Rectification of security cession agreements: How far does it go?

The provision of security is imperative for most transactions in finance. Various types of security exist, one of them being a “cession in security”, which forms the basis of what follows. A cession in security typically creates security interests in the cedent’s personal rights to book debts, moneys in bank accounts, insurance policies, shareholder claims, etc. but what happens when it emerges that the cession in security agreement incorrectly describes the security’s beneficiary? This was the question considered by the Supreme Court of Appeal (SCA) in Prevance Bonds (Pty) Ltd v Voltex (Pty) Ltd (58/2022) [2023] ZASCA 40 (31 March 2023).

20 Apr 2023 3 min read Finance & Banking Alert Article

At a glance

  • The Supreme Court of Appeal (SCA) considered a case involving the incorrect description of a beneficiary in a cession in security agreement in Prevance Bonds (Pty) Ltd v Voltex (Pty) Ltd.
  • The court discussed the concept of rectification of a written agreement to align it with the true intention of the parties, based on a common mistake.
  • The SCA ruled that rectification was justified in this case, as it aimed to correct the recordal of the security cession without disturbing the rights of other creditors in the liquidation process. The case highlights the importance of careful drafting in security cessions to avoid future disputes.

In January 1999, First Strut (RF) Limited (First Strut) applied for a credit facility from Voltex Proprietary Limited (Voltex 2) for purposes of buying goods from Voltex 2. The form used for the credit facilities application (application form) contained a security cession clause (security cession) and also happened to be a form which was previously used by Aberdare Cables SA (Pty) Limited (Voltex 1) for a similar credit facilities application by First Strut in a previous transaction.

In 2013, First Strut was liquidated, and this prompted Voltex 2 to submit its proof of claims as a secured creditor to the liquidators. The liquidators accepted that the claim was secured by the security cession. Three years later, Prevance Bonds Proprietary Limited (Prevance), another of First Strut’s secured creditors, objected to the liquidation and distribution account under section 407 of the Companies Act 61 of 1973. It then emerged that the security cession incorrectly reflected the registration number of Voltex 1 instead of the registration number of Voltex 2. Anxious to avoid losing its status as a secured creditor, Voltex 2 applied to the High Court for rectification of the recordal of its registration number on the application form. The High Court granted the application, but Prevance appealed the decision.

The SCA was asked to decide whether Voltex 2 had provided sufficient evidence to sustain a claim for rectification of the security cession in motion proceedings, and whether it was competent to order rectification of a document after the coming together of creditors (concursus creditorum).

The SCA explained that rectification of a written agreement is an available remedy to parties where a written agreement does not reflect the true intention of the contracting parties through a common mistake.

With reference to Spiller and Others v Lawrence [1976] (1) SA 307 (N), it held that rectification does not amend the agreement between the parties, as that would amend their common intention and in effect devise a fresh pact for them. The aim is instead to bring the written document in line with the actual original consensus of the parties. The SCA further held that a third party may not interfere in the terms and conditions contained in an agreement between two parties as the agreement is between the parties involved alone and its terms operate between them and no one else. As a result, it dismissed Prevance’s application on that point.

On the second issue, the SCA accepted that a concursus creditorum effectively freezes the rights of creditors as at the time a winding-up order is issued. But it rejected Prevance’s argument that rectification would enable an otherwise unsecured creditor to establish a secured claim and thus unlawfully disturb the concursus creditorum established by liquidation. This was because from January 1999, there existed an enforceable claim which the security cession intended to secure, and about which the parties had agreed. The only trouble was that the written document, in the form of the application form, had misrecorded Voltex 2’s registration number as creditor and cessionary. Since the issue was the recordal of the security cession and not the contents of the security cession itself, the document could be rectified without offending the concursus creditorum.

The case presents a cautionary tale to all parties intending to incorporate security cessions in financing transactions. It invites greater care to every detail in the drafting process if parties are to avoid unnecessary litigation upon liquidation or escalation. Nevertheless, the SCA has reminded us that the courts will not take an overly formalistic view to the rectification of finance documents if the parties can show that they had a common intention which was not properly reduced to writing due to a common mistake.

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