6.7 Theoretical issues arising from the pledge theory
6.7.2 Real rights over personal rights
The issue being analysed is whether conceptually one can grant a real right over a personal right. In the pledge theory of cession in securitatem debiti of personal rights,
1249 Ibid 253–254.
1250 See, for example, Bank of Lisbon and South Africa Limited v The Master and Others 1987 (1) SA 276 (A) where one lender held a cession in securitatem debiti of the right of action to the cedent's book debts, and the other lender held a cession in securitatem debiti of the reversionary rights to the same book debts.
1251 Retmil Financial Services (Pty) Ltd v Sanlam Life Insurance Company Ltd and Others [2013] 3 All SA 337 (WCC).
the cedent grants the cessionary a limited real right in its principal debt and the cedent holds the dominium in the right. Case law applying the pactum fiduciae theory has held that the right to the entire principal debt is ceded, whilst case law applying the pledge theory has held that only the right of action or procedural right is ceded. However, granting a limited real right in a personal right is, as explained by critics of the pledge theory, theoretically problematic, given the nature of a personal right; it is the right to enforce conduct by another whereas a real right is the right to a thing.
So, can a cedent confer a real right (a right to a thing) in a personal right (a right to enforce conduct) or is the real right conferred against the proceeds of the principal debt due by the debtor? There are examples in South African law of rights over rights and it can therefore be contended that the concept of rights over rights exists in South African law. One example is in insolvency law,1252 where the effect of a pledge of incorporeal rights, such as the rights to or ownership of shares, a debtors' book or lease rights,1253 is to confer on the holder the rights of a secured creditor. Another example is in property law, where an out-and-out cession by a mortgagee to a new mortgagee of its rights under a bond is permitted, subject to registering such cession in terms of the Deeds Registries Act because the new mortgagee's rights are created in respect of the transferred rights.1254 A further example is in the law of landlord and tenant, where the sub-lease of lease rights is recognised because the sub-lessee has rights over or in respect of the lessee's rights to lease. Reid,1255 for example, states that 'the idea of rights over rights is in fact found in most legal systems, whatever the theoretical status of rights as things'. While the fact that rights over rights exist in other areas of South African law might perhaps be seen as justification for having a real right in a personal right, such justification does not in itself, I submit, deal with the longstanding criticism that it is impossible to have a real right in a personal right, nor does it explain what the cessionary's real right in a personal right is in respect of. The concept of rights over rights is, I submit for reasons that follow, innate in cession in securitatem debiti and does not affect the traditional distinctions between real security rights and personal security rights.1256
One can approach the issue as to whether one can have a real right over a personal right, in other words, a real right over the right to require another to perform, from a different perspective, by enquiring, as Lubbe1257 does, how cession, which is traditionally a complete rights transfer, can be structured so that it displays the characteristics of pledge of a creditor's claim. Lubbe answers the question on two levels.
First, it is necessary to shift the focus from a normal cession (a complete rights transfer) to a cession limited to aspects of the cedent's rights (an implicit premise is that personal rights are divisible as discussed above) in such a way that the cessionary acquires
1252 Insolvency Act.
1253 Reid 'Obligations and Property: Exploring the Border' 1997 Acta Juridica 225.
1254 Deeds Registries Act 47 of 1937. See the discussion in section 4.12 Does cession of a principal debt automatically transfer security given for the principal debt to the cessionary, or must the security be separately ceded?
1255 Reid 'Obligations and Property: Exploring the Border' 1997 Acta Juridica 225 at 232.
1256 See section 4.5 Personal and real security, and the registration of security rights.
1257 Lubbe 'Components of the Creditor's Interest' 1989 THRHR 492–493.
control of the economic value of the right as security. Second, in Dutch law, a creditor's claim is viewed as a bundle of components, such as the ability to release a debtor, to compromise a claim with the debtor, to novate the claim, or to transfer the claim. Such a view is not, Lubbe argues, in conflict with South African law.
The component parts of rights are those recognised in English law, US law and Dutch law. A plausible solution to the criticism that it is impossible in law to have a real right over a personal right is the view held by Lubbe that the real right of pledge is held in respect of the proceeds of the principal debt due by the debtor to the cedent, rather than in the cedent's personal right to require performance (payment) by the debtor.1258 The cessionary therefore acquires a real right to the economic value (the proceeds) of the personal right that serves as security for the secured debt, as opposed to acquiring a real right in the cedent's right to require its principal debtor to perform. If the real right of security is held in the proceeds that arise from the principal debt due, the need to justify the basis in law on which a cessionary can acquire a real right in a personal right falls away. On this construct, the real right operates classically against a thing, namely, the proceeds of the right to the payment of the principal debt. Applying this construct to a syndicate where the lenders hold their security directly and not through a Security SPV, the senior lender will therefore hold, as security, the right of action to the principal debt proceeds, while the mezzanine lender will hold, as security, the dominium or reversionary interest to the same principal debt proceeds. Practically, these security rights are held by the syndicate lenders against a sum of money. Both the senior lender and the mezzanine lender thus hold real rights (their security rights) against the same principal debt proceeds, not against the cedent's personal right to require its debtor to render performance of the principal debt. Here one must separate the right to require performance from the result of that performance, which are the proceeds, to make sense of the concept. However, if the syndicate lenders hold their security through a Security SPV, then it is the Security SPV and not the lenders that holds real security rights against the principal debt proceeds. The impossibility of the relationship between the real right and the personal right to require performance of the debtor has, through the decades, been the principal criticism of critics of the pledge theory, including Brits, De Wet, Scott and Nienaber.
I submit that the proposed divisibility construct whereby a right consists of component parts creates the legal basis on which the cedent can confer a real right in favour of the cessionary, not in its personal right to performance by the cedent's debtor, but rather directly in the proceeds that will result from the principal debtor rendering performance of its obligations. The cessionary acquires a real right in the sense of a right to a thing (the money), while the cedent retains its residual interest therein. I submit that this addresses the criticism that one cannot have a real right in a personal right and acknowledges the component parts of personal rights.
1258 Lubbe Contract: General Principles (2020) 546–547 para 13.73.
6.7.3 The reversionary interest and the right of action: Security under the Insolvency