Novation

HMRC's Corporate Finance Manual distinguishes novation from simple assignment: while a straightforward transfer of a lender's rights to another party “is known as an assignment,” a “tripartite agreement may lead to the creation of a new debt albeit on the same terms. This is known as a novation.” Novation is the mechanism generally used to transfer liabilities and obligations rather than mere rights, precisely because an obligor cannot simply hand its duties to someone else without the counterparty's agreement.

Because novation creates a wholly new contractual relationship, all affected parties must consent to it. The guidance states that where there is no pre-agreed substitution clause, a change of contracting party “will require the consent and agreement of all the parties to the contract” — the original creditor or counterparty, the outgoing party and the incoming party. The effect is that “the old debt is extinguished and a new one created,” which is what separates novation from arrangements such as defeasance, where the original party remains legally liable despite a third party agreeing to perform in its place.