Assigning a Debt: Section 130, Notice to the Debtor and What the Assignee Takes

A lender or a supplier with an overdue debt may prefer to sell it than to pursue it. A buyer, in turn, may be better placed to recover. In both cases the transaction is an assignment of the debt, and the law attaches conditions to it that decide whether the buyer can later enforce what it has bought. This note explains how a debt is assigned in India, what the assignee takes and the points on which assignments commonly fail. It is general information, not advice on a particular transaction.

The legal basis

A debt is an actionable claim, a term defined in Section 3 of the Transfer of Property Act, 1882. Section 130 provides that the transfer of an actionable claim is effected only by the execution of an instrument in writing signed by the transferor or his duly authorised agent. The transfer is complete on execution of the instrument, and from that date all the rights and remedies of the transferor vest in the transferee, who may sue in his own name without making the transferor a party. The Section does not require the debtor's consent.

Notice to the debtor

The debtor is not bound by the assignment until it has notice. Section 131 provides that the notice should be in writing, signed by the transferor or transferee. Until the debtor receives it, a payment made by the debtor to the original creditor discharges the debt. The assignee should therefore give notice at once, in a form that can be proved, and ask the debtor to pay the assignee in future. Where a debt has been assigned twice, the one who gave notice first has priority, on the principle in Section 132 and the related provisions.

What the assignee takes

• The claim subject to the debtor's defences. Section 132 provides that the transferee takes the claim subject to all the liabilities and equities to which the transferor was subject at the date of the transfer. A set-off, a defect in the underlying contract or a dispute about performance is available against the assignee as it was against the original creditor.
• The security that goes with the debt. A mortgage or charge securing the debt passes with it, though the assignee should check that the charge has been registered in its favour where the law requires.
• No warranty of solvency. Section 133 provides that, unless the contract says so, the transferor does not warrant the solvency of the debtor. The assignee takes the credit risk, and should require representations about the validity and the amount of the debt.
• Limitation as it stood. The assignment does not restart limitation. The assignee takes the claim with the time already run. A fresh period arises only from an acknowledgment or part-payment under Sections 18 and 19 of the Limitation Act.

Pending proceedings

Where the debt is the subject of a suit, Order XXII Rule 10 of the Code of Civil Procedure allows the suit to be continued by or against the person to or upon whom the interest has devolved, with the leave of the court. An assignee of a decree may apply to execute it under Order XXI Rule 16. In an insolvency application, the assignee of a financial debt is admitted as a financial creditor in place of the assignor, provided that the assignment is proved.

Limits on what can be assigned

Section 6(e) of the Transfer of Property Act prohibits the transfer of a mere right to sue, but an actionable claim is not within the prohibition. A claim for unliquidated damages in tort, which is no more than a right to sue, cannot be assigned in the same way. Some contracts also prohibit assignment without consent, and an assignment in breach may be ineffective against the debtor or give rise to a claim. Loans by a bank to a borrower can be assigned to another bank or to an asset reconstruction company on the terms of the Securitisation Act.

Points to check before buying

1. The chain of assignments, each in writing and signed by an authorised signatory.
2. Stamp duty on the assignment deed under the applicable State law. An unstamped instrument cannot be admitted in evidence until the duty and the penalty are paid.
3. The debtor's acknowledgment, if any, and any dispute raised earlier.
4. Whether the security has been registered, and whether it needs to be re-registered or noted in the assignee's name.
5. The records the seller will hand over: the original agreements, the ledger, the notices and the correspondence.

An assignment is only as strong as its documentation. The buyer who obtains the records, the chain of title and the notice will find enforcement considerably easier.