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?
the assignee in an assignment does not become a party to the initial contract between the debtor and the assignor. This is comparable to a novation in so far that the parties of the novation do not become parties to the initial contract because a new contract is created whereas in an assignment the underlying contract remains on foot.
Because in a novation the novation results in a new contract the rights are not subject to equities. In an assignment the assignee takes subject to equities.
Novation comprises a discharge of existing obligations where consent is required whereas consent is not required in an assignment at common law.
Consideration is required for novation whereas an assignments does not strictly require consideration.
In a lending arrangement the borrower has to be a party to the novation process although it will usually be the case that the express terms of the loan agreement provide that the borrowers consent is not required for the novation to take effect. In the normal course, the documentation required to effect a novation of loan depends on the provisions in the loan agreement.
However most loan agreements (including the APLMA and LMA recommended form) will have a transfer certificate attached as a schedule that operates by way of novation. There is also a provision in the loan agreement where all parties (including the borrower) agree that provided the other conditions to any transfer set out in the loan agreement are complied with the borrower consents to the novation effected by the execution of the transfer certificate.
In the case of a lending arrangement where it could be the case that the loan may not be fully drawn, the new lender as substituted party could be assuming obligations to advance monies to the borrower where the novation has taken effect
so, mechanically, if a lender wishes to exit or reduce its exposure under a particular lending position, it will want both to sell existing advances that are outstanding and to relieve itself of the obligation to make new advances
A novation is different to an assignment as in a novation there is no assignment of rights and obligations but rather the creation of new rights and obligations in a new agreement.
In the formal sense, a third party will become a ‘substituted contracting party’ by a novation of the original agreement. Novation will ordinarily require the agreement of the original and the substituted party.
Novation is the only way in which a party can effectively ‘transfer’ all its rights and obligations under an agreement to the ‘substituted contracting party’.
