Novation is the legal process of replacing one party to a contract with a new party, so the new party takes over both the rights and the obligations. Crucially, it needs the agreement of everyone involved.
Novation versus assignment
Assignment usually transfers only the benefit of a contract. Novation transfers the whole thing, including the obligations, and effectively creates a fresh agreement with the new party in place of the old.
Where it comes up
It can arise during business sales or restructures, where contracts need to move from one entity to another cleanly.
- It transfers rights and obligations together.
- It needs all parties to agree.
- It differs from a simple assignment.
If your limited company or LLP is restructuring and a Credicorp facility might be affected, talk to us early so we can discuss the right approach together.
See also: What is a guarantor in business lending?, Can I borrow from another company in the group? and Glossary: default.