Assignments: Pass or fail?

Current trends

Over recent years, there has been an increase in the number of borrowers (companies or individuals) who are defaulting on the terms of their facilities, whether through a lack of financial understanding (and subsequent mismanagement) or, alternatively, simply not obtaining advice as to the affordability of the contractual arrangements that they are entering.

With the current trends surrounding both corporate insolvency and individual bankruptcies, it does not appear that this will change anytime soon.

But what do you do if you have absolutely no interest in enforcing your rights arising under, or in connection with, a facility, a guarantee or a judgment?  Do you simply “write off” the debt owing to you?  Or do you attempt to recover it via some other method?

Due to the current state of the market, it appears that more and more financiers are entering into assignments of debt.

The importance of contractual detail

The recent case of Clark v Gallop Reserve Pty Ltd[1] highlights the importance of contractual detail when drafting assignments of debt.

The factual matrix

Proceedings had been commenced by a lender against a guarantor, Mr Stephen Clark (Mr Clark), for monies owing under a guarantee.  Mr Clark did not defend the claim and default judgment in excess of $800,000 was subsequently entered against him in August 2011.

In terms of deciding how best to enforce the judgment, the lender entered into a deed of transfer and acknowledgment (Deed) with Gallop Reserve Pty Ltd (Gallop) which subsequently attempted to enforce the judgment obtained against Mr Clark.  However, as a result of the assignment, it was a statutory requirement that Gallop seek leave of the Court to enforce the judgment (Application). 

Given the potential ramifications associated with the enforcement of the judgment, Mr Clark opposed the Application on the basis that the judgment debt had not been assigned pursuant to the Deed (ie the definitions incorporated into the Deed were not broad enough to encapsulate the judgment).

First instance

At first instance, His Honour Justice Martin of the Supreme Court of Queensland held that the judgment debt had indeed been assigned pursuant to the terms of the Deed and therefore granted leave for Gallop to commence enforcement action against Mr Clark.

The appeal

Mr Clark subsequently appealed to the Court of Appeal arguing that Justice Martin had misconstrued the Deed and that the judgment debt did not fall within the ambit of the definitions contained in the Deed as the judgment debt was not money owing “under” the facility that was originally entered into, nor was it money owing “in connection with” that original facility.

The decision

The issue in the appeal was one of contractual construction and interpretation which depended upon (amongst other things) the language that was used in the Deed.

It was unanimously held that:

1. there was a connection between the judgment debt and the original facility as the judgment was obtained based upon the facility that was entered into, the subsequent non-performance of its terms and the enforcement of the guarantee.  There was therefore “a substantial and logical connection between the two, such that the judgment debt comfortably falls within the expression ‘money owing in connection with the…Facility’ ”;[2] and
2. there was nothing contained within the Deed or any other surrounding circumstances indicating that the parties to the Deed would have intended to exclude the judgment debt from the rights and entitlements to be assigned (notwithstanding that the Deed was entered into some 3 years after the judgment had been obtained).[3]

For those reasons, the decision of Justice Martin at first instance was upheld and leave was granted to Gallop to enforce the judgment.

Lavan Legal Comment

This case highlights that the importance of contractual construction and detail in assignments of debt (and indeed any document whereby parties are entering into an agreement) can never be underestimated.

The definition of the property or debt being assigned should (generally speaking) be drafted to cast the net as wide as possible so that it deals with rights and interests arising both under, and in connection with, the documents the subject of the transaction in question.  This of course depends on the circumstances surrounding each particular case.  However, the absence of such contractual detail in the past may have significant ramifications in the future.