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Chapter CTM61605

Document Cited in Related
Vincent
Published date16 April 2016
Record NumberCTM61605
Assignment or novation of debt

It may be claimed that a loan has been repaid through either assignment or novation of the debt. It is important to establish the full facts surrounding the various arrangements and the book-keeping steps before deciding whether the arrangements amount to an assignment, a novation or something else and what the consequences will be in terms of repayment of the loans or charges on the participator under ITTOIA05/S415.

As a general rule in contract law, liabilities cannot be assigned because a person is entitled to know to whom he is to look for the satisfaction of his rights under a contract.

Novation

A liability may be transferred with the consent of all the parties involved but this is in effect the rescission of one contract and the substitution of a new one in which the same acts are to be performed by different parties. This is called a novation and it can only take place by agreement between all the parties. There must be consideration, which will usually take the form of the discharge of the old contract.

For a novation to be effective all parties must consent to it and there must be an intention to novate. This is the essential difference between a novation and an assignment.

A common form of novation occurs where A is indebted to B and C is indebted to A, and all three parties mutually agree that C shall become B’s debtor in place of A. Certain conditions, however, must be fulfilled, in order for the novation to be effective. These conditions are:

  • that the intermediate debt of A to B should be extinguished
  • that the same or a larger amount should be due from C to A, than A to B and
  • that a defined and ascertained liability should be transferred

If the debt is novated it has been released and not repaid. Section 458 relief would be due on the original debt, and ITTOIA05/S415 may apply. Depending on the facts, the new loan may also be subject to a new charge under Section 455.

As Millett J explained in Collins v Addies (65TC at page 201F):

as a matter of law it is not possible for a debtor to assign a legal liability … the transaction has to...

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