Background

A contractor had entered into a contract with a builder and a subcontractor. The contractor later assigned its claims against the builder to the subcontractor in order to settle its debts with the subcontractor, but soon afterwards, it went into liquidation. 

Claim

The liquidators (on behalf of the contractor) asked the Supreme Court to:

• declare the assignment agreement invalid, because the purpose of the assignment was to prefer the interests of the subcontractor over the contractor's other creditors
• order the subcontractor to repay the payments made to it by way of the assignment.

Decision

The Supreme Court ruled that the assignment did not constitute a form of security for the subcontractor (an unsecured creditor) over the contractor, since the assignment is only a security if its effectiveness is linked by the contracting parties to the debtor's failure to perform the contract. Instead, the Supreme Court found that the assignment served the purpose of performance of the contract. The conclusion of this contract was part of the contractor's normal activities, so the contractor could not recover the payments. 

Key takeaways

The court ruled that an assignment cannot automatically be seen as a security, only if its validity is linked to the debtor's default. 

There are two conditions for invalidating an assignment by a company in liquidation: the assignment must be for the benefit of the creditor, and it cannot have been done in the debtor's ordinary course of business.

Supreme Court Case-No. Gfv. 30.054/2023/3.

Find out more

To discuss the issues raised in this article in more detail, please contact a member of our Restructuring and Insolvency team.