Assignment of claims

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Assignment of claim is an agreement between a creditor (known as the assignor) and a third party (known as the assignee) whereby a third party acquires a claim from an existing creditor (P. Kallenbach, N. Reid, (2010). pp.1-5). During the term of the obligation relationship, there may be a change of entity on the part of the creditor or the debtor. However, this change does not affect the content and subject matter of the legal relationship (P. Kallenbach, N. Reid, (2010). pp.1-5). Moreover, the change may be a consequence of a legal act (e.g. a contract) or result from legal regulations. In the case of the assignment of the claim, the debtor must provide his debt to another entity (an assignee), so his situation does not change (P. Kallenbach, N. Reid, (2010). pp.1-5). Assignment of claim does not require the debtor's consent and participation unless legal regulations provide otherwise. The transfer of receivables is a useful form in the implementation of various economic purposes (P. Kallenbach, N. Reid, (2010). pp.1-5).

The subject of assignment of claim

The subject of the assignment of claim may be any existing claim. The law also allows for assignment of future receivables (e.g. rent for future periods) when their content is specified in the assignment agreement (S. QC. Davies, P. French, G. Chambers, (2012), p.2). The subject of the assignment cannot be the claims related to the payment of due maintenance payments and a bearer's document or a negotiable document by indos). The subject of the assignment of claims is, therefore (S. QC. Davies, P. French, G. Chambers, (2012), p.2):

  1. incidental claims (interest, contractual penalties),
  2. rights protecting the claim
  • property, plant, and equipment (pledge, mortgage),
  • bonds (surety).

Under Art. 509 of the Polish Civil Code, all rights related to the claim are transferred to the assignee together with the claim (mainly the claim for overdue interest) (Polish Civil Code, Lex Lege (2019)).

The parties to the assignment agreement may, however, decide that any incidental claims will remain with the assignor and will not be transferred to the assignee together with the claim itself (S. QC. Davies, P. French, G. Chambers,(2012), p.3).

The existing creditor is obliged to provide the new creditor with all documents and other objects that may be helpful to him/her in the course of debt recovery from the debtor. It should be remembered, however, that the assignee cannot acquire any more rights over the debtor than the assignor did. Moreover, an assignment does not create a new claim, increase its scope or deprive the debtor of any charges (S. QC. Davies, P. French, G. Chambers,(2012), p.3-4).

Assumptions assignment of claim

As regards the general formal requirements for making an assignment of claim, they are as follows (R. Freitag, (2019), p.4-5):

  • the existence of singular succession - derivatives and translational acquisition of subjective rights,
  • lack of consent of the debtor - the debtor does not have to give consent to the assignment of the claim,
  • because his legal situation does not deteriorate as a result of a change in the creditor,
  • the existence of safeguard mechanisms aimed at safeguarding the debtor's position as a result of a change in the creditor, which results from the fact that the debtor's knowledge and consent to the assignment of claim is not required (R. Freitag, (2019), p.4-5).

The assignment agreement is the basis for the assignment of the claim. It is concluded between the creditor and a third party. On its basis, the receivable is transferred from the assignor to the assignee (R. Freitag, (2019), p. 5).

The assignment agreement may be classified as a legal act with dual effect, binding upon the transferor. The conclusion of an agreement whereby the existing creditor undertakes to assign the claim to a third party simultaneously has the effect of disposing of the claim H. Kronke, (2019), pp. 8).

In addition, the assignment of claim agreement is a bailout agreement. This means that its validity depends on the existence of a valid legal basis. The assignment agreement is also a legal act of a consensual nature - the agreement of the parties is sufficient to effectively transfer the receivables H. Kronke, (2019), pp. 8-9). The transfer regulation does not contain the required form for the transfer agreement. However, if the claim has been established by a letter, then its transfer should also be established by a letter. The written form serves only evidentiary purposes, and failure to observe it does not result in the invalidity of the transfer agreement H. Kronke, (2019), pp. 18).

Admissibility of assignment of claim

The creditor may not assign the claim to a third party if that action is not in conformity with the contract (A. Ortí Vallejo, 2010, pp.3-5):

  • by law, a non-transferable claim may not be assigned,
  • a contractual reservation, the assignment of the claim is inadmissible if it conflicts with a clause in the agreement between the creditor and the debtor,
  • properties of the liability - e.g. when the debt is connected with a specific, strictly defined person (A. Ortí Vallejo, (2010), pp.3-5).

The effects of the assignment of claim on the creditor

The main effects of the assignment of the claim from the creditor include (A. Dickinson, (2018), pp.337-340):

  • a change in the person of the creditor - the assignor ceases to be the creditor and becomes the assignee of the claim - the assignee,
  • the acquisition of the claim by the assignee in the state and scope to which the assignee has been entitled up to now,
  • the transfer to an assignee of all rights attached to the claim.

The assignee of the claim shall be liable to the assignee for the claim. For the solvency of the debtor at the time of the assignment, he is liable only in so far as he has assumed this responsibility (A. Dickinson, (2018), pp.337-340).

Consequences of assignment of claim for the debtor

Among the effects of the assignment of the claim from the debtor, it is distinguished by (A. Dickinson, (2018), pp.337-340):

  • protection of a bona fide debtor,
  • transfer from assignor to assignee of all charges against the debtor (e.g. resulting from defects in the declaration of will).
  • the debtor's obligation to perform the obligation towards the new creditor (assignee) (A. Dickinson, (2018), pp.337-340).

However, until the transferor has notified the debtor of the transfer, performance by the previous creditor has effect vis-à-vis the transferee unless the debtor was aware of the transfer at the time of performance. This provision applies mutatis mutandis to other legal acts between the debtor and the previous creditor ( A. Dickinson, (2018), pp.337-340).

Examples of Assignment of claims

  • Assignment of a debt: A debt assignment occurs when a creditor assigns the rights to receive payment from a debtor to a third party. This means that the third-party now has the right to demand payment from the debtor and to collect the debt on behalf of the creditor.
  • Assignment of a lease: In the case of a lease, the assignee takes over the rights and obligations of the assignor. This means that the assignee is now responsible for making payments and complying with the terms of the lease.
  • Assignment of a patent: In the case of a patent, the assignee takes over the rights to use the patent and can now use it to produce and sell products or services. The assignor, on the other hand, must assign all rights to the assignee and no longer has any right to use the patent.
  • Assignment of a contract: In the case of a contract, the assignee takes over the rights and obligations of the assignor. This means that the assignee is now responsible for fulfilling the terms of the contract and is liable for any breach of the contract.

Advantages of Assignment of claims

Assignment of claims is a useful financial tool that can help creditors and debtors alike. It can offer a variety of advantages, such as:

  • The ability for the assignor to transfer their rights to receive payment to an assignee. This allows the assignor to receive payment from the debtor in a more timely manner, as the assignee can pursue the debt more aggressively.
  • It also helps the debtor to pay a single entity rather than multiple creditors, simplifying the payment process.
  • It allows a larger business to secure financing from smaller creditors, who may not have the resources to pursue payment on their own. This can be beneficial for both parties as it allows the larger business to access funds more easily, while the smaller creditor is able to secure payment in a timely manner.
  • It also provides a legal framework for debt collection, allowing creditors to pursue payment through the courts if necessary. This provides a secure and reliable way for creditors to recover their money.

Limitations of Assignment of claims

The assignment of claims has certain limitations including:

  • It cannot be used to transfer a right of action;
  • The underlying debt or obligation must still be valid and enforceable;
  • The assignor must be able to prove that they are the rightful owner of the claim;
  • The assignee must be legally capable of taking on the claim;
  • The assignor must have the contractual right to assign the claim;
  • The assignment of the claim must be in writing and signed by both parties; and
  • The assignor must be able to prove that the assignee agreed to accept the assignment (P. Kallenbach, N. Reid, (2010). pp.1-5).

It is important to note that the assignment of claims may be challenged by the debtor, who may refuse to recognize the assignment. Furthermore, the assignment of claims may be contested by the assignor if the assignee fails to pay the debt as agreed. Therefore, it is essential that the parties to an assignment of claims understand the terms and conditions of the agreement and the potential risks and liabilities associated with it.

Other approaches related to Assignment of claims

Introduction: In addition to Assignment of Claims, there are several other approaches to changing the creditor-debtor relationship.

  • Subrogation: Subrogation occurs when one party assumes the rights and interests of another ("Subrogation in Insurance," n.d.). This means that the subrogating party takes over the rights and duties of the other party, such as the right to collect payments from a debtor.
  • Novation: Novation is a process whereby one party is substituted for another in a contract ("Novation Definition," n.d.). This means that a new party is taking on the same obligations and rights as the previous party but with a different party.
  • Assumption Agreement: An assumption agreement is an agreement where an existing party agrees to take on the responsibilities of another party ("What is an Assumption Agreement," n.d.). This means that the existing party assumes the obligations and rights of the previous party.

In summary, Assignment of Claims is an agreement between a creditor and a third party that enables a third party to acquire a claim from an existing creditor. Other approaches to changing the creditor-debtor relationship include Subrogation, Novation, and Assumption Agreement.

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Author: Barbara Lech