Many businesses struggle with bad debts. Unpaid debts can financially cripple a business, and the time and/or cost of recovering that debt may exceed the value of the debt itself. Often creditors take the risk of paying lawyers and/or debt collectors a significant amount of fees without the assurance of success.
If creditors are not paid, they face paying debt collectors and/or lawyers to collect the debt. But here is an alternative, that is to both write off the debt (and get the tax advantage of doing so) and avoid legal costs (but still get all the advantages of using lawyers).
The solution is through the sale of debt to us. At 90 Nine, when we buy a debt, we engage specialist lawyers to collect the debt and use the Court process to do so. We completely fund this process at no risk to the creditor.
While a relatively new debt enforcement process for New Zealanders, debt buying has been common in Europe and the USA for a while. Debt buying is an arrangement where a debt is purchased from the original creditor by a debt buyer for a percentage of the face value of the debt, based on the potential collectability of the debt.
From a legal perspective, sale of debt is achieved through an assignment.
The assignment of debt
The idea that a contractual right cannot be transferred is an archaic view that has been rejected by equity.
In the 17th century, the English Court of Chancery recognised and enforced the assignment of a contractual right, including the right to receive a debt.
Even though a right to receive a debt is intangible, the Courts regarded a debt as property and an asset capable of being dealt with like any other asset, including being assigned.
The English laws have consequently been adopted in New Zealand and the right to assign “a thing in action” (i.e. a contractual right) is presently recognised by Subpart 5 of the Property Law Act 2007 (“the Act”).
Section 48 of the Act expressly confirms that the ‘thing in action’ includes a right to receive payment of a debt.
Section 50 of the Act provides that a thing in action can be subject to an absolute assignment assuming the proper method and form of assignment is satisfied. This means that personal rights to property such as the right to receive a debt may be assigned from the original creditor to the debt buyer.
When assigning a debt, all rights and remedies of the original creditor over the debt are transferred to the assignee. It is not necessary to provide valuable consideration for the assignment meaning that debts can be bought for zero dollars. Further, it is possible to assign an amount or debt that will or may be payable in the future.
The laws of equity in relation to assignment continue operating concurrently with the statutory provisions and can be of benefit in limited circumstances where the statutory requirements of assignment have not been satisfied. However, practically, enforcing an equitable assignment might be more challenging, and for this reason, it is always advisable to assign a debt through statutory assignment under the Act.
Proper method and form of assignment
Under s 50 of the Act, for an absolute assignment of a thing in action to occur, at the minimum, the assignment needs to be in writing and signed by the assignor.
In addition to the minimum requirements, we recommend the best practice is to assign a debt through a deed, to reduce risk of future challenge to the assignment. A deed is a legal document which, in accordance with s 9 of the Act, needs to:
- Be in writing;
- Be signed by all parties;
- Have signatures witnessed in accordance with the Act (unless the party is a body corporate with no fewer than 2 directors);
- Include the locality of the place of residence and the occupation or description of the witnesses.
The deed will become binding once the above is done and when it is delivered by the person to be bound by it or their agent. This can be done through physical delivery or through fax/email.
Generally, the deed should make it clear who the parties are and what it is that is being assigned with as much certainty and clarity as possible.
Pursuant to s 51 of the Act, once a debt has been assigned, the notice of assignment needs to be provided to the debtor. That means informing the debtor, preferably in writing, that the debt is now payable to the debt buyer. If actual notice is not given to the debtor and the debtor pays the debt to the original creditor, this discharges the debtor’s liability to pay to the debt buyer. Although, the original creditor must now pay those funds to the debt buyer. In the case of joint debtors, only one needs to be given actual notice of the assignment.
Rights that cannot be assigned
Some contractual rights are incapable of assignment, whether under equity or under the Act.
A common example of such right is the right pursuant to the contract which expressly prohibits the assignment, either entirely or without the consent of all parties.
Another right that cannot be assigned is the bare right to a cause of action, which is not attached to a property interest such as a debt.
The Act addresses the assignment of rights, including right to a debt, but not the assignment of the burden of obligation. Assignment of contractual liabilities is generally not possible, unless limited exceptions apply.