assignment of debt nz

Selling a Debt: The Legalities, The Contract and the Forbidden

Many businesses struggle with bad debts. Unpaid debts can financially cripple a business, and the time and/or cost of recovering that debt may exceed the value of the debt itself. Often creditors take the risk of paying lawyers and/or debt collectors a significant amount of fees without the assurance of success.

If creditors are not paid, they face paying debt collectors and/or lawyers to collect the debt. But here is an alternative, that is to both write off the debt (and get the tax advantage of doing so) and avoid legal costs (but still get all the advantages of using lawyers).

The solution is through the sale of debt to us. At 90 Nine, when we buy a debt, we engage specialist lawyers to collect the debt and use the Court process to do so. We completely fund this process at no risk to the creditor.

While a relatively new debt enforcement process for New Zealanders, debt buying has been common in Europe and the USA for a while. Debt buying is an arrangement where a debt is purchased from the original creditor by a debt buyer for a percentage of the face value of the debt, based on the potential collectability of the debt.

From a legal perspective, sale of debt is achieved through an assignment.

The assignment of debt

The idea that a contractual right cannot be transferred is an archaic view that has been rejected by equity.

In the 17th century, the English Court of Chancery recognised and enforced the assignment of a contractual right, including the right to receive a debt.

Even though a right to receive a debt is intangible, the Courts regarded a debt as property and an asset capable of being dealt with like any other asset, including being assigned.

The English laws have consequently been adopted in New Zealand and the right to assign “a thing in action” (i.e. a contractual right) is presently recognised by Subpart 5 of the Property Law Act 2007 (“ the Act ”).

Section 48 of the Act expressly confirms that the ‘thing in action’ includes a right to receive payment of a debt.

Section 50 of the Act provides that a thing in action can be subject to an absolute assignment assuming the proper method and form of assignment is satisfied. This means that personal rights to property such as the right to receive a debt may be assigned from the original creditor to the debt buyer.

When assigning a debt, all rights and remedies of the original creditor over the debt are transferred to the assignee. It is not necessary to provide valuable consideration for the assignment meaning that debts can be bought for zero dollars. Further, it is possible to assign an amount or debt that will or may be payable in the future.

The laws of equity in relation to assignment continue operating concurrently with the statutory provisions and can be of benefit in limited circumstances where the statutory requirements of assignment have not been satisfied. However, practically, enforcing an equitable assignment might be more challenging, and for this reason, it is always advisable to assign a debt through statutory assignment under the Act.

Proper method and form of assignment

Under s 50 of the Act, for an absolute assignment of a thing in action to occur, at the minimum, the assignment needs to be in writing and signed by the assignor.

In addition to the minimum requirements, we recommend the best practice is to assign a debt through a deed, to reduce risk of future challenge to the assignment. A deed is a legal document which, in accordance with s 9 of the Act, needs to:

• Be in writing;
• Be signed by all parties;
• Have signatures witnessed in accordance with the Act (unless the party is a body corporate with no fewer than 2 directors);
• Include the locality of the place of residence and the occupation or description of the witnesses.

The deed will become binding once the above is done and when it is delivered by the person to be bound by it or their agent. This can be done through physical delivery or through fax/email.

Generally, the deed should make it clear who the parties are and what it is that is being assigned with as much certainty and clarity as possible.

Pursuant to s 51 of the Act, once a debt has been assigned, the notice of assignment needs to be provided to the debtor. That means informing the debtor, preferably in writing, that the debt is now payable to the debt buyer. If actual notice is not given to the debtor and the debtor pays the debt to the original creditor, this discharges the debtor’s liability to pay to the debt buyer. Although, the original creditor must now pay those funds to the debt buyer. In the case of joint debtors, only one needs to be given actual notice of the assignment.

Rights that cannot be assigned

Some contractual rights are incapable of assignment, whether under equity or under the Act.

A common example of such right is the right pursuant to the contract which expressly prohibits the assignment, either entirely or without the consent of all parties.

Another right that cannot be assigned is the bare right to a cause of action, which is not attached to a property interest such as a debt.

The Act addresses the assignment of rights, including right to a debt, but not the assignment of the burden of obligation. Assignment of contractual liabilities is generally not possible, unless limited exceptions apply.

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Assigning debts and other contractual claims - not as easy as first thought

Harking back to law school, we had a thirst for new black letter law. Section 136 of the Law of the Property Act 1925 kindly obliged. This lays down the conditions which need to be satisfied for an effective legal assignment of a chose in action (such as a debt). We won’t bore you with the detail, but suffice to say that what’s important is that a legal assignment must be in writing and signed by the assignor, must be absolute (i.e. no conditions attached) and crucially that written notice of the assignment must be given to the debtor.

When assigning debts, it’s worth remembering that you can’t legally assign part of a debt – any attempt to do so will take effect as an equitable assignment. The main practical difference between a legal and an equitable assignment is that the assignor will need to be joined in any legal proceedings in relation to the assigned debt (e.g. an attempt to recover that part of the debt).

Recent cases which tell another story

Why bother telling you the above?  Aside from our delight in remembering the joys of debating the merits of legal and equitable assignments (ehem), it’s worth revisiting our textbooks in the context of three recent cases. Although at first blush the statutory conditions for a legal assignment seem quite straightforward, attempts to assign contractual claims such as debts continue to throw up legal disputes:

• In  Sumitomo Mitsui Banking Corp Europe Ltd v Euler Hermes Europe SA (NV) [2019] EWHC 2250 (Comm),  the High Court held that a performance bond issued under a construction contract was not effectively assigned despite the surety acknowledging a notice of assignment of the bond. Sadly, the notice of assignment failed to meet the requirements under the bond instrument that the assignee confirm its acceptance of a provision in the bond that required the employer to repay the surety in the event of an overpayment. This case highlights the importance of ensuring any purported assignment meets any conditions stipulated in the underlying documents.
• In  Promontoria (Henrico) Ltd v Melton [2019] EWHC 2243 (Ch) (26 June 2019) , the High Court held that an assignment of a facility agreement and legal charges was valid, even though the debt assigned had to be identified by considering external evidence. The deed of assignment in question listed the assets subject to assignment, but was illegible to the extent that the debtor’s name could not be deciphered. The court got comfortable that there had been an effective assignment, given the following factors: (i) the lender had notified the borrower of its intention to assign the loan to the assignee; (ii) following the assignment, the lender had made no demand for repayment; (iii) a manager of the assignee had given a statement that the loan had been assigned and the borrower had accepted in evidence that he was aware of the assignment. Fortunately for the assignee, a second notice of assignment - which was invalid because it contained an incorrect date of assignment - did not invalidate the earlier assignment, which was found to be effective. The court took a practical and commercial view of the circumstances, although we recommend ensuring that your assignment documents clearly reflect what the parties intend!
• Finally, in Nicoll v Promontoria (Ram 2) Ltd [2019] EWHC 2410 (Ch),  the High Court held that a notice of assignment of a debt given to a debtor was valid, even though the effective date of assignment stated in the notice could not be verified by the debtor. The case concerned a debt assigned by the Co-op Bank to Promontoria and a joint notice given by assignor and assignee to the debtor that the debt had been assigned “on and with effect from 29 July 2016”. A subsequent statutory demand served by Promontoria on the debtor for the outstanding sums was disputed on the basis that the notice of assignment was invalid because it contained an incorrect date of assignment. Whilst accepting that the documentation was incapable of verifying with certainty the date of assignment, the Court held that the joint notice clearly showed that both parties had agreed that an assignment had taken place and was valid. This decision suggests that mistakes as to the date of assignment in a notice of assignment may not necessarily be fatal, if it is otherwise clear that the debt has been assigned.

The conclusion from the above? Maybe it’s not quite as easy as first thought to get an assignment right. Make sure you follow all of the conditions for a legal assignment according to the underlying contract and ensure your assignment documentation is clear.

Contact our experts for further advice

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• Corporate Debt

Debt Assignment: How They Work, Considerations and Benefits

Daniel Liberto is a journalist with over 10 years of experience working with publications such as the Financial Times, The Independent, and Investors Chronicle.

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

Katrina Ávila Munichiello is an experienced editor, writer, fact-checker, and proofreader with more than fourteen years of experience working with print and online publications.

Investopedia / Ryan Oakley

What Is Debt Assignment?

The term debt assignment refers to a transfer of debt, and all the associated rights and obligations, from a creditor to a third party. The assignment is a legal transfer to the other party, who then becomes the owner of the debt . In most cases, a debt assignment is issued to a debt collector who then assumes responsibility to collect the debt.

Key Takeaways

• Debt assignment is a transfer of debt, and all the associated rights and obligations, from a creditor to a third party (often a debt collector).
• The company assigning the debt may do so to improve its liquidity and/or to reduce its risk exposure.
• The debtor must be notified when a debt is assigned so they know who to make payments to and where to send them.
• Third-party debt collectors are subject to the Fair Debt Collection Practices Act (FDCPA), a federal law overseen by the Federal Trade Commission (FTC).

How Debt Assignments Work

When a creditor lends an individual or business money, it does so with the confidence that the capital it lends out—as well as the interest payments charged for the privilege—is repaid in a timely fashion. The lender , or the extender of credit , will wait to recoup all the money owed according to the conditions and timeframe laid out in the contract.

In certain circumstances, the lender may decide it no longer wants to be responsible for servicing the loan and opt to sell the debt to a third party instead. Should that happen, a Notice of Assignment (NOA) is sent out to the debtor , the recipient of the loan, informing them that somebody else is now responsible for collecting any outstanding amount. This is referred to as a debt assignment.

The debtor must be notified when a debt is assigned to a third party so that they know who to make payments to and where to send them. If the debtor sends payments to the old creditor after the debt has been assigned, it is likely that the payments will not be accepted. This could cause the debtor to unintentionally default.

When a debtor receives such a notice, it's also generally a good idea for them to verify that the new creditor has recorded the correct total balance and monthly payment for the debt owed. In some cases, the new owner of the debt might even want to propose changes to the original terms of the loan. Should this path be pursued, the creditor is obligated to immediately notify the debtor and give them adequate time to respond.

The debtor still maintains the same legal rights and protections held with the original creditor after a debt assignment.

Special Considerations

Third-party debt collectors are subject to the Fair Debt Collection Practices Act (FDCPA). The FDCPA, a federal law overseen by the Federal Trade Commission (FTC), restricts the means and methods by which third-party debt collectors can contact debtors, the time of day they can make contact, and the number of times they are allowed to call debtors.

If the FDCPA is violated, a debtor may be able to file suit against the debt collection company and the individual debt collector for damages and attorney fees within one year. The terms of the FDCPA are available for review on the FTC's website .

Benefits of Debt Assignment

There are several reasons why a creditor may decide to assign its debt to someone else. This option is often exercised to improve liquidity  and/or to reduce risk exposure. A lender may be urgently in need of a quick injection of capital. Alternatively, it might have accumulated lots of high-risk loans and be wary that many of them could default . In cases like these, creditors may be willing to get rid of them swiftly for pennies on the dollar if it means improving their financial outlook and appeasing worried investors. At other times, the creditor may decide the debt is too old to waste its resources on collections, or selling or assigning it to a third party to pick up the collection activity. In these instances, a company would not assign their debt to a third party.

Criticism of Debt Assignment

The process of assigning debt has drawn a fair bit of criticism, especially over the past few decades. Debt buyers have been accused of engaging in all kinds of unethical practices to get paid, including issuing threats and regularly harassing debtors. In some cases, they have also been charged with chasing up debts that have already been settled.

Federal Trade Commission. " Fair Debt Collection Practices Act ." Accessed June 29, 2021.

Federal Trade Commission. " Debt Collection FAQs ." Accessed June 29, 2021.

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What is the Difference Between Assignment and Novation?

Assignment of contracts is a fairly common practice in the business world.  

In an assignment, the person assigning the contract - the "Assignor" - assigns the benefits of the contract the Assignor holds to a new person (the "Assignee") who takes the benefit of that contract "the Assignee". Some contracts may expressly prohibit assignment and some contracts provide that a contract may not be assigned without the consent of the other party. If a contract has no provision relating to assignment, then the general rule is that it may be assigned, with a few exceptions. 1

Usually, a contractual party will want to ensure that if a contract is assigned, then the Assignee has sufficient skill and financial backing to continue to perform the contract and, if this is the case, it is important to make sure an assignment provision in a contract takes account of that so consent can be withheld if an Assignee does not fulfil those criteria.

Critically, in an assignment, the general law states that the Assignee takes the benefit but not the burden of the contract.  

This means that if the Assignee does not perform the contract, the Assignor remains liable. This can sometimes leave the other contractual party with a remedy if the Assignee is insolvent and does not perform. 2  However, as noted earlier, the best way of dealing with an assignment request is to complete due diligence on the Assignee, since it may be that if you later need to make a demand on the Assignor (particularly if they are a company), the Assignor may no longer be able to meet that demand under the assigned contract if the Asignee fails to perform it. For example, a company selling its business to an Assignee may liquidate following the sale (after paying all creditors at that time and returning a final dividend to shareholders), which makes it very difficult to make any later claim against it if the Assignee does not perform the contract.

An assignment is fundamentally different from a novation. In a novation, a new contract is entered into between the new party (the "Novatee") and the other continuing contracting party/parties and the original party (the "Novator") is released from all of their obligations (usually from the date the novation takes effect). For this reason, a novation poses a greater risk to the continuing contract party or parties than an assignment since they have no recourse against the Novator if the Novatee fails to perform the contract. If someone makes a request to you for novation, you should treat the request very seriously. You should consider obtaining consideration for the consent or some form of guarantee and will need to complete very rigorous due diligence on the new party to make sure they can perform the contract. You should also check when you enter into a new contract with anyone that the contract does not allow the other party to novate the contract, particularly without your consent and a rigorous agreed process in place for that consent to allow you to assure yourself the party that takes novation can perform the contract.

Assignment and novation can be a tricky area of law. As always, if you have an issue with assignment or novation or encounter an unusual clause in a new contract concerning assignment or novation, you should take legal advice – we are happy to help!

For any enquiries contact:

Andrew Knight on (09) 306 6730 ( [email protected] )

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‍ Contract Law

____________________________

1    Exceptions include "personal" contracts where the particular skill, identity or characteristics of a party are fundamental to the contract. Bare rights of litigation are also not assignable.

2     Note that Section 241 of the Property Law Act 2007 has special provisions in respect of leases that make assignors liable for payment of rent and obligation under the lease, but not for increased obligations the assignee and landlord might agree to on a variation of lease unless the lease provided for that variation.

© McVeagh Fleming 2020

This article is published for general information purposes only.  Legal content in this article is necessarily of a general nature and should not be relied upon as legal advice.  If you require specific legal advice in respect of any legal issue, you should always engage a lawyer to provide that advice.

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It is common for people to agree to an “assignment” a contract. However, at law, an “assignment” can only transfer the benefit of a contract and not the burden. The common use of the term “assignment” in these circumstances is not correct.

A contractual benefit, such as a right to receive payment of a debt, can be assigned from one person to another. If the assignment is in writing, the person who owes the debt need not consent. However, the person owing the debt still has to be given notice of the assignment to know that the obligations are now owed to a third party.

By way of example, if A is owed a debt by B, A can transfer the right to be paid to C. This might commonly be done when a business is bought and sold or as part of a factoring arrangement. If B is not notified of the assignment and pays A, C cannot also recover the debt from B. If B has been given notice of the assignment, then B is directly responsible to C. The assignment of the contractual benefit to be paid the debt does not pass to C any contractual obligations of A. Therefore, if B is only required to pay the debt if A does certain things, then unless A does those things, or C does them for A, the obligation to pay will not arise. B cannot enforce any obligation against C as B and C have not entered into a contract together. There are other means of transferring contractual rights and obligations other than by assignment.

Subcontracting is a good example of the transfer of contractual rights and obligations through a second contract.The extent to which the original parties are both bound by the subcontracting arrangement will depend upon the terms of the original contract and the subcontract. Another means of transferring a contract from one person to another is by way of “novation”. “Novation” is a legal term which occurs when a contract between A and B is replaced with a contract between A and C. A’s contractual rights and obligations are unchanged except that the other party to the contract is no longer B, it is C. C has the same rights and obligations as B had under the original contract.

If you are looking at transferring contractual obligations and benefits from yourself to another person or taking on another person’s contractual obligations, you need to be clear about whether both the benefit and the burden is passing from one person to another, who will be able to enforce the contract and who it will be enforced against. Whilst an “assignment” does not require the other party to the contract to consent or be party to the assignment arrangements, a “novation” does require all parties to consent. That is because a new contract is formed to replace the old one.

If you are owed money and want it paid to someone else, then an assignment of the debt is appropriate and the person owing the money can be informed by notice. If you want to transfer more complicated rights, or to transfer a contract that has both obligations and benefits attached to it, for example a sale and purchase agreement, you need to transfer or “novate” the whole agreement.

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50 How thing in action assigned

The absolute assignment in writing of a legal or equitable thing in action, signed by the assignor, passes to the assignee—

all the rights of the assignor in relation to the thing in action; and

all the remedies of the assignor in relation to the thing in action; and

the power to give a good discharge to the debtor.

Subsection (1) applies whether or not the assignment is given for valuable consideration.

Subsection (1) applies subject to—

section 51 ; and

any equities in relation to the thing in action that arise before the debtor has actual notice of the assignment and would, but for subsection (1), have priority over the rights of the assignee.

The priority of an assignment to which subsection (1) applies and which is not given for valuable consideration is to be determined as if the assignment had been given for valuable consideration.

A legal or equitable thing in action is to be treated as having been assigned in equity (whether the assignment is oral or in writing) if—

the assignee has given valuable consideration for the assignment; or

the assignment is complete.

Subsection (5)—

prevails over any rule of equity to the contrary; but

applies subject to sections 24 and 25 .

An assignment to which subsection (5) applies is complete when the assignor has done everything that needs to be done by the assignor to transfer to the assignee (whether absolutely, conditionally, or by way of charge) the rights of the assignor in relation to the thing in action.

Subsection (7) applies even though some other thing may remain to be done, without the intervention or assistance of the assignor, in order to confer title to the rights on the assignee.

Compare: 1952 No 51 s 130

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What is a deed of debt.

A Deed of Debt is a document for recording a loan from one person to another. The Deed helps make it clear that the person receiving the loan must pay back the money or return the property at a chosen time.

The person who loans money or property is called the Creditor, and the person who receives the loan is called the Debtor. Deeds of Debt are particularly useful when someone loans money or property to a trust or where parents help one of their children purchase their first home by loaning them money for their deposit. These types of agreements are most effective when the lending party does not intend to recover interest on the loan.

Do I need a Deed of Debt?

A Deed of Debt allows parties to document a loan. A Deed of Debt records who is involved, the amount being transferred, whether the loan is interest free, and how the loan is to be repaid.

In our experience, a Deed of Debt is an important tool where parents are wanting to help their adult child, often either married or de-facto, purchase a family home. A Deed of Debt will record the loan to the child. The Deed of Debt can then function as an effective record of the loan for any future relationship property or separation agreement between the child and their partner.

Where parents help their child purchase a home and the child is in a relationship, we recommend seeking a relationship property agreement to protect that child’s equity (and debt) by reference to the loan from his or her parents.

What are the benefits of a Deed of Debt?

If someone refuses to repay money that you have loaned to them, having a valid, enforceable legal document can make recovering a loan easier.

Things to keep in mind when getting a Deed of Debt

It is important to ensure that you fully identify the people involved, and who is giving and receiving the loan. The amount to be repaid is also crucial.

Anyone entering into a Deed of Debt should always be aware of any tax or financial consequences that may follow (for example, whether interest applies and how it is to be repaid). We recommend that you seek legal and tax advice before entering into a Deed of Debt. Agreeable would be happy to help connect you with a lawyer who could provide that advice.

We look forward to working with you!

If you’re ready to work some magic and start drafting your own Deed of Debt, get started ! If you have any questions about how the process works, feel free to give us a call on 0800 9 AGREE.

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Home | Browse Topics | Consumer rights & money | Credit and debt | Disputing that you owe a debt

• Consumer rights & money

Chapters in this topic

Credit and debt

• Consumer protection

• Debt recovery and enforcement
• Your rights and obligations when you borrow money
• Key terms and concepts
• High cost consumer credit contracts
• Responsible lending requirements
• The information you must be given
• Interest and fees
• Credit-related insurance
• Your rights as a guarantor
• Contents of the guarantee

Disputing that you owe a debt

• Credit reports
• Debt recovery by a debt collection agency
• How debts are recovered through the courts
• Repossession
• Use of disabling devices on goods
• Repaying the loan
• Dispute resolution schemes
• Challenging an unfair credit contract through the courts
• Enforcing the credit contract laws against lenders
• Other legal protections when you get credit
• The no-asset procedure
• Debt repayment orders
• A creditor's proposal

What can I do if I disagree that I owe the money?

You should tell the lender or debt collection agency as soon as possible that you dispute the debt and tell them why. Do this in writing and keep a copy of the letter.

If the debt is $30,000 or less, you can take a claim to the Disputes Tribunal, where you ask them to make an order that you don’t owe the disputed amount (see: “ The Disputes Tribunal ”).

All lenders who use credit contracts must be registered as financial service providers and be members of an approved dispute resolution scheme. Therefore, if the disputed debt arises out of a credit contract, you can complain to the dispute resolution scheme the lender belongs to (see: “ Other legal protections when you get credit ”).

If you simply do nothing, the lender might take enforcement action against you.

If you dispute the debt, the lender or debt collection agency might:

• negotiate with you about the debt, or
• take court action to recover the debt (see: “ How are debts recovered through the courts? ”).

If you need help, get support from your local budget advice service (see: “ Where to go for more support ” at the bottom of this page).

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Where to go for more support

Legal information and support groups

Community Law

Your local Community Law Centre can provide you with free initial legal advice.

Consumer Protection

The Consumer Protection website has useful information on a range of consumer topics. Consumer Protection is part of the Ministry of Business, Innovation, and Employment (MBIE).

Consumer NZ

The Consumer NZ website provides a wide range of information on consumer issues and template letters you can use to write to traders to enforce your rights.

Website: www.consumer.org.nz Email:   [email protected] Phone: 0800 226 786 (0800 CONSUMER)

Commerce Commission

The Commerce Commission enforces the laws against misleading and deceptive conduct by traders (the Fair Trading Act) and the consumer credit legislation (the Credit Contracts and Consumer Finance Act). The Commission provides information on these areas on its website.

Website: www.comcom.govt.nz Email: [email protected] Phone: 0800 943 600

To make a complaint online: comcom.govt.nz/make-a-complaint

Citizens Advice Bureau (CAB)

CAB provides free, confidential and independent information and advice. See CAB’s website for valuable information on a range of topics.

Website: www.cab.org.nz Phone: 0800 367 222 Facebook:   www.facebook.com/citizensadvicenz

FinCap and Money Talks

FinCap is a non-government organisation providing free financial mentoring services.

Website: www.fincap.org.nz Email: [email protected] Phone: 04 471 1420

MoneyTalks is a financial capability helpline operated by FinCap. The Financial Mentors offer free, confidential advice by phone, text, email and live chat.

Insolvency and Trustee Service (ITS)

The ITS deals with bankruptcies, no-asset procedures, summary instalment orders and some company liquidations. Information about those processes is available on its website. The ITS is part of the Ministry of Business, Innovation and Employment (MBIE).

Website: www.insolvency.govt.nz Phone: 0508 INSOLVENCY (0508 467 658)

Dispute Resolution Schemes

There are four dispute resolution schemes for consumers dealing with lenders and other credit providers. Contact the scheme your service provider has registered with.

1. Financial Services Complaints

Website: fscl.org.nz Phone: 0800 347 257

2. Insurance & Financial Services Ombudsman

Website: www.ifso.nz Phone: 0800 888 202

3. Banking Ombudsman

Website: www.bankomb.org.nz Phone: 0800 805 950

4. Financial Dispute Resolution Service

Credit Reporting

Your credit record

There are three credit reporting companies that operate nationally in New Zealand. To check your record or correct any information, you’ll need to contact them all.

You’re entitled to a free copy of your credit record. You should make sure you choose the free option when you contact each company.

1. Centrix – www.centrix.co.nz – 0800 236 874 2. Illion – www.illion.co.nz – 0800 733 707 3. Equifax – www.equifax.co.nz – 0800 698 332

Personal Properties Securities Register (PPSR)

Search the PPSR register to see if there is any security interest registered against a vehicle. This can be done for a small fee by registering to check online.

Website: www.ppsr.companiesoffice.govt.nz

Privacy Commissioner

The Privacy Commissioner has information on your rights in relation to credit reporting and how to complain if you feel your rights have been breached.

Website: www.privacy.org.nz Email: [email protected] Phone: 0800 803 909

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Giving and taking guarantees and security

Are there any restrictions on giving and taking guarantees and security.

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New Zealand

Some of the key areas affecting the giving of guarantees and security are as follows.

There are no general restrictions in New Zealand on the giving and taking of guarantees. Guarantees are usually taken in the form of a deed, with appropriate witnessing, to avoid the need for the guarantor to receive consideration or benefit in order to enforce the guarantee.

Lender responsibility principles

Lender responsibility principles exist when giving and taking guarantees in relation to a consumer credit contract. Every creditor that takes a guarantee of a consumer credit contract has disclosure obligations to the guarantor as part of this obligation.

It is important to check the constitutional documents of a company giving a guarantee or security to ensure it has an express or ancillary power to do so and there are no restrictions on the directors' powers that would be preventative. Under New Zealand law, directors have a general duty to promote the success of the company for the benefit of its members as whole; as such, they will need to be able to show that adequate corporate benefit is derived from the company giving the guarantee or security. This is often more difficult in the case of upstream or cross-stream guarantees or security provided by a subsidiary to its parent or sister company. The safe approach is often to have the members of the company approve the giving of the guarantee or security by resolution.

Guarantees and security may be at risk of being set aside under New Zealand insolvency laws if the guarantee or security was granted by a company or individual within a certain period of time prior to the onset of insolvency. This would be the case if the company giving the guarantee or security received inadequate consideration, and as such, the transaction was at an undervalue. For such a transaction to be set aside, certain statutory criteria would have to be met, including that the guarantee or security was given within two years of the onset of insolvency of the affected party. Guarantees and security may also be challenged on other grounds relating to insolvency.

Major transactions

In respect of companies incorporated in New Zealand, if the amount guaranteed is greater than half the value of the gross assets of the company, the approval of 75% of the shareholders of the company is generally required before the grant of the guarantee, unless the grant is conditional on later approval in that manner.

Financial assistance

It is unlawful for a company to provide financial assistance for the purchase of its own (or of its holding company's) shares unless relevant shareholder and director approvals are obtained and a certificate from directors relating to solvency given. Financial assistance in this context would include giving a guarantee or security in connection with the share purchase.

Are there any restrictions on lending and borrowing?

The Credit Contracts and Consumer Finance Act 2003 places restrictions on advertising content related to consumer loans. The Responsible Lending Code imposes on lenders of consumer finance and credit contracts obligations to abide by when issuing loans.

Financial institutions do not have to be registered banks in order to take deposits and make loans.

Banks may face restrictions on residential home loan lending due to Loan to Value Ratio (LVR) restrictions imposed via bank registration conditions. These restrict banks on the amount of low deposit lending they can do. Note that this only applies to residential investment and would exclude commercial transactions.

When borrowing money secured over residential homes by mortgage, certain LVR restrictions exist. These restrictions specify the minimum deposit requirements when buying an owner-occupied property to live in or when buying residential investment property. Certain exceptions do apply.

Non-bank deposit takers must comply with the Non-Bank Deposit Takers Act 2013.

Last modified 13 Dec 2019

What are common lending structures?

Lending in New Zealand can be structured in a number of different ways to include a variety of features depending on the commercial needs of the parties.

A loan can either be provided on a bilateral basis (a single lender providing the entire facility) or syndicated basis (multiple lenders each providing parts of the overall facility).

Syndicated facilities by their nature involve more parties (such as agents and trustees which fulfil certain roles for the finance parties), are more highly structured and involve more complex documentation. Larger financings will typically be done on a syndicated basis with one of the syndicate taking the lead in coordinating and arranging the financing.

Loans will be structured to achieve specific objectives, e.g. term loans, working capital loans, equity bridge facilities, project facilities and letter of credit facilities etc.

Loan durations

The duration of a loan can also vary between:

• a term loan, provided for an agreed period of time but with a short availability period;
• a revolving loan, provided for an agreed period of time with an availability period that extends nearer to maturity of the loan and which may be redrawn if repaid;
• an overdraft, provided on a short-term basis to solve short-term cash flow issues; or
• a standby or a bridging loan, intended to be used in exceptional circumstances when other forms of finance are unavailable and often attracting a higher margin.

Loan security

A loan can either be secured, unsecured or guaranteed or limited resource. For more information, see Giving and taking guarantees and security . 

Loan commitment

A loan can also be:

• committed, meaning that the lender is obliged to provide the loan if certain conditions are fulfilled; or
• uncommitted, meaning that the lender has discretion whether or not to provide the loan.

Loan repayment

A loan can also be repayable on demand, on an amortizing basis (in instalments over the life of the loan) or scheduled (usually meaning the loan is repayable in full at maturity).

What are the differences between lending to institutional / professional or other borrowers?

Lending to institutional/professional borrowers is subject to less regulatory oversight and therefore is less burdensome from a compliance perspective.

Lender Responsibility Principles will only apply to consumer credit contracts  (except for consumer leases). Subject to this, parties are generally free to contract on their own terms and conditions subject to restrictions which apply generally (for example in relation to penalties, and oppressive conduct).

Do the laws recognize the principles of agency and trusts?

Yes, both principles are recognized as a matter of New Zealand law.

For instance, it is possible to appoint an agent to act on behalf of other parties and a trustee to hold rights and other assets on trust for the lenders or secured parties.

Are there any other notable risks or issues around lending?

Loan agreements and other finance documents are subject to general contractual principles. There are few general risks or issues particular to lending transactions (such as usury laws or similar), beyond these risks which generally arise in other jurisdictions.

There is a renewed focus on conduct with new standards being imposed on financial service providers to ensure that they serve the needs of customers, treat customers fairly, recognise and prioritise customer interests and effectively manage conflicts of interest. The FMA is expecting this to be actively monitored and managed by boards and senior management with legislation implementing new conduct licensing regime expected to be introduced in Parliament by the end of 2019.

Specific types of lending

Loan-to-value ratios limit New Zealand banks on the amount of low-deposit residential mortgage lending. Banks and other institutions must abide by prudent lending standards.

Standard form documentation

Banks and other consumer finance providers typically use their own standard form loan agreements and security documents for transactions under NZD2 million, and often for larger transactions also.

Are there any other notable risks or issues around borrowing?

A range of legislative protections and standards exist in relation to consumer finance transactions, or transactions with individuals (as distinct from companies, trusts or other entities), such as those under the Credit Contracts and Consumer Finance Act 2003, Fair Trading Act 1986 and the Consumer Guarantees Act 1993.

What are common types of guarantees and security?

Common forms of guarantees.

Guarantees can take a number of forms.

A particular distinction worth remembering is between a performance guarantee and a payment guarantee:

• A performance bond describes a financial undertaking used to protect a buyer against the failure of a supplier to deliver goods or perform services in accordance with the terms of a contract. The issuer of the bond undertakes to pay to the buyer a sum of money if the seller fails to deliver the goods or perform the contracted services on time or in accordance with the terms of the contract.
• A ‘see to it’ guarantee is a promise by the guarantor to see to it that the primary obligor fulfils its obligations under the primary contract. If the primary obligor fails to fulfil its obligations under the primary contract, the guarantor will be in breach of its obligations under the guarantee.
• A payment guarantee is narrower in scope than a performance guarantee as it only covers the payment of money rather than other contractual obligations.

Other types include rental guarantees, advance payment bonds, collateral guarantees, bid, tender, warranty bonds, custom bonds and shipping guarantees.

Common forms of security

Common forms under New Zealand law include:

• a mortgage over interest in land;
• a security interest over personal (i.e. non-land) assets; such as inventory, goods, plant and investment securities such as shares;
• possessory security such as a pledge; and
• rights of set-off.

Different types of security are suitable for securing different types of assets.

Under New Zealand law it is possible to grant security over all of the assets of a New Zealand company or individual assets. Granting security over all of a company's assets will tend to be achieved by way of a debenture which will include:

• a mortgage over real estate;
• a fixed charge over assets which are identifiable and can be controlled by the creditors (such as equipment);
• a floating charge over fluctuating and less identifiable assets (such as stock); and
• an assignment by way of charge over receivables and contracts.

Are there any other notable risks or issues around giving and taking guarantees and security?

Giving or taking guarantees.

To be valid, a guarantee needs to be in writing, signed by the guarantor and provided for good consideration.

Consideration for a guarantee is subject to general contractual principles. In the case of a guarantee, the underlying obligations will usually be the consideration for the guarantee and so it is advisable to execute the guarantee at the same time as executing the underlying obligations to avoid any suggestion of past consideration. Often the guarantee is included in the loan agreement and so this should not be an issue. Also it can be difficult to establish consideration for a guarantee as the primary obligations are between the underlying obligor and beneficiary, for example between the borrower and lender. As a result, guarantees are often executed as deeds to avoid any argument about whether good consideration was provided. Deeds have particular execution requirements under New Zealand law which need to be observed.

Additionally, there is a risk that a guarantee may be set aside if it was procured by undue influence by a borrower or lender. A party being provided with a guarantee should be alive to this issue and take steps to avoid claims of undue influence by, for example, requiring the guarantor to take separate legal advice.

Lender responsibility principles exist when taking guarantees. Failure to abide by these could result in issues for the guarantor. Every creditor that takes a guarantee of a consumer credit contract has disclosure obligations to the guarantor as part of this obligation.

Giving or taking security

A security document may need to be executed as a deed if it:

• contains a mortgage over land;
• confers a statutory power of sale and power to appoint a receiver; or
• contains a power of attorney.

Once granted, security needs to be properly perfected before it is valid against third parties. Perfection formalities can range from having the secured asset delivered to the security holder, registration of the security and notice being given to third parties. Mortgages over land are registered on on-line electronic land titles register - Land Information New Zealand, also known as LINZ. Security interests over non-land assets are protected by registering a finance statement on the New Zealand Personal Property Securities Register.

There are no general notarization requirements for security documents under New Zealand law.

Like guarantees, for a period after a new security interest has been granted (known as the hardening period), it is at risk of being set aside in certain circumstances under insolvency laws. Reviewable transactions include those conducted at an undervalue and preferences and invalid floating charges.

Michael Thompson

Partner DLA Piper New Zealand [email protected] T +64 9 300 3866 View bio

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• About civil debt >

Pay civil debt

When you are ordered by the court to pay a civil debt to a creditor, you should make arrangements with the creditor to pay them directly.

If you pay the correct amount within the right timeframe, you won’t be contacted by the court.

If you don’t pay the correct amount, or if you don’t pay on time, the creditor can ask the court to take enforcement action against you. This is called civil enforcement.

Learn about civil debt

About the judgment or order

The judgment or order should explain how much you have to pay and when you have to pay it. It might also include:

• specific instructions for paying the creditor or
• an agreed attachment order, if you agree to one at the hearing. This can be filed in court the same day.

It is important to talk to the creditor (or their agent) about your ability to pay. If you can’t pay the debt as specified in the court order:

• you may be able to organise with the creditor to pay by instalments or
• you can apply for enforcement action on yourself, so the debt is being paid.

If you disagree with the decision made in a judgment order, you can contact the Court or Tribunal, where the original order was made, to file an appeal. Here are the links to the courts process around how to apply for an appeal:

• Civil Court
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• Land Valuation Tribunal
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Please note, filing an appeal does not always automatically stop any enforcement action being taken. Please visit the relevant page to confirm the requirements of the Court or Tribunal where the original order was made.

Enforcement can begin once the order is made

Once a court or tribunal has made an order or judgment that you must pay the creditor, enforcement can begin if you do not pay them on time.

Fees or costs from court enforcement action may be added to the amount you owe.

There are two enforcement options you can take:

• File a financial statement
• Apply for an attachment order

As well as those options, the creditor can ask the court to:

• assess your ability to pay on paper, over the phone or at a hearing
• seize your property
• order that money owed to you be paid to the creditor and stop you from selling property
• sentence you to community work if you do not follow court orders

This page was last updated: 29th November 2022

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Assigning or subleasing – what is the difference?

The terms assigning and subleasing are often used in a commercial leasing context, to refer to when a tenant transfers their rights under a commercial lease to another party. 

Assigning a Lease

A tenant may want to sell their business or move to other premises, but if their lease has not come up for expiry yet, they will not be able to terminate it.  Instead, they might need to assign their lease to the party who buys the business, or to a new tenant.

Landlord’s consent

Assigning a lease requires the landlord’s written consent.  A landlord is likely to want to know (and is entitled to know) all about the new tenant including their financial situation, the nature of their business, and conduct reference checks. 

Although they can conduct thorough due diligence on a prospective tenant, the landlord cannot unreasonably withhold their consent, nor can they ask for any extra payment in order to give their consent.  To formalise the assignment, a written Deed of Assignment of Lease needs to be completed and signed by all parties including the landlord. 

Original tenant’s liability

On a day-to-day basis the new tenant takes on all of the lease obligations.  However, the original tenant (and any guarantors to the lease) will remain liable under the terms of the lease until such time as it is terminated, varied, or renewed beyond the original renewal rights. This means that should the new tenant fail to meet any of their obligations (for example if they get behind in their rent payments), the landlord could come after the original tenant and/or their guarantors.

A sublease differs from an assignment of lease in that the original tenant (the “head tenant”) continues to be responsible for all of the lease obligations, but a subtenant is occupying the premises and paying a contribution towards the rent. 

Subleasing is common where a head tenant is not using all of their leased premises, and wants to make some additional money by subleasing a portion of the leased premises to a third party without giving up their own lease (the “head lease”) altogether.  By way of a Deed of Sublease, a subtenant agrees to pay rent for part of the premises, often a specific portion of a total area marked out on a floor plan, directly to the head tenant.

A head lease will often specify that the landlord’s consent to a sublease is needed.  If the subtenant is going to use the premises for a business use that differs from the head tenant’s as recorded in the head lease, then that new use must be disclosed to the landlord as part of obtaining their consent, and recorded in the Deed of Sublease as a variation of the head lease terms.

Head tenant’s liability

The head tenant remains liable to the landlord for the entire premises, even if a portion of that has been subleased.

The subtenant must comply with the terms of the head lease as well as their own sublease arrangement, so it is essential that they receive a copy of the head lease at the outset.  A subtenant should not sign a subleasing agreement without having reviewed the head lease first, otherwise they may find themselves with obligations they cannot fulfill.

Alan Knowsley  Partner Wellington

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We provide litigation, legal representation and advice in fields such as employment law, buying and selling properties, setting up a family trust, commercial law, property law, Māori land, family law, relationship property, body corporates and construction. In addition to these legal services, we also provide highly efficient debt collection New Zealand wide for clients from large companies right through to small businesses and individuals.

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Debt recovery and enforcement methods - What options do you have if a customer fails to pay their bills?

Do you need help in recovering a debt clients often ask what options they have to recovery money owed by an individual or a business. this article outlines what options are available to you if you need to recover a debt..

If a company, other entity or person owes you money, you are creditor. The person owing you the money is a debtor.  As a creditor, whether you are a business or an individual, there are various legal remedies available to you for recovering a debt owing to you where a debtor cannot or will not pay.

Before you can exercise any remedies, you must establish that you have a claim against the debtor.  For example, you must be able to show that there was an agreement between the parties to supply a service or a product in return for a payment of those services or products.  Where the amount in claim is ascertained during the formation of the contract, this is considered a claim in liquidated damages.

Alternatively, you may have an unliquidated claim for damages.  For example, you may have a claim in contract for lost profits as a result of a breach of contract.  In this circumstance, the amount owing cannot be ascertained by a simple calculation, and a judicial hearing is usually required.

It is not uncommon, where a debtor fails to pay, for a creditor to have sent reminder letters and final warning notices putting the debtor on notice that they will take further action, but what happens next if the debtor ignores these notices, refuses to pay or denies it owes the debt?

Starting Point

Demand Letter

Where a debtor owes you money, a good place to start is by formally demanding payment by way of a demand letter.  A demand letter will briefly set out why you are entitled to payment and demand payment to be made by a certain date.  A well composed demand letter may prompt a response and sometimes a settlement proposal, as a debtor may perceive that you are prepared to take the matter further and that the debtor may incur further legal costs if they do not pay what they owe.  If the debtor disputes the debt after receiving the demand, this may assist you in making a decision about what method of recovery to use.

Statutory Demand

If the debtor is a company, a legal demand in the form of a “statutory demand” may be issued against the debtor company.  The requirements for a statutory demand are set out in section 289 of the Companies Act 1993.

A statutory demand must be in writing and served on a company where there is no dispute over the debt and the debt is greater than $1,000. A statutory demand is a useful tool in a creditor’s arsenal and may prompt payment from a debtor.  However, a statutory demand is intended to be the first step in putting a company into liquidation and should be used to prove insolvency of a company rather than as a means to collect outstanding money.

The use of statutory demands are a common and effective way of prompting payment from a debtor, but proper care must be exercised to ensure that it is issued and served in accordance with the requirements of the Companies Act 1993.

Commencing Proceedings

If a demand letter or a statutory demand does not prompt payment or settlement discussions, you will need to consider whether to seek judgment against a debtor by issuing proceedings in the appropriate forum.  There are three potential forums in which you can seek judgment: the Disputes Tribunal, the District Court and the High Court.

Before issuing proceedings, you will need to consider the implications, such as costs to do so and the ability of the debtor to satisfy the judgment (that is, does the debtor have any assets to pay the debt?)  Alternatively, you may decide that issuing proceedings is the best way to put pressure on the debtor to pay, to avoid the further cost of litigation, the stigma of having a judgment against the debtor’s name and the impending threat of bankruptcy or liquidation.

Disputes Tribunal

Where the debt is disputed (and only when it is disputed), legal action can be taken to recover a debt in the Disputes Tribunal.  The Disputes Tribunal hears claims up to the value of $30,000.  The Tribunal offers a more informal setting with Referees presiding as decision makers rather than Judges.  Parties must represent themselves and cannot be represented by lawyers at the Tribunal.  However, lawyers may assist with applications to the Tribunal and with preparation for the hearing.  Just like a Court Order, a decision made by Referee is called an “Order” and it will set out what the parties need to do and when it must be done.  A Tribunal Order is legally binding and must be followed.

District Court and High Court Proceedings

A District Court has the jurisdiction to determine any proceeding where the debt is not more than $350,000.  Any proceeding in respect of a debt in excess of $350,000 must be commenced in the High Court.  The High Court also determines bankruptcy and liquidation proceedings.

To recover debts through the District Court, general proceedings are commenced by filing a statement of claim, notice of proceeding and a list of documents relied on.  The person commencing the proceedings is the plaintiff.  Once these documents are filed with the Court, they are served on the other party (known as the defendant) who has 25 working days to file a statement of defence.  If a statement of defence is not filed, and where the claim is for unliquidated damages, the plaintiff may apply for a judgment by default.

There are other applications that may be made to the District Court, for example, an interlocutory application for summary judgment.  This can be used as a “fast-track” approach for obtaining a judgment without the need for a trial.  A summary judgment application is made in instances where the plaintiff asks the Court to grant judgment without trial because the defendant has no lawful defence.

Time limits

There are limits on how long you have to issue proceedings after the relevant event or debt arose.  Generally, you must bring a claim within six years from the time of the event that the claim is based on.  There are some exceptions to this rule and these are set out in the Limitation Act 2010.

Enforcing the Judgment 

Once you have successfully obtained a judgment, you can apply for an order to enforce the judgment.  The different methods of enforcement in the District Court include:

• Attachment order
• Charging order

Warrant to seize property

• Garnishee order

Where it is unknown what assets the debtor holds, a financial assessment hearing is usually used as a first step to establish the debtor’s financial circumstances.  At a financial assessment hearing, the debtor must make a declaration under oath outlining exactly what assets and debts they have, what they earn and the amount they can pay in instalments to repay the debt.  Where the debtor is a company, then the relevant company officer is required to attend.  You can also attend to examine and question the debtor on their finances.  During a financial assessment hearing, a Court may also make an attachment order to enforce a judgment.  If a debtor fails to attend, a warrant for their arrest may be issued.

Attachment order 

An attachment order is designed to secure your right to the debtor’s earnings by requiring their employer to deduct money directly from the debtor’s salary or wages.  Deductions can also be made from pensions, WINZ benefits and ACC payments.  However, no more than 40% of the debtor’s net income can be deducted and both parties need to agree on how much can be deducted and how frequently the payments will be made.

Charging orders

You may also be able to obtain a charging order against the debtor’s assets (for example, land or personal property) which prevents the debtor from disposing of the assets that are identified in the order, until the debtor pays the judgment.  A charging order operates as a “stop order”, preventing or restricting a debtor from dealing with or selling property.  If the debtor owns land, a charging order allows for a caveat to be lodged against the title.

A warrant to seize property enables a bailiff appointed by the Court to enter the premises of a debtor to seize their money or goods.  The goods seized may then be sold to satisfy the judgment.  The bailiff is authorized to seize goods of the debtor except for their:

• Tools of trade to a value not exceeding $5,000; and
• Necessary household furniture and effects, including clothing for the debtor and their family, to a value not exceeding $10,000.

If, after seizure and the debtor has not paid within five working days, the bailiff may sell the goods at public auction and the proceeds of the sale will be paid towards the judgment sum owing.  A bailiff can also immobilise any motor vehicle belonging to the debtor, pending payment of the debt.

This procedure is only available in the High Court.  However, you may be able to apply to have a judgment transferred from the District Court to the High Court.  As with a warrant to seize property, a sale order authorizes a bailiff to seize and sell property, and there are similar limitations to what can be sold, that is, a debtor is entitled to keep tools of trade and necessary household furniture.

Garnishee Order

A garnishee order enables you to recover the judgment sum from any debts owing to the judgment debtor by a third party.  The court can make a garnishee order requiring the third party to pay money directly to you, for example, a bank may be ordered to pay money directly to you if there is money held in a debtor’s bank account.  You may become aware of the debt owed by a third party at a financial assessment hearing, this is why a financial assessment hearing may be a useful first step to ascertain the debtor’s financial position.

This article is only intended to provide a brief overview of the procedure for pursuing claims and enforcing judgments in the respective jurisdictions.  Drafting court documents and appearing in court can be a complex, time consuming and confusing exercise for those not familiar with court processes.  It is advisable (and often cost effective) to consult your legal advisor for advice before deciding what debt recovery option to take.  If you are successful, costs such as legal fees and disbursements (filing fees and service fees) may be awarded against the unsuccessful party so that can help you cover the costs of obtaining legal advice.

If you have any queries about your debt recovery or enforcement options, please contact one of our team for advice.

This article is current as at the date of publication and is only intended to provide general comments about the law. Harkness Henry accepts no responsibility for reliance by any person or organisation on the content of the article. Please contact the author of the article if you require specific advice about how the law applies to you.

For further information

Sarah Rawcliffe

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