Enforcing partially assigned debts against the debtor
The increase of supply chain finance has driven an increased interest in parties considering the sale and purchase of parts of debts (as opposed to purchasing debts in their entirety).
While under English law part of a debt can be assigned, there is a general requirement that the relevant assignee joins the assignor to any proceedings against the debtor, which potentially impedes the assignee’s ability to enforce against the debtor efficiently.
This note considers whether this requirement may be dispensed with in certain circumstances.
Can you assign part of a debt?
Under English law, the beneficial ownership of part of a debt can be assigned, although the legal ownership cannot.1 This means that an assignment of part of a debt will take effect as an equitable assignment instead of a legal assignment.
Joining the assignor to proceedings against the debtor
While both equitable and legal assignments are capable of removing the assigned asset from the insolvency estate of the assignor, failure to obtain a legal assignment and relying solely on an equitable assignment may require the assignee to join the relevant assignor as a party to any enforcement action against the debtor.
An assignee of part of a debt will want to be able to sue a debtor in its own name and, if it is required to join the assignor to proceedings against the debtor, this could add additional costs and delays if the assignor was unwilling to cooperate.2
Kapoor v National Westminster Bank plc
English courts have, in recent years, been pragmatic in allowing an assignee of part of a debt to sue the debtor in its own name without the cooperation of the assignor.
In Charnesh Kapoor v National Westminster Bank plc, Kian Seng Tan3 the court held that an equitable assignee of part of a debt is entitled in its own right and name to bring proceedings for the assigned debt. The equitable assignee will usually be required to join the assignor to the proceedings in order to ensure that the debtor is not exposed to double recovery, but the requirement is a procedural one that can be dispensed with by the court.
The reason for the requirement that an equitable assignee joins the assignor to proceedings against the debtor is not that the assignee has no right which it can assert independently, but that the debtor ought to be protected from the possibility of any further claim by the assignor who should therefore be bound by the judgment.
Application of Kapoor
It is a common feature of supply chain finance transactions that the assigned debt (or part of the debt) is supported by an independent payment undertaking. Such independent payment undertaking makes it clear that the debtor cannot raise defences and that it is required to pay the relevant debt (or part of a debt) without set-off or counterclaim. In respect of an assignee of part of an independent payment undertaking which is not disputed and has itself been equitably assigned to the assignee, we believe that there are good grounds that an English court would accept that the assignee is allowed to pursue an action directly against the debtor without needing the assignor to be joined, as this is likely to be a matter of procedure only, not substance.
This analysis is limited to English law and does not consider the laws of any other jurisdiction.
Notwithstanding the helpful clarifications summarised in Kapoor, as many receivables financing transactions involve a number of cross-border elements, assignees should continue to consider the effect of the laws (and, potentially court procedures) of any other relevant jurisdictions on the assignment of part of a debt even where the sale of such partial debt is completed under English law.