Debt novation: the essence of the procedure, the procedure for carrying out, the necessary documents

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Novation of a debt into a loan obligation - a procedure carried out at the conclusion of an agreement to replace old debts affecting the sale, lease or property rights. The process is regulated by article 414 and is formalized taking into account article 808 of the Civil Code.

Debt features

Under the debt obligation understand the occurrence of debt to the creditor. The debtor undertakes to provide services or property to the creditor in the process. At the same time, the borrower fulfills its obligations on predetermined conditions. Contracting parties can be both individuals and legal entities. A mandatory requirement for a debt novation agreement is the correct execution.

The subject of the transaction is the main detail of the agreement, which plays an important role in the context of the replacement procedure. In most cases, the subject of the transaction is money, but other options are allowed:

• Participation in a shared construction agreement, according to which the debtor receives ownership of real estate.
• Purchase and sale.
• Property rental.

Innovation is allowed in all of the above cases, if its conditions suit both sides of the case.

Novation of debt into loan commitment

Performed only if the debtor has outstanding obligations to the creditor. There is a need to change the subject of the transaction: the service or thing that is the subject of the previous contract is replaced by another one.

The procedure for novating a debt into a loan obligation is carried out in accordance with Article 818 of the Civil Code. The agreement is drawn up in writing in cases approved by law:

• A legal entity acts as a creditor.
• The amount of debt exceeds 1000 rubles.

The obligations of the debtor specified in the previous agreement are leveled after the replacement is made, being displaced by the debts specified in the agreement. The conditions for its implementation are also prescribed. Debts to creditors are written off after the person copes with his new obligations.

Recognition of the legitimacy of the transaction

A concluded transaction is recognized as legitimate only if the subject and form of fulfillment of obligations changes in the contract. A novation is considered legal if the creditor receives a bill of exchange from the debtor for a certain amount. In this case, the form of obligations is replaced, which makes the transaction legitimate.

The indicator of legitimacy is the participation of certain individuals. A new contract at the conclusion is signed by the parties involved in the previous transaction,whose form changes. The document will lose its legal force if it does not bear at least one of the previous signatures.

The deal is executed upon the will of both parties. It is impossible to initiate the procedure unilaterally. The condition of legitimacy is the voluntary signing of the agreement.

The law on innovation regulates the conduct of various operations, but has its limitations: the subject of the contract should not affect the identity of one of the parties. The following factors are considered limiting:

• Compensation for physical or moral damage.
• Alimony arrears.

You can legally replace an item if it does not concern the parties to the case, which should be indicated in the documentation.

Contract conditions

The old contract and the terms of repayment of the debt lose their legal force after drawing up the contract of novation of the debt into a loan obligation. They are replaced by new conditions: for example, under the old transaction, the creditor could receive the debtor's property as collateral. Novation without collateral does not require the return of property from the creditor.

To recognize the legitimacy of the new contract, the conditions of the previously executed transaction are prescribed. The correctness of drawing up an agreement is determined not only by legal subtleties, but also by the nuances of financial statements. Such documentation is provided if one of the parties is a legal entity. Contracts on obligations are amended in the reporting periodfor the time spent reissuing.

The subject of the new transaction must be equivalent to the subject of the old one. For example, the cost of rent, which was the subject of a previous transaction, must correspond to the amount of money under the novation agreement.

The debt novation procedure is universal and can be carried out for any transactions. Such agreements are concluded only on a voluntary basis and are the will of the parties who consider this option beneficial. Property is replaced by its equivalent amount of money. The paper has legal force if it is correctly executed and it indicates the new terms of the contract and the subject of the transaction.

Innovation is one of the sought-after legal procedures to update a deal and make it profitable for both parties. Its implementation is regulated by the Code of the Russian Federation. The nuances of drawing up and concluding a contract, the conditions under which it is considered legitimate, are specified in the laws.

Contract execution

Agreement on debt novation, in accordance with Article 818 of the Civil Code of the Russian Federation, is drawn up in the same form as a loan agreement. In writing, the document is drawn up if the lender is a legal entity.

The agreement is drawn up by mutual agreement of the parties, since it is impossible to sign the novation of a debt into a loan unilaterally.

The novation agreement sample contains the following information:

• place and date of compilation;
• personal information about the debtor and creditor;
• subject of the contract;
• data on initial commitments;
• dispute resolution procedure;
• new commitment details;
• duties, rights and responsibilities of the parties;
• procedure and deadlines for fulfilling obligations;
• bank details and addresses of the parties to the agreement;
• the procedure for terminating or changing the terms of the transaction;
• signatures of the parties.

The debt novation agreement is drawn up in two copies, equal in legal force.

The text of the agreement contains a list of attached documents required to convert the debt into a loan obligation. The agreement may also specify a debt repayment schedule, a form of guarantee and other nuances.

Concluding an agreement is impossible when it comes to paying alimony or paying compensation for damage to the he alth or life of a citizen. The agreement, the subject of which is the transferred payments, is declared invalid, as it contradicts the laws of the Russian Federation.

How a contract is drawn up

The previous version of the agreement for novation of a debt into a promissory note becomes null and void when a new one is drawn up. The terms of the contract are subject to change. Proper drafting of a document requires taking into account some rules:

• Debt is repaid not with goods or specific property, but with a certain amount of money.
• It may indicate the transfer of valuables as collateral until the debt is returned.
• To maintain the legitimacy of the new treaty, it spells out the important terms of the previous agreement.
• Information abouteach document are entered into the financial statements of the organization that is one of the parties to the contract. Information is entered during the reporting period when drawing up contracts for obligations.
• The new subject of the agreement must be equivalent to the old one specified in the previous contract.
• Documents are drawn up in accordance with the requirements for business papers.
• Changes to the basic conditions must be made to the contract.

The demand for debt novation is explained by the possibility of mutually beneficial resolution of issues between the borrower and the debtor.

Required Items

Innovation is recognized as legitimate only with written documentation - a bilateral contract. The implementation of innovation unilaterally or by a court decision is not allowed in accordance with paragraph 1 of Article 452 of the Civil Code of the Russian Federation.

There is no exact sample of this document in the legislation, and therefore its execution is allowed in any form with the obligatory indication of important information to give the contract legal force. The following conditions must be met:

• Description of the original obligation.
• Entering data on the amount of debt.
• Indicating the new obligation and its amount.

Other material conditions are duplicated in two copies of documents and bind both contracts.

Main points

• Title page. It indicates the date of execution of the agreement, the signatures of the parties, information about each of the parties, details.
• The subject of the contract is prescribed.
• The parties may not disclose information, as evidenced by the instruction to maintain confidentiality.
• The responsibility and obligations of the parties are prescribed.
• Methods for resolving disputes and conflicts in pre-trial and judicial procedures are indicated.
• The deadlines for the debtor to fulfill his obligations to the creditor are entered.
• A new subject of the contract is being prescribed, equivalent to the old one.

A well-written and executed document has full legal force and contains information about the transaction.

Required documents

To draw up a contract for the novation of a promissory note debt or loan obligation, various documents are required, but in most cases the following papers are used:

• The previous agreement, which loses its legitimacy after the execution and signing of a new one.
• Documents confirming the identity of individuals, or constituent documents of organizations to enter information about the parties.
• Documents of title to pledged property.

The subject of a new transaction affects the number of documents required to draw up a contract.

Conclusion order

The novation agreement (or debt forgiveness) greatly facilitates the functioning of organizations. Most often, they resort to compiling it in force majeure situations, for example, when counterparties miss deadlines.

Any company at some point in itsexistence is faced with a shortage of funds and an inability to meet obligations. Debt novation in such cases is the best option and is accompanied by the following actions:

• the presence of mutual consent of the parties;
• a new agreement is drawn up, which specifies the property or the amount transferred instead of the subject of the contract;
• claims on the original debt cease.

To recognize a transaction as legal and legitimate, it must comply with all legal requirements.

Innovation in promissory notes

Debt obligations of the parties can be expressed in the issuance of a bill - a security debt paper. Under the bill understand long-term borrowed obligations. The novation of a debt into a bill of exchange is said to be in the event that the term of the loans is extended for an indefinite period.

Long-term bill loans have an expiration date, after which the bearer of the security must receive a loan, which is not always beneficial for one of the parties. Debt obligations may be extended in such situations, however, the decision on this remains at the discretion of the parties.

To confirm the relationship of the parties, a security is issued - a bill of exchange, which ceases to be valid due to the expiration of the document. The issue of a new security is required, which is included in the promissory note novation procedure.

Promissory note novation procedure

1. As a result of the negotiations, the parties must come to the conclusion that the promissory notesobligations cannot be terminated within the stipulated time. Since the extension of the relationship is beneficial to both participants, there should not be any disputes.
2. The current bill and the previous contract on the basis of the agreement of the parties lose their legal force. Instead, a new contract is drawn up and new securities are issued with similar previous obligations, but with a different maturity. Innovation in this case is an updated contract with re-accounted obligations of the parties.
3. The novation of a bill involves the revision or addition of interest, the amount of the debt and other conditions and is defined as an independent legal procedure.
4. Promissory notes are novated when the execution of a loan obligation is carried out not in money, but as part of the debt or by restructuring the loan into securities.

Conclusion

Debt novation is possible subject to certain conditions and proper drafting of the contract. The procedure is the best solution for companies facing inability to pay debts.