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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Assignment of debts, statutory demands and offsetting claims
It is not uncommon for a creditor (assignor) to transfer their right to receive payment of a debt (assignment) to a third party (assignee). The assignee will then seek payment from the debtor.
The assignee of the debt can issue to the debtor company a statutory demand for the payment of the debt if the debt exceeds the statutory minimum, which is currently $2,000.
For the assignee issuing the statutory demand, there will be threshold issues as to whether notice of the assignment has been given to the debtor and whether appropriate details of the assignment are contained in the statutory demand.
Assignee has the same rights and obligations as the assignor
The assignee of the debt takes the assignment subject to the rights and obligations of the assignor.
This was demonstrated in the recent decision of Mascarene Pty Ltd v Slater [2016] VSC 395 relating to a building dispute.
In Mascarene a judgment debt was assigned and the assignee issued a statutory demand.
The Court held that the assignee was not prevented from seeking payment of interest as it had the same rights as the assignor, as if the assignment had not taken place.
However, the assignee also took the assignment subject to the obligations that would have applied to the assignor in respect of the debt.
In seeking to set aside the statutory demand the debtor company claimed it had an offsetting claim against the assignor for reinstatement costs relating to building works.
Although the assignee was not a party to the building contract and not personally liable for the reinstatement costs, the debtor company was successful in claiming the setoff and reducing the amount of the statutory demand by the amount of the reinstatement costs.
It is clear that an offsetting claim cannot be sidestepped by assigning the debt.
The assignee of a debt receives the benefit of the debt subject to the rights of the assignor but also subject to the assignor’s obligations in respect of the debt.
A statutory demand can be issued in respect of an assigned debt however the assignment does not prevent the debtor company from disputing the existence or amount of the alleged debt or seeking to raise an offsetting claim.
If you would like more information about these issues, please contact Graham Roberts on +61 7 3231 2404.
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Tips in Enforcing Assigned Debts
Articles , Restructuring + Insolvency
Sep 23, 2016
It is common for debts to be assigned by creditors for numerous reasons. Once a debt is assigned however it does not mean the assignee can seek to enforce the debt without facing potential difficulties.
Firstly, a question might arise as to whether the assignment is valid. Some agreements or contracts specifically exclude the ability to assign a right arising in the agreement or contract. For an assignment of a debt to be valid, notice must be given to the debtor in accordance with section 12 of the Conveyancing Act 1919 (NSW) .
Proving notice was given can often be a problem when a large number of debts are assigned. Often a pro forma letter is produced and issued en masse , with no copies of the letters actually sent and addressed to each debtor being maintained.
The right of a debtor to assert an offsetting claim in defence to any step taken to enforce a debt by the assignee can also cause issues. An assignee acquires the same rights and obligations of the assignor. Therefore if proceedings are commenced by the assignee to enforce the debt, the defendant debtor may have an offsetting claim which arises out of the arrangement between the assignor and the debtor, to which the assignee is not a party.
Section 21 of the Civil Procedure Act 2005 (NSW) provides for an offsetting claim to be made by way of defence even if the offsetting debt has no relationship to the debt which is the subject of the assignee’s claim. If no debt is found to be owing by the debtor to the assignor then the assignee has essentially been assigned nothing of value. Similar offsetting provisions apply to applications to set aside a creditor’s statutory demand for payment of debt.
When considering taking an assignment of debt, one should carefully consider the value of the assigned debt that might be recovered and ensure the notice formalities are met.
For more information please contact us , you may also be interested in our recent piece on assignment of debts in the context of bankruptcy .
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COMMENTS
12 Assignments of debts and choses in action. Any absolute assignment by writing under the hand of the assignor (not purporting to be by way of charge only) of any debt or other legal chose in action, of which express notice in writing has been given to the debtor, trustee, or other person from whom the assignor would have been entitled to ...
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.
(1) An absolute assignment, in writing signed by the assignor, of a debt or thing in action (other than an assignment expressed to be by charge only) is effective at law to transfer the right to the debt or thing in action if written notice of the assignment is given to the debtor, trustee, or other person, (the liable person ) from whom the ...
Authorisation. This version of the legislation is compiled and maintained in a database of legislation by the Parliamentary Counsel's Ofice and published on the NSW legislation website, and is certified as the form of that legislation that is correct under section 45C of the Interpretation Act 1987.
The Civil Law (Property) Act 2006 (ACT) section 205 defines a chose in action as (with examples) ‘an intangible personal property right recognised and protected by the law. Examples include debts, money held at a bank, shares, rights under a trust, copyright, and the right to sue for breach of contract’. The common element is that these are ...
Assignment of debts, statutory demands and offsetting claims. It is not uncommon for a creditor (assignor) to transfer their right to receive payment of a debt (assignment) to a third party (assignee). The assignee will then seek payment from the debtor.
An assignment of a cause of action may be effected as part of a transfer of property to which the cause of action relates, for example a debt (which is effectively both property and a cause action itself) or the transfer of a lease which may carry with it the right to existing arrears of rent;
In NSW, assignments of debts and choses in action are governed by section 12 of the Conveyancing Act. This provides that there is four criteria that must be met in order to effect a legal assignment:
For an assignment of a debt to be valid, notice must be given to the debtor in accordance with section 12 of the Conveyancing Act 1919 (NSW). Proving notice was given can often be a problem when a large number of debts are assigned.
a distinct mode of assignment”. The concluding Part VI (“Why It Matters”) concisely explains areas where the conception of equitable assignments matters, including the effect of anti-assignment clauses, oral gifts of legal choses in action and assign.