By Andrew Hack, a Solicitor of Matthews Folbigg Lawyers in our Insolvency, Restructuring and Debt Recovery Group
Why assign?
Do you have a debt that has been on your ledger but you are having difficulty recovering it? Are you sick of chasing the same debtor with no result?
Creditors are able to realise value from debts that they no longer want to chase by selling them to third parties. The most common occurrence is where companies sell a book of debts to a debt collection agency. Debt collectors frequently buy debts from creditors in order to pursue the debtors as an alternative to acting as the creditor’s debt collection agent.
Any security interest attached to a debt can also be assigned together with the debt. This will allow the assignee to recover the assigned debt against the assets of the debtor provided by way of security. Creditors may obtain a higher value in any consideration given in exchange for an assignment of a secured debt (rather than an unsecured debt).
There are other common instances where assignments of secured debts are useful. For example, an assignment is often used as an alternative to requiring a debtor to undertake a refinance. If there is an existing subordinated security interest, an incoming financier would not have the same priority as the outgoing financier, without an assignment. This is because the Personal Property Securities Register (“PPSR”) operates a “first in time” basis where the first creditor to register normally obtains priority (subject to certain exceptions). An incoming financier relying on a freshly registered financing statement will end up being subordinated to valid pre-existing financiers. An assignment by the outgoing financier to the incoming financier may mean that the incoming financier retains the same level of priority.
Other examples of assignments of secured debts are:
- where a financier with a subordinated security interest intends to enforce the security, an assignment may be taken in the course of paying out the priority financier, in order to have control of enforcement processes; and
- in a sale of business transaction.
However, with any assignment, there can come issues if proper due diligence is not conducted. If a security interest contains defects, and that security is assigned to a third party, the third party will inherit those defects and can then be liable for any rectification costs or consequences of the defects (including loss of security). It is paramount that advice be obtained and proper due diligence is completed to ensure any security interest is properly held without defects and that any proposed assignment is valid.
The process
The starting point is to check that the underlying credit agreement allows for creditors to assign their debts. For example, there must not be a covenant that prohibits the creditor from assigning the debt to third parties. Some credit agreements may provide that debts cannot be assigned without permission from the debtor.
Assignees should read the terms of the credit contract carefully as they will be taking all the rights and obligations of the existing creditor under that credit contract.
If the credit arrangement is subject to the National Credit Code, attention should be paid to whether the assignee has an Australian Credit Licence. Pursuant to s 10 of the National Consumer Credit Protection Act 2009 (Cth), an assignor is included as a ‘credit provider’ and therefore must be compliant with the National Credit Code.
The next step is to prepare a Deed of Assignment as between the assignor and the assignee. Assignors will need to think about what exposure they may have, and what their future involvement may be, as a result of the transaction. This can involve consideration of warranty clauses, such as whether the assignor warrants that the debt and/or security interest is enforceable. Typically, the assignor wants to move on from the relationship with the debtor and just receive some value for disposing of the asset. Therefore, an assignor must carefully consider what warranties and representations it is prepared to make to the assignee, as well as what type of warranties the assignor may wish to expressly exclude.
Conversely, the assignee will need to consider the warranties it wants to obtain from the assignor, to obtain some protection if an issue arises as to the enforceability of the debt and/or security interest as against the debtor. Otherwise, assignees should obtain as much information about the formation of the credit contract as possible so they can be satisfied that there are no defects which they would inherit from the assignor, and as evidence in order to recover the debt in court, if required.
Once the assignor and assignee have entered into an agreement, written notice is required to be given to the debtor (see s 12 of the Conveyancing Act 1919 (NSW)).
The last thing to do is for the assignor to effect a transfer of any relevant registration on the PPSR or other security.
If you would like more information or advice in relation to assigning debts or insolvency, restructuring or debt recovery law generally, contact Andrew Hack at andrewh@matthewsfolbigg.com.au or a Principal of the Matthews Folbigg Insolvency, Restructuring & Debt Recovery Group:
Jeffrey Brown on (02) 9806 7446 or jeffreyb@matthewsfolbigg.com.au
Stephen Mullette on (02) 9806 7459 or stephenm@matthewsfolbigg.com.au
