does not require that the debtor was insolvent at the time of the assignment. One reason why these assignments are void unless registered is that it can be difficult to judge whether a proper price has been paid in respect of a general assignment. Also, the presence of substantial book debts may deceive creditors into thinking that the debtor is creditworthy: registration enables the prudent creditor to discover the true position. The restrictions, however, only apply in bankruptcy and it may be that, in the modern context, this restriction puts unincorporated businesses at an unwarranted disadvantage.

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English law assignments of part of a debt: Practical considerations

United Kingdom | Publication | December 2019

Enforcing partially assigned debts against the debtor

The increase of supply chain finance has driven an increased interest in parties considering the sale and purchase of parts of debts (as opposed to purchasing debts in their entirety).

While under English law part of a debt can be assigned, there is a general requirement that the relevant assignee joins the assignor to any proceedings against the debtor, which potentially impedes the assignee’s ability to enforce against the debtor efficiently.

This note considers whether this requirement may be dispensed with in certain circumstances.

Can you assign part of a debt?

Under English law, the beneficial ownership of part of a debt can be assigned, although the legal ownership cannot. 1 This means that an assignment of part of a debt will take effect as an equitable assignment instead of a legal assignment.

Joining the assignor to proceedings against the debtor

While both equitable and legal assignments are capable of removing the assigned asset from the insolvency estate of the assignor, failure to obtain a legal assignment and relying solely on an equitable assignment may require the assignee to join the relevant assignor as a party to any enforcement action against the debtor.

An assignee of part of a debt will want to be able to sue a debtor in its own name and, if it is required to join the assignor to proceedings against the debtor, this could add additional costs and delays if the assignor was unwilling to cooperate. 2

Kapoor v National Westminster Bank plc

English courts have, in recent years, been pragmatic in allowing an assignee of part of a debt to sue the debtor in its own name without the cooperation of the assignor.

In Charnesh Kapoor v National Westminster Bank plc, Kian Seng Tan 3 the court held that an equitable assignee of part of a debt is entitled in its own right and name to bring proceedings for the assigned debt. The equitable assignee will usually be required to join the assignor to the proceedings in order to ensure that the debtor is not exposed to double recovery, but the requirement is a procedural one that can be dispensed with by the court.

The reason for the requirement that an equitable assignee joins the assignor to proceedings against the debtor is not that the assignee has no right which it can assert independently, but that the debtor ought to be protected from the possibility of any further claim by the assignor who should therefore be bound by the judgment.

Application of Kapoor

It is a common feature of supply chain finance transactions that the assigned debt (or part of the debt) is supported by an independent payment undertaking. Such independent payment undertaking makes it clear that the debtor cannot raise defences and that it is required to pay the relevant debt (or part of a debt) without set-off or counterclaim. In respect of an assignee of part of an independent payment undertaking which is not disputed and has itself been equitably assigned to the assignee, we believe that there are good grounds that an English court would accept that the assignee is allowed to pursue an action directly against the debtor without needing the assignor to be joined, as this is likely to be a matter of procedure only, not substance.

This analysis is limited to English law and does not consider the laws of any other jurisdiction.

Notwithstanding the helpful clarifications summarised in Kapoor, as many receivables financing transactions involve a number of cross-border elements, assignees should continue to consider the effect of the laws (and, potentially court procedures) of any other relevant jurisdictions on the assignment of part of a debt even where the sale of such partial debt is completed under English law.

Legal title cannot be assigned in respect of part of a debt. A partial assignment would not satisfy the requirements for a legal assignment of section 136 of the Law of Property Act 1925.

If an assignor does not consent to being joined as a plaintiff in proceedings against the debtor it would be necessary to join the assignor as a co-defendant. However, where an assignor has gone into administration or liquidation, there may be a statutory prohibition on joining such assignor as a co-defendant (without the leave of the court or in certain circumstances the consent of the administrator).

[2011] EWCA Civ 1083

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What Is an Assignment of Debt?

George Simons | December 02, 2022

Co-Founder of SoloSuit George Simons, JD/MBA

George Simons is the co-founder and CEO of SoloSuit. He has helped Americans protect over $1 billion from predatory debt lawsuits. George graduated from BYU Law school in 2020 with a JD-MBA. In his spare time, George likes to cook, because he likes to eat.

Edited by Hannah Locklear

Editor at SoloSuit Hannah Locklear, BA

Hannah Locklear is SoloSuit’s Marketing and Impact Manager. With an educational background in Linguistics, Spanish, and International Development from Brigham Young University, Hannah has also worked as a legal support specialist for several years.

Summary: Have a debt collection agency coming after you for a past due account? Not convinced that they have the right to sue you? Learn about the assignment of debt and how you can beat a debt collector in court.

Assignment of debt means that the debt has been transferred, including all obligations and rights, from the creditor to another party. The debt assignment means there has been a legal transfer to another party, who now owns the debt. Usually, the debt assignment involves a debt collector who takes the responsibility to collect your debt.

How does a debt assignment work?

When the creditor lends you money, it does so thinking that what it lends you as well as interest will be paid back according to the legal agreement. The lender will wait to get the money back according to the contract.

When the debt is assigned to another party, you must be notified when it happens so you know who owns the debt and where to send your payments. If you send payments to the previous creditor, the payments probably will be rejected and you could default.

When the debtor gets this notice, it's wise for them to check that the creditor has the right balance and the payment that you should pay each month. Sometimes, you may be able to offer changes to the terms of the loan. If you decide to try this, the creditor must respond.

Respond to debt collection lawsuit in 15 minutes with SoloSuit.

Why creditors assign debts

Note that debt assignments and debt collectors must adhere to the Fair Debt Collection Practices Act . This is a law overseen by the FTC that restricts when the debtor can contact you and how. For example, they only can call you between 8 am and 9 pm and they cannot call you at work if you tell them not to do so.

If the FDCPA is broken by the debt collector, you can file a countersuit and may get them to pay damages and your attorney fees.

There are many reasons why the creditor may assign a debt. The most common reason is to boost their liquidity and reduce risk. The creditor could need capital, so they'll sell off some of their debts to debt collection companies.

Also, the creditor may have many higher-risk loans and they could be worried they could have a lot of defaults. In these situations, the creditor may be ok with selling debts for pennies on the dollar if it enhances their financial outlook and reassures investors.

Or, the creditor may think the debt is too old to worry about and may not assign it at all.

Different perspectives on debt assignment

Debt assignment is often criticized, especially in the past 30 years. Debt buyers often engage in shady practices. For example, some debt collectors may call consumers in the middle of the night and harass them to pay debts. Or, they may call friends and family looking for you. Some debt collectors even use foul language with consumers and threaten them.

Sometimes the debt is sold several times, so the consumer is chased for a debt she doesn't owe. Or, the debt amount could be different than what the debt collector claims.

Don't let debt collectors harass you. Respond with SoloSuit.

What to do if a debt collector comes after you

If you owe a debt and the debt has been assigned to a debt collector, you may be getting a lot of phone calls at all hours to get you to pay what you allegedly owe. This can continue for months or even years.

Sometimes, you can just ignore the phone calls and nothing happens. However, if enough money is involved, the debt collector could file a lawsuit against you. The worst thing you can do in this situation is to ignore the lawsuit.

What you should do is use the debt assignment game against them. What happens is this: The debt was probably sold a few times. You want to make the debt collector prove that the debt is yours and that you owe what they say you owe.

When the debt has been sold several times, it can be difficult for them to track down all that paperwork. You need to respond to the lawsuit by filing an answer with your clerk of court and then mail that answer to the debt collector by certified mail.

If you are being pursued for a debt that has been purchased by a third party debt buyer, there is a good chance you can get the issue resolved fairly easily. For example, in many instances, you may be able to negotiate a fairly low settlement on the debt, if you prefer to do so. This is because many companies who specialize in debt assignments actually purchased the debt for pennies on the dollar and are not actually looking to collect on the full amount owed.

Even if you cannot negotiate a settlement, make sure to log all of your interaction with the debt buyer since the collection agents they employ are notorious for routinely violating provisions contained within the FDCPA, which means you may have grounds to file a counterclaim and demand compensatory damages.

What is SoloSuit?

SoloSuit makes it easy to respond to a debt collection lawsuit.

How it works: SoloSuit is a step-by-step web-app that asks you all the necessary questions to complete your answer. Upon completion, you can either print the completed forms and mail in the hard copies to the courts or you can pay SoloSuit to file it for you and to have an attorney review the document.

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Home » Law and Ethics » How do the courts classify charges over book debts?

How do the courts classify charges over book debts?

Executive Summary

This study is designed to get a clear understanding of charges over a company’s book debts and the courts role to develope it by judging the nature and volume of reported cases. Although, the charges over book debts frequently give rise to difficulties as the Company Act 1985 does not define ‘book debt’, it has been defined by judges in a series of cases.

This project further discusses the evolution of the floating charge and recent developments in the law which have considered the question whether a lender may create a fixed charge over the borrower’s assets which are of a type traditionally the subject of a floating charge, in particular book debt. The recent Privy Council decision in Agnew is at odds with the English position and this article considers whether the current uncertainty in the law should be resolved by legislative reform based upon the New Zealand model.

Finally, the project examines the nature of the security mechanisms of fixed and floating charges. In particular, charges over company book debts and their practical importance to corporate activity, are considered.

Relevant English, Australian and New Zealand case law is examined, with a detailed analysis of the judgment of the Privy Council in Agnew and Kevin James Bearsley v. The Commissioner of Inland Revenue and Official Assignee for the Estate in Bankruptcy of Bruce william Birtwhistle and Mark Leslie Birtwhistle(2001) UKPC 28; (2002) 20 ACLC 3,051

1.The creation of a charge on book debts:

Significant developments take place this century in law by the courts in relation to one particular type of charge frequently used by companies as security for repayment of a loan, namely, a charge over a company’s book debts. However, a charge over a book debt may be created in many ways and, for it to operate as an equitable assignment or charge, no particular form of words is required in the document 1 . In particular, an agreement between a debtor and a creditor that the debt owing shall be paid out of a specific fund coming to the debtor, or an order given by a debtor to his creditor upon a person owing money or holding funds belonging to the debtor, directing such person to pay the funds to the creditor, will create a valid equitable charge upon such fund, unless there is an absolute assignment. This will only be the case if the agreement, as well as providing that the fund shall be applied in a particular way, also imposes a positive obligation in favour of the creditor to apply the fund towards payment of the debt 2 .

Thus, an undertaking to pay a specified sum out of the first moneys to be received on a future sale of certain rights constituted a good equitable assignment of the entitlement to the moneys 3 . A letter from a company to its customer instructing the customer to pay to the company’s account at its bank all amounts payable by the customer and stating that the instructions were to be regarded as irrevocable without the bank’s consent, constituted a charge on the book debts of the company and also has been held to be within S 396 (1) (e) of the Company Act 1985 4 .

2.Book debts define in common law:

This category of charge frequently gives rise to difficulties because the Companies Act 1985 does not define ‘book debts’ . The question whether any item is a book debt is generally a question of fact. The term ‘book debts’ has been defined by Lord Esher MR as ‘debts arising in a business in which it is the proper and usual course to keep books, and which ought to be entered in such books’ 5 . Furthermore, a debt is a book debt if it arises in the course of a business and, as a matter of practice, such a debt would, in the ordinary course of a business, be entered in well-kept books relating to the business 6 . It is not necessary that it actually be entered, only that it be of the sort that accountancy practice would ordinarily require to be entered in the relevant books as a book debt (or, at least, as a debt) 7 . The fact that a company holds security or a guarantee for the debt does not alter its nature as a book debt. However, to be a book debt it must be enforceable by action directly against the debtor.

3.The nature of the charges:

The courts primarily determine whether a charge has been created over book debts and, if it has, the nature of the charge 8 . However, companies generally have two options available to them. First, a company can, like a natural person, provide a lender with a fixed or specific charge over the company’s property, for example a mortgage over its land. Secondly, unlike a natural person, a company can provide a floating charge. Thus, a fixed charge is one, which attaches to a specific item of property such as freehold and leasehold property, goodwill, shares in subsidiaries, intellectual property rights, fixed plant and machinery. The fixed charges also attaches to these categories of assets acquired in the future by the company. Importantly, the chargor is not permitted to dispose of the property without the chargee’s consent. A floating charge, on the other hand, covers a class of property, but does not attach to any specific items within the class until some specified future event occurs. Until that event transpires, the chargor can dispose of items in the class in the ordinary course of its business without reference to the chargee. In this way, a floating charge enables a company to provide security for a loan via assets, which will flow into and out of its ownership 9 .

It can be said that recently, the boundary between the fixed and floating charge was fairly settled, at least in England, judging by the nature and volume of reported cases. Lord Macnaghten’s description of fixed versus floating charges in Illingworth v. Houldsworth 10 is helpful:

A specific charge, I think, is one that without more fastens on ascertained and definite property or property capable of being ascertained and defined; a floating charge, on the other hand, is ambulatory and shifting in its nature, hovering over and so to speak floating with the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten on the subject of the charge within its reach and grasp 11 .

However, the instrument creating the several charges will, in most cases, state whether each is intended to take effect as ‘fixed’ or ‘floating’ security. So, the characterisation in the instrument is unlikely to be determinative; a charge expressed to be ‘fixed’ may take effect as a floating charge. Indeed, it has been said that ‘the subjective intentions of the parties to the instrument are irrelevant and inadmissible’ for the purposes of determining the proper categorisation of the charge 12 .

4.The creditors prefer to take fixed charge over book debts:

The efficient operation of company business relies to a great extent on the ability of companies to procure debt capital. This in turn is dependent on the confidence of lenders in their ability to protect themselves against undue risk. A fixed charge gives a greater level of protection than a floating charge. One of the inherent risks of a floating charge, not shared by a fixed charge, is that certain unsecured creditors, including employees of the company, are given priority over a creditor who holds a floating charge (including a floating charge that has become fixed). For this reason, a lender taking security will prefer to obtain a fixed charge over those assets available for such a charge, that is, fixed assets which the company is not likely to want to dispose of whilst the charge exists. Furthermore, many small companies do not have large tangible assets such as property. Therefore, the practice was that the bank would like to take a fixed charge over future monies due to the company (e.g. book and trade debts, amounts due under insurance claims, refunds due from Crown Departments etc.). In reality, for many small companies, the book debt ledger was the barometer, which set the level of lending the bank, was prepared to extend.

However, there may be insufficient fixed assets available and this will then necessitate the creation of floating charges with their attendant risk. The types of assets, which are typically subject to floating charges, are book debts and trading stock.

5.The floating charge becomes attractive to the creditors:

The floating charge is used most often to take security over a company’s book debts, leaving the company the freedom to deal with the book debts by collecting them in the ordinary course of its business. However, the use of the floating charge took hold because, if a corporate debtor had been obliged to comply with the terms of a fixed charge, the effect on its circulating capital would be to paralyse its business. The reason for this was that under a fixed charge, unless the debtor company obtained the consent of the creditor, it would be unable to deal with its assets without breaking the terms of the fixed charge. This meant that it would be unable to give its customers ownership of the goods that it sold to them, or make use of the money that they paid it for goods sold. It could not use that money or the cash in its bank account to buy more goods or to meet other commitments 13 . In other words, a fixed charge deprived the company of its cash flow.

The floating charge, on the other hand, was intended to give creditor effective and comprehensive security over the debtor company’s whole business as well as its assets, while at the same time leaving the debtor company free to deal with its assets and pay its trade creditors in the ordinary course of its business. This form of security became especially attractive for banks that advanced loans to their corporate customers.

6.The vulnerability of the floating charges:

By the 1970s, however, banks had become disillusioned with the floating charge, because of the increasing range of claims of other creditors with floating charges, as well as the growth in other classes of preferential creditor with priority over the banks on the insolvency of corporate debtors. This led the banks to explore other ways of expanding their use of fixed charges 14 .

It was, however, generally considered that it was not possible to take a fixed charge over a fluctuating class of present and future book debts. The reasons for this were commercial: book debts were part of the circulating capital of a business, and were an important component of its cash flow, and a fixed charge would have the effect of strangling the debtor’s business.

7.The controversial academic debates on book debts:

In 1994, a decision of the English Court of Appeal (Civil Division) 15 , relating to charges over company book debts, gave rise to a flurry of academic debate. Professor Roy Goode started the debate, in which he pronounced the New Bullas decision to be “so disappointing” 16 . Conversely, Alan Berg, in a reply to Goode described New Bullas as “a correct and helpful decision ” 17 . The debate (into which a number of other academics also weighed) centred on the question of whether security in a book debt and its proceeds creates one security interest or two. According to Goode , if it creates a single interest which changes its character “from fixed to floating as it moves from assets to proceeds” 18 , then the interest in the proceeds ranks ahead of the claims of preferential creditors. If, on the other hand, upon collection of the proceeds of the book debt an entirely new floating security “springs into existence ” 19 , then the interest will be subordinate to the claims of preferential creditors.

Recently, the Privy Council in Agnew and Kevin James Bearsley v. The Commissioner of Inland Revenue and Official Assignee for the Estate in Bankruptcy of Bruce William Birtwhistle and Mark Leslie Birtwhistle 20 emphatically declared New Bullas to have been wrongly decided. The Privy Council’s decision is of significant interest to banks or others that hold a charge over the book debts of a borrowing company as security for a loan. Lenders may be wise to re-evaluate the level of security that such charges afford them, in light of the direction in which the Privy Council’s decision has taken the law.

The Agnew case, which emanated from New Zealand , concerned a company, Brumark Investments Limited that went into receivership. The receiver collected payment of various book debts of the company. The issue before the Privy Council was whether the amounts realised from the book debts should be applied towards payment of the company’s employees (and the Commissioner of Inland Revenue) as preferential creditors, or whether the amounts collected should be paid to Westpac Bank which held a charge over Brumark’s book debts. The answer turned on whether the charge was fixed or floating, for only a fixed charge would allow the bank to receive preferential payment under the relevant statutory provisions relating to receivership. The trial judge held the charge in question was a fixed charge, but this was reversed by the New Zealand Court of Appeal. The Privy Council dismissed the subsequent appeal by the bank and held the charge to be a floating charge, notwithstanding its description as a fixed charge in the debenture.

Lord Millett delivered the judgment of the Privy Council and commenced with a useful account of the history and an analysis of the nature of fixed and floating charges over book debts. This account is briefly summarised.

8.Case law on book debts:

Historically, series of cases have developed the applicability of charges over book debts. The cases analysed here both fixed and floating charges over book debts. The floating charge originated in a series of Chancery Division decisions in the 1870s 21 . The earliest judgment to recognise a floating charge did so as a necessary inference of the wording used in the particular debenture in question. The case was In re Panama, New Zealand and Australian Royal Mail Co 22 . The debenture charged ‘the undertaking’ of the company and ‘all sums of money arising there from’ 23 . The court regarded the words ‘the undertaking’ as including circulating assets. To construe the wording in the debenture as creating a fixed charge would mean the company would be unable to deal with its circulating assets without consent of the charge holder. Effectively this would paralyse the company’s operations 24 . Instead, the court took the view that the parties must have intended the company to continue its business. Such intention was inconsistent with the essential features of a fixed charge and the parties were therefore taken to have agreed on a type of charge, which did not possess the characteristics of a fixed charge. Thus came into existence a type of charge consistent with the intention of the company carrying on business, the floating charge. The floating charge enables a creditor to acquire comprehensive security over the entire undertaking of a company whilst simultaneously allowing the company to deal with its assets in the course of its daily business, without reference to the creditor holding the charge.

The most celebrated, and certainly the most often cited, description of a floating charge is that given by Romer LJ in re Yorkshire Woolcombers Association Ltd 25 . He stated that a charge would be a floating charge:

…. If you find that by the charge it is contemplated that, until some future step is taken by or on behalf of those interested in the charge, the company may carry on its business in the ordinary way as far as concerns the particular class of assets 26 .

This case was the first decision to consider charges in the specific context of book debts. The court held that a charge on uncollected book debts was necessarily a floating charge because the company’s right to receive the book debts and use them in carrying on business was inconsistent with the nature of a fixed charge 27 . The matter went to the House of Lords under the name Illingworth v. Houldsworth 28 . Where Lord Halsbury LC stated:

… the whole purport of this instrument is to enable the company to carry on its business in the ordinary way, to receive the book debts that were due to them, to incur new debts and to carry on their business exactly as if this deed had not been executed at all. That is what we mean by a floating security 29 .

The analysis primarily in Illingworth does not preclude a lender from holding a fixed charge over a company’s debts. To do so, a lender can take an assignment of a specified debt, notify the debtor of the assignment and become entitled to collect the debt itself. However, Lord Millett, in Agnew , pointed out the impracticality of such an arrangement from the perspective of both the lender and the borrowing company. The lender is unlikely to want to be the collector of the debt. Moreover, notification to the debtors of the company of the assignment has the potential to seriously harm the company’s credit.

An alternative method of obtaining an effective fixed charge over book debts is for the lender/assignee not to notify the company’s debtors of the assignment (until the company is in default). The assignee then authorises the assignor company to collect the debts as trustee on the assignee’s behalf.

Whilst this alternative method creates a feasible alternative for lenders with regard to specified debts, according to Lord Millett ‘ it was, however, generally considered that it was not possible to take a fixed charge over a fluctuating class of present and future book debts’ 30 . These concerns were laid to rest in cases decided in the 1970s and 1980s. In 1979, in Siebe Gorman & Co Ltd v. Barclays Bank Ltd 31 . A company granted its bank a fixed charge on its book debts and a floating charge over other assets. The company could not dispose of the debts by, for example, assigning or factoring them. It could, however, collect them if it subsequently paid the proceeds into an account in its name with the lending bank. On the facts, Slade J found that the company was not free thereafter to draw on the account without the bank’s consent, even though this was not expressly stated in the debenture. This critical factor led the Judge to conclude that the charge was fixed. However, had the company enjoyed an unrestricted right to deal with the money in the bank account, the charge would have been ‘no more than a floating charge’ 32 . The bank in Siebe Gorman appeared to be the beneficiary of a generous interpretation of the wording of the debenture. The debenture provided that:

during the continuance of this security the company… shall pay into the company’s account with the Bank all monies which it may receive in respect of the book debts and other debts hereby charged and shall not without the prior consent of the Bank in writing purport to charge or assign the same in favour of any other person and shall if called upon to do so by the bank execute a legal assignment of such book debts and other debts to the Bank.

This wording was sufficient to lead Slade J to conclude that the bank had sufficient control to constitute the charge as fixed 33 . His Honour stated:

I do not accept the argument that the provisions…negative the existence of a specific charge. All that they do, in my judgment, is to reinforce the specific charge given …The mere fact that there may exist certain forms of dealing with book debts which are not specifically prohibited…does not in my judgment turn the specific charge into a floating charge 34 .

Lord Millett in Agnew noted that Slade J’s finding that the company was not free to draw on the account without the consent of the bank ‘has been doubted’ 35 .

The decision was followed by the Supreme Court of Ireland in Re Keenan Bros Ltd 36 , a charge over present and future book debts was held to be a fixed charge where moneys collected by the company from the book debts were required to be paid into a designated account from which withdrawals could only be made with written consent of the bank. In both the above cases the deciding factor was that the proceeds of the book debts collected by the company were not available freely for the company’s use.

Conversely, in the Australian case Re Falcon Sportswear Pty Ltd; Hart v. Barnes 37 , where a debenture purported to create a fixed charge over book debts, but the parties agreed that the company could collect the debts and use the proceeds at its discretion. The charge was held to be floating because the charged assets were not under the chargee’s control.

A number of subsequent cases followed this line of reasoning. Where a company was free to utilise the proceeds of collected debts without reference to the lender, the charge over the book debts was consistently held to be a floating charge. In Re Brightlife Ltd 38 the company purported to grant its bank a fixed charge over its present and future book debts and a floating charge over its other assets. The company was not permitted to sell, factor or discount debts without the bank’s consent, but it could collect the debts and pay them into its ordinary bank account, although it was not required to do so. Notwithstanding the description of the charge over the book debts as fixed, the court held it was a floating charge, because the company was free to collect the proceeds which were then at the free disposal of the company 39 . Hoffmann J stated that:

A right to deal in this way with the charged assets for its own account is a badge of a floating charge and is inconsistent with a fixed charge 40 .

Supercool Refrigeration and Air Conditioning v. Hoverd Industies Ltd 41 and In re Cosslett (Contractors) Ltd 42 are similar to Brightlife . In Cosslett, the court described the position as follows:

The question is not whether the chargor has complete freedom to carry on his business as he chooses, but whether the chargee is in control of the charged assets.

These decisions established that banks were able to obtain the security of a fixed charge as long as they exercised control over the charged assets. This apparently did not satisfy the banks. Banks did not want to take on the monitoring of the chargor company’s bank account nor did banks want to be required to give consent to withdrawals from the account. Hence, the development in the 1990s of the novel approaches taken by the drafters of the debenture in the New Bullas case.

9.New Bullas versus Agnew approach:

The debenture in New Bullas was designed to obviate the need for monitoring of bank accounts and consent to withdrawals by the bank whilst still providing the security of a fixed charge. Whereas all the debentures considered in previous cases treated book debts and the proceeds thereof indivisibly, the draftsman in New Bullas split them into two. The new-look New Bullas debenture endeavoured to create two distinct charges, a fixed charge on uncollected book debts and a floating charge on their proceeds. The intention of the debenture was clearly to create a situation where the company could not factor or assign uncollected debts, but could collect them. Upon collection the proceeds would be subject to a floating charge.

The debenture in Agnew , which Lord Millett believed to be closely modelled on the New Bullas debenture, was described by his Lordship as follows:

It is expressed to create a fixed charge on the book debts of the company which arise in the ordinary course of trading and their proceeds, but not those proceeds which are received by the company before the charge holder requires them to be paid into an account with itself (which it could do at any time but never did) or the charge created by the deed crystallises or is enforced whichever should first occur. Subject thereto, the charge is expressed to be a floating charge as regards other assets of the company. The debenture prohibits the company from disposing of its uncollected book debts, but permits it to deal freely in the ordinary course of its business with assets, which are merely subject to the floating charge; these include the money in its bank accounts and the proceeds of the book debts when collected 43 .

This meant that the company was free to collect its book debts and deal with the proceeds in the ordinary course of business. However, the company could not assign or factor the book debts.

The debenture in Agnew differed from the New Bullas debenture in that the proceeds of the debts were not to be released from the fixed charge until they were paid into the company’s bank account, whereas in New Bullas they were to be released as soon as they were collected by the company. However, the Privy Council saw no significance in this distinction to the issue under consideration.

In both cases the companies went into receivership and the issue that arose was whether, given the companies’ ability to deal freely with the collected proceeds of the book debts, the uncollected debts were subject to a fixed or a floating charge, notwithstanding the description of the charge as fixed.

The court at first instance in New Bullas followed the decision in Brightlife and held that the uncollected debts were subject to a floating charge 44 . However, this was reversed by the Court of Appeal . Nourse LJ gave the Court of Appeal’s judgment and held the matter to be one of construction in which the intention of the parties was paramount. Clearly, the parties intended exactly what they had expressed, namely a fixed charge over the uncollected debts and a floating charge over the proceeds. His Honour concluded that unless some principle of law prohibited the parties from such an agreement, their clear agreement must prevail 45 .

To approach the issue as a matter of construction was, however, described by Lord Millett in Agnew as ‘fundamentally mistaken’ 46 . Instead, the Privy Council regarded the correct approach as being a two-part process. First, the court must establish the intention of the parties in relation to the rights and obligations each has over the charged assets. This done, it is for the court then to categorise the charge. The categorisation is a matter of law that is not dependent on the intention of the parties.

If their intention, properly gathered from the language of the instrument, is to grant the company rights in respect of the charged assets which are inconsistent with the nature of a fixed charge, then the charge cannot be a fixed charge however they may have chosen to describe it … The only intention which is relevant is the intention that the company should be free to deal with the charged assets and withdraw them from the security without the consent of the holder of the charge; or, to put the question another way, whether charged assets were intended to be under the control of the company or of the charge holder 47 .

On the facts of Agnew this led to the conclusion that the charge was floating as the only limitation on the company’s control was its inability to assign or factor the book debts. Over and above this, the company enjoyed complete control over the debts, their collection and the proceeds thereof.

One of the grounds of argument of the preferential creditors in New Bullas was rejected by Nourse LJ on an interesting theoretical basis. The preferential creditors argued that the charge over the debts was floating because the company had freedom to withdraw the debts from the security and use the proceeds. Nourse LJ , however, regarded this ability of the company as being not at the will of the company, but rather as arising from the agreement of the parties in advance when they entered into the debenture. The Privy Council in Agnew forcefully rejected this aspect of Nourse LJ’s judgment. Lord Millett pointed out that every charge derives from contract and that pursuit of this reasoning would convert every floating charge into a fixed charge 48 .

Nourse LJ, in New Bullas , also treated as vital to the court’s finding of a fixed charge the fact that the company could not dispose of the charged assets to third parties by assigning, factoring or charging them. It was regarded as unnecessary to prohibit in addition the collection of the debts and disposal of the proceeds. The Privy Council also rejected this, stating ‘alienation and collection are merely different methods of realising a debt by turning it into money’ 49 . To restrict one and allow the other is inconsistent with the fixed nature of the charge. ‘It allows the debt and its proceeds to be withdrawn from the security by the act of the company in collecting it’ 50 .

The last matter dealt with by the Privy Council in Agnew has been the subject of much debate, namely, whether a debt can be separated from its proceeds. Lord Millett noted the academic articles relating to this issue and whilst recognising that a debt and its proceeds are two different assets, thought that the proceeds represent the entire value of the debt. An assignment or charge of a receivable like a debt, which does not carry the right to its receipt, is worthless. Lord Millett concluded that even if conceptually the ownership of a debt can be separated from the ownership of its proceeds, in the context of security it makes no commercial sense. This accounted for the draftsman of the debenture in Agnew purporting to separate the book debts and their proceeds, but not attempting to separate their ownership. They were charged by the same chargor to the same chargee. Lord Millett described it as a matter of personal choice whether one describes a debenture such as the Agnew debenture as creating two different charges or a single convertible charge.

The Privy Council’s conclusion in Agnew was that the company was left in control over the process by which the charged assets were removed from the charge and replaced by different assets which were not the subject of a fixed charge and were at the company’s free disposal. This was found to be inconsistent with a fixed charge.

10.The approval of New Bullas:

The New South Wales Supreme Court in Australia, in Whitton v. CAN 003 266 886 Pty Ltd (Controller Apptd) (in liq) & Ors 51 . approved of and followed the decision of Nourse LJ in New Bullas. Bryson J gave judgment on a deed of charge, which purported to create a fixed charge as to all book debts, present and future of the mortgagor and a floating charge over moneys or property actually received by the mortgagor on account of any book debt. The floating charge provided that the mortgagor could not dispose of any property under the floating charge without written consent of the mortgagee except in the ordinary course of business . The New South Wales Supreme Court held that there was a fixed charge over moneys received on book debts after appointment of the receiver.

Bryson J described floating charges 52 as “a creation of ingenuity and judicial laissez faire in the Nineteenth Century” and as “prominent features of the raw deal which, according to Lord Templeman, unsecured creditors receive: see Borden (UK) Ltd v. Scottish Timber (1981) Ch 25 at 42”. Bryson J rejected the standpoint taken by Hoffmann J in Brightlife and followed instead the decision in New Bullas . In Bryson J’s view, the intention of the parties should determine the issue- “Principle requires that characterisation as a floating charge take place according to the rights which the parties intended to create” 53 . His Honour referred to the statement of Nourse LJ in New Bullas that the debt be collected and the proceeds applied to business, however, on insolvency, a fixed charge enabling the lender to intercept payment to the company may be of real value.

11.The consequences of Agnew:

The Privy Council is the highest appellate tribunal for appeals from decisions of British Commonwealth court. Although, strictly speaking, its decisions are not binding on English domestic courts, they are of very persuasive authority and certainly indicative of how such issues are likely to be viewed in the future at the same level (i.e. by the House of Lords as the highest appellate tribunal for purely domestic appeals).

If English courts followed Agnew , the charges on book debts of New Bullas type of debentures will not be fixed on uncollected book debts unless the charges on the proceeds are also made fixed. Importantly, the general rule is that the chargee must be in ‘control’ of the proceeds if the charge is to be fixed.

Furthermore, Banks may well be forced to reconsider the value of their security, particularly where they are heavily reliant upon book debts and if there are likely to be significant preferential claims on insolvency. This may cause certain banks to reduce overdraft limits. There is also likely to be a move away from debenture lending and towards some form of invoice discounting.

The question of fixed or floating charges would be important for insolvency practitioners who are acting as receivers because of preferential claims and priority. A receiver who would wrongly classify the charge as fixed may become personally liable for paying the wrong creditor.

12.Was the decision in Agnew correct?

The effect of Privy Council decision in Agnew is that if a secured party wants to rank ahead of preferential creditors in relation to its security interest in receivables, it must maintain genuine control of the proceeds of those receivables, as they are collected. The categorisation of charges as fixed and floating is actually something of a pretext, as the only significance of the distinction is the relative ranking of the secured party in relation to preferential creditors.

One might conclude, however, that even if the distinction is a pretext, it is perfectly valid for the court to require a secured party to meet certain conditions if it is to take security ranking ahead of preferential creditors. After all, a security agreement between a borrower and a lender has ramifications that go beyond their relationship. Other creditors of the borrower, including particularly vulnerable creditors such as employees, 54 are affected by the arrangement. However, the court in Agnew alludes to this in its discussion of the difficulties that floating charges pose for ordinary creditors 55 .

Although the Privy Council does not expressly put it in these terms, it must be the need to protect other creditors that justifies its interference with an agreed arrangement between a borrower and a lender. It is difficult to find any other justification that there is no inherent feature of fixed and floating charges that requires the distinction between them to be maintained in order for a legal framework governing secured transactions to function effectively.

Furthermore, after Agnew , the borrowers seeking to secure finance with receivables will simply be required to look to factors and other lenders who are in effect prepared to purchase the receivables 56 . Alternatively, such a borrower could make arrangements with its bank whereby the bank sets up adequate arrangements for policing the collection of the receivables and the payment of their proceeds into a blocked account.

From the point of view of the borrower, all of this makes the financing of its working capital more complicated and more expensive. It is difficult to see how that serves the interests of employees or any other creditors of the borrower, since such mechanisms will in any event be designed to ensure that the lenders rank ahead of preferential creditors in relation to receivables.

Notwithstanding its conceptual faults, New Bullas , which Agnew suggests is no longer good law, produced a more satisfactory commercial result than Agnew . New Bullas provided a device whereby a lender could take a valid first-ranking security interest in receivables without the parties incurring the significant additional cost of a policing arrangement. The Privy Council in Agnew took a more interventionist approach, but with no real justification beyond the somewhat perfunctory one of putting right the conceptual shortcomings of New Bullas . Therefore, the English courts should avoid going down the route of Agnew and, if legislation is necessary, Parliament should consider what is required to avoid English law taking this retrograde step.

13.Conclusion:

The legal status of charges over book debts is still unclear. The approach of charges similar to those described in the cases in this article is commonplace in UK’s business and banking practice. It seems inevitable that, before long, the issue considered in these cases will arise again before the English courts. It remains to be seen whether future English courts will follow the New Bullas approach of the Court of Appeal or be persuaded by the opposite decision in the recent Privy Council judgment in Agnew . Importantly, the decision of the Court of Appeal in New Bullas is still binding as a precedent on the English courts up to the Court of Appeal, because decisions of the Judicial Committee of the Privy Council, although of persuasive authority, are not precedents binding on the English courts. Moreover, so far as New Zealand law is concerned, the very question involved in Agnew will cease to exist when New Zealand legislation floating charge passed in 1999 is brought into force. It would therefore appear that a breathing space is available for the banks in this country to amend their loan documentation governing existing secured loans, and to adjust the loan documentation used by them in future, so as to counter the likelihood that the eminent commercial lawyers who sat in the Judicial Committee in Agnew render similar judgments if a parallel English case comes before the House of Lords. If that is done the only disturbance, which the decision of the Judicial Committee will have caused, will be the addition of a paragraph to the standard loan documentation used by English banks. This addition was probably implicit in the documentation used in New Bullas .

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The interchangeability of fixed and floating charges, (2003) Com Law Vol. 24 No.2. P. 60-62.

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The nature of security over receivables (2002) 23 Co Law (3) P 84-92.

Book debt security-The end of New Bullas? (2002) 23 C0 Law (1) .P 24-25.

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Brumark revisited-The Privy Council and Brumark: A lingering shadow over book debts? ( 2001) 22 Co Law (10). P 318-319.

Charges-Fixed or Floating? (2003) IL & P Vol.17 No.6 P 221-224.

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1 Durham Brothers v. Robertson (1898) 1 QB 765 at 796; William Brandt’s v. Dunlop (1905) AC 454 at 462).

2 Ridick v. Candell (1852) 1 De GM Lloyds Bank Limited (1982) 2 All ER 449 at 453).

3 Cotton v. Heyl (1930) 1 Ch 510)

4 Re Kent & Sussex Sawmills Limited (1947) Ch 177; Walter & Sullivan Limited v. Murphy Limited (1955) 2 QB 584; Paul and Frank Ltd v. Discount Bank (Overseas) Limited (1967) Ch 348 at 364).

5 Official Receiver v. Tailby (1886).

6 Generally, a bank will issue a bond or a guarantee or will make advances against a ‘charge’ over moneys standing to the credit of a company’s account with it. Such a credit balance represents a debt from the bank to the company; Foley v. Hill (1848) 2 HL Cas 28; Parker v. Marchant 1 Ph 356 at 361, but it is doubtful that it is a ‘book debt’ for the purposes of the section (Re Brightlife, Re Permanent Houses (Holdings) Ltd and Northern Bank v. Ross (1990) BCC 883).

7 Paul and Frank Ltd v. Discount Bank (Overseas) Limited (1967) Ch 348; Re Brightlife).

8 For example, Re Cosslett (Contractors) Ltd (1996) 4 All ER 46).

9 There are three basic features of a floating charge, which need to satisfy before, were analysed in Re Yorkshire Woolcombers Association Ltd; Houldsworth v. Yorkshire Woolcombers Association Ltd (1903) 2 Ch 284, and are:

it is an equitable charge over the whole or a class of the company’s assets, for example over the book debts;

the assets subject to the charge are constantly changing; and

the company retains the freedom to deal with the assets in the ordinary course of business until the charge ‘crystallises’.

This was offered as a description and not a definition. These three characteristics are the ‘indicia’ of a floating charge, not a definition of it and it is possible to have a floating charge, which does not contain all of them (Re Bond Worth (1980) 1 Ch 228). The first two characteristics are typical of a floating charge but they are not distinctive of it, since they are not necessarily inconsistent with a fixed charge. It is the third characteristic, which is the hallmark of a floating charge and serves to distinguish it from a fixed charge. Since the existence of a fixed charge would make it impossible for the company to carry on business in the ordinary way without the consent of the charge holder, it follows that its ability to so without such consent is inconsistent with the fixed nature of the charge.

10 (1904) AC 355

12 Re Cimex Tissues Ltd at 628)

13 In addition, it could not use borrowed money either, not even, as Sir George Jessel MR. observed, the money advanced to it by the charge holder. In short, a fixed charge would deprive the company of access to its cash flow, which is the lifeblood of a business. Where, therefore, the parties contemplated that the company would continue to carry on business despite the existence of the charge, they must be taken to have agreed on a form of charge, which did not possess the ordinary incidents of a fixed charge.

14 Having, however, a fixed charge meant imposing a requirement that the company should pay the proceeds of its book debts into its bank account, but was not a problem for banks or their customers, because companies did that in any case, even where there was no such requirement. But the banks did not want to comply with other fixed charge requirements, such as that of having to monitor the company’s bank account and consent whenever the company wanted to make a withdrawal. The banks wanted the best of both worlds: a fixed charge on the company’s book debts, but with the company having the same freedom to use the proceeds of the charge had been a floating charge.

15 RE New Bullas Trading Ltd (1994) BCC 36 (1994); 12 ACLC 3, 203.

16 “Charges over Book Debts: a Missed Opportunity” (1994) 110 Law Quarterly Review 592.

17 “Charges over Book Debts: a Reply” (1995) Journal of Business Law 433.

18 n 6 at 603

20 (2001) UKPC 28; (2002) 20 ACLC 3,051.

21 Before the introduction of the legislation the expression ‘floating charge’, though in common use, had no distinct meaning. It was not a legal term or term of art. Now, it became necessary to distinguish between fixed charges and charges which were floating charges within he meaning of the Acts. Lord Macnaghten’s essayed the first judicial definition in Governments Stock and other Securities Investment Co Ltd v. Manila Railway Co. (1897) AC 81, at p86: ‘ A floating security is an equitable charge on the assets for the time being of a going concern. It attaches to the subject charged in the varying condition in which it happens to be from time to time. It is of the essence of such a charge that it remains dormant until the undertaking charged ceases to be a going concern, or until the person in whose favour the charge is created intervenes’.

22 (1870) 5 Ch App 318.

23 Agnew at 3054

24 This theme was repeated in many of the cases: see for example In re Florence Land and Public works Co (1878) at p 541 per Sir George Jessel MR; Biggerstaff v. Rowatt’s Wharf Ltd (1896) 2 Ch 93 at p 101 per Lindley LJ and p 103 per Lopes LJ.

25 (1903) 2 Ch D 284

26 Ibid at 295.

27 In 1910, the jurisprudential nature of the floating charge further was analysed by Buckley LJ in Evans v. Rival Granite Quarries Ltd. (1910) 2 KB 979. By now it was evident that the classification of a security as a floating charge was a matter of substance and not merely a matter of drafting. As Fletcher Moulton LJ observed in that case at p 993: “But at an early period it became clear to judges that this conclusion did not depend upon the special language used in the particular document, but upon the essence and nature of a security of this kind”.

28 (1904) AC 355

29 Quoted in Agnew at 3,056

30 At 3,057

31 (1979) 2 Lloyd’s Rep 142.

32 However, Slade J said at p. 158:

“…if I had accepted the premise that (the company) would have had the unrestricted right to deal with the proceeds of any relevant book debts paid into its account, so long as that account remained in credit, I would have been inclined to accept the conclusion that the charge on such book debts could be no more than a floating charge”.

33 The decision in Siebe Gorman has been criticised on the basis that the parties clearly intended the company to continue to trade and, in practical terms, it could not do so if periodically deprived of all debts due to it. Legal debated on this issue continues, so it is possibly that, at some stage, Siebe Gorman will be reversed- with the consequence that many perceived fixed charges will prove to be floating charges. Until Siebe Gorman is reversed, however, it continues to be relied upon by clearing banks compelled to address the practical and business considerations of their customers.

34 . Ibid at 159.

35 n 1 at 3,057

36 (1986) BCLC 242

37 (1983) 1 ACLC 690; (1982) 7 ACLR 310; In Hart, Anderson J held that the charge was a floating charge. The debenture holder could not sensibly be said to have obtained a proprietary interest by way of a fixed charge when its interest was

“ defeasible and capably of being destroyed by the company which is able to use the proceeds of such book debt in its business without in any way being accountable to the debenture holder for such proceeds”.

38 (1987) Ch 200

39 The case was thus distinguishable from but very similar to Siebe Gorman save that it was concerned with the proceeds of book debts, which were still uncollected when the receivers were appointed.

40 Ibid at 209.

41 (1994) 3 NZLR 300

42 (1998) Ch 495

43 n 1 at 3,053.

44 In addition, Mr Justice Knox’s judgment is reported at (1993) BCC 251. Having considered the provisions of the debenture and several of the previous authorities, including Re Yorkshire Woolcombers Association, Ltd., Siebe Gorman & Co Ltd. v. Barclays Bank Ltd. and RE Brightlife Ltd., the judge reached the conclusion that the case fell on the floating charge side of the line, in that the company’s ability to deal with book debts was, at the creation of the charge. met subject top am a greater fetter than Hoffmann J had held to be inadequate in Re Brightlife Ltd. He continued, at p.265E-F:

“Absent a direction from 3i there was a freedom of action conferred upon the company which was in my judgment inconsistent with the existence of a specific charge”.

45 On the other hand, the decision is inconsistent with the actual decisions in Brightlife and Supercool and contrary to the statements of principle in virtually every case from Re Youkshire Woolcombers Association Ltd. to Cosslett.

46 Ibid at 3,060.

50 Ibid at 3,061

51 (1996) 14 ACLC 1799

52 Ibid at 1,809.

53 Ibid at 1813.

54 It is more difficult to make this argument in relation to the Crown revenue agents, and the Department of Trade and Industry has proposed the abolition of the Crown preference. White Paper, Insolvency- A second Chance, Secretary of State for Trade and Industry (July 2oo1)

55 Agnew, paras 9&10

56 This throws into relief the distinction between the sale of a receivable and a charge over a receivable, and means that the distinction could be crucial to the creation of a perfected arrangement for financing secured by receivables. Again, this is contrary to what the draftsmen of the UCC (Uniform Commercial Code-United States) recognised as the commercial trend: “commercial financing on the basis of accounts and chattel paper is often so conducted that the distinction between a security transfer and a sale is blurred…(therefore the purchaser of a receivable) is treated (under the UCC) as a secured party, and his interest is a security interest”. Comment 2 to s.9-102 of the Pre-Revision (2000) Art.9 of the UCC.

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