1. Introduction

Assignment of contracts in restructuring refers to the transfer of contractual rights, benefits, or, where legally permitted, contractual obligations from one entity to another during a corporate reorganisation, merger, acquisition, insolvency proceeding, or business sale.

It is an important issue in corporate and insolvency law because a distressed business may have valuable customer agreements, technology licences, supply contracts, leases, distribution arrangements, and research agreements that a purchaser wishes to preserve.

For example, a biotechnology company facing insolvency may sell its laboratory assets and intellectual property to another company. The purchaser may want to take over the company's clinical research agreements, manufacturing contracts, and licensing arrangements. However, the sale of the business does not necessarily mean that every contract automatically transfers to the purchaser.

The central legal question is:

Can a company transfer its contractual rights and obligations to another entity without obtaining the other contracting party's consent, and what happens when the contract contains restrictions on assignment?

The answer depends on the governing law, the terms of the contract, the nature of the rights and obligations, and the restructuring procedure being used.

This explanation focuses principally on Australian law, with comparative principles from English and United States law where relevant.

2. Meaning and distinction between assignment, novation and transfer

These concepts must be distinguished because they produce different legal consequences.

Assignment

Transfers contractual rights or benefits, such as the right to receive payment. It ordinarily does not, by itself, transfer the assignor's contractual burdens or release it from liability.

Novation

Replaces an existing contractual relationship with a new one, usually substituting a new contracting party. The consent of the relevant parties is ordinarily required.

Business or asset transfer

Transfers selected assets and rights as part of a transaction. Individual contracts still need to be examined to determine whether they transfer, require consent, or must be renegotiated.

Example: Company A has a contract requiring Company B to supply specialised equipment. If Company A assigns its right to receive equipment to Company C, the assignment may transfer the relevant benefit, subject to the contract and applicable law. It does not automatically make Company C responsible for Company A's payment obligations or release Company A from them.

Novation may instead substitute Company C for Company A, with the necessary consent and agreement about accrued liabilities.

3. Legal framework in Australian restructuring

Assignment of contracts in Australia is governed by common-law principles, applicable state and territory legislation, the terms of the contract, and relevant insolvency laws.

The principal issues are:

Whether the contractual right is legally assignable.

Whether the agreement prohibits assignment or requires consent.

Whether the proposed transaction transfers only benefits or also obligations.

Whether restructuring legislation affects the parties' rights.

Whether licences, regulatory approvals, confidentiality obligations, or personal services prevent the transfer.

The Australian Government's legal guidance distinguishes assignment from novation and explains why corporate restructurings frequently require a novation where a new company is to assume both contractual rights and responsibilities.

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Assignment of rights under general contract law

A contractual right, such as a debt or right to payment, may generally be assigned, subject to statutory requirements, contractual restrictions, and exceptions for personal or otherwise non-transferable rights.

The position is different for contractual obligations. A party cannot ordinarily escape its duties simply by transferring them to another company. Consent and an effective novation or another legally recognised mechanism are normally necessary.

Assignment and insolvency restructuring

Restructuring can involve several distinct processes:

Share sale: The company's shares change hands, but the company itself remains the contracting party.

Asset sale: Selected assets and potentially assignable contractual benefits are transferred to a purchaser.

Voluntary administration or restructuring: The company seeks to preserve value, negotiate with creditors, or facilitate a sale.

Liquidation: Assets are realised for creditors, subject to applicable statutory and contractual rules.

Schemes of arrangement: A court-supervised compromise or arrangement may alter rights within its legally authorised scope.

A restructuring transaction does not, merely because it is approved or commercially desirable, automatically transfer every contract. The precise statutory mechanism and the wording of the transaction documents must be examined.

4. Important case laws

Case 1: Norman v Federal Commissioner of Taxation (1963) 109 CLR 9

Court: High Court of Australia.

Legal principle: The distinction between existing property rights and future rights, and the requirements for an effective assignment.

This case is a foundational authority on the assignment of intangible rights. It is frequently cited for the proposition that the nature of the right being transferred matters: an existing contractual or proprietary right may be assignable, whereas a mere expectation of receiving property in the future may not amount to an immediate effective assignment of that property.

Application to restructuring: A distressed company cannot assume that every anticipated revenue stream or future contractual benefit has already been effectively transferred merely because an assignment deed has been signed. Lawyers must identify the legal nature of the right, whether it presently exists, and whether the required formalities have been satisfied.

For example, a biotechnology company may attempt to assign receivables under an existing manufacturing agreement. The assignment should clearly identify the relevant receivables and comply with applicable legal and contractual requirements.

Case 2: Olsson v Dyson (1969) 120 CLR 365

Court: High Court of Australia.

Legal principle: Assignment of contractual rights and the distinction between assignment and novation.

The case is a leading Australian authority cited in legal guidance concerning the difference between transferring benefits and replacing a contracting party. The general rule is that an assignment may transfer a contractual benefit without making the assignee the party responsible for the original contract's obligations.

Application to restructuring: Where a company sells its right to receive payments under a supply contract, the purchaser may obtain the assigned benefit. However, the original company ordinarily remains responsible for supplying goods, performing services, or meeting other contractual obligations.

A purchaser seeking complete substitution should therefore consider a novation rather than relying on an assignment alone.

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Case 3: ALH Group Property Holdings Pty Ltd v Chief Commissioner of State Revenue (2012) 245 CLR 338

Court: High Court of Australia.

Legal principle: The legal effect of assignment and novation depends on the rights and obligations actually created by the transaction documents.

The dispute concerned a property sale agreement and a deed involving assignment of the purchaser's rights. The Court considered whether the subsequent arrangements amounted to a novation or instead preserved the original contract while assigning rights under it.

The case demonstrates that the label attached to a deed is not necessarily decisive. The instrument must be construed as a whole, taking account of its operative provisions and legal effect.

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Application to restructuring: A restructuring deed should clearly specify:

Which contractual rights are assigned.

Whether the original contract continues.

Whether the incoming party assumes any obligations.

Whether the outgoing party is released from future liabilities.

How accrued claims and existing breaches will be treated.

This is particularly important when a purchaser agrees to perform a seller's obligations but the original contracting party is not expressly released.

Case 4: CSG Ltd v Fuji Xerox Australia Pty Ltd [2011] NSWCA 335

Court: New South Wales Court of Appeal.

Legal principle: Contractual language and the distinction between assignment and novation are central to determining the legal consequences of a transfer.

This decision is relevant to the construction of contractual arrangements that contemplate transferring a contract to another entity. It illustrates the importance of examining what the parties actually agreed, rather than assuming that the commercial result sought automatically follows from the terminology used.

Application to restructuring: A company selling a business should examine whether its contracts contain a consent requirement, an express novation mechanism, or provisions governing a change in the supplier. Even where the incoming business is commercially similar, the counterparty may have bargained for performance by the original entity.

The decision is also cited for the observation that assignment and novation may produce similar practical outcomes in some circumstances, despite their different legal foundations.

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Case 5: Leveraged Equities Ltd v Goodridge (2011) 191 FCR 71

Court: Full Court of the Federal Court of Australia.

Legal principle: Contractual provisions can, in appropriate circumstances, prospectively authorise a novation mechanism, and the drafting of assignment and novation clauses is important.

The decision illustrates that the parties' original agreement may establish a mechanism for a later substitution of contracting parties. Whether that mechanism is effective depends on the wording and legal operation of the clause.

Application to restructuring: A well-drafted commercial agreement can anticipate a future sale, group reorganisation, or transfer to a successor entity. A clause should specify when consent is needed, how it is obtained, and what conditions govern substitution.

However, the decision should not be understood as establishing that any company can unilaterally transfer all contractual obligations without consent. The legal effect depends on the original agreement and the applicable law.

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Case 6: Fightvision Pty Ltd v Onisforou (1999) 47 NSWLR 473

Court: New South Wales Court of Appeal.

Legal principle: Contractual substitution and novation require an effective agreement demonstrating the necessary consent.

The case is cited in Australian legal materials addressing the consensual basis of novation. Its relevance lies in the need to establish that the parties intended and agreed to the substitution rather than inferring a complete transfer of contractual responsibility from a change in commercial arrangements alone.

Application to restructuring: A purchaser may begin operating a business, pay invoices, or communicate with customers after an acquisition. Those activities do not necessarily establish that all existing contracts have been novated. The parties should execute appropriate documentation and identify the effective date of substitution.

Case 7: Energy Works (Hull) Ltd v MW High Tech Projects UK Ltd [2020] EWHC 2537 (TCC)

Court: High Court of England and Wales, Technology and Construction Court.

Legal principle: Assignment transfers contractual rights but does not ordinarily transfer contractual burdens or release the original contracting party.

The decision explains the distinction between assignment and novation in the context of a construction subcontract. An assignment leaves the original contract in place, while novation substitutes a new contractual relationship. Assigned rights remain subject to applicable contractual defences and restrictions.

Bailii

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Application to restructuring: This is a useful comparative authority for Australian commercial transactions, although it is not binding on Australian courts. A purchaser acquiring a construction, manufacturing, or biotechnology business must not assume that receiving the contract's benefits automatically makes it responsible for all of the original party's obligations.

5. Assignment clauses and consent requirements

An assignment clause may prohibit the transfer of rights, require prior written consent, or specify that consent cannot be unreasonably withheld. The exact language matters.

Consider three common forms:

Some contracts distinguish between assignment of receivables, assignment of the entire agreement, subcontracting, a change of control, and novation. These are not necessarily interchangeable.

For example, the Australian Commonwealth Department of Finance's model clause provides for prior written approval and allows the customer to assess the incoming supplier's ability to perform and the effect on value for money. This is an example of a contractual mechanism, not a universal rule applicable to all private contracts.

Department of Finance

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6. Insolvency law and statutory restrictions

Assignment must also be analysed in the context of the applicable insolvency regime.

In Australia, relevant legislation may include the Corporations Act 2001 (Cth), together with applicable state or territory property and contract legislation. The precise provisions depend on whether the company is in voluntary administration, liquidation, restructuring under a statutory process, or another procedure.

Important issues include:

Ipso facto clauses: Certain contractual rights to terminate or modify obligations because of specified insolvency-related events may be stayed under Part 5.1, Part 5.1A or Part 5.3A of the Corporations Act, depending on the circumstances and statutory exceptions.

Voidable transactions: Transfers made before liquidation may be challenged where the statutory requirements for unfair preferences, uncommercial transactions, or other voidable transactions are met.

Secured creditors: A purported assignment may be affected by existing security interests, priority rules, or requirements under the Personal Property Securities Act 2009 (Cth).

Licences and regulated contracts: A contractual right to exploit intellectual property or conduct regulated activities may not be transferable without additional consent or regulatory approval.

Court-approved arrangements: A scheme or other statutory process can affect rights within its legally authorised scope, but should not be treated as a general licence to disregard every contractual restriction.

The practical distinction is that an assignment may be valid under ordinary contract law yet still be vulnerable to a security interest, a statutory restriction, or a challenge by an insolvency officeholder.

7. Practical example: assignment of contracts in a biotechnology restructuring

Suppose BioGen Pty Ltd is financially distressed and sells its laboratory business to NewLife Biotech Pty Ltd.

The business has five important agreements.

A proper restructuring plan would identify which contracts are essential to continuing the business, obtain required consents, and determine whether assignment, novation, termination and replacement, or another arrangement is appropriate.

For instance, BioGen might assign a right to receive payment to NewLife, while remaining responsible for services under the original agreement. If NewLife is to replace BioGen as the service provider, a novation may be required. A patent licence may also require separate approval under its express terms.

The purchaser should not assume that buying the laboratory's equipment, employees' services, and intellectual property automatically transfers the associated contracts.

8. Drafting an effective assignment or novation deed

A well-prepared restructuring deed should address the following matters.

Identification of the contract: State the original agreement's date, parties, amendments, and relevant provisions.

Scope of transfer: Identify the precise rights being assigned and any rights expressly excluded.

Consent and conditions: Record any required consent and conditions precedent to completion.

Assumption of obligations: State which obligations the incoming party agrees to perform and from what date.

Accrued liabilities: Allocate responsibility for existing breaches, unpaid amounts, warranties, and pending claims.

Release and indemnities: Specify whether the outgoing party is released and which indemnities survive completion.

Security and guarantees: Address guarantees, insurance, security interests, and any replacement collateral.

Regulatory and confidentiality matters: Deal with licences, personal information, intellectual property, clinical data, and confidentiality requirements where relevant.

Governing law and disputes: Preserve or amend applicable dispute-resolution and governing-law provisions as appropriate.

A deed should reflect the transaction's actual legal effect. Calling a document a “deed of assignment” does not itself establish that obligations have been transferred or that the original party has been released.

9. Remedies for wrongful or ineffective assignment

Where a party transfers contractual rights contrary to an applicable restriction, possible consequences include:

A claim for breach of contract.

Termination, if the contract and applicable law permit it.

An injunction or other appropriate court order.

Damages for proven loss.

Disputes over whether the assignment is effective against the counterparty.

Insolvency-related challenges to a transfer where statutory grounds are established.

The remedy is not automatic in every case. Courts must consider the wording of the restriction, the legal character of the assignment, the applicable law, and the relevant facts.

A further distinction is essential: a contract may prohibit assignment without necessarily making every attempted assignment legally ineffective. The consequences of breach depend on the construction of the clause and the governing law.

10. Conclusion

Assignment of contracts is a significant legal and commercial mechanism in corporate restructuring because contractual relationships can be among a distressed company's most valuable assets.

The central principles are:

Assignment generally transfers contractual benefits, not the burden of performing the contract.

Novation ordinarily requires the relevant parties' consent and can substitute a new contracting party.

Contractual restrictions, statutory formalities, and the personal nature of certain rights may limit transferability.

Insolvency proceedings can affect enforcement rights but do not automatically transfer all contracts.

Clear drafting and careful review of liabilities, consents, licences, and security interests are essential.

The principal Australian authorities include Norman v Federal Commissioner of Taxation, Olsson v Dyson, ALH Group Property Holdings Pty Ltd v Chief Commissioner of State Revenue, CSG Ltd v Fuji Xerox Australia Pty Ltd, and Leveraged Equities Ltd v Goodridge. Together, these authorities provide a useful framework for analysing assignments and novations in corporate transactions.

For the statutory framework, consult the current Corporations Act 2001 (Cth) on the Federal Register of Legislation.

Federal Register of Legislation

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Academic note: This discussion focuses on Australian law, with comparative English authority. The outcome of an actual restructuring will depend on the governing law, the precise contract terms, and the relevant insolvency procedure.