23 September 2020 by Finance & Banking Alert

Cession in security: Casting the net too widely

In previous articles an analysis of different aspects of the law of cession including its nature (both out-and-out cession and cession in security), a cessionary’s common law obligations, the role of notice to the debtor and obtaining a fair price for ceded rights in security cessions was undertaken. It was stated that in South African law, cession in security of personal rights is based on the common law principle that one debt (the principal debt) can be used to secure the obligation to fulfil another debt (the secured debt).  

In this article, the scope of the ceded right is explored. In a cession in security, the dominium or reversionary interest in the principal debt remains vested in the cedent, who transfers by cession its right of action in that principal debt to the cessionary. A right of action is the legal standing to collect the principal debt. In that context, how widely should the cession in security be scoped? A practice has evolved where lawyers, after describing specific ceded rights in cession agreements, include generic descriptions of the cedent’s rights that are also pledged and ceded in security, by using descriptions such as the cedent pledges and cedes in securitatem debiti ‘all the cedent’s right, title and interest in and to the ceded rights’. Consideration is given to what such generic descriptions might mean and whether it poses any risks to the parties. For example, are all the rights thereby ceded, are fruits of the ceded rights and future rights thereby ceded in security? Much depends on what the parties intended the cession in security to cover. Differing intentions as to the scope of the cession in security could result in litigation.

In Coopers & Lybrand and Others v Bryant 1995 (3) SA 761 (A) the Appellate Division (as it then was) dealt with whether the respondent’s personal damages claim against a third party formed part of rights that were ceded in security to a bank, and was therefore excluded from the claim under which the respondent sought to recover damages. Mr Bryant (respondent), ceded in securitatem debiti all his rights, title and interest to all his book debts, other debts and claims of whatsoever nature, present and future, to the Standard Bank of South Africa Limited (SBSA), as security to repay amounts drawn down under banking facilities made available to him. Unrelated to the cession, he sued his accountants and auditors for damages arising from his reliance on their professional advice that a proposed business venture was financially sound. The accountants contended that the aforesaid cession in security to SBSA divested Mr Bryant of the locus standi to institute the action against them. This resulted in a dispute as to whether the cession in security included his personal claims against his accountants for breach of contract.

The court analysed whether the deed of cession of the book debts was wide enough to include Mr Bryant’s damages claim against his accountants. Applying the principles then applicable to contract interpretation (which principles are beyond the scope of this article), the Appellate Division held that the expression ‘book debts’ undoubtedly referred to the respondent’s trading debts and not his private debts. The parties had intended a cession in security of the respondent’s business’s book debts. His claim against his accountants was a personal claim not covered by the terms of the deed of cession. Accordingly, the respondent had locus standi to institute the claim against his accountants. The issue in Coopers arose from the fact that Mr Bryant conducted business in his personal capacity, and not through a company. The distinction between his business’s book debts and his personal claims therefore had be made.

The broader issue is that the parties to a cession in security should apply their minds to its scope, and not routinely include generic descriptions that the cedent pledges and cedes in securitatem debitiall the cedent’s right, title and interest in and to the ceded rights’ in the cession unless they truly intend it to serve as security. If so, the parties should agree on what those rights are, or the classes of rights, that are thereby ceded. A lender (as cessionary) seeking to enforce its security rights due to a borrower’s failure to repay a loan, would not want its enforcement action to be thwarted with a defence by the borrower (as cedent) that the purported security rights were excluded from the cession in security. Often, such a possible defence tempts the lender’s lawyers to cast the net wide by including the generic descriptions aforesaid. Yet, leaving aside the outcome that contract law interpretation principles may have on such a dispute, therein lies the risk.  

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