The recent case of Frischmann v Vaxeal Holdings SA 2023 has brought into question the ability of parties to execute assignment documents under a power of attorney. The purpose of this note is to provide a brief overview of assignments, powers of attorney and the outcome of the Frischmann case.
What is an assignment?
An assignment is a way of transferring rights under a contract from one person to another. An assignment transfers benefits under a contract to another party but does not transfer the obligations (commonly referred to as the burdens). In a finance context, assignments by way of security are generally taken over rights under contracts, for example rights to receive income or other payments.
The requirements for a valid, legal assignment are set out in section 136 of the Law of Property Act 1925 (the LPA 1925). These are, broadly, that (i) the assignment must assign of all the contractual rights benefitting the assignor, (ii) the assignment must be in writing and signed by the assignor and (iii) notice must be given to any contractual counterparty of the assignment.
If any of these requirements are not satisfied, an assignment can still exist, albeit as an equitable assignment rather than as a legal assignment. An equitable assignment provides the assignee with different rights and options in respect of the assignment contract.
What is a power of attorney?
A power of attorney is a legal document where one party appoints another party to act on their behalf and in their name. The attorney would then be legally authorised to enter into contracts on behalf of that party, depending on the type of the power of attorney.
In a finance context, a general power of attorney is most common, and this is governed by the Powers of Attorney Act 1971.
What did Frischmann v Vaxeal Holdings say?
As mentioned above, key elements of an assignment under section 136 of the LPA 1925 require that a legal assignment must be in writing and signed by the assignor in their own name.
In Frischmann, an individual appointed an attorney to sign certain documents on their behalf. The attorney executed an assignment on behalf of that individual under a valid power of attorney.
The High Court found that, since the attorney had signed the assignment on behalf of the assignor (as opposed to the individual signing in their own name), the requirement that the assignment be signed by the assignor was not met.
The court determined that the Powers of Attorney Act 1971 could not be used to override any requirements stipulated in other statute. Therefore, the assignment did not constitute a legal assignment under section 136 of the LPA 1925.
Since the assignment had not satisfied the requirements in the LPA 1925, the court considered that an equitable assignment had taken place.
What should lenders and other finance parties be aware of when lending to individuals?
Lenders and finance parties should be aware of the difference between a legal and equitable assignment, particularly when lending to or receiving an assignment from an individual.
The crucial difference is that the beneficiary of a legal assignment can enforce assigned rights against a third-party in their own name.
In contrast, the beneficiary of an equitable assignment would have to join the assignor in an action to enforce their assigned rights against a third-party. This could cause complications when a lender looks to enforce its security.
A similar issue was raised at the High Court in Technocrats International Inc v Fredric Ltd (No.1) 2004 and the court's position in Technocrats and Frischmann seems clear: any assignment given by an individual must be signed by that individual.
Is the position different for companies?
The rationale in Frischmann is very specific to individuals.
On 30 January 2025, the Financial Law Committee of the City of London Law Society (the FLC) produced a note reviewing the judgement in Frischmann.
In the note, the FLC concluded that, in respect of corporate entities, the requirement under section 136 of the LPA 1925 would likely be satisfied where an attorney signs on behalf of a corporate body, such as companies, limited partnerships and limited liability partnerships (LLPs).
The FLC noted that this is because a corporate body cannot sign in its own name and that section 43(1)(b) of the Companies Act 2006 sets out how a company can be made a party to contracts, i.e., by an individual acting on its behalf. The position is similar in respect of LLPs.
It is important to note that the facts of the Frischmann case did not concern assignments by way of security. However, the judgement in Frischmann is important for lenders and other finance parties because it has generally been assumed that the execution of an assignment under a valid power of attorney on behalf of an individual would take effect as a legal assignment.
The Frischmann case is a first instance case and discussion of this point has not yet reached the higher appeal courts. Nonetheless, lenders should be wary of relying on an equitable assignment and should ensure that the individuals they lend to are signing any assignments in their own name.
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