Introduction
Often when we do not provide personal surety, the security of a loan can take the form of a cession. Therefore, the theory behind what we agree to when we agree to a cession is critical.
South Africa has two types of cession: out-and-out and securitatem debiti (security). This has been confirmed in the Supreme Court of Appeal (SCA) case of Grobler v Oosthuizen [2009] 5 SA 500 (SCA). In this case, the SCA gave the provision of cession as security a measure of certainty.
Types of Cession
The two types differ because an out-and-out cession is a bilateral agreement where all rights are entirely ceded to the cessionary. This means the rights no longer belong to the cedent but instead belong to the cessionary. It’s a reversionary interest, which means the cessionary must re-cede the rights to the cedent when the secured debt has been paid off. However, this is not automatic and requires a re-cession agreement unless otherwise stated. Failing to re-cede the debt can have severe consequences for both parties.
On the other hand, a security cession, also known as a pledge and cession in securitatem debiti, is when the cedent pledges or encumbers their rights against their debtor and transfers these rights to the cessionary to secure an obligation owed to them. For example, a security cession is typically used to create a security interest in the cedent’s rights to book debts, bank account funds, insurance policies, or shares. It has been legally recognized that a cession in securitatem debiti is similar to a pledge of corporeal movable property.
Intentions Matter – The Grobler Case
In the case of Grobler, the court established that the type of cession depends on the parties intentions. Therefore, it is crucial that the parties clearly express the kind of cession they intend to enter into. This intention must be clearly outlined in the agreement and reflected in its performance.
At this stage, parties can structure security cessions as they wish, but if their intention is unclear, the pledge construction will be the default.
Formalities are not required for the obligatory agreement or act of cession. However, parties can agree on specific formalities that the cession must comply with. The cession can be expressed, inferred from the parties’ conduct, or tacit. Although it need not be in writing, parties may choose to reduce it to paper; if so, it will only be valid.
If the cedent defaults on the secured debt, the cessionary can realize its security by using its locus standi to collect the principal debt and use the proceeds to settle it. However, whether the cessionary may do so before the cedent defaults is a factual matter that the terms of the obligatory agreement must determine.
In the case of Retmil Financial Services (Pty) Ltd v Sanlam Life Insurance Company Ltd and others [2013] 3 All SA 337 (WCC), the Western Cape High Court established that a cessionary, like a pledgee, must act as a bonus paterfamilias, meaning they must take reasonable precautions to protect the ceded right and exercise due diligence. They are also responsible for safeguarding the cedent’s interests in the right.
If the cessionary fails to meet these obligations, the cedent may have a damages claim against them, depending on the circumstances. Additionally, whether the cessionary can collect the principal debt from the debtor when the cedent is not in default but instead servicing the secured debt is a factual matter to be determined by the terms of the obligatory agreement, not a legal one.
Conclusion
It is, therefore, crucial to ensure that the intent of both parties is agreed upon. Further, the parties’ conduct is bona fide when exercising the pledge and for the parties to release when exactly the debt is claimable. Contact an attorney at SchoemanLaw Inc for any guidance on your cession.
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