Security in one form or another is given by people who transact
with each other on a daily basis. The bigger the transaction, the
greater the security required. For instance, parties entering into
a securities lending transaction in terms of a Global Master
Securities Lending Agreement (GMSLA) regularly require security to
be provided by the borrower. Fortunately the Supreme Court of
Appeal has given some certainty on the provision of cessions in
security in South Africa. At about the same time, the South African
Securities Lending Association (SASLA) published a revised Schedule
for parties entering into a GMSLA in terms of South African law.
The consequences of following the advice SASLA received need to be
The Schedule sets out a number of ways for a borrower in a
securities lending arrangement to provide the lender with
collateral. In particular, the Schedule suggests a method whereby,
according to SASLA's external advice, a lender may cede
uncertificated securities in securitatem debiti (forgive
the use of Latin: there is no better way to describe this type of
cession in security) without entering details of the cession in the
borrower's securities lending account (statutory flagging).
A cession is a bilateral act by which an incorporeal right is
transferred from a cedent to a cessionary. There are two types of
cession to choose from namely:
an out-and-out cession in terms of which the ceded right is
transferred completely by the cedent to the cessionary and the
cessionary is obliged to re-cede the right back to the cedent if
the secured debt is discharged.
a cession in securitatem debiti in terms of which the
cedent retains a reversionary interest in the ceded right so that
the ceded right automatically reverts to the cedent to the extent
that the secured debt is paid by the debtor.
For years there has been some debate in South Africa on how a
party who is ceding shares to secure a debt excercises the option
of constructing the security cession as either an out-and-out
cession or as a cession in securitatem debiti. This debate
was resolved by the Supreme Court of Appeal in Grobler v
Oosthuizen (2009) ZA SCA 51. The court made it clear that
parties who intend an out-and-out cession of personal rights must
clearly express an intention to enter into an out-and-out cession
thus transferring full ownership. This intent must appear not only
from the agreement itself but also from the way it is performed.
Absent this clear expression of intention, the courts in South
Africa will assume that the parties intended to enter into a
cession in securitatem debiti. Therefore, an expressly
intended out-and-out cession transferring full ownership of the
right would have to be supported by the parties accepting the
consequences of an out-and-out cession and performing all
obligations in respect of these consequences. The consequences of
an out-and-out cession of securities would include:
the payment of securities transfer tax;
making the appropriate balance sheet entries;
in relation to banks, holding the required capital in relation
to the consequent contingent liabilities;
exposure to the insolvency risk because securities transferred
to a cessionary out-and-out would fall within the cessionary's
estate on insolvency; and
an obligation to pay capital gains tax in certain
The court in Grobler's case reaffirmed that if the cession
is only a cession in securitatem debiti of personal
rights, this type of cession is akin to a pledge of tangible
property. Thus, the cedent of securities in securitatem
debiti retains a reversionary interest in the ceded securities
which means that if the principal debt is paid by the debtor, the
ceded securities automatically revert to the cedent who has given
If the securities are dematerialised, the Securities Services
Act specifies that any cession in securitatem debiti of
the uncertificated securities "must be effected"
through statutory flagging. Any cession in securitatem
debiti of an interest in uncertificated securities not
effected by means of statutory flagging would thus be invalid.
That, therefore, is the clear choice. Anyone pledging
uncertificated shares as security must accept that notice of the
cession as security must be given to third parties by statutory
flagging or if an out and out cession is the real intention, by
transferring the shares to the new owner with all the potentially
adverse and costly risks and consequences.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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