Cession in security of shares

Certificated securities: Does one need to take delivery of share certificates to create a valid cession in security?

No, delivery of a share certificate is not a requirement to create a valid cession. As a general rule the law prescribes no formalities for a cession of certificated shares and the cession is created by consensus between the parties.

In Botha v Fick [1995] (2) SA 750 (A), the court held that no formalities are required for the cession of ownership – mere consensus is sufficient to establish a cession. The legal duty resting on a registered shareholder of a company who has sold their shares to deliver a share certificate and a completed share transfer form to the purchaser arises from the obligatory agreement (between the parties) and is not a requirement for the validity of a cession whereby the right and title to the shares are transferred. The court further explained that the rule referred to in Labuschagne v Denny [1963] (3) SA 538 (A) – that “where a right of action is evidenced in a document, delivery of the document to the cessionary is necessary, not for the validity but for the completion of a cession of that right of action” – is not a rule of substantive law and it does not establish any requirement for the validity of the cession. This rule amounts only to a matter of evidence wherein delivery will be considered to be an important factor where the question arises as to whether or not the cession has been proved.

Uncertificated securities: What is the procedural requirement to create a valid cession in security of uncertificated shares?

Uncertificated securities are defined in section 1 of the Companies Act 71 of 2008, read with section 1 of the Financial Markets Act 19 of 2012 (Financial Markets Act), as securities that are not evidenced by a certificate or written instrument and that are transferable by entry without a written instrument. There is therefore no share certificate that can be delivered to effect a cession.

While delivery of a share certificate is not a requirement for validity, as explained above, it may still be vital evidence of a cession. In order to address this, section 39 of the Financial Markets Act provides that a cession to secure a debt must be effected by entry into the account of the cedent in favour of the cessionary, specifying the name of the cessionary, the interest in the securities ceded and the date. This will ensure that the security interest is effective against third parties.

In this respect securities account administrators are often provided with a written notice of the security interest being created and request a signed acknowledgement and confirmation that the interest has been noted against those particular uncertificated shares.

Cession of bank accounts

Does one need to adopt any perfection process to create a valid cession in security of bank accounts?

No, there are no specific requirements or formalities prescribed for establishing a cession in security over a bank account. As is the case with a cession in security of certificated shares, consensus, usually in the form of a valid cession in security agreement, alone is sufficient to establish the security.

We often request a signed notice from the cedent to the account bank notifying them of a particular cession and a signed acknowledgement from the account bank, acknowledging the security interest created over the particular bank account(s). A notice and acknowledgement in this instance is made for purposes of protecting the cessionary against any loss that it may incur in cases where the account bank renders performance to the cedent instead of the cessionary in cases of default.

Cession of book debts

Can one cede both existing and future book debts?

Yes, the cession in security of book debts can extend to both existing debts and debts which may arise in the future. Generally, a cession in security of this nature would be worded so as to endure for as long as the obligation for which the cession acts as security exists, ensuring that the cedent has the right to claim and receive until such time that the debt is satisfied.

In practice, the debtor of the book debt must be notified of the cession in security to ensure that, upon notice of default, payment is made to the cessionary, and not inadvertently received by the cedent. If the cession results in a splitting of claims, i.e. if the book debt is ceded to a consortium of lenders who are not acting through a single lender, then the written consent of the debtor is required.

Cession of insurance proceeds

Does one need to adopt any specific perfection process to create a valid cession in security of insurance proceeds?

The conclusion of a valid cession in security agreement to establish a security interest over insurance proceeds requires certain free choice provisions, as contained in section 43 of the Short-Term Insurance Act 53 of 1998 (Short-Term Insurance Act), to be included in the cession in security agreement for it to not be void (except in cases where money is loaned upon the security of the mortgage of immovable property).

Each cedent needs to be provided with notice of their entitlement and rights under section 43 of the Short-Term Insurance Act and to then confirm that they have exercised their freedom of choice and that they were not subject to any coercion or inducement as to the manner in which that freedom of choice was exercised. We often include the notice and confirmation requirement in the security agreement itself.

While there are no specific perfection requirements or formalities prescribed for validity, we often request that a signed notice be sent to an insurer from the cedent and for a signed acknowledgement, together with confirmation of noting of the cessionary’s interest on an insurance policy to be returned. This facilitates enforcement as it serves as evidence of the cession and ensures the co-operation of the insurer at enforcement as a means of protecting the cessionary against any loss that may be incurred by way of the insurer rendering performance to the cedent instead of the cessionary in cases of default.

It is worth noting that in cases where the underlying insurance policy requires the consent of the insurer to effect any security interest, such consent will be required for the creation of a valid cession, and in cases where the security cession amounts to a splitting of claims, then the insurer’s consent is required.