May 2019 | Kieran Kelly
What is the common thread through each of the following scenarios?
- a business that wants to sell an outstanding debt;
- a business that is being sold inclusive of debts owed to it; and
- a liquidator that wants to sell its right to an insolvent trading claim ie a claim against directors of the insolvent company for trading whilst insolvent.
The answer is the application of the law of assignment.
The law of assignment involves three key players:
- the obligor: the party to the original contract with the assignor;
- the assignor: the party that transfers its contractual rights pursuant to the contract with the obligor to another party;
- the assignee: the party that is assigned the assignor’s rights under its contract with the obligor, but who was not a party to the original contract.
Assignments are very useful as a commercial tool. However, issues arise when basic requirements are either not understood or are ignored.
Consider the following.
- Was the contractual right assignable?
The first step when deciding to assign a right is to decide whether or not the right is properly assignable. The following is a brief guide:
- only non-personal contractual rights can be assigned;
- an assignor cannot assign a greater right than it has;
- the obligations of the obligor cannot be increased or varied; and
- only rights and not obligations can be assigned.
These requirements provide a safeguard to the obligor. For example, a contract for personal service might require a football player to play for a particular team for a certain period of time. Since the football player has unique abilities and skills, it would be unfair to the obligor for that player to assign his rights under the contract to another player.
Before proceeding, you should ensure that the right being assigned satisfies each requirement.
- Was the assignment valid at law?
The next step is to consider whether the assignment is valid at law.
The requirements of a valid legal assignment (in all Australian states) are as follows:
- only the benefit of an agreement may be assigned;
- the assignment must be absolute;
- the rights to be assigned must be wholly ascertainable and must not relate to part only of a debt;
- the assignment must be in writing and signed by the assignor; and
- notice of the assignment must be received by the assignee.
If each of these elements is not satisfied, the assignment is at best an equitable assignment.
While equitable assignments are permissible (and in fact were the only permissible assignments prior to the passing of the Judicature Act in 1873), if an assignment is only valid in equity, it is necessary to consider whether any further issues arise.
- What else should I bear in mind?
Once you are comfortable that an assignment is generally valid either at law or in equity, it is necessary to consider if there are any other impediments or considerations. Those include:
- given the amount of debt in question, whether the relevant court has jurisdiction to deal with an equitable assignment; and
- whether any legislation prevents the assignment.
In relation to (1), an example is a party seeking to rely on an equitable assignment in the Local Court of NSW. As the Local Court of NSW has limited equitable jurisdiction, it is not possible to rely on an equitable assignment and it is therefore critical that a legal assignment has been perfected.
In relation to (2), an example is the case of Tasmanian Seafoods Pty Ltd v MacQueen, in which it was found that legislation restricted assignments of abalone diving licences and a purported assignment was therefore invalid.
This is a non-exhaustive list and each prospective or purported assignment must be considered in light of its own facts.
- Final comments
The above is a brief summary of the law relating to assignment. It is a complex area of law that is often not understood. We often encounter issues with a purported assignment that arise long after the time when a party understands that an assignment has taken place.
We recommend that if you have any uncertainty about the validity of a particular assignment, you immediately seek legal advice.