Statutory Loan Transfers – A Missed Opportunity
There are a number of legal techniques in the Irish loan market for transferring a portfolio of loans and underlying security. These include assignment, novation and transfer under a bespoke statutory process.
An assignment is only effective to transfer rights. If liabilities are also to be transferred this requires a novation – which is effectively a new contract between the transferring bank, the obligor and the transferee bank. Where a large pool of loans and security is transferred the novation route is unworkable.
Bespoke transfers include transfer schemes under Part III of the Central Bank Act 1971 ("CBA 1971"), and under the Asset Covered Securities Act 2001 ("ACSA 2001"). These schemes provide a legally secure method of transferring rights and liabilities without having to put in place a novation with each customer. If available, therefore, a statutory scheme can be particularly useful where a large portfolio is transferred.
In AIB Mortgage Bank v Thompson  IEHC 515 the High Court (Baker J) considered the ability of the transferee of a loan book under ACSA 2001 to recover on foot of a transferred loan where the transferor bank was not a party to the claim. While the court ultimately held that the transferee bank could bring an action for repayment without joining the transferor, the process by which the court reached that conclusion did not give the statutory scheme under ACSA 2001 the prominence it deserved. Instead, the court engaged in a close analysis of the law relating to legal assignments holding that there was no transfer of the legal interest - albeit ultimately holding that ACSA 2001 meant that joining the transferor to the litigation would achieve nothing.
We respectfully suggest that the analysis could have started and finished with a consideration of ACSA 2001. This provided that an in-scope transfer is effective to transfer assets and liabilities comprised in the loan portfolio. We also suggest that the decision is not authority for the proposition that even where ACSA 2001 (or CBA 1971) applies, the court must nonetheless analyse whether a full legal assignment has taken place. A legal assignment is a different mode of transfer to a statutory transfer process. An ACSA 2001 or CBA 1971 transfer does not require a legal assignment: in each of those cases the transfer is effective because the statute says so.
The Facts in Brief
The case involved the transfer of a portfolio of loans by Allied Irish Banks plc to AIB Mortgage Bank under ASCA 2001. The process involved statutory approval by the Central Bank of Ireland ("CBI"). ASCA 2001 provides that an approved transfer is effective to transfer all of the transferor bank's rights and liabilities to the transferee bank and thereafter the transferor bank has no rights or liabilities in respect of the transferred loans.
The defendant defaulted on her loan and resisted the transferee bank's motion for summary judgment contending, amongst other things, that there had not been a full legal assignment of her loan to the transferee bank. If this were correct then (had there been no ACSA 2001 transfer) the transferor bank would have to be joined to the proceedings (normally, as co-plaintiff). In order for there to be a legal assignment the transferee bank must give notice under the Judicature Act 1877 that the borrower's loan has been assigned to it (a "Judicature Act Notice"). One purpose of a Judicature Act Notice is to inform the borrower to whom he must repay the loan. (It also, incidentally, protects the transferee because after the date of the Judicature Act Notice the borrower may not accrue rights of set-off against the transferee. It therefore preserves the integrity of the underlying debt.)
Where a Judicature Act Notice has not been given, a transfer is merely an equitable assignment. An equitable assignee must normally join the transferor to any legal proceedings brought to recover the underlying debt. (Further, an equitable transferee is vulnerable to rights of set-off accruing between the transferor and the borrower and to the transferor effecting a later legal assignment to a third party).
Baker J carefully reviewed the law on assignments of debts and concluded that there had been no effective Judicature Act Notice. Neither the borrower's consent to the transfer of her loan nor correspondence indicating that the transferee bank was the new owner of her loan, amounted to a Judicature Act Notice. So the case has salutary lessons on the content of these notices.
However what is problematic about the decision is the limited relevance ACSA 2001 appeared to have for the court (and this may have been the result of the manner in which the parties presented the issues). The court concluded that the only significance of ACSA 2001 was to provide an exception to the general rule that an equitable transferee must join the transferor to legal proceedings. The court held that ACSA 2001 (in providing for the transfer of rights and liabilities) meant that there was "no need" to join the transferor to the proceedings. While that conclusion was correct as a practical matter, ACSA 2001 also provided that the transfer was effective. Therefore an analysis of the law relating to assignments was not necessary.
The decision in Thompson cannot be read as authority for the proposition that under a statutory transfer scheme under ASCA 2001 (or, for that matter, CBA 1971) there still has to be a legal assignment. Rather, a statutory transfer scheme is effective on its own to effect the transfer of rights and liabilities. The law of assignments is not relevant to a statutory transfer.
The decision provides a useful discussion of what is required for an effective Judicature Act Notice; it must identify the transferee, the asset being transferred and it must be dated. In practice, however, most professionally drafted "hello" and "goodbye" letters in loan sale transactions will meet these basic requirements.