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Finance brief - January 2013
- A Guide to Yacht Finance
- A Guide to Recovering Money from a Russian Personal Guarantor
- Marketforce and IEA 10th "The Future of Private Banking" Conference, October 2012
- General liens and financial collateral
- All monies guarantees: do they do what it says on the tin?
- Suing for book debts after assignment: who can bring proceedings?
- Potential lender liability when taking security over an asset
The subject of who can sue for book debts following their assignment was recently addressed by the Court of Appeal in the case of Bexhill (UK) Ltd v Razzaq [2012] EWCA Civ 1376. Specifically, the Court of Appeal considered whether (i) a particular assignment of book debts was absolute or operated by way of charge only, (ii) who could sue for recovery of book debts following an assignment of such book debts in favour of a lender and (iii) whether the lender as assignee of the book debts could authorise the borrower to bring an action for recovery of the book debts in the borrower's sole name.
Background
The borrower provided premium credit funding to insurance brokers, enabling insurance brokers to offer to their clients the facility to pay their annual insurance in instalments rather than in an annual lump sum. The borrower did not itself fund the sums it advanced to the insurance brokers but entered into a facility agreement with a lender to fund these premium funding arrangements. As security for the obligations owed by the borrower to the lender, the borrower entered into a debenture in favour of the lender pursuant to which it "assigns and agrees to assign absolutely in favour of [the lender] all of [the borrower's] rights, title, interest and benefit in "receivables" and it assigns and agrees to assign absolutely in favour of [the lender] all of [the borrower's] right, title, interest and benefit in each "relevant contract". The receivables comprised all present and future book and other debts, money claims and other amounts recoverable or receivable by the claimant. It also extended to the benefit of all rights and remedies relating to claims for damages and other remedies for non-payment.
Under the terms of the debenture entered into in favour of the lender, the borrower undertook that all payments received by it pursuant to the arrangements it entered into with the insurance brokers were to be paid directly into a collection account and all other receivables were to be collected by the borrower in the ordinary course of trading as agent for the lender and upon receipt paid into the collection account.
A customer of the borrower had given a legal charge over a commercial property as security to the borrower for amounts advanced under a premium credit funding arrangement. When the borrower's customer defaulted, the borrower sought possession of the property pursuant to the charge. The customer argued that the borrower had no right to sue for possession as whatever rights it had constituted receivables and such receivables had been assigned to the lender, which was not a party to the legal proceedings.
Key points in the decision
Whether a particular instrument creates an absolute assignment or an assignment by way of charge is a question of construction of the relevant instrument taken as a whole and the principle and the consequences of an assignment being absolute or by way of charge only were explained in Hughes v Pump House Hotel Co 1902 2KB 190 where it was stated that "if it is clear from the instrument as a whole that the intention was to pass all of the rights of the assignor in the debt or chose in action to the assignee the case will come within section 25 of the Judicature Act and the action must be brought in the name of the assignee." In this case the wording in the debenture entered into between the borrower and the lender assigns absolutely to the lender all of the existing receivables. Whether such an absolute assignment is a legal assignment will depend on whether notice in writing has been given to the debtor in each case (which had not been given in this case) and when future receivables come into being then they will be the subject of absolute assignments in equity. When there has been an absolute assignment that takes effect in equity, as was the case in this instance, the general rule is that it is the equitable assignee i.e. the lender that has the right to sue, and the borrower will not be allowed to maintain an action unless the lender is joined as a party to the claim.
The Court also held that having assigned its rights absolutely to the lender, the borrower could not bring an action in its own name as agent as such an action would need explicit wording granting the borrower authority to act as the lender's agent. Secondly, the notion of the borrower acting as agent of the lender seemed to be inconsistent with what had been assigned to the lender and would need "clear wording" to authorise the borrower to bring proceedings in the lender's name of the very thing that had been assigned by the borrower.
Takeaway points for a lender
Note that in many standard form debentures, it may well be that the that the reveivable or contract is charged in favour of the lender rather than assigned, in which case the issues discussed in this article will not arise.
However, in the event that the security is being granted by way of an assignment, care should be exercised by a lender in framing the nature of the assignment that it requires from a borrower. Absent clear wording to the contrary, a borrower who has assigned absolutely the benefit of a receivable or contract under a security document will be unable to take proceedings to recover those receivables or sue on that contract without joining the lender as a party to the proceedings. This has cost implications for a lender and needs to be considered carefully at the outset of any relevant transaction.