Assignment of Debts - The myths and

misconceptions

Trevor Robinson, Partner and Karolina Popic, Senior Associate

If you have any questions about the details of this document

please contact Trevor Robinson or Karolina Popic on + 61 2 9353 4000

Clayton Utz Lawyers

Levels 22-35 No. 1 O'Connell Street Sydney NSW 2000 Australia
PO Box H3 Australia Square Sydney NSW 1215
T + 61 2 9353 4000 F + 61 2 8220 6700

www.claytonutz.com

Our reference 166/706/21726803

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Table of Contents

1. Introduction..................................................................................................................1
2. Legal vs Equitable Assignments ...............................................................................1
2.1 Legal assignment ........................................................................................1
2.2 Equitable assignment..................................................................................3
2.3 Other considerations...................................................................................4
3. Assignment of related rights......................................................................................7
4. Main risks associated with not giving notice of assignment to a
debtor ...........................................................................................................................9
4.1 Priorities .......................................................................................................9
4.2 Equities.......................................................................................................10
5. The effect of title retention clauses ("romalpa" clauses) ......................................13
5.1 What are title retention clauses? .............................................................13
5.2 Why relevant in this context? ...................................................................14

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1. Introduction
The assignment of debts (with or without any related rights) arises in a number of
circumstances in practice.

As structured capital markets lawyers, we see it every day. In a typical securitisation

transaction, the entity that is owed a debt (for example an ADI) assigns that debt to a special
purpose vehicle or trust, which debts support debt instruments issued by that special purpose
vehicle or trust.

The assignment of debts is also relevant in a number of other situations. For example,
factoring, invoice discounting and the sale of a loan portfolio.

In each of these situations, one must carefully consider the requirements to assign a debt and
the risks and adverse consequences of so doing.

In this paper, we address a number of issues:

• The requirements of legal v's equitable assignments of debts and the

advantages/disadvantages of each.

• The assignment of related rights.

• The effect of any set-off rights and other equities.

• Some issues regarding title retention clauses in this context.

There are, no doubt, other issues. For example, we do not address privacy or the clean sale
requirements under APS120, which is the prudential standard that regulates securitisation by
ADIs. Nor do we touch upon how to effect any changes to the underlying loan documentation
that may be required if a loan portfolio is transferred and the assignee wants to conform the
assigned documentation to its existing documentation.

2. Legal vs Equitable Assignments

2.1 Legal assignment

Section 12 of the Conveyancing Act 1919 (NSW)

Section 12 of the Conveyancing Act (and its equivalent in the other States and Territories)
governs the requirements for legal assignments of debt and other choses in action. It provides
as follows:

"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 chose 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 receive or claim such debt or chose in action, shall be, and be deemed to
have been effectual in law (subject to all equities which would have been entitled to priority
over the right of the assignee if this Act had not passed) to pass and transfer the legal right to
such debt or chose in action from the date of such notice, and all legal and other remedies for
the same, and the power to give a good discharge for the same without the concurrence of the
assignor: Provided always that if the debtor, trustee, or other person liable in respect of such
debt or chose in action has had notice that such assignment is disputed by the assignor or
anyone claiming under the assignor, or of any other opposing or conflicting claims to such
debt or chose in action, the debtor, trustee or other person liable shall be entitled, if he or she
thinks fit, to call upon the several persons making claim thereto to interplead concerning the
same, or he or she may, if he or she thinks fit, pay the same into court under and in conformity
with the provisions of the Acts for the relief of trustees."

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 Requirements for legal assignment

Thus the requirements for a legal assignment can be summarised as follows:

(a) there must be an assignment and it must be absolute;

(b) the assignment must be by writing under the hand of the assignor; and

(c) there must be express notice in writing to the debtor.

• Absolute assignment by writing under the hand of the assignor

The assignment must be absolute, that is there has to be an outright transfer of title
and may not only be by way of security or charge, or be conditional.

No particular form of assignment is required, but it must sufficiently indicate an

intention on the part of the person entitled to the debt to immediately dispose of the
property concerned and to vest it in the assignee. The words used must also clearly
identify the property and need to indicate that the assignment is binding
immediately and irrevocably.

It should be appreciated that a typical offer by an assignor in an equitable

assignment will not qualify as an assignment by writing under the hand of the
assignor for this purpose as it does not satisfy all of these elements.

To convert the assignee's title from an equitable to a legal one requires a further
written assignment to be executed (and express written notice of such assignment to
be given to the relevant debtor).

As a consequence, a typical equitable assignment document will provide for the

assignor to appoint the assignee not only its attorney to give notice to the relevant
debtor but also to sign any other document on behalf of the assignor.

• Express notice to the debtor

This is an essential element for vesting legal title and is not merely a mechanism for
protecting the assignee's priority.

It must be express. Implied or constructive notice is not sufficient.

It must state:

o the fact of the assignment specifically;

o the name of the assignee; and

o the date of the assignment and the amount of the debt (although a misstatement
of either will not necessarily render the assignment ineffective1).

1
Van Lynn Developments Ltd v Pelias Construction Co Ltd [1968] All ER 824. In this case, notice of assignment
that did not refer to the date was held to be valid. This case also cited the case of Denney, Gasquet, and Metcalfe v
Conklin [1913] 3 KB 177 where the date of assignment was included in the notice, but there was no mention of the
amount assigned. However, the notice was held to be valid, as notice is sufficient if it brings “to the notice of the
debtor with reasonable certainty the fact that the deed does assign the debt due from the debtor so as to bind the debt
in his hands and prevent him from paying the debt to the original creditor.” (at 180)

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 One of the purposes of this notice is to inform the debtor with certainty of the
person in whom the legal right to sue is vested. This also protects the assignee
against payment to the assignor, prevents the debtor from obtaining a valid
discharge of liability from the assignor and preserves the assignee's priority (more
on this later).

Notice may be given by either the assignor or assignee. In practical terms it is of

greater importance to the assignee that the debtor is aware of the assignment and of
its validity. However, from a debtor's perspective, why would it rely on a notice
from a stranger (i.e. the assignee) to the effect that the debtor now owes that
stranger the debt that it previously owed to original creditor. As a consequence, it is
prudent for both the assignor and the assignee to give notice of the assignment to
the debtor.

Notice may be given at any time but, if it is to be given, it should be given as soon
as possible.

Advantages of legal assignment:

• No consideration is required for a valid legal assignment.

• The assignee is entitled to sue the debtor in its own name and does not need to join
the assignor as a party to the action.

• The debtor can safely perform its obligations in favour of the assignee.

• The assignee is the person who can discharge the debt.

• A legal interest obtained for value and without notice of earlier equitable interests
will be accorded priority ahead of equitable interests.

Disadvantages of legal assignment:

• The identity of the assignee is disclosed to the debtor.

• Stamp duty is payable on an ad valorem basis in some States.

• Parts of debts cannot be legally assigned.

• The assignment must be absolute, and not by way of security.

2.2 Equitable assignment

The requirements for a valid equitable assignment differ in situations where there is valuable
consideration, and where the assignment is a gift.

Requirements where there is valuable consideration

As with legal assignments, a clear expression of intention to assign is necessary and the subject
matter of the assignment must be identified with certainty.

The consideration required to support an assignment of this kind is consideration sufficient to

support a simple contract.

Where there is a purported assignment but the legal requirements for assignment are not
satisfied, equity "treats as done that which ought to be done".

Where there is an agreement to assign a debt for valuable consideration, the agreement will be
effective in equity from the moment the consideration is paid or executed.

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 As the assignor will continue to be the legal "owner" of the debt, the assignor will be regarded
to be a trustee for the assignee, who will be regarded as the equitable owner of the debt.

Requirements where there is no valuable consideration

The basic test is that a voluntary assignment is valid only when everything "necessary" has
been done to achieve a legal assignment. There are different judicial interpretations as to what
"necessary" means. The view preferred in Australia is whether the assignor has done all that is
necessary without further action on its part to place the vesting of the legal title within the
control of the assignee and beyond the recall or intervention of the assignor2. Once this has
been done the assignment is valid in equity.

This means that the assignor must sign an absolute assignment in writing for this type of
equitable assignment to be effective. As noted above, notice can be given by either the
assignor or the assignee with a consequence that a notice of the assignment by the assignor
(even if to be held by the assignee in escrow) is not required.

Advantages of assignments in equity

• No notice to the debtor is required.

• The assignment may be absolute or may be conditional or by way of security.

• A part of a debt may be assigned (if supported by consideration).

• Writing is not required (if supported by consideration).

• If done correctly no stamp duty will be payable.

Disadvantages of assignments in equity

• The assignor must be a party to any action to enforce the interest assigned, either by
suing in the assignor's name, or by joining the assignor in the action. This may be
dispensed with in special circumstances but, on a general comment, will only rarely
be departed from.

• The assignee takes its interest subject to any equities that arise after the assignment
but before notice is given to the debtor (as to which see below). Subject to the
discussion below, both legal and equitable assignees take subject to equities that
arose before the assignment.

2.3 Other considerations

• Novation:

Where a party seeks to transfer not only its rights under a contract but also the
burden of a contract, this can only be done by novation. The effect of a novation is
to create a new contract with the existing one being discharged.

Importantly, novation requires the agreement of all parties, including the debtor,
whereas assignment is generally effective without the consent or co-operation of the
debtor.

2
per Mason CJ and McHugh J in Corin v Patton (1990) 169 CLR 540 at 549-560

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 Such consent may be actual or deemed. The lowest risk approach is to obtain actual
consent from the debtor. But in practice, actual consent may be difficult or
unfeasible to obtain.

Relying on deemed consent is a riskier approach, but may be a more commercially

viable option. Authority on this issue is that "the requirements of our law are
satisfied by a tacit agreement to extinguish the former obligation, and this is
inferred when an inconsistent obligation is by agreement substituted."3 The key
concept is "substitution by agreement of an inconsistent obligation." For example,
the assignee may decide to rely on a debtor making a drawing request after
receiving appropriate notice of the proposed substitution as the basis of the consent
to novation which incorporates the "inconsistent obligation."

A risk with this approach is that the debtor's conduct may be ambiguous because the
debtor is doing what it would otherwise be entitled to do. It may not be conduct
signifying assent to the assumption of the burden of the contract by the assignee.

In our view, it is not enough to rely on the debtor doing something that it is legally
obliged to do (such as making a regular repayment under the loan contract) to
signify the required consent.

• Assignment of mortgages:

As to the assignment of mortgages, section 91(1) of the Conveyancing Act provides

that a mortgage may be transferred, by a memorandum indorsed or annexed to the
mortgage and signed by the persons to be bound and witnessed by one witness.

Section 91(4) provides that "every such memorandum of transfer shall operate as a
deed of assignment of the mortgage debt, and as a deed of conveyance of the estate
and interest of the mortgagee of and in the mortgaged property, and shall vest the
debt and estate and interest in the assignee, together with all the rights, powers and
remedies of the mortgagee expressed or implied in the mortgage."

Care must be exercised when transferring a mortgage that may by its terms secure
more than one debt. For example, a mortgage may secure debt 1 and debt 2.
However, the assignor may only wish to transfer the mortgage and debt 1. The
effect of section 91(4) of the Conveyancing Act is that if the assignor transfers the
mortgage, both debt 1 and debt 2 will be assigned.

One way of countering this problem in practice is to assign the mortgage and both
debts but to provide for the assignee to hold debt 2 on bare trust for the assignor. In
this way debt 2 remains the asset of the assignor and, importantly, it remains
secured by the mortgage.

• Servicing:

Where notice is not given to the debtor, it is usual for the assignor to continue to
have responsibility for the day-to-day servicing of the debt.

This means that the assignor as servicer will collect moneys from the debtor. If the
debtor pays the assignor and the assignor intermingles those moneys with its other
moneys, it is unlikely that the assignee will be able to trace through to those
moneys. For this reason, it is not uncommon to set up a strict regime for those
moneys to be paid directly by the debtor into an account controlled by the assignee

3
per Windeyer J (dissent) in Olsson v Dyson (1969) 120 CLR 365 at paragraph 18 and referred to subsequently in
Hospitality Group Pty Limited v ARU [2001] FCA 1040 at 138-139

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 or to require the assignor to pay those moneys into that account immediately on
receipt (and conduct regular audits to check that this is in fact done).

• Perfection of Title:

An equitable assignee will want to protect itself and reserve the power to convert its
interest from equitable to legal if certain events occur. Typical events include there
having been a breach of representation or warranty by the assignor, a failure to pay
the assignee moneys received by the assignor, or assignor insolvency.

This is usually achieved by the assignor appointing the assignee its attorney to
perfect its interest in the subject debts. Pursuant to such a power of attorney, the
assignee could enter into the absolute assignment by writing under the hand of the
assignor and provide express notice to the debtor as required by section 12 of the
Conveyancing Act. In a secured transaction, the assignee could also execute
transfers of mortgages and other securities from the assignor to the assignee and
arrange for those transfers to be registered.

There has been some debate as to whether a perfection of title power of attorney
survives a liquidator, receiver or administrator being appointed to a company
assignor. Namely, whether the assignee can still exercise its powers under the
power of attorney notwithstanding that appointment.

In the context of an administrator, section 437A(1) of the Corporations Act 2001

(Cth) provides as follows:

"While a company is under administration, the administrator:

(a) has control of the company's business, property and affairs; and
(b) may carry on that business and manage that property and those
affairs; and
(c) may terminate or dispose of all or part of that business, and may
dispose of any of that property; and
(d) may perform any function, and exercise any power, that the
company or any of its officers could perform or exercise if the company
were not under administration."

In addition, section 437C provides that:

"While a company is under administration, a person (other than the

administrator) cannot perform or exercise, and must not purport to
perform or exercise, a function or power as an officer of the company".

As I understand the argument, as the directors of an assignor are no longer in

control of the assets of the assignor (and the administrator is), the appointment of
the assignee as the assignor's attorney is no longer effective.

We disagree with this argument for two basic reasons. First, the assignor does not
relevantly dispose of the assets of the assignor when the assignee perfects its title to
the debts. The assignee already owns the debt and by perfecting its title there is no
disposal of the assignor's bare legal estate.

Secondly, while it is the case that the Corporations Act provides for the
administrator to control the property of the assignor and may dispose of that
property, and one can argue that the bare legal estate, retained by the assignor is
property, the administrator's entitlement to deal with that property is subject to the
valid equitable interest acquired by the assignee. As a consequence, the assignor's
(and thus the administrator's) entitlement to deal with that property is thereby
severely restricted.
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3. Assignment of related rights
If the debt is secured, an assignment of the debt should also include a transfer of the other
related rights. For example, any mortgage, guarantee, the rights under any general insurance
policies, lenders mortgage insurance policies, valuation reports, solicitor's certificates and
other documents evidencing the assignor's interest in the debt, mortgages, the land the subject
of the mortgages and the balance of the securities. Any priority deeds entered into with third
party mortgagees should also be considered.

Each class of ancillary rights should be examined individually to determine whether it can be
assigned and, if so, how.

• Mortgages

• See paragraph 2.3 above for a discussion of some of the issues that are
relevant to such an assignment.

• Existence of a caveat as an impediment to registration of a mortgage

transfer

In order for an assignee to perfect its legal title to a mortgage in relation

to Torrens Title land, it must register the transfer of that mortgage with
the land titles office. In certain circumstances, registration of the transfer
may be impeded by the existence of a caveat in relation to the land the
subject of that mortgage. Whether a caveat has such an effect depends
on the terms of the caveat. Accordingly, if the caveat prohibits "any
dealing" the caveat would operate as a statutory injunction requiring the
Registrar-General to withhold registration until the caveator has been
given the opportunity to pursue remedies against the person who lodged
the dealing for registration. However, a caveat can only prohibit the
recording of a dealing to the extent that the recording would affect the
interest claimed in the caveat. While such a caveat remains in force, the
Registrar-General cannot record in the register any dealing prohibited by
the caveat except with the caveator's consent.

As a precaution, if acting for the assignee it may be worthwhile to obtain

a title search to determine whether there are any such caveats in respect
of the land the subject of the mortgages. This may be prohibitive where
a large number of mortgages are involved.

• Competing unregistered equitable mortgage interests

Following the assignment of a mortgage to an assignee, if the assignee

chooses not to register its interest in that mortgage with the lands titles
office, it is possible that, in certain circumstances, the assignee's interest
in that mortgage will be defeated by a subsequent competing assignee
who had no notice of the earlier assignee's interest.

The circumstances in which an earlier assignee's interest in a mortgage

may be postponed include the earlier assignee failing to lodge a caveat in
respect of its interest in the mortgage. Postponement by failure to lodge
a caveat arises where that failure, when considered in light of all other
circumstances, allows another person to acquire an unregistered interest
on the mistaken assumption that the earlier interest does not exist.
Accordingly, if the subsequent assignee of the mortgage searched the
Register and found no reference to the earlier assignee's interest, it is
considered that the earlier assignee allowed the assignor to create the
interest in the subsequent assignee without the existence of the earlier

SYDWORKDOCS\166\3322386.2 7
 assignee's interest being brought to the subsequent assignee's attention.
On this analysis, the earlier assignee is guilty of postponing conduct and
its interest will be postponed to that of the subsequent assignee.

Notwithstanding the above, in our experience, it is rare for caveats to be

lodged in respect of equitable mortgage interests. In the securitisation
context, for instance, it is not considered a significant risk as it is
unlikely that an ADI would fraudulently seek to assign the same
mortgage to different assignees. A further comfort is the rating agencies'
requirement that ADIs carefully mark their systems to identify those
mortgage debts which have been assigned preventing any such
assignment to two different assignees occurring accidentally. But that is
not to say that there are not other circumstances in which the lodgement
of a caveat would be advisable.

Alternatively, notice of an assignee's interest in an assigned mortgage

may be given to subsequent assignees in other ways. For instance,
where an assignee is also taking a charge over the bare legal interest of
an assignor in the assigned debt (as discussed in detail below in
paragraph 4.1) the assignee may also seek to extend that charge to refer
to the mortgage security in relation to the debt.

• Guarantees

It is likely that the guarantee document will permit its benefit to be assigned (but
this should be checked). Guarantee are choses in action and thus the discussion
above as regards the assignment of debts is equally applicable to guarantees. Legal
assignment of a guarantee will be effected by satisfying the requirements of section
12 of the Conveyancing Act.

• Charges

An assignor may have taken a charge in respect of various property. As above,

charges are choses in action and legal assignment will be effected by satisfying the
requirements of section 12 of the Conveyancing Act.

In addition, if the charge is a registrable charge for the purposes of the Corporations
Act, lodgement of an ASIC Form 311 with ASIC within 45 days of the assignment
will also be required. If the charge relates to a liquor licence or poker machine
licence, notification of the change in mortgagee to licensing boards and gaming
authorities is also required in certain States.

• Insurance Policies

In our experience the benefit of lenders mortgage insurance policies may be

assigned but only after the consent of the insurer is obtained. It is generally not too
difficult to obtain the consent of the lenders mortgage insurers.

In the case of general insurers, parties usually acknowledge the risks and do not
require the assignor to obtain such consents. Instead they usually only require the
assignor to ensure that when each such insurance policy is renewed that it is noted
on the policy that the assignor's interest as mortgagee includes its assigns, whether
legal or equitable.

It is also not uncommon for an assignee to take out "back-up" cover to protect itself
if the benefit of the general insurance does not extend to it.

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 • Solicitor's Certificates and Valuation Reports

The assignor may have received the benefit of a certificate from its solicitor or a
valuation report in connection with the original debt and its security. Transferring
the benefit of these to the assignee may be problematic.

In each case, it is unlikely that their benefit can be assigned. It is also highly likely
that both the solicitor's certificate and the valuation report contain express
provisions to the effect that they can only be relied on by the addressee (namely the
assignor). In addition, even if the assignor could convince the solicitor and valuer
to extend the benefit to the assignee, it may be practically difficult to arrange this,
particularly if a large number of debts are being assigned.

One solution in relation to solicitor's certificates and valuation reports is not to seek
to assign them but rather for the assignor to represent and warrant to the assignee
and indemnify the assignee as to the matters covered by the solicitor's certificate
(that is, the mortgage is valid and enforceable) or valuation report (that is, the
accuracy and completeness of such report) but only to the extent that it recovers
such damages from the solicitor or valuer. Of course, an assignor may not be
prepared to give such representations and warranties.

• Priority deeds

The assignor may have entered into priority arrangements with other financiers
regarding secured properties and these arrangements may contain provisions
prohibiting or restricting the assignor's ability to assign the benefit of the securities.
As there is no "industry norm" each individual security packet may have to be
reviewed to identify the existing priority arrangements, with a decision then made
on a case by case basis. A less than perfect solution (but one which may be
acceptable in practice) is for the assignor to assign its interest in any priority
arrangement in equity only and for the assignee to enter into a deed poll under
which it agrees to the obligations of the assignor under those priority arrangements.

4. Main risks associated with not giving notice of assignment to a

debtor
As discussed above, there are a number of reasons why an assignee may choose not to give
notice to a debtor of its interest in a debt assigned to it. However, if no such notice is given,
the assignee is exposed to certain risks. The two main risks are:

(a) in certain circumstances, the assignee's interest can be defeated by a subsequent

competing assignee who has given notice of its interest to the debtor; and

(b) the assignee's interest will be subject to any equities that a debtor may claim to have
against the assignor after the assignment whilst notice of that assignment is yet to
be given.

4.1 Priorities

Determination of the priority of competing equitable interests depends on when notice of that
interest is given to the debtor by the competing assignees. The rule of thumb is that the person
to give notice first prevails. In the absence of notice of the other's interest in the debt at the
time of taking its interest, the first to give notice to the debtor will have priority over the other.
This is the principle in Dearle v Hall (1828) 38 ER 475.

One way to protect the equitable interest of an assignee who does not give notice to the debtor
(and is therefore at risk) where the assignor is a corporation is to take a charge over the legal
interest retained by the assignor and register that charge with ASIC. Pursuant to section

SYDWORKDOCS\166\3322386.2 9
 130(2) of the Corporations Act, a person is taken to have constructive notice of registered
charges. The scope of that constructive notice has not as yet been settled - does the
constructive notice relate to the existence of the charge only or does it extend to the contents of
the charge document lodged with ASIC? In our view, in the very least, the constructive notice
would extend to the information included on the ASIC Register in relation to that charge.
ASIC is obliged to include the following details on its Register:

• the date of the creation of the charge;

• a short description of the liability (whether present or prospective) secured by the

charge;

• a short description of the property charged,

and as such, notice would be taken to include these details.

4.2 Equities

Unless a debtor has agreed that its debt may be assigned free from all equities, an assignee's
interest in a debt will be subject to all such equities which the debtor may have against the
assignor until such time as notice is given of the assignment to the debtor. Once notice has
been given, any equities arising after that date as between the assignor and the debtor will not
affect the assignee's interest except in certain circumstances. If the equity is "flowing out of
and inseperably connected with" the obligation the benefit of which is assigned, the assignee's
interest is subject to that equity irrespective of whether notice has been given.

Some examples of “equities” in this context are a right of set-off or counterclaim which the
debtor is entitled to raise against the assignor, any right of a debtor to rescind or rectify the
contract or any claim for damages for its breach.

Set-off

A right of set-off may arise in a number of circumstances. Some examples are:

• in relation to an ADI and a debtor where that debtor also has a deposit with the
ADI; or

• in relation to trade receivables where the debtor has a right to damages arising from
the assignor's breach of contract.

Contractual Set-off

Two parties can enter into an agreement to set off their respective liabilities to each other so
that there is only, as between them, a single liability for the balance. Contractual set-off takes
effect according to its terms and will only apply if there is an agreement to this effect.
Contractual set-off is enforceable until one of the parties to the agreement becomes bankrupt
or insolvent. This is discussed further under insolvency set-off.

Equitable Set-off

Equitable set-off was developed by the Courts of Equity to protect a party denied statutory set-
off where this would result in an injustice or an inequitable result. The approach to equitable
set-off varies as between that adopted by the courts in England and the courts in Australia.
The basic prerequisite appears to be that either the claim and the cross-claim arise out of the
same transaction, or the claim and cross-claim arise out of transactions that are inseparably
connected.

Courts may also require that the cross-claim must impeach the claim, although authorities
diverge on this view. That is, it may not be sufficient that the claim and the cross-claim arise

SYDWORKDOCS\166\3322386.2 10
 out of the same or inseparably connected transactions, but rather the cross-claim must in some
way undermine the very basis of the claim. This approach appears to still be in favour in
Australia.4

Generally speaking, the more closely the contracts under which the claims arise are related, the
more likely it will be that an equity will arise to allow a set-off.

In some cases the courts have protected the assignee's right to repayment of the debt free of
set-off. In other cases, the courts have permitted a debtor to set off its debt against damages
for breach of contract where (in one case) the breach rendered the debtor unable to repay the
debt and (in another case) the claim for damages far exceeded the debt. It is conceivable that a
default by an assignor could produce a similar result to either of these fact situations to allow
the debtor an equitable set-off right. For example:

(a) an ADI may offer to customers the ability to offset the interest liability on their loan
debts against the interest earned on a nominated deposit account. Such an account
could be construed as inseparably connected with the corresponding loan debt from
the ADI;

(b) an ADI's default in respect of a customer's deposit may result in the customer
defaulting on its loan debt. In this situation, the loan debt and the deposit could be
regarded as so closely connected that it would be unjust not to allow the customer to
set-off the deposit against the loan debt.

In the context of an assignment, if a right of equitable set-off existed as against the assignor
prior to notice of assignment being given to the debtor, the right to set-off will continue as
against the assignee. In addition, equitable set-off may also be available in relation to set-off
arising after notice of the assignment if it could be said that the equities to which the assignor,
and thus the assignee, are subject to (that is, the set-off right) are "flowing out of and
inseparably connected with" the obligation the benefit of which is assigned.5

Statutory Set-off

The statutory right to set-off no longer exists under New South Wales or Queensland law.
However, the statutes of set-off remain in operation in all other States and Territories.

The statutory right to set-off is based upon the English Statutes of Set-Off of 1729 and 1735.
When the Australian States were established as British colonies the statutory right of set-off
was incorporated into the statute law of each State. In New South Wales and Queensland these
statutes were repealed respectively by the Imperial Acts Application Act 1969 (NSW) and the
deletion of Part 15 Rule 25 from the Supreme Court Rules (NSW) and the Imperial Acts
Application Act 1984 (Qld).

Statutory set-off is a procedural defence to an action for payment of a debt owing by the
defendant to the plaintiff. It allows the defendant to set-off against the plaintiff's claim the
indebtedness of the plaintiff to the defendant.

The statutory set-off right applies only when the demands are "mutual" and "liquidated" and
are due and payable before the date of the relevant action. Mutuality is discussed below.

4
See Meagher, Gummow & Lehane, Equity: Doctrines and Remedies (4th ed, 2002, Butterworths) at pp 1057-1060,
1063
5
See Meagher, Gummow & Lehane, Equity: Doctrines and Remedies (4th ed, 2002, Butterworths) at p 284

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 For example, the debtor's indebtedness to an ADI under a loan and the ADI's liability for the
credit balance of the debtor's deposit accounts would normally be sufficient to satisfy both of
these requirements.

However, where the loan is assigned to another person, statutory set-off may only be asserted
in respect of debts which arose before notice of the assignment was given to the debtor.
Unlike equitable set-off, once the debtor receives notice of the assignment, equity would
restrain the debtor from diminishing the rights of the assignee by relying on defences that only
accrued after notice.

Insolvency Set-off

Insolvency set-off arises where one of the claimants is insolvent or bankrupt. Insolvency set-
off is governed by statute (s 86 of the Bankruptcy Act 1966 for individuals and s 553C of the
Corporations Act for companies).

The two sections are identical and provide that where there have been mutual credits, mutual
debts or other mutual dealings between the bankrupt or insolvent party and a person claiming a
debt in the bankruptcy or insolvency:

(a) an account will be taken of what is due from one party to the other in respect of
those mutual dealings;

(b) the sum due from one party must be set off against any sum due from the other
party; and

(c) only the balance of the account may be claimed or is payable.

Insolvency set-off, when it applies, is mandatory and applies to the exclusion of statutory,
equitable and contractual set-off. Unlike other forms of set-off it cannot be excluded by
agreement between the parties (contractual exclusion of set-off is discussed below). However,
mutuality is required for insolvency set-off to apply. The ability of the debtor to set-off in an
insolvency situation is further discussed below.

Mutuality

For statutory and insolvency set-off to be permitted there must be mutuality. The general
principle underlying mutuality is that the claim of one person should not, without agreement,
be used to satisfy the liability of another.

For there to be mutuality, each claimant must be the beneficial owner of the claim owed to it.
In the context of the assignment of a debt, the mutuality principle seems to prevent statutory or
insolvency set-off by the debtor as a result of the change in equitable ownership of the debt.
This is due to the fact that before perfection of title, the assignor is the legal owner of the sold
debt, but the assignor is the owner in equity. After perfection of title the assignor will be
neither the legal nor equitable owner of the sold mortgages and thus mutuality will not be
present.

Generally, the time for determining mutuality is when the set-off is being asserted (or at the
commencement of insolvency, in the case of insolvency set-off).

Contractual exclusion of set-off

In summary, any assignee of a debt should review the debt documentation provisions for the
following two issues:

(a) does the debtor have a right to set-off; and

(b) is the assignor entitled to assign the debt free of any set-off or other equities.

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 From an assignee's perspective, both statutory and equitable set-off can be excluded by an
express contractual provision to this effect.6

Contractual set-off will only apply to the extent agreed.

Insolvency set-off may not be excluded by contract and is mandatory.

Trade Practices Act 1974 (Cth)

A further "equity" which may arise in relation to trade receivables is pursuant to the linked
credit provider provisions of the Trade Practices Act. These provisions essentially set up a
statutory right of set-off in favour of certain debtors. In order for the provisions to apply, the
debtor must be a "consumer" for the purposes of section 4B(1) of the Trade Practices Act, that
is the goods or services acquired by the debtor must be ordinarily acquired for personal,
domestic or household use or consumption or the purchase price payable does not exceed
$40,000.

If the assignor is a linked credit provider to the supplier for the purposes of the Trade Practices
Act, pursuant to section 73(1) of the Trade Practices Act the assignor will be jointly and
severally liable with the supplier in relation to loss or damage suffered by the debtor as a result
of misrepresentation, breach of contract, or failure of consideration in relation to the contract,
or as a result of a breach of implied conditions or warranties. Pursuant to section 73(4), the
debtor will be able to diminish or extinguish its liability to the linked credit provider against
any liability of the linked credit provider under section 73(1) of the Trade Practices Act.

Whilst, in our view, an assignee would generally not be considered a "linked credit provider"
for the purposes of the Trade Practices Act, the provisions are still relevant. An assignment of
the debt from the linked credit provider to an assignee would be subject to the statutory right of
set-off which the debtor is entitled to claim against the linked credit provider. This statutory
right of set-off may not be contracted out of7. However, there are defences available to a
linked credit provider in relation to a claim by a debtor which may be of assistance.

The linked credit provider provisions in the Consumer Credit Code largely mirror the
provisions in the Trade Practices Act.

5. The effect of title retention clauses ("romalpa" clauses)

5.1 What are title retention clauses?

In their simplest form title retention clauses attempt to retain for the supplier of goods title to
those goods until the whole price for the goods has been paid. They may reach further and
attempt to retain proprietary rights in property with which goods become mixed, book debts
becoming due when the buyer sells the goods to another person and the proceeds of collection
of those sub-debts.

An entire session could be spent on title retention clauses and their effectiveness. Indeed, a
couple of years ago Trevor Robinson did just that. A copy of that paper can be made available
to you.

6
In the context of statutory set-off: Citibank Pty Ltd v Simon Fredericks Pty Ltd [1993] 2 VR 168 and in the context
of equitable set-off: Gilbert Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689.
7
Section 68 of the Trade Practices Act provides that any term of a contract purporting to
exclude, restrict or modify the application of section 73 is void.

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 Suffice it to say that the High Court of Australia in Associated Alloys Pty Limited v ACN 001
452 106 Pty Limited (In Liquidation) (2000) 171 ALR 568 held that these types of clauses are
effective.

5.2 Why relevant in this context?

Care must be exercised if one is acquiring a debt arising between a supplier and a buyer where
the supplier has the benefit of a title retention clause and that clause extends to the sub-debt
that arises as a result of the buyer on-selling the goods to another person (and the proceeds of
that sub-debt).

This is because the High Court held that this type of title retention clause operated to
extinguish the debt between the supplier and the buyer (which debt was bought by the
assignee) and create a trust over the proceeds of the sub-sale in its place.

Accordingly, the assignee must acquire not only the debt in such a case but also the suppliers
interest in that trust. Failure to do so will result in the assignee paying for a debt which can be
extinguished other than by payment.

The assignee must also be diligent in ensuring that the supplier can trace through to the
proceeds of that sub-debt. As to this, see the earlier paper and the Associated Alloys decision
itself.

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 Summary Chart of Debt Transfer Considerations

Want to
transfer debt

Transfer of
Transfer of
rights and
rights only
obligations

Concerns and considerations:

• s 91(4) transfer of mortgage
Assignment Novation:
and debts
• set-off rights Require debtors'
• title retention clauses consent
• transfer of related rights if
debt is secured

Actual

Deemed: "substitution by
agreement of an
inconsistent obligation."

Legal Assignment:

s 12 requirements: Equitable Assignment:

• Assignor to execute
• Evidence of intention
written assignment
to assignment
• Assignor/Assignee: issue
express written notice • valuable consideration

If a perfection of title Other Considerations

event occurs and want
to convert from
equitable to legal title,
must fulfil s 12
requirements
Priorities Servicing

Charge
registered with Release any
ASIC (s 130 existing charges
Corps Act)

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