Actionable Claims

Section 131: the form of the notice

Every notice of transfer must be:

• in writing;
• signed by the transferor or his duly authorised agent, or, if the transferor refuses to sign, by the transferee or his agent; and
• it must state the name and address of the transferee.

The provision for the transferor's refusal is sensible: an assignor who has been paid has little incentive to help, and the assignee should not be defeated by his indifference.

Section 132: the transferee takes subject to equities

The transferee takes the claim subject to all the liabilities and equities to which the transferor was subject in respect of it at the date of the transfer.

This is the central rule of assignment and it should be stated in every answer on the topic. An assignee is not a purchaser in the market who takes free of what he did not know. He steps into the assignor's position exactly, and every defence the debtor had against the assignor survives against him.

The Act's illustrations:

(i) A transfers to C a debt due to him by B, A being then indebted to B. C sues B. B is entitled to set off the debt due by A to him, although C was unaware of it at the date of the transfer.

(ii) A executes a bond in favour of B in circumstances entitling A to have it delivered up and cancelled. B assigns the bond to C for value and without notice. C cannot enforce the bond against A.

Illustration (ii) is the one worth remembering, because it is the opposite of the result under sections 39, 40, 41 and 100, where a transferee for value without notice is protected. In an assignment of an actionable claim, good faith and value do not help. The reason is that what is assigned is a claim, and a claim can never be worth more in the assignee's hands than it was in the assignor's.

Sections 133 to 135: particular cases

Section 133: warranty of solvency. Where the transferor of a debt warrants the solvency of the debtor, the warranty, absent contrary contract, applies only to his solvency at the time of the transfer, and is limited, where the transfer is for consideration, to the amount or value of that consideration.

Two limits, and both are examinable: it is a warranty about the present, not the future, and the assignor's exposure is capped at what he was paid.

Section 134: mortgaged debt. Where a debt is transferred to secure an existing or future debt, the debt so transferred, if received by the transferor or recovered by the transferee, is applied:

first, in payment of the costs of recovery; secondly, in or towards satisfaction of the amount for the time being secured by the transfer; and the residue belongs to the transferor or other person entitled.

This is an assignment by way of security rather than out and out, and the waterfall is the same idea as a mortgagee accounting for surplus under section 76(h).

Section 135: fire policies. Every assignee by endorsement or other writing of a policy of insurance against fire, in whom the property in the subject insured is absolutely vested at the date of the assignment, has transferred and vested in him all rights of suit as if the contract in the policy had been made with himself.

The condition matters: the assignee must own the insured property absolutely at the date of the assignment, because a fire policy is a contract of indemnity and is worth nothing to a person with no interest in the thing insured.

Sections 130A and 135A, on marine policies, were repealed by the Marine Insurance Act 1963 with effect from 1 August 1963, and are noted as repealed rather than explained.

Section 136: judges, lawyers and court officers

No Judge, legal practitioner or officer connected with any Court of Justice shall buy or traffic in, or stipulate for, or agree to receive any share of or interest in, any actionable claim; and no Court of Justice shall enforce, at his instance or at the instance of any person claiming by or through him, any actionable claim so dealt with by him.

This is the disqualification section 6(h)(3) refers to when it forbids a transfer to a person legally disqualified to be a transferee. The purpose is obvious and worth stating: people who administer justice must not have a financial stake in the claims that come before the courts, and the prohibition is enforced by making the claim unenforceable in their hands, or in the hands of anyone claiming through them.

Section 137: what is outside this Chapter

Nothing in the foregoing sections applies to:

• stocks, shares or debentures;
• instruments which are for the time being, by law or custom, negotiable; or
• any mercantile document of title to goods.

The Explanation defines the last: it includes a bill of lading, dock-warrant, warehouse keeper's certificate, railway receipt, warrant or order for the delivery of goods, and any other document used in the ordinary course of business as proof of the possession or control of goods, or authorising their transfer by endorsement or delivery.

The exclusion exists because all of these are transferred by their own rules, under the Companies Act, the Negotiable Instruments Act 1881 and the Sale of Goods Act 1930, and those rules are designed for commerce. In particular, a holder in due course of a negotiable instrument takes free of prior defects, which is the exact opposite of section 132. Applying section 132 to a cheque would destroy negotiability.

A worked example

Meena is owed Rs. 5 lakh by Naresh on an unsecured loan. She assigns the debt to Omkar by a writing she signs.

Is the assignment good? Yes. An actionable claim is transferred by an instrument in writing signed by the transferor, and it is complete on execution, whether or not Naresh is told.

Naresh, not having been told, pays Meena. Under the proviso to section 130, and illustration (i), the payment is valid, and Omkar cannot sue Naresh for the debt. His remedy is against Meena.

Omkar gives notice. It must be in writing, signed by Meena or, if she refuses, by Omkar, and must state Omkar's name and address. After that, Naresh must pay Omkar.

Naresh has a cross-claim. Suppose Meena owed Naresh Rs. 2 lakh when she assigned. Under section 132 and illustration (i), Naresh may set that off against Omkar, even though Omkar knew nothing of it.

Omkar sues. He may do so in his own name, without Meena's consent and without joining her.

Meena warranted that Naresh was solvent. Under section 133 that warranty speaks only to solvency at the date of the transfer, and, the assignment being for consideration, is capped at what Omkar paid.

Change the assignment. Suppose Meena assigned the debt to Omkar not outright but to secure Rs. 3 lakh she owed him. Under section 134, what is recovered goes first to the costs of recovery, then to the Rs. 3 lakh secured, and the residue back to Meena.

Change the subject matter. Suppose the claim were a cheque, or shares in a company, or a railway receipt. Section 137 takes all of them out of this Chapter, and their own law governs.

And if Omkar were the advocate appearing in Naresh's case? Section 136 would forbid him from buying the claim, and no Court would enforce it at his instance or at the instance of anyone claiming through him.

What it does NOT mean

An actionable claim is not a mere right to sue. The latter is unassignable under section 6(e); an actionable claim is assignable under section 130.

A secured debt is not an actionable claim. The section 3 definition excludes a debt secured by mortgage of immovable property or by hypothecation or pledge of movables.

An oral assignment will not do, even as a gift.

Notice is not a condition of the transfer. The transfer is complete on execution; notice protects the debtor.

Good faith and value do not protect the assignee. Section 132 makes him take subject to every equity, and illustration (ii) says so in terms.

A warranty of solvency is not open-ended. It is confined to the date of the transfer and capped at the consideration.

Section 137 excludes commercial paper, because negotiability and section 132 cannot coexist.

Sections 130A and 135A are repealed and should be described as repealed.

Distinctions

Quick revision

• Actionable claim, s.3: an unsecured debt, or a beneficial interest in movable property not in the claimant's possession, recognised by the Civil Courts, whether existent, accruing, conditional or contingent.
• s.130: transfer only by a signed writing, with or without consideration; complete on execution, notice or no notice; but a dealing by an unnotified debtor is valid against the transfer; the transferee may sue in his own name. Marine and fire policies excepted.
• s.131: notice in writing, signed by the transferor or, on his refusal, the transferee, stating the transferee's name and address.
• s.132: the transferee takes subject to all the liabilities and equities at the date of transfer. Value and good faith are no protection.
• s.133: a warranty of solvency speaks to the date of transfer and is capped at the consideration.
• s.134: a debt assigned as security yields, first costs of recovery, then the secured amount, then the residue to the transferor.
• s.135: an assignee of a fire policy in whom the insured property is absolutely vested gets all rights of suit.
• s.136: a Judge, legal practitioner or court officer may not buy or traffic in an actionable claim, and no Court will enforce it at his instance.
• s.137: stocks, shares, debentures, negotiable instruments and mercantile documents of title are outside the Chapter.
• ss.130A and 135A are repealed by the Marine Insurance Act 1963.

Test yourself

1. How is an actionable claim transferred? Only by the execution of an instrument in writing signed by the transferor or his duly authorised agent, whether the transfer is with or without consideration.

2. Is notice to the debtor necessary for the transfer to be complete? No. The transfer is complete and effectual on execution of the instrument. Notice matters because, until the debtor is a party to the transfer or has express notice, his dealings with the debt are valid against the transfer.

3. A owes B, B assigns to C, and A pays B without notice. Can C sue A? No. On the proviso to section 130 and illustration (i), the payment is valid and C cannot sue A. C's remedy lies against B.

4. What must a notice of transfer contain? It must be in writing, signed by the transferor or his duly authorised agent, or by the transferee if the transferor refuses to sign, and must state the name and address of the transferee.

5. Does an assignee who paid value and knew nothing take free of the debtor's defences? No. Section 132 makes him take subject to all the liabilities and equities to which the transferor was subject at the date of the transfer, and illustration (ii) shows a bona fide assignee for value unable to enforce a bond that the obligor was entitled to have cancelled.

6. How far does a warranty of the debtor's solvency extend? Absent a contract to the contrary, only to solvency at the time of the transfer, and, where the transfer is for consideration, limited to the amount or value of that consideration.

7. Why are negotiable instruments excluded by section 137? Because they are transferred under their own law, by which a holder in due course takes free of prior defects. Applying section 132, which makes a transferee take subject to all equities, would destroy negotiability.

8. May an advocate buy a debt that is in litigation? No. Section 136 forbids a Judge, legal practitioner or officer connected with any Court of Justice from buying or trafficking in an actionable claim, and no Court will enforce such a claim at his instance or at the instance of anyone claiming through him.