CESSIONS OF BOOK DEBTS: IMPORTANT DISTINCTION

This is an article exploring the judgement handed down by the South African Supreme Court of Appeal in Engen Petroleum Ltd v Flotank Transport (Pty) Ltd on 21 June 2022.

Windsharp became indebted to Engen under a supply agreement.

As security for the Windsharp’s money debt to Engen, Windsharp ceded (to Engen) a claim to payment which it had against Flotank.

Windsharp was placed in liquidation.

Engen notified Flotank of the security cession and demanded that Flotank pay it direct. Flotank however disregarded Engen’s notice and made nine payments to Windsharp in respect of the ceded debt.

Engen applied for an order that Flotank pay Engen the nine amounts it had paid to Windsharp.

Flotank opposed the application claiming that when Windsharp was liquidated, Windsharp’s claims against Flotank (those ceded to Engen) vested with Windsharp’s liquidators and that Engen could therefore only claim against Windsharp’s liquidators as a secured creditor.

The Supreme Court distinguished between a pledge cession and an outright cession.

In a pledge cession it is only the right to claim payment of a debt that is ceded. If the ceded claim is worth R1m for example, and the creditor’s claim (Engen) is R600,000, the debtor (Flotank) must pay R600,000 to the creditor and the balance of R400,000 to the cedent (Windsharp).

In an outright cession the ownership and right to claim payment are ceded. If the ceded claim is worth R1m for example, and the creditor’s claim (Engen) is R600,000, the debtor (Flotank) must pay R1m to the creditor and nothing to the cedent (Windsharp), it is the creditor that pays the balance to the cedent.

It remains open to the parties to the cession to structure it either as a pledge or as an out-and-out cession and the type of cession adopted is to be determined by reference to their clear intention.

The Supreme Court held that:

(1)        from the wording of the cession, the parties’ express intent was to achieve an out-and-out cession;

(2)        therefore the debt ceded by Windsharp was an asset in Engen’s estate; and

(3)        Flotank was obliged, on receipt of notice of the cession, to make payments to Engen and not to Windsharp. 

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