Winding up on a factored debt

By Karen O'Flynn.

Key Points:
A failure to give a written notice of an assignment of a debt can be fatal.

The factoring of debts by assignment has become an everyday business practice.

An essential part of the assignment process is making sure that the debtor knows who its "new" creditor is - after all, you don't want the debtor to pay the money to the wrong person. Apart from making common sense, giving written notice to the debtor is a statutory requirement under State conveyancing legislation.

As a couple of recent court cases have shown, disputes about proper notice can also derail winding up applications based on assigned debts.

What's a company to do?

The first case (Condor Asset Management v Excelsior Eastern, in the NSW Supreme Court) was relatively straightforward.

Condor received a statutory demand for $15,768.50 from Excelsior Eastern.

The demand said that the debt was for money that Condor had allegedly borrowed from GDK Financial Solutions and that the debt had been assigned to Excelsior. This was apparently the first indication Condor had that the debt had been assigned to Excelsior.

Condor applied to have the demand set aside.

Excelsior argued that the demand itself satisfied the legal requirement for a written notice of assignment of the debt. The judge said that, even if that was correct, the demand in this case shouldn't be allowed to stand. That was because the demand didn't contain enough information about the assignment. All it said was that GDK had assigned the debt to Exclesior. This would leave a company in an invidious position:

• if it took the demand at face value and paid the money to the person claiming to be the assignee of the alleged debt, how could it be sure that creditor had really assigned the debt?
• on the other hand, if it didn't pay the money to the alleged assignee and it turned out that there really had been an assignment, it would be deemed to be insolvent and would face the possibility of being wound up.

The judge did not rule out the possibility that a statutory demand might satisfy the requirement for a written notice of assignment. However, it would need to contain a lot more information than a simple statement that the alleged debt had been assigned.

But they paid our invoices

Shortly after the Condor judgment, another assignment/statutory demand issue lobbed into court, this time in Western Australia.

Here, the dispute about assignment turned on the invoices that the assignee had sent to the company before issuing its statutory demand.

From mid-2004, Mr Yabsley was contracted to provide consulting services to Westpoint Corporation. Mr Yabsley sent invoices to Westpoint, and those invoices were paid. In September 2004, Mr Yabsley apparently assigned debts arising under the contract to Image Progress Pty Ltd. Thereafter, Westpoint allegedly began to receive invoices for branding services bearing the name and ABN of Image Progress. Initially, these were apparently paid, but two invoices - dated January and March 2005 - were allegedly not paid. As a result, Image Progress served a statutory demand on Westpoint. Westpoint applied to have the demand set aside.

This appeared to be another case in which no specific written notice of the assignment had been sent to the company as required by the conveyancing legislation.

Nevertheless, Image Progress argued that Westpoint was well aware of the assignment, because:

• it had told a Westpoint employee of the assignment and that future invoices would contain a different ABN;
• after the assignment, it had sent Westpoint invoices in the name and ABN of Image Progress (and those invoices had been paid).

Therefore, said Image Progress, the invoices constituted sufficient written notice of the assignment.

Westpoint argued that a proper notice of assignment has to do more than just state the name and ABN of the assignee of the debt - it must specifically tell the debtor that the debt has been assigned.

In the end, the court did not have to decide the issue. In order to set aside a statutory demand, all the court has to find is that there is a genuine dispute between the parties. Here, there was clearly a genuine dispute about whether the invoices had satisfied the requirement for a written notice of assignment. Accordingly, Westpoint was entitled to an order to set aside the demand.

Comment

Together, these cases illustrate the importance of a proper notice of assignment of a debt.

As long as invoices in the assignee's name are being paid, serving a formal notice of assignment might seem unnecessarily legalistic. However, if things turn nasty, the failure to serve a written notice can definitely put a spanner in the works of the enforcement process.

For further information, please contact Karen O'Flynn.