Draw a structure diagram showing the parties and legal obligations for an
Assignment
Novation
Declaration of trust
Participation
Risk participation
Now draw another diagram showing how the party who now receives the benefit (from the modes above) would take legal action to enforce the debt against the debtor and whether it would have to join any other party?
As we discussed above an assignment for value will be enforceable in equity by the assignee. And, the benefit of a contract is in general assignable in equity and may be enforced by the assignee.
The assignor is not a necessary party to enforce the assignment although the assignor ought to ordinarily be joined in any proceedings.
At common law, an assignee of a chose in action can bring proceedings in the assignor’s name to enforce the obligation, even though the assignor refuses to consent. The presumption is that the assignment is sufficient authority to bring proceedings in the assignor’s name.
In most large scale financing transactions notice to the underlying debtors is not given by the assignor of the chose in action. This means that the assignment until notice is given to the underlying debtors can only ever be an equitable assignment.
There are good reasons for not providing notice to the underlying debtors (such as mortgage loan borrowers). The first reasons is that it would be very time consuming.
The second is that it plainly is not good for business. For example, if the Commonwealth Bank notified its 15,000 customers every time it executed one of its securitisation transactions many of its customers would wonder what was happening
Question
If no notice is given then what is the status of the assignment?
EQUITABLE ? LEGAL ?
What is the consequence of that ?
Answer
The main risk, if notice is not given, is that the debtor/mortgager might continue to make payments to the assignor/originator, and the debtor/mortgagor cannot be obliged to pay again in the event the assignor/originator fails to remit those payments to the assignee. This problem doesn’t arise in securitisation transactions as the originator will undertake to transfer payments to the securitisation issuer following the assignment.
Another problem that arises due to the failure to notify the borrower of the assignment is that it may permit the borrower to set off claims that he or she has against the originator, against obligations he or she owes to the originator. Under general law, an assignee (legal or equitable) takes ‘subject to equities’. Remember s 12
A contract may expressly or impliedly authorise the assignment of rights that would not otherwise be assignable.
Conversely, the contract may expressly or impliedly prohibit the assignment of rights that are otherwise on their face assignable
An attempted assignment of contractual rights in breach of a prohibition on assignment is ineffective: ‘if the law were otherwise, it would defeat the legitimate commercial reason for inserting the contractual prohibition, viz, to ensure that the original parties to the contract are not brought into direct contractual relations with third parties‘
However, an assignment in breach of a contractual prohibition may still have an effect as between the assignor and the assignee.
In particular, ‘[i]f the obligor or promisor, after the purported assignment, performs the contract in favour of the assignor, the assignor may hold the fruits of such performance upon trust for the assignee, by analogy to the treatment in equity of contracts to assign afteracquired property’
However, a contract may (also) prohibit one or both parties from declaring themselves to be a trustee of the benefit of the contract.
It is important to point out that one must use the correct terminology when drafting assignment clauses in financing documents.
So when wish to document a novation provision it could be fatal to use the term assignment.
The first stage in determining whether a contractual right can be assigned is whether it is characterised as a chose in action.
A right that is a chose in action is a personal proprietary right that can be transferred to a third party at law or in equity according to the formal rules governing the transfer of such rights.
The relevant (and assignable) chose may be the benefit of the contract as such; that is, the bundle of rights, powers, privileges and immunities created by the contract rather than a particular right conferred by a term of the contract.
Some individual rights may be considered separately for the purpose of assignment because they are sufficiently discrete and independent of other provisions of the contract
In Austino Wentworthville Pty Limited v Metroland Australia Limited [2013] NSWCA 59 Barrett J summed up what he considered to constitute an absolute assignment:
An “absolute” assignment is one that is unconditional and does not attempt to affect part only of the chose in action.
The fact that an assignment otherwise absolute is accompanied by an express proviso for redemption, an implied right of redemption or the creation of a trust in respect of future proceeds does not deprive it of its absolute character.
An assignment by way of charge is one the effect of which is to give a right of payment out of the subject matter assigned without outright transfer of that subject matter. Such an assignment occurs when, for example, there is a transfer of a right to be paid out of a particular fund or of so much of a debt as is sufficient to satisfy a future indebtedness.
The character of the assignment must be ascertained from the terms and effect of the instrument, according to the construction of it as a whole.
An assignment may be effective as an equitable assignment even if the formalities required by s 12 of the Conveyancing Act have not been satisfied.
Pending the giving of notice, the assignment takes effect in equity only: Norman v Federal Commissioner of Taxation [1963] HCA 21; (1963) 109 CLR 9 at 28 per Windeyer J.
Section 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 receive or claim such debt or chose in action, shall be, and be deemed to have been effectual in law (subject to all equities which would have been entitled to priority over the right of the assignee if this Act had not passed) to pass and transfer the legal right to such debt or chose in action from the date of such notice, and all legal and other remedies for the same, and the power to give a good discharge for the same without the concurrence of the assignor: Provided always that if the debtor, trustee, or other person liable in respect of such debt or chose in action has had notice that such assignment is disputed by the assignor or anyone claiming under the assignor, or of any other opposing or conflicting claims to such debt or chose in action, the debtor, trustee or other person liable shall be entitled, if he or she thinks fit, to call upon the several persons making claim thereto to interplead concerning the same, or he or she may, if he or she thinks fit, pay the same into court under and in conformity with the provisions of the Acts for the relief of trustees.”
a contractual obligation cannot be assigned without the consent of the other contracting party; that is, it is not possible to transfer the burden of a contract to a third party other than by novation.
When we speak of assignment we are talking about assigning the benefits as we cannot assign burdens – we can only do this by novation
NB: Linden Gardens Trust Ltd v LenestaSludge Disposals Ltd [1994] 1 AC 85 referred to – assignment of “the contract“ – we know now that it is trite law that it is impossible to assign “the contract” as a whole, in the sense that phase ie ‘including both burden and benefit’.
Under general law, a debt or other chose in action may be assigned by two methods:
legal assignment or equitable assignment.
A legal assignment is absolute if the requirements of s 12 of the Conveyancing Act have been satisfied. Several steps must be taken before s 12 of the Conveyancing Act causes an assignment of the kind it describes to be “effectual in law”.
There must be a written instrument. It must be executed by the assignor.
And express notice of the assignment must be given to the debtor.
