A lender, having entered into a facility agreement and a security agreement, acquires rights and incurs obligations (duties). For example, the lender has an obligation to advance the loan, a right to repayment thereof, and an obligation to receive payment when tendered.
Similarly, a lender has a right to have the agreed security interests created, and an obligation to preserve the security given.821 Having acquired these rights and obligations, and having advanced the loan, but having not yet been repaid, the lender may want to sell the loan for value to a new lender during the loan term. The substance of the transaction could be a straightforward disposal of a loan,822 a factoring transaction, or a securitisation transaction.823 In this scenario, it is assumed that the lender's ability to sell and cede the loan is not prohibited in the contract by a pactum de non cedendo.824 The new lender becomes, pursuant to implementing the sale, either a co-lender with the original lender as a senior lender or a mezzanine lender,825 or substituted as the lender under the original facility agreement and the security agreement, or a sub-participant in the loan.826 Legally, this is achieved by the lender ceding its rights and delegating its obligations under the
815 Brits Real Security Law (2016) discusses the first in time principle generally (at 7) and then discusses it in relation to different security instruments such as: bonds over movable property (at 159), special and general bonds (at 196), security held under the Security by Means of Movable Property Act 56 of 1993 (at 258) and pledge of claims (at 322). Also see Contract Forwarding (Pty) Ltd v Chesterfin (Pty) Ltd and Others 2003 (1) All SA 267 (SCA) para 6, where the court held that '[r]eal rights are stronger than personal rights and in the case of conflicting real rights the principle prior tempore potior iure applies.'
816 The term 'finance documents' is defined in n 582.
817 As contemplated in Chapter 6 (Business rescue and compromise with creditors) of the Companies Act 2008.
818 As contemplated in the Insolvency Act.
819 See the discussion on lenders voting in favour of enforcement action in section 4.11.2 The security structure.
820 The LMA's intercreditor agreement for leveraged acquisition finance transactions (senior/mezzanine), 20 March 2020, clause 18 (Application of proceeds).
821 With regard to a lender who holds security interests in securitatem debiti it was held in Retmil Financial Services (Pty) Ltd v Sanlam Life Insurance Company Ltd and Others [2013] 3 All SA 337 (WCC) para 30 that 'the cessionary, like the pledgee, is under a duty to exercise due diligence with regard to the right and to protect the interests of the cedent, on pain of liability for damages sustained by the cedent should he fail to do so. He must deal with the ceded right as a bonus paterfamilias.'
822 A disposal of this kind is sometimes referred to as a sale in the secondary loan market. See, for example, Drucker & Puri 'On Loan Sales, Loan Contracting and Lending Relationships' (July 2009) 22(7) The Review of Financial Studies.
823 Locke Aspects of Traditional Securitisation in South African Law (LLD thesis, UNISA, November 2008) describes securitisation as 'the pooling of a homogenous group of income-producing assets, the sale of these assets by the original holder (originator) to an insolvency-remote third party (a special purpose vehicle or SPV) and the issue by the SPV of marketable securities (typically debt instruments such as debentures) to finance the purchase of the assets. The transferred assets serve as security for the securities issued' (at 15).
824 I analyse this phenomenon in section 5.6 Agreements prohibiting or restricting cession (pacta de non cedendo).
825 See the analysis of syndicate lending in chapter 2 The Law of Loans and chapter 4 Security for Loans.
826 See section 3.2.4 The nature of syndication for a discussion and analysis of sub-participants.
original facility agreement to the new lender for value, who accepts the cession and delegation. I will now explore the assignment in more detail.
In our common law, a right is transferred by cession827 and an obligation (duties) by delegation. A lender (a cedent) cannot transfer both its rights and obligations to a new lender (a cessionary) by cession alone. Instead, the term 'assignment' is used to simultaneously denote the legal acts of both the cession of rights and the delegation of obligations.828 The traditional perspective though is that only duties (which would include the duty to pay debts) can be transferred by 'a delegation involving a novation.'829 Lubbe explains, however, that Botha v Van Niekerk en 'n Ander,830 which was supported in subsequent judgments despite academic criticisms,831 is authority for a different view that, with the concurrence of the creditor, the debtor can transfer its duties (which would include the duty to pay its debts) to a third party through an assignment without a novation.832 Thus, if the creditor, debtor and third party agree, such a transfer of duties is possible without the need to extinguish the debtor's obligations and replace it with new obligations owed by the third party to the creditor.833 Again, traditionally, a novation can be used to transfer a current, valid obligation by extinguishing it and substituting it with a new obligation.834 If one of parties is to be substituted by another, then novation is termed a delegation.835 In order to cede a right, the concurrence of two parties is required, namely, the lender (the cedent) and the new lender (the cessionary).836 The cession is valid whether or not the debtor has consented, and the debtor's consent to, or knowledge of, the cession is, in law, irrelevant.837
The debtor should, however, be informed of the cession so that the debtor renders its performance to the party entitled under the cession to receive the performance. A debtor who has not been informed of the cession, and who renders performance of its obligation to the cedent in accordance with the terms of its contract with the cedent, is immune from suit.838 If, however, the facility agreement or the lender's terms and conditions under which a loan was advanced prohibits the cession,839 or creates a prior cession in securitatem debiti in favour of the cessionary, and the existing lender wants to sell and assign only part of the loan while retaining a part of the loan, the debtor will have to consent to the cession because of the contractual prohibition on cession; without this consent, the purported
827 The concept of out-and-out cession is analysed in section 5.1.2 Cession in security versus out-and-out cession.
828 Reinecke 'Insurance Part 2' LAWSA vol 12(2) 2 ed (2012) para 128.
829 Lubbe Contract: General Principles (2020) 585 para 14.40.
830 Botha v Van Niekerk en 'n Ander 1983 (3) SA 513 (W).
831 Joubert 'Botha v Van Niekerk 1983 3 SA 513 (W) Die koper of sy genomineerde' 1984 THRHR 234.
832 Lubbe Contract: General Principles (2020) 585 para 14.41.
833 Lubbe 'Law of Purchase and Sale' 1983 Annual Survey of South African Law 160.
834 Reinecke et al 'Novation and Delegation' LAWSA vol 12 2 ed (2012) para 146; see the discussion of novation in section 3.2.4 The nature of syndication.
835 Ibid para 129.
836 Lubbe 'Cession' LAWSA (2013) para 128; De Wet & Van Wyk Kontraktereg (1992) 251; Sande Cession of Actions (1906) ch II, under the heading In how many various ways cession may be correctly effected, where Sande states that '[w]ithout mandate actions are ceded in any other way by mere consent, provided there exist an antecedent title or cause, whence the intention to transfer the action may be gathered'.
837 Lubbe Contract: General Principles (2020) 505 para 13.15; National Sorghum Breweries Ltd v Corpcapital Bank Ltd 2006 (6) SA 208 (SCA) para 1; Van Staden NO and Another v Firstrand Ltd and Another 2008 (3) SA 530 (T) paras 28 and 29;
Kariem 'Cession in Security: Notice to the Debtor' Finance and Banking Alert Cliffe Dekker Hofmeyr Inc., 18 May 2020.
838 See section 5.1.3 Notice of the cession to the principal debtor and performance including set-off.
839 The LMA's Term Facilities Agreement, clause 24.1 (Cessions and delegations by obligors).
cession will be void.840
To transfer an obligation, the concurrence of three parties is required, namely, the debtor, the lender (the cedent) and the new lender (the cessionary).841 The parties must plainly have intended that the lender would transfer its rights and obligations to the new lender, who will be substituted in the lender's stead. Delegation is classified as a 'species of novation'.842 Our courts have clearly established these principles and consider it a misnomer and incorrect that cession transfers both rights and obligations.843 The type of cession contemplated in this scenario is an out-and-out cession, which is a complete transfer of rights from one party to another.844 The lender thereby transfers its claim for repayment of the loan to the new lender, for value. The transfer is achieved by the lender ceding all its rights and delegating its obligations.845 The net effect of the assignment is that the lender is divested of its rights and obligations under the original facility agreement, which comes to an end when the assignment is agreed to be effective.
In this context, the vexed question that arises is whether the cession of the lender's rights and the delegation of its obligations under the loan agreement automatically, without the need for any further conduct, transfers the lender's security interests, or whether a separate transfer of the security interests is needed. It is submitted that, in South African law, the nature of the security rights determines whether delegation of the principal debt results in the automatic cession (transfer) and delegation of the associated security, or whether the security must be separately ceded.
In 1979, in Pizani and Another v First Consolidated Holdings (Pty) Ltd,846 the Appellate Division heard an appeal against an order of the Witwatersrand Local Division upholding exceptions to a plea. The respondent had sued the appellants in the court a quo for the payment of monies under suretyships given by them for the obligations of the lessee (Grinding Wheels (Pty) Ltd) arising from an equipment lease agreement. The lessee was liquidated, resulting in the lease agreement being terminated, and the respondent was placed in possession of the leased equipment. The respondent then claimed arrear rental, interest and damages, and sued the sureties. Although the sureties acknowledged that they had signed the suretyships, they contended they were not liable on a number of grounds including that, unless the suretyships were ceded out-and-out simultaneously with
840 In a secured term loan transaction in which I advised a lender in 2018/2019, a condition precedent of the loan was the pledge and cession in securitatem debiti by the borrower of its rights to a bank account, and the acknowledgment by the bank at which the account was held of such cession. The bank refused to acknowledge the cession, citing its internal risks as the reason. The refusal raised the enforceability of the cession for, if there was a prohibition on cession, or a prior cession of the same account, the purported cession would be unenforceable. See also section 5.4 Partial cession: Splitting the claim for an analysis of the legal principles that must be complied with if a monetary claim is to be split between different creditors.
841Froman v Robertson 1971 (1) SA 115 (A) at 122C–H. In terms of clause 23.2 (Borrower consent) of the LMA's Term Facilities Agreement, the debtor's consent is not required for transfers as defined and the debtor's consent is deemed to be given within five business days after the lender requested it for any other transfers unless the debtor expressly refuses to consent.
842 Froman v Robertson 1971 (1) SA 115 (A) at 122C–H.
843 Ibid.
844 The LMA's Term Facilities Agreement, clause 23.1 (Cessions and delegations by the Lenders), permits a lender to transfer 'any or all of its rights and/or obligations … to another bank or financial institution or to a trust, fund or other entity which is regularly engaged in or established for the purpose of making, purchasing or investing in loans, securities or other financial assets.'
845 Ibid.
846 Pizani and Another v First Consolidated Holdings (Pty) Ltd 1979 (1) SA 69 (A).
the cession of the lease rights, the sureties could not be held liable under the suretyships.
The court noted that one school of thought held that cession of the principal debt automatically transferred the cedent's claims against the surety to the cessionary, while the other held that cession of the principal debt was not sufficient to transfer the cedent's claims against the surety to the cessionary, and that a separate cession was required. The former position arose from the nature of cession.847 The court considered the views of Voet848 on the subject, stating that although Voet supported the view that both the main action and the accessory actions had to be ceded, in the same paragraph Voet later accepted 'that privileges attached to the ceded right, or rights which cleave to the action ceded, pass to the cessionary by the cession of the main right'.849
The court held that, in light of this position, the view that, without a separate cession of rights under the suretyship, the surety was discharged on cession of the principal debt could not be justified. The cession of the principal debt had the effect that the original creditor could no longer claim from the principal debtor or the surety as that right had passed to the cessionary, who had stepped into the original creditor's (the cedent's) shoes.
The cessionary acquired the cedent's rights against the principal debtor and the cedent's rights in respect of the secured debt, which included the right to sue the principal debtor and the surety.850 The court rejected the view that, as a matter of law, the cessionary could not acquire rights against the surety without a separate cession of such rights.851 However, this did not apply in all cases, as the wording of the cession might confine it to a certain scope, and the terms of the suretyship might limit the surety's liability by, for example, the surety undertaking exclusive liability to that creditor only as a delectus personae.852 The court held further that different considerations may apply to other forms of security where the law prescribed formalities, procedures and registrations to be observed.853
The Pizani principle was discussed and adopted in a number of judgments after 1979, the most recent being in 2014, in DH Brothers Industries (Pty) Ltd v Gribnitz NO and Others,854 in the Kwazulu-Natal division of the High Court. The applicant applied to set aside a board of directors' resolution to place the company under business rescue.855 The court, in deciding whether it was just and equitable to set aside the resolution under section 130(5)(a)(ii) of the Companies Act 2008, had to consider if the business rescue plan was not one envisaged under the Act, because it provided for the compulsory cession of 75.5 per cent of the applicant's claim, leaving the applicant unable to claim that portion against the directors who had provided suretyships for it. The court held that this submission depended on whether the business rescue plan deprived the applicant and other creditors
847 Ibid 77B–C, where the court held: 'Such effect is that the cessionary veritably steps into the shoes of the cedent. Whatever claims could, but for the cession, have been enforced by the cedent may after the cession be enforced by the cessionary.
This is of the essence of the cession.'
848 D 18.4.12 in Gane's translation.
849 Pizani and Another v First Consolidated Holdings (Pty) Ltd 1979 (1) SA 69 (A) at 77G–H.
850 Ibid 77H and 78A–B.
851 Ibid 78E.
852 Ibid 78F–H.
853 Ibid 78D–E.
854 DH Brothers Industries (Pty) Ltd v Gribnitz NO and Others 2014 (1) SA 103 (KZP).
855 As contemplated in Chapter 6 (Business rescue and compromise with creditors) of the Companies Act 2008.
from proceeding against the sureties. Citing the authority of Pizani, the court held that at common law the cession of a claim entitled the cessionary to claim against both the principal debtor and the surety. The cedent could no longer enforce these claims because 'it has perforce ceded its claim against the principal debtor, and suretyship is an accessory obligation'.856 Security was first held to be accessory in nature in 1931 in Kilburn.857 The Pizani principle was, I submit, based on the perspective that the security in that case was accessory to the principal debt.
The Pizani principle can be applied to the pledge and cession in securitatem debiti of bank accounts, debtors' books, unlisted shares and insurances if these forms of real security are accessory to the secured debts that they secure and there are no contrary statutory conditions. The out-and-out cession of a principal debt that is secured by the pledge and cession in securitatem debiti of any of these rights has the effect in law that the accessory security rights are likewise ceded to the cessionary without the need for a separate cession. Given its accessory nature, this kind of security 'follows' the principal obligation into the hands of the new lender as its fate is bound to the principal obligation. If the principal obligation (the loan) is assigned, so is the security.
I submit that the Pizani principle does not apply to certain types of accessory security rights where legislation requires such rights to be registered in order to be legally effective.
Accessory security rights that must still be separately ceded and registered are security rights in listed, uncertificated securities and bonds. The Financial Markets Act requires the registration of listed, uncertificated securities that are ceded or pledged in security. The name of the pledgee or cessionary, the number or nominal value of the uncertificated securities, the interest ceded or pledged, and the date of entry must be recorded in the central securities account or the securities account.858 So, every time the cessionary or pledgee changes because of a new cession, the new party's name and details must be registered. This implies, I submit, that, despite the Pizani principle, a separate (from the cession of the loan) pledge and cession in securitatem debiti of listed, uncertificated securities is required every time new security is created, so that it can be registered as required by the Financial Markets Act.
In terms of sections 3(1) and 52 of the Deeds Registries Act,859 the cession of mortgage bonds and notarial bonds must also be registered.
What is the effect of a no assignment clause on the principle that assigning the loan automatically assigns the security because the security is accessory to the loan? In terms of a no assignment clause, the obligors may not cede their rights nor delegate their obligations under the facility agreement to a third party.860 If an obligor were to assign its rights and obligations it would be a breach of the no assignment clause. The no assignment
856 DH Brothers Industries (Pty) Ltd v Gribnitz NO and Others 2014 (1) SA 103 (KZP) paras 64 and 65.
857 Kilburn is discussed in section 4.6 The accessorial principle.
858 See section 4.5 Personal and real security, and the registration of security rights.
859 Deeds Registries Act 47 of 1937.
860 The LMA's Term Facilities Agreement, clause 24.1 (Cessions and delegations by Obligors).
clause does not apply to a novation of the loan, though, as assignment and novation are substantively distinct concepts. I submit that, although the Pizani principle would ordinarily result in the automatic transfer of accessory security rights to a new lender, a no assignment clause would, depending on its content, render the Pizani principle contractually ineffective. In other words, unless the assignment of the obligors' facility rights and obligations, and the accompanying security rights transfer is consented to by being reduced to writing and signed by the parties, the accessory security rights would, in those circumstances, not follow the assignment of the loan for which the security rights were given.861
While the no assignment clause prohibits the borrower and the other obligors from ceding their rights against the lenders or delegating their obligations under the finance document to third parties,862 the lenders are allowed, subject to stipulated conditions, to transfer their rights and obligations against the borrower and the other obligors to new lenders,863 which facilitates loan syndication. Once implemented, the obligors would be bound to new lenders to whom they will owe obligations originally owed to the initial lenders.
The lenders are further allowed to encumber their rights under the finance documents to secure that lender's third party obligations.864 The lenders can control, through the obligor no assignment clause, the obligors' abilities to trade their rights and obligations in the market because it poses a risk to the obligors repaying and securing the loan. It is submitted that the obligor no assignment clause, the lender transfer clause and the lender encumbrance clause would be acceptable under South African contract law principles as enforceable against the parties as it is aligned with such principles.
Sometimes intra-group assignments by the lender to companies within the lender group occur865 because lenders often need the contractual flexibility to move the loan from its books of account to another group company for accounting reasons. It will only do so if the security can likewise be assigned.
New lenders would want certainty that when they 'purchase' the loan, the security originally given for the loan is likewise 'purchased', as this mitigates the risk of non- payment. The Pizani principle adequately covers this concern. However, where the law prescribes formalities, procedures and registrations that must be complied with in respect of security rights, these will have to be complied with to ensure that the security is legally effective, since legislative registration requirements override the common law.866
861 The LMA's Term Facilities Agreement, Schedule 2 (Form of transfer certificate) contains a note that it is the new lender's responsibility to ascertain whether any documents or formalities are required to perfect a transfer of a share in the existing lender's security.
862 Ibid clause 24.1 (Cessions and delegations by Obligors).
863 Ibid clause 23.1 (Cessions and delegations by the Lenders).
864 Ibid clause 23.7 (Security over Lenders' rights).
865 Ibid clause 23.1 (Cessions and delegations by the Lenders) can be utilised for this purpose.
866 See ss 3(1) and 52 of the Deeds Registries Act, discussed in section 4.9 The realisation of security, which require cessions of bonds to be registered in the relevant Deeds Office; and s 39 of the Financial Markets Act, discussed in section 4.4 The meaning of 'security' in the Insolvency Act, which requires the pledge and cession in securitatem debiti of listed securities to be registered.