CMS Expert Guide for taking security in South Africa

Yes. If the guarantor is a company and the beneficiary is a related or interrelated person, the financial assistance requirements under sections 44 and/or 45 of the Companies Act, 2008 need to be complied with (see paragraph 4 below.) 

Guarantees may be granted by individuals with full and undiminished capacity. When taking a guarantee from a married individual, spousal consent may be required, depending on the applicable marital regime.

No.

No.

Yes (see paragraph 4 below).

Yes (see paragraph 4 below).

Yes (see paragraph 4 below).

Financial Assistance

Section 44 of the Companies Act, 2008 regulates financial assistance given by a company in the form of a loan, a guarantee or the provision of security to any person for the purpose of, or in connection with, subscribing for any option or securities, issued or to be issued by the company or a related or inter-related company or for the purchase of any securities of the company or any related or inter-related company. 

Section 45 of the Companies Act, 2008 regulates financial assistance given by a company to a related person or a director thereof, or an inter-related person (as defined) including the lending of money as well as guaranteeing or securing obligations. 

To authorise the provision of financial assistance in terms of both sections 44 and 45, the board of directors must pass a resolution and be satisfied that:

• immediately after providing the financial assistance, the company will satisfy the solvency and liquidity test (as set out in section 4 of the Companies Act, 2008);
• the terms relating to the financial assistance are fair and reasonable to the company; and
• any conditions or restrictions on the granting of financial assistance set out in the company's memorandum of incorporation have been satisfied. 

Financial assistance cannot be authorised unless it is pursuant to:

• an employee share scheme that satisfies the requirements of section 97 of the Companies Act, 2008; or
• a special resolution of the shareholders, adopted within the previous two years, which approved the assistance either for the specific recipient of the financial assistance, or a category of potential recipients into which the specific recipient falls. 

Ordinarily, a special resolution of the shareholders will be required. The special resolution must be passed before the relevant board resolution, as financial assistance is not capable of ratification. 

Failure to comply with sections 44 and/or 45 may render the financial assistance void and the directors of the guarantor may be held personally liable for the failure to comply with sections 44 and/or 45. 

Distributions

In terms of the Companies Act (2008), a distribution includes a company incurring a debt or other obligation for the benefit of one or more shareholders of the company, or of another company within the same group of companies. 

Should a guarantee and/or other security constitute a distribution, then section 46 of the Companies Act (2008) must be complied with. The directors of the guarantor must pass a resolution confirming that, at the time of making the distribution in the form of the provision of the guarantee and/or other security, the company will satisfy the solvency and liquidity test immediately after making the distribution.

There are no formal requirements for the execution of guarantees. 

The validity and enforcement of a guarantee is subject to applicable financial assistance rules (see paragraph 4 above).

Yes, a guarantee/security provided to a creditor can secure future obligations with the same creditor or future creditors under the same facility; however, to the extent any change is made to the quantum or duration of the debt secured, financial assistance approvals must be refreshed (see item 4 above).

Guarantees under South African law create separate principal obligations and are not dependent on the validity of the secured debt. Other security (including cession, cession and pledge and suretyship) creates accessory obligations and are dependent on the validity of the underlying principal obligation, and, therefore, any defect in the validity of the underlying obligation will impact the enforceability of the security. Accordingly, a guarantee is a preferable and a stronger form of security under South African law than a suretyship. 

Indemnities are recognised under South African law as creating principal obligations, which are capable of being secured. Indemnities are commonly used in the security SPV structure (see paragraph 10 below.)

Yes, a guarantee and other security can be continuing.

Yes (see paragraph 15 below).

South African law does not recognise the concept of the security trustee or the use of security agents as security may only be granted for a valid principal obligation (not an accessory obligation) owing by the security provider to the creditor(s). Moreover, registerable security (e.g. mortgage bonds, special notarial bonds, and general notarial bonds) cannot be registered in favour of a security agent or security trustee in terms of section 54 of the Deeds Registries Act, 1937. For security to be granted in favour of a security trustee or a security agent, a parallel debt obligation owing by the security provider to the security trustee or security agent must be created, for which parallel debt obligation is equivalent to the principal obligation owed to the creditor(s). 

In South Africa, in transactions in which there are multiple creditors, it is common for a company in the form of a special purpose vehicle (security SPV) to be established to serve as the holder of security granted by the security provider. The security SPV is typically owned by an independently owned trust. The security SPV will provide a guarantee (known as a debt guarantee) to the creditors for all of the secured obligations of the security provider, which in turn will provide an indemnity to the security SPV for any claims made by the creditors against the security SPV under the debt guarantee.

In the case of security held for the benefit of the creditors via a security SPV, and provided the relevant definitions in the security documents are sufficiently broad to cover changes to the parties to the credit agreement, no formalities need to be observed. In the event that definitions in the security documents require amendments, an addendum may be required. In the case of security held by a single creditor directly, a guarantee or other security agreements typically have a cession or transfer clause that states that the secured creditor may cede or assign their rights under the agreement, subject to agreed terms. 

While not a legal requirement for a valid cession and delegation of the rights and obligation under the security documents to the new creditor, notice of such cession and delegation should be provided to the security provider and acknowledged by the security provider in writing. 

With regard to registered security (including mortgage bonds, special notarial bonds or general notarial bonds), the secured creditor can cede or transfer the rights under the bonds by registering the cession with the relevant Deeds Registry.

Changes to the guaranteed/secured obligations must be reflected, where relevant, in amendments to the credit agreement in either an addendum or an amended and restated credit agreement, as well as in changes similarly effected to the terms of the guarantee or other security agreement. 

With respect to changes to the principal debtor, guarantees or other security agreements typically have a cession and delegation clause that will stipulate whether or not obligors can cede or transfer their obligations. The clause may provide that the security provider cannot cede their security obligations without written consent from the secured creditor. If the cession occurs without the required consent, the security provider would be in default.

Under South African law, contracting parties have a choice of law. However, certain exceptions exist, including that, in order to establish a valid security interest in an asset, that security interest must be governed by the law of the place where the asset is situated (lex situs). Therefore, South African law will apply to agreements creating security interests over assets located in South Africa.

Foreign judgments are recognised and enforceable under the following conditions:

• the foreign court had jurisdiction to preside over the matter in accordance with the principles recognised by South African law with reference to the jurisdiction of the foreign court;
• the judgment is final and conclusive in its effect and has not become outdated;
• the judgment would not be contrary to South African public policy;
• the judgment was not obtained fraudulently;
• the judgment does not involve the enforcement of a penal or revenue law of the foreign state; and
• the enforcement of the judgment is not precluded by the provisions of the Protection of Businesses Act,1978 (PB Act). The PB Act further requires that the consent of the Minister of Trade, Industry and Competition is obtained before certain foreign judgments can be enforced in South Africa. The South African courts have interpreted the ambit of the PB Act restrictively and the current market view is that the ambit of the PB Act would appear not to include loans from, or guarantees to, foreign lenders. 

South Africa is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. In terms of section 16 of the International Arbitration Act, 2017 ("International Arbitration Act") a foreign arbitral award is recognised as required by such Convention and will be made an order of court upon application and then enforced in the same manner as any judgment or court order granted in South Africa, subject to Chapter 3 of the International Arbitration Act.

Yes. A guarantee provided by a South African security provider in favour of a foreign entity is subject to exchange control approval from the Financial Surveillance Department of the South African Reserve Bank. The application for approval is made by the South African security provider through its authorised dealer in foreign exchange, such as its commercial bank. The approval process generally takes between four and six weeks, subject to certain exceptions.

There are no hardening periods in respect of guarantees or non-registrable security under South African law. In terms of section 88 of the Insolvency Act (1936), if a bond is not registered in the relevant Deeds Registry within two months from the date it was executed, the bond shall not grant any preference in favour of the secured creditor should the borrower be sequestrated or liquidated within a period of six months after lodgement of the bond. As a result, the secured creditor would not have a right to payment of the secured claim out of the proceeds of the secured assets of the security provider's insolvent estate in preference to the claims of concurrent creditors.

A general notarial bond is a form of floating security applicable to movable assets. It however does not create security until it is perfected following a court order and attachment of goods covered by the general notarial bond. 

Incorporeal assets, which are secured under a cession in security, are often included in the same agreement. This is, however, a practical accommodation and not in the nature of floating security. 

Yes, subject to the same considerations as discussed in item 4 above.

Only mortgage bonds, general notarial bonds and special notarial bonds are notarised.

Mortgage bonds over real estate, general notarial bonds and special notarial bonds must be registered at the relevant Deeds Registry. 

Hypothecs over registered designs, trademarks and patents must be lodged with the relevant Registrar.

There is no legal requirement for a contract to be executed in local language. It is common practice to have agreements in English.

Yes, in relation to registrable security.

Security generally follows a first in time first in law approach. Security created by mortgage bonds, special notarial bonds, cessions in security and pledges creates a first ranking security in respect of the assets covered by them. 

With respect to insolvency proceedings, foreign creditors have the same rights as local creditors, but this does not affect the local ranking provisions. The claims of foreign creditors do not rank lower than those of non-preferent creditors. 

In respect of registrable security, medium complexity. Searches can be conducted to establish the existence of registrable security.

In respect of non-registrable security, medium to complicated. No register exists in relation to this security and, accordingly, a secured creditor will be, reliant on disclosure by the security provider of any existing security interests.

Security documents other than mortgage bonds, general notarial bonds and special notarial bonds can be executed by way of e-signing. 

The Deeds Registries have publicly available and online access to mortgage bonds, general notarial bonds and special notarial bonds. 

There are no public registers for guarantees, cessions in security, pledges and other non-registrable security.

Registration of bonds is done by the security provider, however, as a matter of practice, the secured creditor will require a power of attorney to register the bond on behalf of the security provider.

In respect of registrable security only, a search in the Deeds Registry’s records can be done online as well as physically at the relevant Deed’s Office should the records not be found online. 

There are no registers for guarantees, cessions in security, pledges or other non-registrable security.

The costs for the preparation, lodgement and registration of bonds and costs to cancel bonds can be significant. The costs of registration of registrable security are based on the prescribed tariff, which is a percentage of the value for which the security is to be registered, on a sliding scale. This can be a significant amount, however, most conveyancers will, as a matter of practice, offer a discount against the tariff rate. The current turnaround time at the Deeds Registry for registering bonds is between three and four weeks, depending on the number of bonds and linked transactions. 

With respect to registered intellectual property, nominal registration fees are payable for hypothecations. An updated pricelist for registering the hypothecation of intellectual property rights can be found on the website of the Companies and Intellectual Property Commission and the costs range between R60.00 and R590.00.

Notaries can charge fees for bond preparation in accordance with a prescribed tariff. This tariff determines a fee based on the amount secured by the bond on a sliding scale, with the starting amount charged being between 0.8% and 1.9% of the secured sum. 

As indicated in paragraph 27.1 above, most notaries will, as a matter of practice, offer a discount against the tariff rate.

In respect of a general notarial bond, the secured creditor will be required to make an application to court in order to perfect the security interest. The costs of such an application will depend, among others, on the legal counsel appointed. 

Similarly, where the assets secured under a special notarial bond are not capable of being taken into the possession of the secured creditor, an attachment by the sheriff is required in terms of a court order.

Yes.

Yes, any non-performance of the principal agreement, as agreed by the parties.

Yes, any non-performance of the security agreement, as agreed by the parties.

Yes, as agreed by the parties.

The right to enforce security will arise in those circumstances which are contractually agreed between the parties.  These may typically include cross-default of any other indebtedness of the borrower or security provider, commencement of legal proceedings, cessation of business, material adverse effect/change, audit qualification, etc.

No. There is no mandatory period.

Certain forms of security, like security granted through a pledge, cession in security, or special notarial bond, allow the secured creditor to sell, whether by private treaty or public auction, or take-over the secured assets and use the proceeds to discharge the principal obligation without first obtaining a judgment against the security provider.

Yes, ordinarily this must be done at fair value, which may, in the absence of agreement between the parties, be subject to independent valuation.

Yes; sale by private treaty must be done on notice of not less than ten business days to the security provider at fair value, which may, in the absence of agreement between the parties, be subject to an independent valuation. The ability of a creditor to take over a borrower's assets without first obtaining a court order is referred to as parate executie. 

As long as the security provider is not prejudiced, a parate executie arrangement pertaining to movables pledged and delivered to the secured creditor is enforceable. This kind of agreement, however, is void with regard to security over immovable property and secured assets that are not in the secured creditor's control when the creditor intends to exercise its rights.

N/A.

Yes, the secured creditor may appropriate amounts standing to the credit of secured bank accounts or receive amounts in respect of secured debts, receivables or insurance policies.

In the case of a general notarial bond covering all the assets of an individual or organisation, the secured creditor must first obtain possession of the secured assets, typically through an order from the High Court of South Africa's Sheriff. Following that, the secured creditor may sell the assets and use the money received to pay down the outstanding debt. 

Enforcing mortgage bonds and general notarial bonds will always require a court order, as will special notarial bonds where the secured creditor is unable to take possession of the secured asset(s). 

In order to enforce security, modest fees must be paid to the court's sheriff in the event that the sheriff must attach property. 

If the debtor is in business rescue, the enforcement of the debts through a forum such as a court will need the consent of the business rescue practitioner.

Fairly easy, balanced and average, but quick for some types of security, e.g. bank accounts and receivables where parate executie is available (see paragraph 30.2 above). 

No. The laws in the area are well established and rarely changed.