Pledge and Cession under South African Law
There are various different ways in which an asset may be transferred under South African law.
Pledge: A pledge creates a real right over tangible movable property. The asset is placed in the possession of the pledge holder or secured party. In the case of cash, the pledge giver sets up a custody account in the name of the pledge holder. The pledge holder must retain possession of the asset, and is unable to use the asset or fruits of the asset. The pledged assets must also be segregated from other similar assets that the pledge holder has.
Cession in securitatem debiti: This is a transfer of possession of intangible movable property. Title to the property does not transfer and remains in the transferor’s estate.
Out-and-out cession: Title to the asset is transferred, subject to the right of the cedent to have the property transferred back to it by the cessionary, once the debt obligation is discharged.
In a bankruptcy scenario, the rights of creditors become crucial in determining what rights one has to an asset that has been transferred by one of the three methods above.
A secured creditor gets paid from the sale of the asset over which they hold security (less any expenses which may be incurred to maintain of or dispose of the asset). If a secured creditor’s claim cannot be satisfied from the sale of the asset, they will rank as a concurrent creditor.
A preferred creditor is a creditor who does not have a secured claim, but ranks above a concurrent creditor. A preferred creditor is paid from the proceeds of unencumbered assets (as liquidated in the order set out in the Insolvency Act).
A concurrent creditor is paid from the remainder of the residue of the estate once the preferred creditors have been paid.
These legal principles become key when dealing with collateral in terms of the Credit Support Annexes in derivatives trading, and in the Global Master Securities Lending Agreement and Global Master Repurchase Agreement in securities lending and repurchase transactions.
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