Book Debts as a Security for the Loan/Advance :
Borrowers can take advances by assigning book debts in favour of the bank. Section 130 of the Transfer of Property Act, permits assignment of actionable claim and the procedure to be followed is:
(i) The assignment must be in writing and signed by the transferor or his duly authorised agent
(ii) Notice of the assignment in writing must be given to the debtor; and
(iii) The assignment may be absolute or by way of charge
Legal Implication of assignment
(i) The assignee can sue in his/ their own name and can give a valid discharge
(ii) The debtor can exercise any right of set off against the assignee, which but for such transfer, he could have exercised against assignor
(iii) As an actionable claim includes future debts, there can be a valid assignment of future debts as well
Precautions to be taken
(i) The value of the security depends on the solvency of the debtor and his right of set off, if any. The banker must enquire into both aspects
(ii) The instrument of assignment must be in writing and duly signed in the presence of the banker, signed by the assignor or his duly authorized agent
(iii) The banker must serve notices of assignment on debtors, who must be asked to acknowledge its receipt and confirm:
(a) The amount of the debt
(b) His right of set off, if any, and
(c) Whether he has received notice of prior assignments, if any
(iv) An undertaking from the borrower should be taken that the amount of debts collected directly if any by him will be passed on to the banker, towards the loan account and operations in account be controlled to ensure this compliance
(v) Where the book debts are as assigned by a joint stock company, the charge must be registered with the Registrar of Joint Stock Companies.