By Elton Law Group
A lender sells a loan book. An owner sells their business and wants the customer contracts to follow. A group restructures and wants a new entity to take over a facility. Everyone asks the same question: “can we just transfer the contract?”
Rather than answer in the abstract, this article follows one contract through every kind of transfer.
The contract: “Roast Co” supplies “The Corner Cafe” with 50kg of beans every Monday. The Cafe pays $2,000 at the end of each month.
Every party to a contract has two sides to its bargain:
- The benefit: what it is entitled to receive. Roast Co’s benefit is the $2,000 each month.
- The burden: what it must do. Roast Co’s burden is the 50kg of beans every Monday.
This split is the whole key: benefits can be transferred without asking anyone; burdens can never be transferred without everyone’s agreement. Everything below is this one rule playing out.
Assignment: moving a benefit
Roast Co needs cash now, so it sells its right to the Cafe’s monthly $2,000 to a financier at a discount.
Only a benefit moves. Roast Co still delivers the beans, and the Cafe’s position is unchanged except for the account it pays into. That is why the law allows it without the Cafe’s consent: the Cafe loses nothing. Assignment redirects the mail; nobody new moves into the house.
Every assignment then takes one of two forms, depending entirely on how carefully it is executed.
Done properly: legal assignment
Section 12 of the Conveyancing Act 1919 (NSW) sets three requirements:
- the assignment must be absolute (the whole debt, not part, and not merely as security);
- it must be in writing, signed by the assignor (Roast Co); and
- express written notice must be given to the debtor (the Cafe).
Tick all three and the financier gets full legal title: it can sue the Cafe in its own name and never needs Roast Co again.
Done sloppily: equitable assignment
Fail any requirement (a partial assignment, a handshake deal, or no notice to the Cafe) and equity will still enforce the transfer, but the financier’s position is weaker in three ways:
- it generally cannot sue the Cafe without joining Roast Co to the proceedings, a real problem if Roast Co is uncooperative or insolvent;
- until the Cafe receives notice, every payment it makes to Roast Co validly discharges the debt; and
- if Roast Co assigns the same debt twice, priority goes to whichever financier notified the Cafe first, not whoever signed first.
The practical rule is simple. Give written notice to the debtor immediately, every time. Notice costs a letter; its absence can cost the debt.
Two catches to note
- Every assignee takes “subject to equities”. If Roast Co delivered stale beans and the Cafe earned a $500 set-off, the financier collects $1,500, not $2,000. An assignee never gets a better right than the assignor held: the debt comes with its existing defences and disputes, and the price should reflect them.
- Equitable property must be assigned in writing. Some property, such as an interest under a trust, exists only in equity rather than on the formal records. Assigning it must be in writing under section 23C, whatever form the assignment takes, or it may fail entirely
Novation: moving a burden
Roast Co’s founder sells the roasting business to Fresh Beans Pty Ltd, which wants the whole Cafe contract: the money and the delivery obligation.
Now a burden is moving, and that changes everything. The Cafe agreed to rely on Roast Co’s beans, reliability and solvency. It never agreed to depend on Fresh Beans. So the law requires novation: the old contract is discharged and an identical new one is created between Fresh Beans and the Cafe, by a deed of novation signed by all three parties. If the Cafe refuses, the contract cannot move, and Roast Co remains bound to deliver beans it no longer roasts.
The one-line test: if only money or another benefit is moving, assign; if duties are moving, novate.
What cannot be assigned
- Obligations. Never, by anyone, under any drafting. If Roast Co “assigns” its deliveries to a cheap courier and the beans arrive crushed, the Cafe sues Roast Co. Only novation moves a burden. This is the most common misunderstanding in commercial dealings.
- Rights under a contract that forbids it. If the supply agreement requires consent to assign, an assignment made without it may be ineffective against the Cafe, not merely a technical breach. Checking for anti-assignment clauses is the first step of due diligence on any loan book or business purchase.
- The benefit of a personal contract. Where identity is the essence of the deal, even the benefit cannot move. The clearest example is an employee: a business seller cannot assign its staff to the buyer like receivables, because each employee agreed to work for that employer and nobody else. Moving them takes novation or, in practice, a fresh contract. Either way, the employee must say yes.
- A bare right to sue. The Cafe cannot sell its stale-beans damages claim, on its own, to a stranger who wants to run the lawsuit for profit. The law refuses to let grievances become merchandise. But when the financier bought the $2,000 debt, the right to sue for it travelled automatically: that is a debt with its enforcement tool attached, not a traded lawsuit.
- Genuinely future property. The Cafe’s payments for the coming year are assignable today because the contract already exists. Receivables from customers Roast Co merely hopes to sign are different: no contract, no right, nothing to assign at law. Equity’s workaround is that an assignment of future receivables given for value operates as a binding promise that bites the moment each contract is signed, which is how lenders take security over “present and after-acquired book debts”.