Getting rid of bad debt

If a borrower cannot make payment under a facility agreement, the lender has the right to call an event of default. However, declaring an event of default is not the only option available to the lender in such circumstances, and commercially, instead of declaring an event of default and possibly triggering the borrower's insolvency, a lender may wish to explore other alternatives. One possible solution is transferring the lender’s rights under the facility agreement to a third party, who may be willing to purchase the debt at a discount. This article discusses some practical and legal issues in relation to the transfer of loans and related security (together referred to in this article as the "finance documents").

Novation or assignment?

A novation transfers the lender's rights and obligations under the finance documents to a third party. However legally and technically, the original rights and obligations are not "transferred"; rather, the original finance documents are terminated and replaced with new contracts between the obligors and the third party transferee (in duplicate form to the original finance documents).

An assignment transfers only the lender's rights under the finance documents to a third party transferee. Unlike in a novation, the lender’s obligations under the finance documents cannot be assigned and would remain with the lender.

Whether to assign or novate the finance documents is usually a commercial decision. We set out below some points that the parties may wish to consider.

Practical issues

We set out below some practical issues for a lender to consider.

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