Cession by Agent of Future Commission to Secure a Debt or Guarantee

Agreement of cession between agent and guarantor being a bank, whereby rights to claim have been ceded.

Cession refers to, in essence, the “formal giving up of rights” or “the act of relinquishing one’s right”. In South African law a formal agreement is required between the parties in terms of which the cedent agrees to transfer a right, which the cessionary in turn accepts. Cession could take various forms in law.

A cession in security of a debt leaves a reversionary right with the cedent. This means that should the cedent pay the cessionary in full, the ceded debt (or what is left of it) reverts to the cedent.

If accounts are, for example, ceded to a third party, the cedent would lose all control over such accounts until they are ceded back, if applicable. The cessionary would then be able to collect the outstanding accounts from debtors.

There are two types of cession:

• an out and out cession; and
• a pledge and cession in securitatem debiti.
An out and out cession is where the cedent divests and transfers its rights against its debtor to the cessionary so that the cessionary becomes the owner or holder of the rights. The cessionary thereby becomes the new creditor of the debtor, who must henceforth render performance to the cessionary. In this type of cession, the rights leave the cedent’s estate and vest in the cessionary’s estate.

A pledge and cession in securitatem debiti (known as a cession in security or a security cession), is where the cedent pledges or encumbers its personal rights against its debtor and transfers such rights to the cessionary to secure the fulfilment, by the cedent or a related party, of an obligation owed to the cessionary.

A security cession is typically used to create a security interest in the cedent’s personal rights to book debts, moneys in bank accounts, insurance policies or shares.

The ceded rights arise from the contract between the cedent and its debtor and is known as the principal debt. The obligation is typically the repayment of a loan or the payment of a price for goods sold or services rendered and is known as the secured debt as security is provided for the debt.

The essentials of the cession are the following:

• a description of the parties;
• the obligatory agreement:
(i) a description of the subject matter, that is, the rights being ceded.
(ii) a description of the principal debt, or the creation of the principal debt.
(iii) the agreement to cede and statement of the causa - an agreement to cede as security for the principal debt.

• The Transfer agreement (also referred to as The Deed of Transfer);
(i) A statement that the document constitutes an actual cession and the cause underlying the cession;
(ii) A provision relating to delivery of the documents of title;
(iii) A provision relating to notice to debtors concerning the cession.
• The following constitute non essentials of a cession, but the commercially required terms of the cession (thus forming part of the obligatory agreement):
(i) default and recovery provisions;
(ii) disclaimer by cessionary in respect of loss provision;
(iii) continuing cover provision;
(iv) a certificate of indebtedness provision;
(v) cession of the so called “reversionary rights” provision;
(vi) inspection of records and furnishing of details provision;
(vii) a severability clause;
(viii) a general clause dealing with such matters as non-waiver of rights, domicile addresses and costs.

Future assets

We distinguish in law between non-existent rights and future rights. A future right is a right which does not exist on the cession date, but which may come into existence. Our law permits the cession in security of future rights. To create genuine security in an asset, the asset must be delivered, or deemed to be delivered, to the creditor. For intangible assets, it is now generally accepted that rights to future intangible assets can be granted as security.

However, when dealing with immovable assets, or intangible movable assets, at best there can only really be an undertaking by the debtor to deliver the asset (or procure the registration of a bond over the asset) once that asset is in its possession. This undertaking is nothing more than a contractual undertaking, which affords no real security.

A general notarial bond can be passed over all present and future movable property, but until the property is attached and taken into the possession of the creditor, no real security is created.

Intangible assets present difficulties regarding the granting of security. A person’s right to grant security over an intangible asset can be restricted by common law, by agreement and by statute. Under common law the principal restrictions on a person’s right to cede an intangible asset are that:

• A third-party debtor’s position cannot be burdened by the cession. Therefore, a cession of a portion of a debt is not valid without the third-party debtor’s consent.
• A cession which deprives a third-party debtor of a right of set- off is invalid if the debtor and the creditor have acted in bad faith to deprive the third-party debtor of the right of set-off.
• Purely personal rights are incapable of cession (for example, the rights of partners against each other), as are rights under employment contracts.