Assignment as security
When a loan agreement is concluded, it is in the lender's interest that the amount is secured (for example by an assignment as security) to prevent problems from a possible inability of the borrower to pay. It is not always possible or in the parties' interest to use the financed object or the financed transaction itself as collateral.
General information on assignment as security
The assignment as security offers a form of security regulated in the German Civil Code (BGB, §§ 398 ff). It must be noted that the assignment as security per se does not serve to satisfy the creditor. This claim against a third party, which is assigned to the lender (assignee/Zessionar) to secure the loan debt, must actually exist at the time of transfer and the borrower (assignor/Zedent) must be the holder.
The principles of speciality and determinacy apply, which state that the claim assigned to the lender as security must be specific or ascertainable with respect to the cause of the debt, content and debtor (especially important in the case of a global assignment). Of course, the claim to be transferred must also be transferable.
This is not the case if an assignment prohibition is contractually agreed or if statutory assignment prohibitions under § 399 BGB and § 400 BGB apply. § 399 BGB states that a claim cannot be assigned as security if this would involve a change in its content.
According to § 400 BGB, the claim must be attachable in an assignment as security, which means the attachment limits resulting from the ZPO must be observed. Assignments are also unlawful if, for example, they violate confidentiality obligations (e.g. for medical or attorney fees).
Legal and contractual provisions on assignment as security
A loan agreement containing all necessary data and conditions is concluded between the lender and the borrower. In addition, a security agreement for the assignment as security is concluded. This is a so-called bilateral right of disposition.
Furthermore, note that for life insurance policies the assignment as security depends on the consent of the third-party debtor. If the assignment is not notified to the insurer, it is considered provisionally ineffective. Accessory securities, such as surety and mortgage, which are permanently connected with the existence of the claim, pass to the secured party when the claim is assigned as security. There is no bona fide acquisition of claims.
If a claim is assigned several times as security, only the first assignment prevails according to the priority principle. Even if the claim is assigned to secure a loan, the assignor remains the contractual partner of the debtor and can assert the defence under § 320 BGB against him. That means he can refuse performance until the counter-performance has been provided, unless he is contractually obliged to perform first.
It is common practice that goods remain the property of the seller until they are fully paid. If an extended retention of title is agreed (the intermediate seller receives authority to dispose of the goods from the original seller), the purchase price claim is considered assigned to the original seller.
If a claim subject to an extended retention of title is offered to the lender as security, this means for the lender that the claim cannot be assigned because it belongs to the original supplier.
Protection of the debtor in assignment as security
The principle of debtor protection pursuant to §§ 404, 406 BGB applies, since the debtor is not required to cooperate in the assignment. He also does not have to be informed. Accordingly, the debtor retains the right of defence (§ 404 BGB), which he also has against the assignee.
Types of assignment as security
A distinction is made between the open and the silent assignment.
- In an open assignment, the debtor of the assignor (the third-party debtor) is informed of the assignment of the claim to the assignee. That means he is notified either orally or in writing by the assignor or receives the so-called notice of assignment from the assignee. The debtor can then only validly discharge the debt by paying the assignee. The assignor can only still insist on receiving the performance if the assignee agrees to the recall notice or if he has a claim under § 812 BGB.
- In a silent assignment the third-party debtor is not informed. This is often the case with assignment as security. The assignor assigns the claim or several claims (framework assignment) to the assignee and, by agreement as security, the assignee is obliged in the internal relationship to resort to this claim only if the assignor does not repay the loan. The assignor is authorized by the assignee to collect the claim. Upon repayment, the claim is reassigned to the assignor.
The silent assignment has the advantage for the assignor that his business partners receive no information about the financing of his transactions. Assignments are divided into single assignments and framework assignments. As the name suggests, a single assignment transfers an individual claim, while a framework assignment transfers multiple claims.
Global assignment and blanket assignment
Depending on the origin of the claims, a distinction is made between global assignment and blanket assignment. In a global assignment, claims against certain third-party debtors are assigned, with both existing and future claims passing to the lender at the time of their creation.
In a blanket assignment, already existing claims against several different third-party debtors are assigned. The assignor also undertakes to assign further claims. In both cases it is important that the borrower instructs his debtors to transfer payments to his account at the lending bank. The money is then used to repay the loan. If a debtor transfers to an account at another bank, the borrower must transfer the amount to the lending bank.
Set-off in assignment as security
This concerns the offsetting of claims against each other, that is, a claim is extinguished by a counterclaim. In assignment as security, one must distinguish whether the debtor's claim is directed against the assignee or the assignor.
If the claim is directed against the assignee, it can normally be set off without difficulty. If the claim is against the assignor, the procedure depends on whether the debtor had knowledge of the assignment or whether the set-off was already declared to the assignor before the assignment.
For example, if the debtor could reasonably assume that he could set off the claim with his counterclaim, he is considered entitled to protection under § 406 BGB, although this again depends on when he learned of the assignment. If the debtor knew about the assignment, he can no longer set off against the assignee.