Rule
An actionable claim is a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property, or to any beneficial interest in movable property not in the claimant's actual or constructive possession, which civil courts recognise as grounds for relief (S.3). The debt or interest may be existing, accruing, conditional or contingent.
- It is transferred by an instrument in writing signed by the transferor or his authorised agent (S.130).
- The transfer is complete on execution. The transferor's rights and remedies vest in the transferee, whether or not notice is given.
- But a debtor who pays the transferor without knowing of the transfer is discharged (S.130, proviso).
Debts and similar claims have value and are bought and sold, for example in factoring. The law makes the writing enough between the parties, and protects the debtor who has not been told.
| Provision | What it says |
|---|---|
| S.3 | Definition of actionable claim |
| S.130 | Transfer by signed writing, complete on execution; debtor who pays without notice is discharged |
| S.131 | Notice of transfer: in writing, signed, with the transferee's name and address |
| S.132 | Transferee takes subject to the liabilities and equities against the transferor at the date of transfer |
| S.133 | If the transferor warrants the debtor's solvency, it is solvency at the time of transfer, up to the consideration received |
| S.134 | Debt transferred as security: transferee accounts for what he recovers |
| S.135 | Assignment of rights under a policy of fire insurance |
| S.136 | Judges, legal practitioners and court officers cannot buy actionable claims |
| S.137 | Negotiable instruments and similar documents are outside this chapter |
Requirements
| # | Requirement | What to check |
|---|---|---|
| 1 | An actionable claim | Unsecured debt, or beneficial interest in movables not in the claimant's possession |
| 2 | Not a mere right to sue | A bare right to sue cannot be transferred (S.6(e)) |
| 3 | Instrument in writing | Signed by the transferor or his agent. No registration needed |
| 4 | Notice to the debtor, for full protection | Not needed for validity, but until it is given the debtor may safely pay the transferor |
Notice does not make the transfer valid. It only stops the debtor from getting a discharge by paying the transferor, and lets the transferee sue in his own name with no risk of that defence.
What is and is not an actionable claim
| Is | Is not |
|---|---|
| Unsecured loan | Debt secured by mortgage of land, or by pledge or hypothecation |
| Book debts of a business | Bare right to sue for damages (S.6(e)) |
| Arrears of rent already due | Goods in the claimant's own possession |
| Money due under an insurance policy | Negotiable instruments (S.137) |
| Right to a declared dividend | Right to immovable property |
Illustrations
1. Simple assignment
- Facts: Ravi lends Suresh Rs.5 lakhs without security. Ravi assigns the debt to Kavitha by a signed writing, and Kavitha gives Suresh written notice.
- Result: Suresh must pay Kavitha. If he pays Ravi after the notice, he is not discharged.
- Why: The transfer was complete on execution, and the notice took away the S.130 proviso defence.
2. Payment before notice
- Facts: Same facts, but before any notice, Suresh pays Ravi Rs.2 lakhs.
- Result: Suresh is discharged to that extent. Kavitha can claim Rs.3 lakhs from Suresh and Rs.2 lakhs from Ravi.
- Why: S.130, proviso, and S.132 (equities against the transferor).
3. Set-off
- Facts: A owes B Rs.10 lakhs. B assigns the debt to C. At the date of transfer A has a claim of Rs.4 lakhs against B for defective goods.
- Result: C can recover only Rs.6 lakhs from A.
- Why: C takes subject to the equities against B (S.132).
4. Secured debt
- Facts: A lends Rs.10 lakhs to B on a mortgage of B's house.
- Result: Not an actionable claim. Its transfer is a transfer of the mortgage.
- Why: S.3 excludes debts secured by mortgage of immovable property.
5. Life insurance policy
- Facts: Meena assigns her life insurance policy to her bank as security for a loan.
- Result: The assignment is governed by S.38, Insurance Act.
- Why: The policy money is an actionable claim, but a special law sets the form for life policies.
Key Cases
S.130 to S.137 are mostly applied on their own words. The four cases in the earlier version could not be verified for these points and have been removed (see the review report).
Distinctions
| Basis | Actionable claim (S.130) | Negotiable instrument (NI Act) |
|---|---|---|
| Transfer | Signed writing | Delivery, or endorsement and delivery |
| Equities | Transferee takes subject to them (S.132) | Holder in due course takes free of them |
| Notice to debtor | Protects the transferee | Not needed |
| Law | TPA, S.130 to S.137 | Negotiable Instruments Act, 1881 |
Exam Scenario
Sharma lends Verma Rs.8 lakhs without security. He assigns the debt to Kumar by a signed letter. Kumar does not tell Verma. Sharma later assigns the same debt to Patel, who gives Verma written notice at once. Before that notice reaches him, Verma pays Rs.3 lakhs to Sharma. Advise.
Approach
- Met: The debt is an actionable claim (S.3).
- Met: Each assignment is by signed writing, so each is complete on execution (S.130).
- Issue: Priority between Kumar and Patel. Kumar's assignment came first, so Sharma had nothing left to give Patel. On the textbook view, the English rule that the first to give notice wins does not apply in India.
- Met: Verma's payment of Rs.3 lakhs to Sharma was made without notice, so Verma is discharged to that extent (S.130, proviso).
- Issue: Verma may also have paid Patel in good faith after Patel's notice. Any such payment, made without notice of Kumar's transfer, also discharges him.
Conclusion: Kumar has the better title. He can recover from Verma Rs.5 lakhs, less any sum Verma paid Patel in good faith before learning of Kumar's assignment.
Remedy: Kumar can sue Sharma for the Rs.3 lakhs he received. Patel can sue Sharma for the consideration he paid. Verma can raise his payments without notice and any set-off he had against Sharma (S.132).
Recall Check
- Define an actionable claim under S.3.
- When is the transfer of an actionable claim complete?
- What is the effect of notice to the debtor?
- Who cannot buy actionable claims under S.136?
Flashcards
What is an actionable claim under S.3 TPA?
A claim to any debt not secured by mortgage of immovable property or by pledge or hypothecation of movables, or to any beneficial interest in movable property not in the claimant's possession, which civil courts recognise as grounds for relief.
What is the mode for transferring an actionable claim?
An instrument in writing signed by the transferor or his authorised agent (S.130). Notice to the debtor (S.131) protects the transferee against payment to the transferor.
Does the transferee of an actionable claim take it free of defences?
No. Under S.132 he takes subject to all liabilities and equities to which the transferor was subject at the date of transfer.
Is notice to the debtor essential for the assignment to be valid?
No. The transfer is complete on execution of the writing, with or without notice (S.130). Without notice, a debtor who pays the transferor is discharged.
What is the priority rule for competing assignments?
On the usual Indian view, the earlier assignment prevails, because S.130 makes it complete on execution. The English rule that the first to give notice wins is not adopted. A debtor who pays a later assignee without notice of the earlier one is still discharged.
Define "actionable claim" under S.3.
A claim to any debt (other than a debt secured by mortgage of immovable property or by pledge or hypothecation of movables) or to any beneficial interest in movable property not in the possession of the claimant.
How is an actionable claim transferred under S.130?
By an instrument in writing signed by the transferor or his authorised agent.
Is registration required for transfer of an actionable claim?
No. Only a written instrument signed by the transferor is required.
What does S.132 mean by "subject to equities"?
The transferee gets no better right than the transferor had. Defences available against the transferor at the date of transfer, such as part-payment or set-off, can be raised against him.
How is priority determined between competing assignees of the same claim?
On the usual Indian view, by time of the assignment, since it is complete on execution (S.130). The English rule in Dearle v Hall is not adopted. The debtor is protected for payments made without notice.
Does the transferor warrant the debtor's solvency?
Not unless he agrees to. If he does warrant it, under S.133 the warranty covers only solvency at the time of transfer and is limited to the consideration received.