17.01  Consider that A is indebted to B, and that a third party, C, has an interest in the debt. This may arise, for example, because C is an assignee, or the holder of a security interest, or the beneficiary of a trust, or an undisclosed principal, or a person with subrogation rights, or a judgment creditor levying execution on B's asset in the form of the debt. If A has a cross-claim against B that would otherwise be eligible for a set-off against the debt, A would be concerned to know whether the set-off is still available notwithstanding the interest of C. Alternatively, if A has a cross-claim against C, the question may arise whether the cross-claim can be set off against A's debt to B, given C's interest in the debt. Some general principles were considered earlier in the context of a discussion of mutuality.¹ The purpose of this chapter is to consider the availability of a set-off in cases involving assigments, crystallized floating securities, trusts, execution creditors and subrogation rights. Undisclosed principals² were considered earlier, as were assignments in the context of the principle in Cherry v Boultbee³ and combination of bank accounts.⁴ In addition, the Contracts (Rights of Third Parties) Act 1999 in some circumstances permits a person who is not a party to a contract to enforce a term in the contract which purports to confer a benefit on him or her, and the chapter concludes with a brief discussion of set-off in that situation.

17.02  When a debt is assigned,⁶ a set-off may occur as between the assignee's beneficial interest in the assigned debt and a cross-claim that the debtor has against the assignee.⁷ In addition, there is a general equitable principle⁸ that, in some circumstances, an assignee takes subject to equities, which include rights of set-off,⁹ that are available to the debtor as against the assignor.¹⁰

17.03  Consider the case of an equitable assignment of a common law debt.¹¹ Commonly, the question of set-off will arise in the situation in which the assignor is indebted to the debtor on a cross-debt that is independent of the assigned debt. When the assignee sues for payment of the assigned debt, the debtor asserts that the debts should be set off under the Statutes of Set-off,¹² notwithstanding the assignment. The basic principle is that, if the cross-debt arose after the debtor had notice of the assignment, the debtor cannot set it off against the assignee, but that a set-off is available if the cross-debt arose before the debtor had notice.¹³ In N W Robbie & Co Ltd v Witney Warehouse Co Ltd¹⁴ the Court of Appeal sought to explain the denial of a set-off in relation to a post-notice cross-debt on the ground that the demands are not equitably mutual. The assigned debt is owned beneficially by the assignee, whereas the cross-debt constitutes a claim against the assignor. This is not a convincing explanation, however. It fails to explain why a set-off is allowed to the debtor when the cross-debt arose after the assignment but before the debtor had notice of the assignment, because in the period between assignment and notice mutuality determined (p. 810) by reference to beneficial titles similarly would be lacking.¹⁵ The preferred analysis¹⁶ is that at common law mutuality for the purpose of the Statutes of Set-off is determined by reference to legal titles, so that if cross-debts are legally mutual there is a prima facie right to a set-off under the Statutes. The question then becomes whether equity regards it as unconscionable for the debtor to rely on this right of set-of otherwise available at law when the equitable title to one of the debts is in someone else.¹⁷ This reflects the position that applied before the Judicature Acts. An assignment of a debt was not then generally recognized by the common law courts, in the sense that the assignee could not enforce the debt in a common law action brought in his or her own name.¹⁸ The assignee was required to sue in the name of the assignor. If the assignor refused to allow his or her name to be used, the assignor could be compelled to do so by a court of equity. As far as the common law was concerned, however, the resulting action to enforce the debt was still the assignor's action, and unless equity intervened defences available to the debtor against the assignor, including pursuant to the Statutes of Set-off, could be asserted in that action. Equity would not enjoin the debtor at the request of the assignee from raising defences that arose before the debtor had notice of the assignment.¹⁹ However, it was considered unconscionable for the debtor to diminish the rights of the assignee by relying on defences that accrued after the debtor had notice of the assignment,²⁰ and so in that situation the assignee could obtain an injunction to restrain the debtor from relying on the defence.²¹ The Judicature Acts brought about a fusion of the courts of law and equity,²² but the courts nevertheless have (p. 811) continued to apply the principle that an assignee is bound by equities arising before notice. Moreover, notwithstanding the fusion, and notwithstanding the modern view as to enforcement, that an equitable assignee may sue in his or her own name subject to a requirement (which can be dispensed with in exceptional circumstances²³) of joining the assignor as a party to the action,²⁴ the explanation should still be the same.

17.04  The Judicature Acts²⁵ also introduced a statutory form of assignment, the successor of which is set out in s. 136(1) of the Law of Property Act 1925.²⁶ In order to come within this provision, the assignment must be in writing, it must be absolute and not by way of charge only, and express notice in writing must be given to the debtor. When the section is com-plied with, the assignee obtains the legal title to the debt and may sue in his or her own name without joining the assignor. The operation of the section has a hybrid quality. It has been said that it enables an assignee to acquire a title that has all the procedural advantages of a legal title but so far as priorities are concerned the assignee's position is no better than if the assignment had been effected in equity.²⁷ The section preserves the equitable principle that an assignee takes subject to equities, so that a debtor can rely, as against a statutory assignee, on a right of set-off that would have prevailed against an equitable assignee before the Judicature Acts.²⁸ This includes a set-off at common law under the Statutes of Set-off.²⁹ On the other hand, because the assignor is not a party to the action, the debtor cannot counterclaim in the action for the excess of the assignor's indebtedness to him or her over and above the amount of the assigned debt.³⁰

17.05  In Australia, the Personal Property Securities Act 2009 (Cth) establishes a national law governing security interests in personal property. Section 12 defines ‘security interest’ (p. 812) broadly as including the interest of a transferee of an ‘account’ or a ‘chattel paper’, whether or not the particular transaction secures a payment or the performance of an obligation.³¹ Therefore, an absolute transfer of an ‘account’ or a ‘chattel paper’ is governed by the Act. Those concepts are defined in s. 10. Essentially, an ‘account’ is a debt that arises from disposing of property (whether by sale, lease, licence or in any other way) or granting a right or providing services in the ordinary course of business, and a ‘chattel paper’ is a ‘writing’³² that evidences a monetary obligation and a security interest in, or a lease of, specific goods, or a security interest in specific intellectual property or a specific intellectual property licence. Section 80(1) sets out the ‘taking subject to equities’ principle in the case of those transfers. It provides that the rights of a transferee of an account or chattel paper are subject to:

1. (a)  the terms of the contract between the debtor and the transferor and any equity, defence, remedy or claim arising in relation to the contract (including a defence by way of a right of set-off); and

2. (b)  any other equity, defence, remedy or claim of the debtor against the transferor (including a defence by way of right of set-off) that accrues before the first time when payment by the debtor to the transferor no longer discharges the obligation of the debtor under s. 80(8) of the Act to the extent of the payment.

Section 80 preserves the basic rule, that a transferee takes subject to equities and defences, though it gives rise to a number of difficulties.³³ Apart from s. 80, the Act is expressed not to apply to rights of set-off or combination of accounts.³⁴ It should not therefore affect the application of the principles discussed below in relation to assignments of other forms of debt.

17.06  An assignee takes subject to a cross-demand available to the debtor against the assignor only if the cross-demand would have been available as a set-off as between the assignor and the debtor in circumstances where neither was insolvent.³⁵ It has been suggested in Australia that in some cases a cross-demand that would not have given rise to a set-off in an action by the assignor against the debtor nevertheless may be asserted against the assignee.³⁶ This is (p. 813) contrary to the view expressed by the House of Lords in Bank of Boston Connecticut v European Grain and Shipping Ltd,³⁷ and it should not be accepted as correct.

That statement was adopted by Lord Brandon of Oakbrook in the House of Lords in the Bank of Boston case as setting out the applicable test for an equitable set-off as between the original parties, to which an assignee also takes subject.³⁹ Traditionally, an equitable set-off was said to be available where the connection between the claimant's claim and the defend-ant's cross-claim was such that the claimant's title to sue was impeached.⁴⁰ Lord Brandon said that the concept of impeachment is not a familiar one today, and formulated the test instead by reference to whether the defendant's cross-claim could be characterized as ‘flowing out of and inseparably connected with the dealings and transactions which also give rise to’ the claimant's claim.⁴¹ This was said to be merely a different version of the impeachment test,⁴² but in truth it is broader. Thus, it is difficult to see how the formulation adopted in the Bank of Boston case could ever operate to deny an equitable set-off when the same transaction is the source of both demands, whereas in the context of the traditional impeachment test it has been said that it is not sufficient for an equitable set-off that the cross-demands arose out of the one transaction.⁴³ In Australia the courts have tended to be more rigorous than those in England in emphasizing impeachment of title as the basis of equitable set-off,⁴⁴ and in order to distinguish the statement in Government of Newfoundland v Newfoundland Railway Co, which formed the foundation of the test approved in Bank of Boston v European Grain and Shipping, it has been suggested that the Government of Newfoundland case in truth was not concerned with determining the avail-ability of an equitable set-off as between the debtor and the assignor in that case. Rather, it was concerned with the question whether an assignee of a contract could recover moneys owing under it without being met by a counterclaim for breach by the assignor of the (p. 814) same contract.⁴⁵ It is said to have been assumed in the Government of Newfoundland case that Newfoundland legislation similar to s. 25(6) of the Supreme Court of Judicature Act 1873 (UK) applied to the assignment.⁴⁶ That legislation conferred a statutory power to assign debts,⁴⁷ and it provided that the assignee took ‘subject to all equities which would have been entitled to priority over the right of the assignee if this Act had not been passed’. The argument proceeds that the equities to which the assignee took subject included not only claims which might have been set off in equity, but also cross-demands which, whilst affording no defence and giving rise only to a counterclaim, under the old system would have founded a common injunction against the enforcement of the plaintiff's claim.⁴⁸ By confining the case to assignments, the view has been expressed that Government of Newfoundland v Newfoundland Railway Co does not provide a good juridical root for any changed doctrine of equitable set-off.⁴⁹

17.08  However, whether or not the Privy Council in the Government of Newfoundland case correctly stated the relevant test for equitable set-off, it is apparent, for reasons set out in greater detail elsewhere,⁵⁰ that it proceeded on the basis that a set-off can be asserted against an assignee only because it could also be asserted against the assignor.⁵¹ The case does not support a proposition that a cross-claim that arises from the transaction which gave rise to the assigned debt may be asserted against the assignee in circumstances where it would not have supported a set-off as against the assignor. Indeed, it is difficult to find any pre-Judicature Acts authority for the proposition that a debtor being sued by an equitable assignee of the debt, but in the name of the assignor, could obtain a common injunction to restrain the action on the basis solely of a cross-demand that would not have given rise to set-off (in its various forms) against the assignor in the absence of an assignment. In the first edition of Kerr on Injunctions, published in 1867 only a short time before the enactment of the Judicature Acts, there is no mention of an injunction being available in that circum-stance.⁵² On the contrary, the principle is stated simply in terms that: ‘The assignee of a chose in action takes subject to any equitable right of set-off existing as against the (p. 815) assignor at the date of or before notice of the assignment …’⁵³ Further, if a common injunction would not have been available before the Judicature Acts, an argument that s. 25(6) of the 1873 Act⁵⁴ itself was the source of a debtor's right to assert the cross-demand against the assignee would not be tenable given that the Judicature Acts were purely pro-cedural.⁵⁵ In so far as Young v Kitchen⁵⁶ has been referred to as a case in which an assignee took subject to a cross-demand that might not have been available as a set-off against the assignor,⁵⁷ it is relevant to note the central point made by counsel for the defendant (Bompas QC) in his successful argument in favour of the set-off. He is reported as having argued that: ‘Whatever defence might be set up against the assignor may be set up against his assignee, for the assignee cannot be in a better position than his assignor.’⁵⁸ In other words, counsel for the debtor regarded it as a case in which the assignee took subject to a defence that was available against the assignor. It was not argued in the alternative that, even if the debtor's unliquidated cross-demand could not have been set off in an action brought by the assignor in his own right, the assignee nevertheless should still take subject to the cross-demand. Nor did Baron Cleasby make any such point in his judgment.⁵⁹

17.09  The theory proposed in Australia originated in a discussion of Government of Newfoundland v Newfoundland Railway Co by Dixon J in McDonnell & East Ltd v McGregor.⁶⁰ Dixon J suggested in the McDonnell case that set-off is not available against a claim for damages.⁶¹ That proposition has now been discredited in relation to equitable set-off,⁶² but it may have influenced his view that the Government of Newfoundland case was not a case of equitable set-off. Moreover, in so far as it has been sought to justify the decision in the Government of Newfoundland case by reference to a notion that an assignee of a contract cannot take the benefit of the contract without also assuming the burden,⁶³ that explanation would be of doubtful validity in Australia following the rejection, by the Full Court of the Victorian (p. 816) Supreme Court in Government Insurance Office (NSW) v K A Reed Services Pty Ltd,⁶⁴ of the broad benefit and burden principle advocated by Megarry VC in Tito v Waddell (No. 2).⁶⁵ Indeed, the House of Lords in Bank of Boston Connecticut v European Grain and Shipping Ltd⁶⁶ specifically rejected the benefit and burden principle as an explanation for the Government of Newfoundland case.

17.10  If the claim assigned is such that as a matter of law it is not susceptible to a set-off as between solvent parties, not because of a lack of connection between the demands but because of its nature, the assignee similarly will take free of a set-off.⁶⁷ This includes a claim for freight under a charterparty in circumstances where the charterer has a cross-claim for damages against the shipowner,⁶⁸ and a claim on a negotiable instrument where the issuer has an unliquidated cross-claim arising out of the transaction in respect of which the instrument was issued.⁶⁹

17.11  In relation to the principle that the cross-claim must have been available as a set-off against the assignor, further difficulty arises in Australia consequent upon the enactment of s. 80(1) of the Personal Property Securities Act 2009 (Cth) in the case of a transfer of an ‘account’ or a ‘chattel paper’ (as defined in the Act).⁷⁰

17.12  Section 80(1)(a) provides that a transferee takes subject to ‘any equity, defence, remedy or claim arising in relation to the contract (including a defence by way of a right of set-off).’ The express references to both ‘claim’ and ‘defence’ (including a defence by way of a right of set-off) suggest that a ‘claim’ to which a transferee takes subject is not synonymous with a ‘defence’. The only requirement in relation to a ‘claim’ is that it must have arisen ‘in relation to the contract’ between the debtor and the transferor, which is broader than the principle which governs the availability of equitable set-off.⁷¹ Paragraph (1)(b) of s. 80 goes even further. It provides that the transferee's rights are subject to ‘any other equity, defence, remedy or claim of the account debtor against the transferor (including a defence (p. 817) by way of a right of set-off)’ that accrues before the time referred to in s. 80(8).⁷² Apart from that temporal limitation, there is no required connection on the face of para. (1)(b) between the assigned claim and the debtor's cross-claim against the transferor. The lack of a required connection accords with the position under the Statutes of Set-off, which apply to mutual debts. The debts need not be connected.⁷³ The Statutes do not extend to damages claims. For that, reliance must be placed upon equitable set-off, but for that form of set-off the cross-claims must be connected.⁷⁴ Thus, there is no set-off under either the Statutes or the principles of equitable set-off in relation to an unconnected damages claim.⁷⁵ But, on a literal reading of s. 80(1), a transferee of an account or a chattel paper could take subject to a totally unrelated cross-claim in damages available to the debtor against the transferor that accrued before the relevant time, for example an unrelated claim in defamation. If correct, this could substantially affect the rights of transferees and would represent a significant departure from the general law position. Section 80(1) is headed ‘Rights of transferee subject to contractual terms and defences’. The heading suggests that the section is directed at claims which give rise to a defence, and s. 80(1) should be construed in that manner.⁷⁶ Though the section heading is not part of the Act,⁷⁷ consideration may be given to it if it is capable of assisting in the ascertainment of the meaning of the section in circumstances where the ordinary meaning would lead to a result which is manifestly absurd or unreasonable.⁷⁸

17.13  Mutual debts in existence between the debtor and the assignor at the date that the debtor receives notice of the assignment may give rise to a set-off under the Statutes of Set-off enforceable against the assignee.⁷⁹ This should also apply where the cross-debt owing by the assignor to the debtor was acquired by the debtor as a result of an assignment before notice,⁸⁰ (p. 818) including where there is an effective assignment without consideration.⁸¹ In the case of set-off under the Statutes of Set-off, the debts are not set against each other until judgment for a set-off.⁸² Notice of an assignment given to the debtor itself does not effect a set-off.⁸³ As a corollary, there must not only be mutual debts in existence at the date of notice but the set-off must also be available when the debtor is sued by the assignee and files his or her defence. If therefore the cross debt is not enforceable at that time,⁸⁴ or if the court in the assignee's action would not determine the cross-debt, for example because it is subject to an arbitration clause or a foreign jurisdiction clause,⁸⁵ the assignee will not be subject to the set-off.⁸⁶

17.14  It is not necessary that the pre-existing cross-debt owing by the assignor to the debtor should have been presently payable before the date of notice.⁸⁷ It should suffice if it is payable when the defence is filed.⁸⁸ It has been said, however, that, if the assigned debt was not presently payable at the date of notice, in order that the cross-debt may be set off it should have become payable before the assigned debt became payable.⁸⁹ The reason for that limitation is unclear. The set-off in issue is the procedural defence provided by the Statutes of Set-off. If the cross-debt owing by the assignor is in existence before notice, it should be sufficient if it is payable at the date that the defence is filed regardless of when the assigned debt became payable. Indeed, it is difficult to reconcile the suggested limitation with Christie v Taunton, Delmard, Lane and Co.⁹⁰ The case concerned an assignment of debentures issued by a company. Notice of the assignment was given to the company on 6 November 1890. Prior to that date, on 3 November, a call was made on shares held by the assignor, which call was payable on 20 November. The debentures on their face were not payable until 31 December, but in the event of the winding up of the company the principal moneys secured by them were to become immediately due and payable. On 19 November the company went into voluntary liquidation. Both the company's liability on the debentures and the assignor's liability for the call constituted existing debts at the date of notice, although they were not payable until after that date. Stirling J held that the company could bring them into an account, notwithstanding that, because of the (p. 819) occurrence of the winding up, the assignor's indebtedness for the call matured after the assigned debt became due and payable.⁹¹

17.15  There must be an existing debt owing by the assignor to the debtor before notice.⁹² It is not considered sufficient for a set-off that a debt accrues in favour of the debtor from the assignor after notice as a result of a contract entered into before notice.⁹³ Thus, where a debtor had leased property to the creditor, and the creditor assigned the debt, it was held that the assignee was not subject to a set-off in respect of rent which accrued to the debtor/lessor after notice of the assignment, even though the lease was entered into before notice.⁹⁴ This is an undesirable result. Set-offs should be favoured in circumstances where there was a possibility of a perception of a form of security in the existence of cross-demands,⁹⁵ and this should be ascertained by reference to the state of affairs existing when a binding contractual relationship was entered into, as opposed to when a debt arose as a result of the contract. It should suffice that there are presently payable cross-debts at the date of the action which arose out of contractual obligations incurred before notice. Consistent with that approach, an exception to the established principle may arise in circumstances where there was a temporary suspension of mutuality.⁹⁶ For example, if a debtor before notice of an assignment of the debt by the creditor held a negotiable instrument upon which the creditor was liable, which the debtor indorsed to a third party before notice, and after notice the debtor was obliged to take up the instrument again as a result of the creditor's default, the assignee would take subject to the debtor's right to set off the resulting claim against the creditor/assignor on the instrument. The availability of a set-off in this situation (p. 820) has been recognized in the context of company receivership,⁹⁷ and questions of set-off in that context are governed by the same principles which apply to assignments.⁹⁸

17.16  The Statutes of Set-off have been repealed in Queensland,¹⁰⁰ which should have as a consequence that the only form of set-off to which an assignee in that jurisdiction takes subject is equitable set-off, together with analogous rights such as pursuant to the principle in Cherry v Boultbee¹⁰¹ and combination of bank accounts.¹⁰²

17.17  In Victoria, it has been suggested that SCR r. 13.14 has had the effect that any cross-claim, whether liquidated or unliquidated, may now be included in the defence and be the subject of a set-off.¹⁰³ That proposition may be debated,¹⁰⁴ but if the rule does operate in that manner prima facie it would have a corresponding effect on the position of an assignee. It could be said that an expanded defence under the rule would not apply in the case of a legal assignment by a creditor which complies with s. 134 of the Property Law Act 1958 (Vic).¹⁰⁵ The argument would be that r. 13.14 is expressed to apply where ‘a defendant has a claim against a plaintiff for the recovery of a debt or damages …’, and in the case of an assignment satisfying s. 134 the assignee is the plaintiff. The argument would proceed that the rule can have no application in relation to a cross-claim against the assignor, who is not the plaintiff, notwithstanding that, if the assignment had not occurred, so that the original creditor would have been the party suing, r. 13.14 would have provided a defence. Therefore, in this situation the set-offs that can be asserted against the assignee are those arising under established principles, rather than pursuant to r. 13.14. Section 134 nevertheless provides that the assignee takes subject to equities, and the point is that, if the assignor had sued, a defence would have been available to the debtor. The principle of taking subject to equities suggests that that defence should also be available against the assignee if it arose before notice.

17.18  But whatever the position in relation to a legal assignment, the same argument ordinarily would not be available in the case of an equitable assignment, because in such a case the (p. 821) action usually is brought in the name of the assignor as plaintiff.¹⁰⁶ If the debtor has an unrelated damages cross-claim against the plaintiff/assignor that arose before the debtor had notice of the assignment, an expanded defence in Victoria under r. 13.14 prima facie would allow the debtor to include it in its defence and set it off against the plaintiff's claim, notwithstanding the assignment, since it is not regarded as unconscionable for a debtor to rely, as against an assignee, on a defence available against the assignor that arose before notice.¹⁰⁷

17.19  It is the date that the debtor receives notice of the assignment,¹⁰⁸ as opposed to the date of the assignment itself, that determines whether an assignee takes subject to a set-off under the Statutes in relation to a cross-debt owing by the assignor to the debtor.¹⁰⁹ The notice need not be in any particular form.¹¹⁰ It need not, for example, be in writing. Nor is it necessary that the notice should come from the assignee.¹¹¹ It would be unconscionable for the debtor to rely on a set-off otherwise available at law if the debtor knows of the assign-ment from whatever source. Moreover, there need only be notice of the fact that the debt has been assigned. The assignee need not be named.¹¹²

17.20  There is little direct authority as to what constitutes adequate notice to the debtor in order to prevent set-offs arising as between the assignor and the debtor, but some guidance can be obtained by reference to the approach adopted in other situations in relation to the adequacy of notice, for example in the case of a priorities dispute between successive assignees of a debt. The relevant principle is the rule in Dearle v Hall,¹¹³ which in essence accords priority to the assignee who is the first to give notice to the debtor. In this situation the courts have emphasized that it is in the interests of an assignee to give notice so as to prevent another assignee, whether earlier or later, obtaining priority. An assignee who does not give (p. 822) notice acts at his or her peril. Accordingly, the duty is on the assignee to give notice.¹¹⁴ Moreover, to be effective the assignee's notice should be clear and distinct.¹¹⁵ To paraphrase Lord Cairns in Lloyd v Banks,¹¹⁶ there must be proof that the mind of the debtor has in some way been brought to an intelligent apprehension of the assignment, so that a reason-able person, or an ordinary person of business, would act upon the information and would regulate his or her conduct by it. In particular, Lord Cairns indicated that proof of what would only be constructive notice would not suffice.¹¹⁷ A similar approach has been adopted when the question concerns payment by the debtor. If the debtor has notice of the assignment, the debtor can only discharge his or her obligation by paying the assignee,¹¹⁸ unless the assignee has agreed otherwise.¹¹⁹ If the debtor ignores the assignment and pays the assignor, the debtor may be liable to pay a second time to the assignee.¹²⁰ Once again, because the debtor may obtain a good discharge by paying the assignor if the debtor does not have notice,¹²¹ the assignee in failing to give notice acts at his or her peril, and accordingly the view is that the assignee must give clear notice in order to secure his or her position.¹²² Thus, in Talcott Ltd v Lewis & Co Ltd,¹²³ the notice sent to the debtor was ambiguous, and it was held that it was insufficient to render the debtor liable to pay the assignee after having already paid the assignor. Nor was there a duty of inquiry imposed.

17.21  Set-off is equivalent to payment,¹²⁴ and the issue of notice for the purpose of whether a cross-debt owing by the assignor to the debtor can be set off against the assigned debt should be determined by like principles. In the case of an equitable assignment, where the legal title to the assigned debt remains with the assignor, the debtor prima facie has a right of set-off at law under the Statutes of Set-off in relation to any cross-debt, no matter when it arises. Equity, on the other hand, will protect the assignee against a set-off arising after the debtor has notice of the assignment.¹²⁵ An assignee therefore acts at his or her peril if he or she does not give notice¹²⁶ because the assignee may not be able to take advantage of the equitable rule. The courts have emphasized that it is up to an assignee to look after his or her own interests and to make inquiries as to prior equities,¹²⁷ and consistent with that (p. 823) view, and with the attitude of the courts in relation to questions of payment and priorities, the onus should be on the assignee to give notice which is clear and unambiguous so as to prevent the debtor obtaining a subsequent right of set-off.¹²⁸ This should also be the case when the requirements for a statutory assignment set out in s. 136 of the Law of Property Act 1925 are in issue,¹²⁹ particularly given the commonly expressed view that the section relates to procedure only.¹³⁰ On the other hand, if sufficient notice is given to the debtor, the debtor cannot refuse to accept it.¹³¹ Nor can the debtor shut his or her eyes to the obvious.¹³² In Cavendish v Geaves,¹³³ a pass book issued by a banking firm from time to time to a customer showed changes in the firm, and principal and interest payments on some bonds given by the customer to the firm appeared as entries in the pass book. This was held to constitute notice that the bonds were assigned to the new firm whenever a change occurred.

17.22  In Australia, the Personal Property Securities Act 2009 (Cth) addresses the question of notice in the context of both payment and set-off in relation to a transfer of an ‘account’ or a ‘chattel paper’ (as defined in the Act).¹³⁴ Pursuant to s. 80(7)(a), the debtor¹³⁵ may con-tinue to make payments to the transferor until the debtor receives a notice that: (i) states that the amount payable, or to become payable, under the contract has been transferred; (ii) states that payment is to be made to the transferee; and (iii) identifies the contract (whether specifically or by class) under which the amount payable is to become payable. The notice must be in writing.¹³⁶ If a notice received was not from the transferor, s. 80(7(b) provides that the debtor nevertheless may continue to make payments to the transferor if the debtor requests the transferee to provide proof of the transfer and the transferee fails to provide proof within five business days after the request. Section 80(8) then provides that payment by the debtor to the transferee in accordance with a notice under para. (7)(a) (including in the circumstances described in para. 7(b)) discharges the obligation of the debtor to the extent of the payment.

17.23  Set-off is dealt with in s. 80(1). It provides, inter alia, in para. (1)(b) that the rights of the transferee are subject to any defence by way of a right of set-off that accrued before the time when payment by the debtor to the transferor would no longer discharge the obligation of the debtor under s. 80(8). That point in time may thus determine (p. 824) whether a set-off which has accrued to the debtor against the transferor can be asserted against the transferee.

17.24  Pursuant to s. 80(7)(b), if a request for proof is made, the transferee must provide the proof within five days. If it is not provided within that time, the debtor can continue to pay the transferor and set-offs against the transferor can continue to accrue at the expense of the transferee. The transferee in that situation presumably would have to provide another notice under para. (7)(a), which seems an unnecessary complication. It is unclear why a time limit is imposed on the transferee. If the transferee was tardy in providing the proof, the debtor would be protected in that he or she could tender payment to the transferor.

17.25  English law regards an unearned debt under an existing contract as an existing debt.¹³⁷ The principle has been expressed in terms that a legal right to be paid money at a future date is a present chose in action if it depends upon an existing contract on the repudiation of which an action could be brought for anticipatory breach.¹³⁸ This broad interpretation ascribed to the concept of existing debts has not been invoked in relation to set-off when the cross-debt owing by the assignor to the debtor is in issue. It is said that a debt which accrues to the debtor from the assignor after notice, albeit pursuant to a prior contract, cannot be set off against the assigned debt.¹³⁹ In New Zealand, the Court of Appeal in Hoverd Industries Ltd v Supercool Refrigeration and Air Conditioning (1991) Ltd¹⁴⁰ considered that the assigned debt is subject to a similar restriction, so that it has to be presently due when the assignment occurs¹⁴¹ in order to be susceptible to a set-off.¹⁴² However, there is other authority which supports the view that the restriction applicable to the cross-debt does not apply to the assigned debt when it arises out of a prior contract. In the context of a company receivership,¹⁴³ the Court of Appeal in Rother Iron Works Ltd v Canterbury Precision Engineers Ltd¹⁴⁴ allowed a set-off in circumstances where a company entered into a contract for the sale of goods, a receiver was subsequently appointed to the company, thereby crystallizing a floating charge, and after the appointment the company delivered (p. 825) the goods to the purchaser, whereupon the purchaser became indebted for the price. The Court of Appeal held that the secured creditor took subject to a set-off available to the purchaser in relation to a debt owing to it by the company before the appointment, not-withstanding that the debt for the price when it arose was embraced by a fixed charge as a result of the crystallization, and notwithstanding that it arose after notice of the appointment, albeit pursuant to a prior contract. It is commonly said that, when a floating charge crystallizes, any debt which is owing to the company and which comes within the ambit of the charge is assigned in equity to the chargee.¹⁴⁵ The case is therefore an authority in relation to assignments. The New Zealand Court of Appeal in the Hoverd Industries case made the point that Rother Iron Works Ltd v Canterbury Precision Engineers Ltd differed from the case before it, in that in Rother Iron Works the debt which the purchaser sought to set off was already due and payable before the company entered into the contract of sale, but the New Zealand court nevertheless acknowledged that the judgment did not turn on that point. Russell LJ in the Rother Iron Works case emphasized instead that, when the debt for the price first came into existence, on delivery of the goods after crystallization, it was subject to the set-off.¹⁴⁶

17.26  More recently, Mance J followed the Rother Iron Works case in Marathon Electrical Manufacturing Corp v Mashreqbank PSC.¹⁴⁷ The case concerned a letter of credit issued infavour of a company, Munradtech, which in turn engaged Mashreqbank to collect moneys payable under the letter. Munradtech assigned the proceeds of the letter of credit to the plaintiffs, and on 2 April 1996 notice of the assignment was given to Mashreqbank. On 22 May 1996 Mashreqbank received the proceeds from the issuer of the letter of credit, whereupon it asserted that the assignees took subject to its right to set off a prior separate debt owing to it by Munradtech. Mance J accepted that the subject of the assignment was Munradtech's entitlement against Mashreqbank as collecting bank, as opposed to Munradtech's entitlement as against the issuer.¹⁴⁸ The date of notice was 2 April, whereas Mashreqbank did not receive the proceeds, and therefore it did not become indebted in respect of them, until later, on 22 May.¹⁴⁹ Nevertheless, its indebtedness arose out of (p. 826) a prior engagement, and Mance J held that the prior debt of Munradtech could be set off against it.

17.27  The approach adopted in the Rother Iron Works case and the Marathon Electrical case should be followed in preference to that favoured by the New Zealand Court of Appeal in Hoverd v Supercool. It is difficult to support the restriction on set-off in the case of a debt arising after notice but pursuant to a prior contract in context of the cross-debt owing to the debtor,¹⁵⁰ and there is no reason for extending that restriction to the assigned debt.

17.28  Alternatively, the subject of an assignment may be a future debt (or an expectancy) that is not the product of an existing contract. If value has been given the assignment will be effective in equity, so that the assignment attaches to the debt as soon as it is acquired.¹⁵¹ The determinative date for a set-off is the date of notice of the assignment, as opposed to the date of the assignment itself, and a set-off would be denied to the debtor if the contract out of which the assigned debt arose was entered into after notice. But what constitutes notice in the case of an expectancy? In the context of a priorities dispute between successive assignees under Dearle v Hall,¹⁵² notice of assignment of a future debt is regarded as ineffective while the debt remains an expectancy.¹⁵³ In Roxburghe v Cox,¹⁵⁴ Baggallay LJ considered that the principle applies also to set-off so that, until the assigned debt has become a present debt,¹⁵⁵ the assignee could not give notice which would prevent rights of set-off accruing to the debtor in relation to cross-debts which may become owing by the assignor. Similarly, the application of that principle to set-off was assumed by Mance J in Marathon Electrical Manufacturing Corp v Mashreqbank PSC,¹⁵⁶ although the debt in that case was held not to be a future debt since it arose out of a prior engagement. Those views are also consistent with descriptions of notice given before an assigned debt has become an existing debt as ‘perfectly useless and idle’ and ‘void altogether’.¹⁵⁷

17.29  But, notwithstanding those views, it is suggested that the principle which applies to Dearle v Hall should not extend to set-off. The fact that, as between successive assignees of an expectancy, notice to the debtor is ineffective while the assigned debt is still an expectancy is not to the point. As far as the debtor is concerned, his or her conscience should be affected (p. 827) as from the time that he or she becomes aware of the assignment.¹⁵⁸ There is support for that approach in Canada in the context of a debt factoring agreement. The Ontario Court of Appeal accepted that the agreement in question operated as a present assignment of future accounts receivable, and held that notice of it precluded the subsequent accrual of rights of set-off in relation to future debts.¹⁵⁹ In truth, notice for the purpose of establishing priorities serves a different function to notice for the purpose of set-off. In the case of priority under Dearle v Hall, notice is given to the debtor because it is regarded as the method by which the assignee gets in possession of the debt,¹⁶⁰ with the first to obtain possession in that sense having priority. But while a debt is still an expectancy, there is nothing in respect of which possession can be taken, and therefore notice at that time is ineffective.¹⁶¹ In the case of set-off, on the other hand, notice defines the point beyond which the debtor's conscience is affected, which can occur whether the debt is present or future. It has nothing to do with obtaining possession of the debt.

17.30  This assumes that there is a present (although an inchoate¹⁶²) assignment of a future debt. If, on the other hand, an agreement contemplates a further agreement in order to effect the assignment of a future debt, as is often the case when book debts are factored, the first agreement itself would not constitute an assignment, in which case notice of it would not be notice of a present assignment which would prevent the accrual of rights of set-off as against future debts. It would be necessary to have regard instead to each subsequent agreement which effects a present assignment of a debt, and then to determine set-off rights in relation to each such debt by reference to the position as at the date of notice of the assignment of that debt.¹⁶³

17.31  The position in relation to an assignment of an expectancy is unclear in Australia under the Personal Property Securities Act 2009 (Cth), s. 80(1) in the case of a transfer of an ‘account’ or a ‘chattel paper’ (as defined).¹⁶⁴ The application of the ‘subject to equities’ principle set out in s. 80(1)(b) rests (through sub-s. (8)) upon the giving of a notice of transfer to the (p. 828) debtor under s. 80(7)(a). Paragraph (7)(a) provides that, if an account or chattel paper is transferred, the debtor may ‘continue to make payments under the contract to the transferor’ until the requisite notice is received, and the notice must state that the amount payable or to become payable under ‘the contract’ has been transferred. It does not refer to future contracts. While sub-para. (7)(a)(ii) provides that the contract need only be identified in the notice by class, and not specifically, the section seems to contemplate an amount payable or to become payable under an existing and identifiable contract at the date of the notice. It should be clarified in the Act that the notice may extend to future accounts receivable from the debtor.

17.32  The preceding discussion concerned the exercise of a right of set-off against an assignee based upon the Statutes of Set-off. For that form of set-off both demands must be liquidated. On the other hand, an unliquidated cross-claim possessed by the debtor against the assignor¹⁶⁵ may be set off against the assigned debt if the case is one in which the claims are sufficiently closely connected to give rise to an equitable set-off as between the debtor and the assignor.¹⁶⁶ In contrast to set-off under the Statutes, it is not necessary in this situation that the cross-claim sought to be set off should have arisen before notice of the assignment. The assignee may take subject to an equitable set-off where the cross-claim arose after notice, if the claims are otherwise sufficiently closely connected.¹⁶⁷ (p. 829) Using the traditional formulation of equitable set-off, the title to sue is impeached, and in that circumstance it should not matter when the cross-claim accrued. The title of an assignee to sue is equally affected.¹⁶⁸

17.33  It has been suggested that the transaction out of which the cross-claims arose should have been entered into before the debtor had notice of the assignment.¹⁶⁹ However, there is no justification for any such limitation. Consider, for example, the case of a receiver appointed to a company under a crystallized floating charge. It is commonly (though sometimes inaccurately) said that crystallization of a floating charge brings about an equitable assignment to the secured creditor of any debt owing to the company and coming within the ambit of the charge.¹⁷⁰ Consider that the receiver enters into a contract on behalf of the company, which the company proceeds to breach, and the resulting damages claim against the company is such that it ordinarily would give rise to an equitable set-off against a debt due to the company under the contract. The debtor in that circumstance should not be denied a set-off on the ground that he or she was aware of the receivership, and of the consequent equitable assignment of the debt under the contract to the secured creditor. If the claims are such that the title to sue would be impeached, it should not matter that the contract was entered after the receivership.

The reference to ‘a debt which arises out of the same contract as that which gives rise to the assigned debt, or is closely connected with that debt’, contemplates equitable set-off.¹⁷² The statement suggests, correctly, that the cross-claim need not have accrued due before (p. 830) notice.¹⁷³ On the other hand, it is not necessary that the cross-claim be for a debt, and indeed in the majority of cases of equitable set-off a damages claim is in issue.¹⁷⁴ Moreover, notwithstanding the suggestion to the contrary in that passage, the courts have emphasized that it is not sufficient for an equitable set-off that the demands arose out of the same con-tract.¹⁷⁵ The question is whether there is a sufficiently close connection, which is to be determined by reference to principles canvassed earlier.¹⁷⁶

17.35  In Australia, s. 80(1)(b) of the Personal Property Securities Act 2009 (Cth)¹⁷⁷ contemplates that a transferee of an account or a chattel paper (as defined) may take subject to a defence of set-off that accrued before notice. There is no such temporal limitation in s. 80(1)(a) in the circumstance where a defence arises ‘in relation to’ the contract between the debtor and the transferor, which is consistent with the above analysis. The language is unfortunate, however, because it does not accurately state the test for equitable set-off applied by Australian courts.¹⁷⁸ Nevertheless, it is suggested that it should be interpreted as incorporating the principles developed in relation to equitable set-off.¹⁷⁹

17.36  In Young v Kitchin,¹⁸⁰ a sufficiently close connection provided the basis for a set-off against an assignee of a sum of money owing under a building contract when the debtor had a damages claim against the assignor for failure to complete and deliver the building by the specified date. Similarly, in Government of Newfoundland v Newfoundland Railway Co,¹⁸¹ the Privy Council held that an assignee of a sum payable to a construction company under a railway construction contract took subject to a claim for damages against the company for not completing the line, while in Lawrence v Hayes,¹⁸² the purchaser of a business was allowed to set off against an assignee's claim for the sums due to the vendor under the con-tract the amount of a judgment obtained against the vendor for damages for breach of warranty. The breach arose from the fact that chattels included in the sale either were not the property of the vendor or were the subject of a charge which had not been paid off. In Canada, a damages claim available to a mortgagor against the mortgagee for breach of an obligation to renew the insurance on the mortgaged premises was set off against the mortgage debt, notwithstanding that the debt had been assigned.¹⁸³

17.37  Those cases should be contrasted with Stoddart v Union Trust Ltd.¹⁸⁴ In the Stoddart case, the defendant in an action brought by an assignee for payment of a debt due under a contract was not allowed to bring into account a claim for damages against the assignor (p. 831) for fraud inducing the contract. The court reasoned that the damages claim was not a claim arising under the contract, or for breach of the contract,¹⁸⁵ but rather it was said to be a claim dehors the contract.¹⁸⁶ That analysis is not convincing,¹⁸⁷ and indeed there is an apparent conflict between the decision in that case, on the one hand, and on the other the principle applied in the context of insolvency set-off, that a claim for damages for misrepresentation inducing a contract with the representor is not a mere personal tort, but rather it constitutes a breach of the obligation arising under the contract so that, even apart from the reform set out in the Insolvency Act 1986 by which tortious demands became provable, it could be employed in a set-off in the event of a bankruptcy.¹⁸⁸ Both Vaughan Williams and Buckley LJJ in the Stoddart case¹⁸⁹ emphasized that the plaintiff was an assignee for value without notice of the fraud. However, that should not have affected the question whether there was an equitable set-off available as against the assignor, and if there was it should have been available against the assignee. The point was also made in the judgments that the debtor in such a case may be entitled to set aside the contract,¹⁹⁰ but if the contract has not been set aside the remedy of set-off should still be available¹⁹¹ Stoddart v Union Trust Ltd should be compared to the decision of Mann CJ in the Victorian Supreme Court in Sun Candies Pty Ltd v Polites.¹⁹² The fraudulent misstatement inducing the purchaser to buy the business in that case constituted a breach of a warranty which determined the amount of the purchase price. Since the cross-claim arose out of the con-tract, the Chief Justice held (following Government of Newfoundland v Newfoundland Railway Co) that it gave rise to an equitable set-off to which the assignee from the vendor took subject.¹⁹³

(p. 832) 17.38  Consider that a debtor has an unliquidated cross-claim against the creditor which is not sufficiently closely connected to give rise to an equitable set-off. If the cross-claim has been converted into a judgment before the debtor has notice of an assignment of the debt by the creditor, the judgment would constitute a debt which should be able to be set off against the assignee under the Statutes of Set-off, since the case would then be one of mutual debts in existence before notice.¹⁹⁴

17.39  An assignee takes subject to a right of set-off that would have been available as a defence to an action brought by the assignor against the debtor, either pursuant to the Statutes of Set-off in the case of mutual debts or because of a defence of equitable set-off when the demands are inseparably connected. If the assignor becomes bankrupt or goes into liquidation¹⁹⁵ after the assignment, the assignee does not take subject to the wider right of set-off that would otherwise have been available under the insolvency set-off section.¹⁹⁶ The debt, having been assigned, will not have passed to the assignor's trustee in bankruptcy as property of the bankrupt or, in the case of a company, it will not constitute an asset of the company distributable amongst creditors. As a consequence, unless the assignment is set aside as a preference or on a similar ground, it may be enforced outside of the operation of the insolvency legislation.¹⁹⁷

17.40  As Wood noted,¹⁹⁸ the bankruptcy of an assignor may give rise to a problem for the debtor.¹⁹⁹ The insolvency set-off section would not apply. Further, a set-off against the assignee, whether by way of equitable set-off or under the Statutes of Set-off, depends upon the continued existence of a claim against the assignor. But if the assignee delays in suing the debtor, so that in the interim the assignor is discharged from bankruptcy, the (p. 833) assignor would be released from liability.²⁰⁰ The debtor would no longer have a cross-claim, and the House of Lords held in Aries Tanker Corporation v Total Transport Ltd²⁰¹ that a claim that has ceased to exist cannot be employed in a set-off. In the case of an equitable set-off, Wood has suggested that the debtor could avoid that result by exercising a ‘self-help remedy’, in the sense that the debtor could act unilaterally to bring about a set-off.²⁰² That view is doubtful, however. Equitable set-off admittedly a substantive defence,²⁰³ but the judgment of Lord Wilberforce in the Aries Tanker case is authority against the view that the equitable defence entitles a debtor to extinguish the debts in that manner.²⁰⁴

17.41  Consider that the debtor becomes bankrupt or is a company which goes into liquidation²⁰⁵ after the assignment.

17.42  A set-off would not be available in that circumstance under the insolvency set-off section, given that the assigned debt is held by the assignee and the insolvent debtor's claim is against the assignor. There would be a lack of mutuality.²⁰⁶ The only possible rights of set-off are equitable set-off²⁰⁷ and set-off pursuant to the Statutes of Set-off. If the cross-demands are sufficiently closely connected to give rise to an equitable set-off, the better view is that the fact of the bankruptcy or the liquidation does not affect the debtor's right, though there is authority which suggests that equitable set-off is not available in bankruptcy or company liquidation in circumstances which are outside the operation of the insolvency set-off section.²⁰⁸ The position is more complicated when one considers the defence of set-off conferred by the Statutes of Set-off in the case of mutual debts. The Statutes provide a procedural defence to an action at law.²⁰⁹ Therefore, when it is said that an assignee takes subject to an equity constituted by this form of set-off, it is meant that the assignee, when suing the debtor, takes subject to the procedural defence that would have been available to the debtor in an action at law brought against him or her by the assignor. If, however, the debtor is bankrupt or is in liquidation, the assignee could not sue the debtor without the leave of the court,²¹⁰ and so the issue ordinarily would not arise in the context of an action against the debtor. A set-off may be asserted instead by the debtor's trustee in bankruptcy or liquidator when a proof is lodged by the assignee, so as to reduce the proof by the amount of a debt owing by the assignor to the debtor.²¹¹ If the trustee or (p. 834) the liquidator rejects the proof lodged by the assignee because of the assignor's debt, the assignee could apply to the court to reverse the decision,²¹² but the question would still not arise in the context of pleading set-off as a defence to an action. On a strict analysis, there-fore, the Statutes should not justify a set-off. There is nevertheless authority to the effect that a trustee in bankruptcy or a liquidator may reduce an assignee's claim in the debtor's bankruptcy or liquidation to the extent of a debt owing by the assignor before notice.²¹³ A similar approach was adopted in another situation. Prior to the enactment of the Supreme Court of Judicature Act 1875, the insolvency set-off section in the bankruptcy legislation did not apply to company liquidation. Set-offs had been enforced in liquidations,²¹⁴ but these were founded upon the right of set-off conferred by the Statutes of Set-off in the case of mutual debts as a defence to an action at law,²¹⁵ rather than upon the bankruptcy set-off section. In Re South Blackpool Hotel Co, ex p James,²¹⁶ Lord Romilly MR allowed a set-off in that context against a proof lodged by a creditor, as opposed to the set-off operating as a defence to an action. He said that: ‘These cases are not to be decided on technicalities, but on principles of common sense.’²¹⁷