South Africa
Generally
No contractual arrangement may breach a legal rule or public policy. Legal rules may be derived from statute or from the common law whereas public policy is a subjective determination made by a judge by taking into account various policy issues, including the spirit and purport of the Constitution of South Africa.
There are a number of rules regarding the charging of interest and penalties. For instance, the in duplum rule states that the amount of interest charged by a lender may not exceed the capital amount of the loan. Further, under and in terms of the Conventional Penalties Act, a creditor shall not be entitled to recover, in respect of an act or omission which is the subject of a penalty stipulation, both the penalty and damages or, except where the relevant contract explicitly provides, to recover damages in lieu of a penalty. A court may also reduce a penalty where it is of the opinion that the penalty is out of proportion to the prejudice suffered by the creditor.
The rights of a creditor may also be limited by application of insolvency, reorganization, business rescue or other similar laws and a creditor may therefore not be able to enforce its rights under a finance agreement to the full extent contemplated therein.
It is important that all financial assistance resolution have been passed as a failure to do so results in the provision of such financial assistance being void. For more information, see Giving and taking guarantees and security – restrictions.
Specific types of lending
Lending to individuals and small corporations which are subject to the National Credit Act requires the lender to take greater precautions in order to ensure that the borrower will not be over-indebted. For more information, see Lending and borrowing – borrower considerations.
Standard form documentation
Most syndicated and large bilateral financing transactions are governed by loan documentation based on the recommended forms published by the Loan Markets Association and which have been tailored to suit the South African market. Documentation developed in-house by the banks is more commonly used for smaller, bilateral finance arrangements.
Are there any restrictions on giving and taking guarantees and security?
Some of the key areas affecting the giving of guarantees and security are:
Financial assistance
When providing a guarantee or security for the obligations a related or inter-related company the guarantor or security provider must be able to comply with the financial assistance provisions and solvency and liquidity requirements as contemplated in the Companies Act. The Companies Act considers the entry into of a guarantee and/or the provision of security for the obligations of a related or inter-related company as the provision of financial assistance. Financial assistance may only be provided if the shareholders of the company, as a first step, have passed a resolution authorizing the provision of that financial assistance, in particular, or financial assistance generally. In order for a company to provide financial assistance, the shareholders of that company must have passed such a shareholder resolution within the preceding two years.
As a further step, the directors of the company will need to pass a separate resolution authorizing the provision of the financial assistance and confirming that the company will comply with financial assistance provisions as contemplated in the Companies Act which require the directors to confirm that:
- the guarantor's/security provider's assets (fairly valued) exceed its liabilities (fairly valued);
- the guarantor/security provider will be able to pay its debts as they fall due for the 12 months; and
- the terms under which the financial assistance is proposed to be given are fair and reasonable to the company.
Distributions
The companies act includes, in its definition of a distribution, the incurrence of a debt or other obligation by a company for the benefit of one or more holders of any of the shares of that company or of another company within the same group of companies. The provision of a guarantee or security by a company in respect of the obligations of a company within the same group of companies would therefore be classified as a distribution. Accordingly, the company providing that guarantee and/or security will need to comply with the applicable provisions of the Companies Act and the directors of that company will need to pass a resolution confirming that, at the time if the provision of such guarantee and/or security:
- the guarantor's/security provider's assets (fairly valued) exceed its liabilities (fairly valued); and
- the guarantor /security provider will be able to pay its debts as they fall due for the 12 months.
Capacity
The guarantor's/security provider's constitutional documents must make provision for that guarantor/security provider to enter into a guarantee and/or provide security for the obligations of a related party or a third party;
Agency
For information regarding the provision of security in favor of an agent, see Lending and borrowing – agency and trusts.
What are common types of guarantees and security?
Common forms of guarantees
The most common type of guarantee in financing transactions is a first demand payment guarantee where the guarantor undertakes to make payment in the event of a default by the borrower.
It is important to ensure that the guarantee creates a principal obligation to pay or perform regardless of the enforceability, validity or legality of the underlying obligation. For more information, see Giving and taking guarantees and security – other issues.
Common forms of security
The most common forms of security are as follows.
Pledge of shares
Perfection requirements include the delivery of share certificates evidencing the shares together with signed, undated share transfer forms where the shares are in certificated form or the noting of the pledge on the account held by the security provider with a central securities depository where the shares are dematerialized.
Cession of rights
All incorporeal rights may be cede in security, provided that the subject of that cession does not expressly prevent the cession of such rights. The most common forms of rights ceded are rights in and to insurance policies and amounts payable thereunder; bank accounts and amounts standing to the credit thereof; key customer contracts; and debtors book.
Mortgage bonds
These provide real security over immovable property and are required to be registered in the South African Deeds Office nearest to where the property is located. This form of security must be prepared and filed by a conveyancing lawyer.
Special notarial bond
A special notarial bond is provided over specified movable assets and is required to be registered in the South African Deeds Office where the security provider's principal place of business is located. This form of security must be prepared and filed by a conveyancing lawyer.
General notarial bond
A general notarial bond is provided over the security provider's movable assets in general and is required to be registered in the South African Deeds Office where the security provider's principal place of business is located. This form of security must be prepared and filed by a conveyancing lawyer.
In relation to the Security SPV structure, also see Lending and borrowing – common structures.
Are there any other notable risks or issues around giving and taking guarantees and security?
Giving or taking guarantees
Guarantees must explicitly state that the guarantee creates a primary obligation and not a suretyship and that the guarantor's obligations thereunder will not be affected by the enforceability, legality of validity of the underlying obligations. A suretyship under South African law creates an ancillary obligation and a defect in the underlying obligation will similarly impact the suretyship. By way of example, if a company is placed under business rescue, the business rescue practitioner is entitled to cancel certain contracts in order to improve the financial position of the company. If the main contract is cancelled, then the suretyship will too be cancelled as it is merely ancillary to the principal obligations.
If the financial assistance provisions of the Companies Act have not been complied with the provision by a company of that financial assistance will be void. Directors may, however, face personal liability, in certain instances, for failing to comply with the financial assistance provisions of the Companies Act.
Giving or taking security
Under, and in terms of, the Insolvency Act, a mortgage bond passed for the purposes of securing a debt that was not previously secured must be registered in the applicable South African Deeds Office within two months from the date on which the debt it is securing is incurred. If registration has not occurred within the aforementioned time period and the security provider is liquidated within six months from the date on which the mortgage bond was registered, the mortgage bond will not secure that debt.
It is also important for the board of directors to have confirmed that the security provider is able to comply with the provisions of the Companies Act relating to financial assistance and distributions (see above) as, upon the occurrence of the liquidation in insolvency of the security provider, a liquidator may consider the provision of the security to have been a voidable disposition and require the creditor to return the assets acquired pursuant to the enforcement of such security.
Jackie Pennington
Partner
DLA Piper South Africa Services (Pty) Ltd
[email protected]
T +27 (0)11 302 0824
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