An equitable assignment is of doubtful value as security. Even a legal assignment cannot be considered first-class security.
The bank as assignee of an assignment, either legal or equitable, should take the following necessary precautions of equitable assignment and safeguards:
Precautions of equitable assignment
1. The customer should give the banker an irrevocable letter addressed to the person who owes the money to the customer requesting that debt be paid to the banker.
In the case of advance against supply bills, the banks usually insist upon an irrevocable power of attorney in its favor.
2. The banker should obtain the customer’s letter as in i) above and send a notice in writing to the customer’s debtor (along with the customer letter) stating that the debt has been assigned to him giving particulars of the debt.
In case of supply bills, the bank sends the original irrevocable power of attorney granted by the borrower in of the bank, to the concerned department of the Government, for registration.
3. The debtor should also be asked to confirm that he has not received any notice of an earlier assignment and has no right to set-off against the assignor.
When a clear notice of assignment is given and acknowledged by the debtor, the debt is thereafter removed from the order and disposition of the assignor and cannot be available to the official receiver even if the customer (assignor) is adjudged an insolvent.
4. The notice of assignment referred to in ii) above should be given by the bank at once to the customer’s debtor as otherwise, a subsequent notice given earlier would obtain priority.
5. A constant watch will be necessary for the financial position of the debtor of the borrower.
6. An assignment should be for the whole of debt and not a part of it.
Form of Assignment
In the case of a legal assignment, no particular legal form is necessary. The customer must, however, declare in writing that in consideration of the bank making or continuing advances or affording banking facilities, the customer assigns to the bank all monies due, or they become due, to the assignor form the debtors whether in the form of book debts or by virtue of any contract between the parties.
The intent to pass the interest of the assignor to the assignee by an assignment must be clear. If the debt assigned is evidenced by a promissory note, the assignor to the assignee by an assignment must be clear. If the debt assigned is evidenced by a promissory note, the assignment must appear on it.
The bank should also obtain an undertaking from the customer that he will pay over to the bank any amount or amounts that he may receive in respect of debt or debts or contract monies so liable to the assignor for any loss which might arise from the banker’s failure to enforce the necessary remedies against payment of the debt.
Sometimes banks accept as security from a limited company the book debts that are due to the company. The mode of charge may be by way of assignment or hypothecation.
In both these cases, the charge has to be registered with the Registrar of Companies under the Companies Act.
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