Article by Loren Burton

Senior Associate

 

In this article we discuss cessions and pledges as forms of security.

Cessions and pledges are forms of security over movable property. A cession is an agreement between two parties in terms of which rights in respect of movable property are transferred, while a pledge is a limited real right (a real right held by a non-owner in the property owned by another and is thus limited) in relation to movable and incorporeal property.

 

Cessions:

As stated a cession is an agreement between two parties, the Cedent (transferor) and the Cessionary (transferee) in terms of which rights are transferred. A cession does not need to be in writing, but if it is, then the parties to the cession can agree on the terms of the cession and ensure compliance with the agreed terms.

 

By way of a practical example – X is owed money by Y in terms of a loan agreement, X wants to borrow money from Z, but Z requires some type of security for the loan. X then indicates to Z that they are owed money from Y in terms of a loan agreement and that they are prepared to cede their right to payment from Y to Z. Z is satisfied with this proposal and the parties then enter into a cession agreement in terms of which Z is then entitled to payment from Y for the monies owing by Y to X. This is an example of a simple cession. Matters may become more complicated where a security cession is entered into. A security cession is used to secure interest in the cedent’s personal rights to money in bank accounts, shares, insurance policies etc.

There are some exceptions to what can be ceded between parties; for example there is a statutory restriction on pension funds being ceded, sometimes written authority is required for a cession to be valid and a cession which goes against public policy will generally be void.

It is important not to overlook the obligations imposed on a cessionary, there needs to be a clear understanding of the obligations in relation to the ceded rights. A cessionary must preserve, take care of and protect the cedent’s interests in the ceded rights. If a cessionary does not properly understand its obligations they may end up having to pay damages to the cedent, which is a situation which should be avoided.

A cession can be a very useful method of securing a debt, however if not properly understood by the parties it could lead to unwanted obligations or a claim for damages. It would be advisable to approach our offices for assistance in entering into a cession agreement to ensure the desired outcome between the parties.

Pledge:

A pledge is a limited real right in relation to movable and incorporeal property. Someone may therefore pledge a right over movable or incorporeal property to secure an obligation. The parties to a pledge are called the Pledgee (the person to whom the pledge is given) and Pledgor (the person providing the property as security).

Once there has been an agreement between parties about a pledge, the pledge is then created when the asset over which a pledge has been agreed, is delivered to the Pledgee by the Pledgor. Once the pledged item is in the possession of the Pledgee, the asset is not for the use and enjoyment of the Pledgee, but rather only as a form of security against the obligation of the Pledgor. In other words, should the Pledgor not fulfil their obligation, the Pledgee may enjoy the proceeds of the asset, which was pledged, the Pledgee also has a preferent claim to the pledged item above other creditors of the Pledgor.

A valid pledge must meet the requirement that the parties intended to grant security over the asset in lieu of performance of an obligation, and the general requirements of a valid contact must also be met, however this type of agreement does not need to be in writing.

 

If the Pledgor does not meet their obligation, the Pledgee may then sell the pledged item to recover what is owed to them by the Pledgor. It is important to note that it is not always as easy as just selling the Pledged item and sometimes it is necessary to obtain a judgement through court before selling the asset.

A Pledge can be a very useful mechanism for securing a debt, the fact that the pledged asset must be delivered to the Pledgee ensures a preferent claim over the item. If a pledge is correctly entered into it can in some instances allow the sale of the pledged asset without first going through the courts to obtain a judgment. It is therefore advisable when a pledge is contemplated to record its terms in writing as then there can be uncertainty as to the parties rights and obligations vis-a-vis each other.

Conclusion:

Whether it would be better to rely on the security provided by a cession or a pledge would be determined by the circumstances of each situation.

We are able to assist you in assessing the situation and advising you on the best option to follow and ensure that you can quickly remedy any default which may arise.

For any further information on this topic or for any assistance in respect of preparing a cession or pledge please contact us on 041 396 9254.

Knowledge