Acquisition and Assignment of Secured Debt: Lessons from Clark v Gallop Reserve Pty Ltd
It is not uncommon, in cases where a credit facility is in default, for a third party (often with a vested interest) to acquire the debt and related finance documents (facility agreement, securities and guarantees). The price paid is often at a discount to the underlying debt. A debt buyer may do this for a number of reasons, ranging from the purely commercial (to realise the profit from the discount) to the more tactical - to protect one or more of the obligors (borrower or guarantors) from enforcement action by the original financier or to give the debt buyer commercial leverage over them.
Notice of an assignment of this type is required under State legislation to perfect it as a legal, rather than equitable, assignment. In some cases, one or more of the obligors will be joined as parties to the assignment document (to give warranties as to the existence of the debt and validity of the security) and will therefore have notice of it without the need for anything more.
In other cases the assignment will be a bilateral agreement between the original financier and the debt buyer and the obligors are not joined. Again, there may be various reasons for the approach taken – the obligors may not be on “speaking terms” with the financier nor inclined to co-operate to provide warranties or the seller and buyer may not want details of the transaction to be made known (particularly the discounted purchase price). In that situation a notice of the assignment must be given to the obligors to perfect the assignment at law.
This was the background to the decision of the Court of Appeal of the Supreme Court of Queensland in Clark v Gallop Reserve Pty Ltd, handed down on 7 June 2016. The appellant (Clark, a guarantor) attempted to thwart enforcement action by Gallop Reserve Pty Ltd (Gallop), which had acquired a secured debt facility from a major bank.
Clark had previously been sued by the bank under his guarantee and a default judgment had been obtained. Gallop naturally believed, when it bought the debt from the bank, that it would be able to stand in the bank’s shoes to enforce the judgment. Clark resisted that attempt on the basis that Gallop had not in fact acquired the bank’s rights as a judgment creditor when it bought the secured loan facility.
The guarantor’s arguments were based on the construction of the assignment document and the fact that the cause of action against Clark under the loan/guarantee document had merged in the judgment – in other words, following the judgment, the obligation to pay the amount Clark had guaranteed arose from the Court’s order and not from the finance documents. Clark argued that the rights arising under the order did not form part of what was assigned.
Clark sought to shore up his argument by relying on an inconsistency in the notice of assignment he received, which simply referred to the subject of the assignment being the money owing “under” the finance documents. It did not specifically refer to any other money owing “in connection with” those documents even though that broader language was used in the assignment document. The trial judge called the notice a “shorthand” version of that contained in the assignment document.
The arguments ultimately failed but the case is useful for highlighting some drafting techniques when a debt (whether secured or not) is acquired in these circumstances. If adopted in the assignment documents in Clarks case it is unlikely that a challenge would have been contemplated.
The takeaways from the case for a buyer looking to effectively acquire the full benefit of a debt facility in similar circumstances are:
- The definition of the property being assigned should be as wide as possible and include (as it did in this case), language which deals not only with rights and interests arising under the relevant finance documents, but also rights and interests “in connection with” those documents – here the judgment debt was held to fall within that description and that is clearly correct.
- If there has been a judgment obtained prior to the assignment against one of the obligors then a specific reference to that judgment and the resulting rights should be included in the definition of the assigned property in the assignment document.
- If, as was the case here, an obligor is not to be joined as a party to the assignment document, then the description of the assigned property in the notice (which is required to be given to that obligor) should replicate the definition in the assignment document.
In this case, the Court of Appeal did not believe that the “shorthand” approach taken to the drafting of the notice given to Clark was sufficient to invalidate the assignment of the rights to enforce the judgment debt, so the outcome was not affected. The point must be made however that Clark may not have attempted the challenge in the first place if the drafting of the assignment document and the notice had been more precise, so the angst of two Supreme Court proceedings would have been avoided. Moreover, while Gallop was successful in the proceedings and obtained a costs order, there will generally always be a gap in the costs recovered by a successful litigant.