Legal and Equitable Assignments; Validity of Notice of Assignment

Readers will be aware that it is very rare for a reported case in the higher courts dealing with invoice finance to emerge, so we were interested to see a report of a recent case in another area of financial services which raised squarely 2 legal concepts which are fundamental to invoice financiers:

• the difference between the legal assignment and equitable assignment of a debt; and
• whether notice of assignment requires the debtor to receive a copy of the instrument of assignment.

Legal and equitable assignment

In Frischmann v Vaxeal Holdings SA [2023] EWHC 2698, the court was concerned with a challenge to the assignment of rights under two loan agreements and a guarantee. The first point considered by the court related to the requirements for a legal assignment as set out in section 136 of the Law of Property Act 1925 (“LPA”).

Section 136 of the LPA provides:

“(1)  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 thing 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 claim such debt or thing in action, is effectual in law (subject to equities having priority over the right of the assignee) to pass and transfer from the date of such notice—

          (a)  the legal right to such debt or thing in action;

          (b)  all legal and other remedies for the same; and

(c)  the power to give a good discharge for the same without the concurrence of the assignor:

Provided that, if the debtor, trustee or other person liable in respect of such debt or thing in action has notice—

(a)  that the assignment is disputed by the assignor or any person claiming under him; or

          (b)  of any other opposing or conflicting claims to such debt or thing in action;

he may, if he thinks fit, either call upon the persons making claim thereto to interplead concerning the same, or pay the debt or other thing in action into court under the provisions of the Trustee Act 1925”.

The defendants contended, among other things, that the assignment here was ineffective and void because it was not in writing under the hand of (signed by) the assignor, as required by section 136 of the LPA. The assignment had been signed on behalf of the assignor by an attorney acting under a power of attorney.

The court found that there was not a valid legal assignment because of the particular provisions of the Powers of Attorney Act 1971, and held that because an effective assignment under section 136 must be in writing and under the hand of the assignor, an assignment signed by the assignor’s attorney did not satisfy this requirement. The court did not accept that the wording of the Powers of Attorney Act 1971 should be treated as rewriting the LPA without express reference to the earlier statute.

Although the court found that there was not a valid legal assignment, the court went on to find that the assignment took effect as an equitable assignment, relying on the case of Technocrats International Ltd v Fredic Ltd (No. 1) [2004] EWHC 692 (QB) [57], in which Field J explained that for there to be an effective equitable assignment:

“all that is needed is some transaction that sufficiently manifests an intention by the owner of an identified [debt] to assign it to another”.

Validity of notice of assignment

An equitable assignment does not require notice to the debtor, but the judge went on to deal with this issue in case it would later be found by a court on appeal that he was wrong about the finding that the assignment did not qualify as a legal assignment, and he gave short shrift to this argument:

“The defendants’ next line of defence is that although they [in] the Re-Amended Defence that they “admit receipt of a letter purporting to give notice of the alleged assignment; nevertheless, [they] cannot plead to whether or not they were given notice of “the Assignment” as no assignment was enclosed with the letter of 18 June 2020 and [they] are not aware if any assignment was in fact executed…

There is no legal requirement that an obligor is to be provided with a copy of the Assignment itself. I conclude that the letter of 18 June 2020 would have amounted to a good notice had section 136 been complied with and was a good notice of the equitable assignment which I have concluded is what had taken place”.

Comment

Although this case does not establish any new principle of law, it is a useful example of the court taking a sensible view of what can sometimes be highly technical legal doctrines relating to assignment and the requirements for notice of assignment.

These issues are highly relevant to invoice financiers:

Equitable assignments can be informal

Any assignment in which the intention of the parties is clear has long been recognised as a valid equitable assignment: there need be no writing, and no notice to the debtor, but the effect of an absolute transfer of ownership of a debt is the same.

There is therefore very little practical difference between legal and equitable assignments: in practice a technical rule requiring Court proceedings to enforce equitable assignments to be brought by both the Financier and the Client is almost universally ignored with no adverse consequences.

Effect of Notice on the Debtor

Receipt of notice of assignment by the debtor has the following important legal consequences:

• it prevents discharge of the debt by subsequent payment to the Client;
• it prevents future changes in the terms of the contract of sale being enforceable against the Financier; and

(3) it fixes the rights of the parties in relation to some aspects of set-off.

Here the court sensibly rejected the debtor’s argument that merely being told about the fact of assignment did not equate to notice, and that it was incumbent upon the assignee to provide a copy of the document or instrument effecting the assignment.

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