Bankruptcy - The validity of assignments of book debts

The recent case of Hill -v- Alex Lawrie Factors; Re Burfoot is a useful reassessment of Section 344 of the Insolvency Act 1986 which provides that a general assignment of book debts is void against the trustee in bankruptcy as regards book debts which are unpaid prior to the presentation of the bankruptcy petition, unless the assignment has been registered under the Bills of Sale Act 1878.

In this case, the bankrupts entered into a factoring agreement with Alex Lawrie Factors Limited (the "Factors") which included a general assignment of all book debts. In addition, the agreement required the bankrupts to provide schedules of specific book debts which the Factors would approve and then make payment to the bankrupts. The bankrupts would then give notice of the specific assignment to the individual debtors.

As an assignment only has legal effect when written notice of it has been given to the debtor (pursuant to the Law of Property Act 1925), the general assignment under the factoring agreement was merely an equitable assignment. The subsequent specific assignments had legal effect beyond the general assignment. For these reasons, it was held that the Factors could rely on the specific assignments against the trustee in respect of the unpaid book debts.

The Honourable Mr Justice Jacobs felt that this decision accorded with "common justice" in that, if the Factors were deprived of the benefit of the specific assignments, they would have lost their money completely even though they had paid their clients. It was also noted that the Factors could protect their position in the future by either changing the basic agreement so as to not include a general assignment or by registering the agreement under the Bills of Sale Act 1878 which would exclude the effect of Section 344 of the Insolvency Act 1986.

For further information, please contact Janet Brier at CMS Cameron McKenna on 020 7367 2326 or e-mail on jemb@cms-cmck.com.