Some defects of Assignment as Security in bank

The following are the defects of assignment as security.

  1. The value of an assignment of an “actionable claim”, say, a right or a debt as a banking security depends not only upon the integrity of the borrower who offers the security but also upon the integrity and creditworthiness of the borrower’s debtor whose debt is assigned.
  2. The assignee stands in the shoes of the assignor. So, he cannot have rights better that those which the assignor possesses. The assignor’s debtor can exercise his right of set-off, if the assignor has any debt to him. In that case, the right of the assignee will be adversely affected.
  3. If there is a breach of the terms of the contract between the parties (assignor and his debtor) not known to the banker, it may result in the repudiation of the debt.

So, bankers do not consider assignment of a debt as a good security. They accept it as security only in exceptional cases where the borrower’s creditworthiness is excellent.

The most common types of assignment as security are:

  1. Book debts of the assignor due from sundry parties.
  2. Contract money due form Government and Semi-Government bodies etc, sometimes known as Supply Bills.
  3. Life Insurances Policies.
  4. Money placed in a deposit account.
Some defects of Assignment as Security in bank

Assignment as Security in bank

It is common observation that the government departments or public sector undertakings do not generally agree to register in their books powers of attorney executed by their suppliers favoring any third party.

A mere holding of a power of attorney will not, therefore, confer assignment in favour of attorney will not, therefore, confer assignment in favor of the bank advancing money to the executor.

The banker therefore covers himself with additional security, such as higher margin, while financing book debts unaccompanied by documents of title to goods.

A question arises whether money placed in the deposit account is assignable by the depositor to another person. The answer is in the affirmative even if the fixed deposit receipt is marked “Not transferable”.

In case, however, the discharge of the receipt and surrendering it are conditions precedent to the withdrawal of the money, the deposit receipt must be returned to the banker who is entitled to deduct from the amount of the deposit any debts due to him by the depositor on the date he received the notice of assignment.

You May Like Also:

Leave a Reply

Your email address will not be published. Required fields are marked *