Assignment of a receivable

What it means

By assignment a creditor transfers a receivable to another creditor. The debtor’s consent is not needed; they only have to be notified so they know whom to pay.

A receivable cannot be assigned where the contract forbids it or where it ends with the creditor’s death. On larger contracts the anti-assignment clause is checked in advance.

The mirror image of assignment is assumption of debt: there the debtor changes, which cannot happen without the creditor’s consent. In an assignment only the creditor changes, and the receivable stays the same together with its accessories and security, such as a lien. The new creditor gets exactly what the old one had, no more and no less.

How it works in practice

It is normally sold at a discount reflecting risk and age. The difference between face value and price is an expense for the assignor, whose deductibility follows the statute.

It differs from factoring in being a one-off transfer of specific receivables rather than rolling finance against a whole portfolio under a facility.

The assignee records a purchased receivable at acquisition cost, meaning the price paid, not the face value. If the debtor later pays more, the difference is income; if less or nothing, it is an expense. When a portfolio of receivables is bought, the price is allocated to the individual items so each can be tracked on its own.

What to watch out for

If the debtor does not know of the assignment and pays the original creditor, the debt is validly discharged. The new creditor then pursues the assignor, and the dispute runs between creditors.

The debtor can raise against the new creditor the defences it had against the old one, including set-off of its own claims that existed at the time of notification. A buyer may thus acquire a receivable that in reality shrinks or disappears. Before buying, the other side of the sub-ledger is checked as well.