It is common for debts to be assigned by creditors for numerous reasons.  Once a debt is assigned however it does not mean the assignee can seek to enforce the debt without facing potential difficulties.

Firstly, a question might arise as to whether the assignment is valid.  Some agreements or contracts specifically exclude the ability to assign a right arising in the agreement or contract.  For an assignment of a debt to be valid, notice must be given to the debtor in accordance with section 12 of the Conveyancing Act 1919 (NSW).

Proving notice was given can often be a problem when a large number of debts are assigned.  Often a pro forma letter is produced and issued en masse, with no copies of the letters actually sent and addressed to each debtor being maintained.

The right of a debtor to assert an offsetting claim in defence to any step taken to enforce a debt by the assignee can also cause issues.  An assignee acquires the same rights and obligations of the assignor.  Therefore if proceedings are commenced by the assignee to enforce the debt, the defendant debtor may have an offsetting claim which arises out of the arrangement between the assignor and the debtor, to which the assignee is not a party.

Section 21 of the Civil Procedure Act 2005 (NSW) provides for an offsetting claim to be made by way of defence even if the offsetting debt has no relationship to the debt which is the subject of the assignee’s claim.  If no debt is found to be owing by the debtor to the assignor then the assignee has essentially been assigned nothing of value.  Similar offsetting provisions apply to applications to set aside a creditor’s statutory demand for payment of debt.

When considering taking an assignment of debt, one should carefully consider the value of the assigned debt that might be recovered and ensure the notice formalities are met.

For more information please contact us, you may also be interested in our recent piece on assignment of debts in the context of bankruptcy.