The assignment of debts is common in many transactions - from the sale of businesses to restructuring scenarios.

Assigning a debt requires written notice of the assignment being given to the debtor.  Under conveyancing legislation this notice can be given by either the assignor or assignee (for example, section 12 Conveyancing Act (NSW)).

Additional rules now apply for debts captured by the Personal Property Securities Act (PPSA).

The PPSA rules apply to the transfer of an “account” – essentially a monetary obligation arising from the provision of goods or services by a business in the ordinary course. Most ordinary trade receivables comprise PPSA accounts.

Parties transferring or assigning a PPSA account must comply with section 80 of the PPSA.   Whilst this section largely reflects the Conveyancing Act provisions, a new section 80(7) regulates the form of notice to be given to the debtor.

  1. the notice must identify the contract (whether specifically or by class) under which the debt is payable; and
  2. unless the notice is given by the assignor, the account debtor may request the assignee for proof of the transfer.  If the assignee fails to provide proof within 5 business days of request, the account debtor may continue to make payments to the transferor and thereby discharge the debt.

Consequences

Assume a trading entity (vendor) sells its receivables to a purchaser (purchaser). The sale agreement includes an assignment of the vendor’s receivables but no provision requiring the vendor to give notice to account debtors.  The purchaser provides notice of the assignment to debtors but fails to answer one debtor’s questions about the assignment within 5 business days of request.  That debtor pays its debt to the vendor.  The vendor is insolvent and is placed in liquidation shortly thereafter.

The purchaser would have remedies against the vendor for recovery of the funds wrongfully paid to it.  That remedy would be worthless however due to the vendor’s insolvency. As the purchaser has not complied with the PPSA any action against the debtor for recovery would fail – as the payment to the vendor discharged its obligations.

Lessons to learn

Many financiers in the business of purchasing receivables have responded to the new legislation by requiring that assignment notices are issued by both assignor and assignee.   Failing to do this may result in otherwise confidential documents being required for disclosure as proof of the transfer.

What should those obtaining assignment of debts do?

  1. Review whether the debt is covered by the PPSA.  Most bank debts and loan monies are not.  Other debts should be assessed on a case by case basis;
  2. If the PPSA applies, issue a PPS compliant notice, preferably from the party assigning the debt;
  3. If the notice of assignment is to be given by the party acquiring the debt, consider in advance what documents will prove the transfer at a minimum.