Transfer of Actionable Claims

Definition of Actionable Claim (Section 3)

The concept of 'Actionable Claim' is a type of property recognized and dealt with under the Transfer of Property Act, 1882, specifically in Chapter VIII (Sections 130-132). While the Act primarily focuses on immovable property, actionable claims represent a category of incorporeal movable property.

Section 3. Interpretation clause:

Explanation of the Definition:

The definition is bipartite, covering two main categories of claims:

1. A claim to any debt (unsecured): This refers to a right to recover money from someone, provided this debt is not secured by a mortgage of immovable property or by hypothecation or pledge of movable property. If the debt is secured in these ways, the creditor has a right against the property itself (a security interest), and the claim is linked to that property, falling outside the scope of a simple 'actionable claim' debt.
2. A claim to any beneficial interest in movable property not in the possession of the claimant: This refers to a right to claim or receive movable property (or a beneficial share in it), where the person making the claim is not currently in possession of that property.

In both cases, the claim must be one that a Civil Court would recognise and enforce, i.e., it must afford grounds for legal relief. The claim can be one that is already due (existent), one that will become due in the future (accruing), one that depends on a condition being met (conditional), or one that depends on an uncertain future event (contingent).

Examples: Debt, Beneficial Interest in Movable Property

Examples of Actionable Claims:

• Unsecured Debts:
  • A loan given to a friend without any security. The lender's right to recover the money is an actionable claim.
  • Arrears of rent for a property (before they become a decree debt).
  • Money due under a contract (e.g., balance payment for goods sold on credit).
  • Salary due but not yet paid.
  • A deposit made with a bank (the depositor's right to claim the money).
  • The right to recover damages for breach of contract or tort (like negligence), *before* the claim is converted into a debt by a court decree. Once decreed, it becomes a 'judgment debt' and might be treated differently in some contexts, though the underlying right to claim arose as an actionable claim.
  • Money due under a life insurance policy upon maturity or death of the insured (before actual payment).
  • A balance in a Provident Fund account.
• Beneficial Interest in Movable Property not in Possession:
  • A partner's right to sue for their share in the surplus assets of a dissolved partnership (where the assets are movable).
  • The right to receive shares in a company that have been allotted but not yet delivered.
  • A person's right to claim specific movable goods held by another person (e.g., goods given for repair or storage, where the owner is not in possession).

Claims that are NOT Actionable Claims under TPA:

• Secured Debts: A debt secured by a mortgage of immovable property or hypothecation/pledge of movable property (e.g., money due on a home loan secured by a mortgage, money due on a car loan secured by hypothecation). The creditor's primary right here is against the security.
• Negotiable Instruments: Debts due on a promissory note, bill of exchange, or cheque are specifically excluded from the definition by a later amendment. They are governed by the Negotiable Instruments Act, 1881, and can be transferred by endorsement and delivery.
• Specific Movable Property in Possession: If a person is already in actual or constructive possession of movable property, their right to that property is not an actionable claim.
• Mere Right to Sue: A bare right to sue for damages for defamation, personal injury, or other claims sounding purely in tort or certain breaches of contract (where the amount is not yet ascertained or the claim is not linked to a specific debt or movable property) is generally not transferable as it is considered a "mere right to sue" under Section 6(e) TPA, which cannot be transferred. The distinction between an actionable claim and a mere right to sue is often complex and depends on whether the claim relates to an existing debt or beneficial interest, or is solely for unascertained damages for a personal wrong.

Actionable claims represent valuable assets that can be transferred, forming an important part of commercial transactions.

Mode of Transfer of Actionable Claims (Section 130)

Section 130 of the Transfer of Property Act, 1882, prescribes the exclusive method for transferring an actionable claim. This method requires a written document and, importantly, notice to the debtor.

Section 130. Transfer of actionable claim:

^* Words like "whether with or without consideration" were added later to clarify that even gifts of actionable claims must follow this procedure.

Written Instrument and Notice

Based on Section 130, the transfer of an actionable claim is effected in two steps:

1. Execution of a Written Instrument:
   • The transfer must be made by an instrument in writing. This document must be signed by the transferor (the original creditor) or their authorized agent.
   • The transfer becomes complete and effectual upon the execution of this written instrument as between the transferor and the transferee. From this moment, the transferee steps into the shoes of the transferor and acquires all their rights and remedies regarding the actionable claim.
   • Crucially, this transfer is valid even if it is made without consideration (i.e., as a gift).
2. Notice to the Debtor (Section 131):
   • While the transfer is complete between the transferor and transferee upon execution of the instrument, it is not effective against the debtor or other person against whom the claim exists, until they receive express notice of the transfer.
   • Section 131 specifies that notice must be in writing, signed by the transferor or the transferee or their agent, and must state the name and address of the transferee.
   • The proviso to Section 130(1) is vital: Any dealing with the debt or claim by the debtor (like making payment to the original creditor) *before* receiving express notice of the transfer is valid against the transferee. This means if the debtor pays the original creditor without notice of the transfer, the transferee cannot demand payment again from the debtor; their remedy is against the original creditor.

Illustrative Timeline:

1. A owes ₹ 1 Lakh to B (Actionable Claim).
2. B signs a written instrument transferring this debt (the actionable claim) to C.
3. At this point, the transfer is complete and effective between B and C. C now owns the right to receive ₹ 1 Lakh from A, as against B.
4. B or C must give written notice of this transfer to A (the debtor).
5. Until A receives express notice, if A pays the ₹ 1 Lakh to B, the payment is valid, and C cannot demand the money from A. C must recover the money from B.
6. Once A receives express notice, A is bound to pay the ₹ 1 Lakh only to C. Any payment made by A to B after receiving notice will not discharge A's liability towards C.

This system protects the debtor from being unfairly subjected to double liability while ensuring the transfer of the claim is legally recognized once the debtor is duly informed.

Rights and Liabilities of Transferee of Actionable Claim

When an actionable claim is transferred, the transferee acquires certain rights and becomes subject to certain liabilities in relation to that claim. These are primarily governed by Section 130(1) and Section 132 of the Transfer of Property Act, 1882.

Rights of the Transferee:

• Acquisition of Transferor's Rights and Remedies (Section 130(1)): Upon the execution of the written instrument of transfer, the transferee of an actionable claim gets vested with all the rights and remedies of the transferor regarding that claim. This includes the right to demand payment from the debtor, the right to file a suit to recover the debt, and any other remedy that was available to the original creditor (transferor). The transferee can sue the debtor in their own name.
• Right to Interest and Accretions: Unless the transfer agreement provides otherwise, the transferee is generally entitled to any interest that accrues on the debt after the transfer, and any other benefit that might arise from the claim.
• Priority based on Notice: As discussed under Section 130, the priority of multiple transfers of the same actionable claim is often determined by the date of notice given to the debtor, not the date of the transfer itself. The transferee who first gives express notice to the debtor generally has priority over subsequent transferees, even if their transfer was made earlier.

Liabilities of the Transferee ("Assignee takes subject to equities"):

Section 132 of the Transfer of Property Act, 1882, is based on the principle of "assignee takes subject to equities".

Section 132. Liability of transferee of actionable claim:

Explanation of Section 132:

This is a crucial limitation on the rights of the transferee. It means that the transferee of an actionable claim cannot acquire a better position than the transferor held at the time of the transfer. The transferee takes the claim subject to all the defences, counterclaims, set-offs, and other equities that the debtor had against the original creditor (transferor) at the date of the transfer (or, arguably, at the date of notice to the debtor, as per judicial interpretation aligning with Section 130 proviso).

Example:

Answer:

Other examples of equities include rights arising from fraud, misrepresentation, failure of consideration, or any other defence that the debtor could have raised against the original creditor. The transferee cannot ignore these issues; they inherit the claim with all its benefits *and* burdens vis-à-vis the debtor.

This principle encourages the transferee to perform due diligence and inquire about the debtor's position and any potential defences or counterclaims before accepting the transfer of an actionable claim.

Exclusions from Transfer of Actionable Claims

While actionable claims generally represent transferable rights, certain types of claims are specifically excluded from this category or are deemed non-transferable under the Transfer of Property Act, 1882, or other laws. Understanding these exclusions is important to define the scope of Chapter VIII of the TPA.

Exclusions based on the Definition (Section 3 TPA):

1. Secured Debts: As per the definition itself, a debt secured by a mortgage of immovable property or by hypothecation or pledge of movable property is not an actionable claim.
2. Negotiable Instruments: Debts secured by or due under a negotiable instrument (promissory note, bill of exchange, cheque) are also excluded from the definition of actionable claim. Their transfer is governed by the Negotiable Instruments Act, 1881, usually by endorsement and delivery.

Exclusions based on Non-Transferability (Section 6 TPA):

Section 6 of the TPA lists various properties or rights that cannot be transferred. Some of these are relevant to claims:

3. A mere right to sue (Section 6(e)): A bare right to claim unascertained damages for a wrong (like a tort or breach of contract without a resulting debt or defined beneficial interest) is considered a "mere right to sue" and is not transferable. This prevents trafficking in litigation.

   Example: The right to sue someone for defamation or battery is a mere right to sue and cannot be transferred. However, once a court passes a decree awarding damages for defamation, the right to recover that decreed amount becomes a debt, which is an actionable claim and can be transferred.

4. Public Offices and Salaries (Section 6(f)): Public offices and the salary of a public officer are non-transferable.
5. Pensions (Section 6(g)): Stipends and political pensions are non-transferable.
6. Right to Future Maintenance (Section 6(dd)): A right to future maintenance is also non-transferable, being a personal right. However, arrears of maintenance (already due) constitute an actionable claim and are transferable.

Other Implied Exclusions:

7. Claims opposed to Public Policy or Law: Claims arising from illegal or immoral transactions generally cannot be legally enforced or transferred.
8. Claims where Transfer is Restricted by Contract: Parties can agree in a contract that a debt or right arising from it shall not be transferable, provided such restriction is not absolute or against public policy.

Therefore, while a wide range of claims can be transferred as actionable claims, the law prevents the transfer of claims that are speculative, purely personal, secured by specific methods, represented by negotiable instruments, or whose transfer is restricted by law or public policy.