Taking security over a South African bank account as a workable option for a foreign lender
Given the political and economic uncertainty in South Africa, foreign lenders are becoming increasingly focused on the type of security available in South Africa to secure their loan exposure when closing funding transactions with South African borrowers.
Unsurprisingly, the lending environment in South Africa has become complex. Leaving aside commercial considerations such as pricing, the maturity term of the loan and the economic health of the sector or market in which the funding is being considered, pertinent questions typically arise around the lender’s ability to take valid security under South African law for the loan funding.
When an international element is added to the funding transaction in the form of an international lender taking security in South Africa, the transaction can become even more complex.
The reason for this is that additional factors and regulatory considerations weigh in on the legal structuring of a cross-border funding transaction and the security to be taken in respect of that funding.
A thorough understanding of the type of security that is available under South African law can give foreign lenders much-needed peace of mind and protection in a default scenario.
Where a non-South African party is the lender in a cross-border transaction, a typical concern raised will be the type of security that this lender can validly and legally take under South African law.
Related concerns are what law needs to be applied to the security documents and how the lender can go about enforcing the security in the South African courts in a default scenario.
In this context, a regular question asked by international transaction parties is whether one can take valid security over a South African bank account.
Under South African law, a security interest over a bank account generally takes the form of a cession in security in favour of the lender (the cessionary) over all the rights, title and interest in and to the bank account that the borrower (cedent) has.
The legal nature of a cession in security has been the source of much debate among legal commentators in South Africa in recent years. It is now widely accepted, however, that the cession in security takes the same construction as a pledge.
This means the creditor receives the limited right to realise that security should the debtor default. Meanwhile, the debtor retains ownership of the asset (practically, the rights to transact on the pledged bank account and the funds credited to that bank account) and the right to again realise that asset once the underlying debt has been discharged.
There are five legal requirements for the valid creation of a cession in security under South African law:
The borrower must be entitled to cede the personal right, as the holder of such right;
The personal right must be capable of cession (note, personal rights in bank accounts are capable of cession under South African law);
There must be agreement and clear intention between the borrower and the lender to transfer such rights as security for an underlying debt;
No formalities are required for a cession to be valid; all that is required is for the intention of the parties to cede the rights to be clearly expressed; and
Consent of the borrower is not required, but the cession of the right must not result in prejudice to the borrower.
For a pledge to be perfected under South African law, physical delivery of a movable asset is required. In turn, for a cession in security to be perfected under the law, there are only two requirements: an express agreement between the borrower and the lender, and an intention to create the security.
In the event of the borrower’s insolvency, the lender will be a secured creditor in the insolvent estate of the borrower in accordance with the Insolvency Act, 1936. This also means that as long as the security cession is in place, a default is triggered if the borrower delegates the rights, title and interest in the bank account, unless the lender consents in writing to such cession and delegation.
In conclusion, a security cession over the bank account of a borrower affords a foreign lender real security under South African law and protection in a default scenario.