Section 4 – Assignation of claims: insolvency
23.Section 4 sets out what the legal effect of an assignation document is in the event of the assignor’s insolvency.
24.Subsection (1) provides that this section is relevant only where the claim that was assigned was not held by the assignor at the time of granting the assignation document. This covers assigning a claim that is not yet in existence, as well assigning a claim which exists but which the assignor does not yet hold. Where the assignor becomes insolvent after granting an assignation document in respect of such a claim, this section will apply.
25.Subsection (2) provides that an assignation of such a claim is, subject to subsection (3), ineffective if the assignor becomes the holder of the claim after becoming insolvent (i.e. during the period of the insolvency or after being discharged).
Example
A tradesman assigns future invoices to a factor. The tradesman is sequestrated, and then issues an invoice for a new job carried out after the date of sequestration. The tradesman only becomes the holder at that point. The claim in respect of that invoice will not transfer to the factor.
26.Subsection (3) has the effect that an assignation is, however, effective where the claim is in respect of income from property in existence at the time the assignor becomes insolvent, and is not attributable to anything done or agreed to be done by the assignor after the insolvency.
Example 1
A musician has licensed the use of a song in an advert, and assigns the royalties due in respect of that use. The assignation is effective even if the musician becomes insolvent.
Example 2
A landlord assigns the future rent on a property to a bank. The landlord is sequestrated. The assignation remains effective for rents arising after the date of sequestration because the rents derive from an asset (the property) of, and not from efforts by, the landlord.
27.An assignation that is ineffective under subsection (2) does not become effective if the assignor is discharged from the insolvency. However, subsection (4) provides that claims that remain effective on an insolvency (i.e. they survive under subsection (3)) become ineffective under subsection (5) if the assignor is discharged from a sequestration or from a protected trust deed. The effect is that any claim which comes into being after such a discharge is not transferred by the assignation, with the effect that the assignor makes a fresh start after insolvency.
28.Subsections (4) and (5) will mainly benefit individuals, as only a few types of legal person can be sequestrated (for example, partnerships). This protection does not otherwise apply to legal persons, and indeed the effect of a corporate insolvency is in nearly all cases the dissolution of the corporation.
29.Subsection (6) provides for the meaning of insolvency for the purposes of section 4, in respect of both individuals and legal persons (such as limited companies).
30.Subsection (7) gives the Scottish Ministers power to amend the list of insolvency processes listed in subsection (6), as well as to apply subsections (4) and (5) to circumstances other than sequestration or the granting of a trust deed.
