Issues to consider When Using Cession of Book Debts

Published: 18th July 2010
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One of the more common forms of security used by commercial creditors is the cession of book debts.

A cession is the act by which a person/entity (known as the cedent) transfers their personal right to another (known as the cessionary). By signing a cession of book debts a debtor therefore agrees to transfer to the creditor the right to claim money that is or may become due and owing to the debtor by their debtors.

The clear advantage of a cession of book debts is that money owed to a business can be, and usually is, the single largest liquid asset of a business upon which the creditor can act for recovery.

The disadvantage however being the collectability of such ceded debts. Another important issue is the fact that cessions rank in order of the date that they were given by the cessionary. So if you are a cessionary who receives a cession from one of your debtors (cedent) that is the subject of a previous cession you will rank behind the first cessionary and only received the reversionary rights once that previous cessionaries debt has been settled.

In the case of Momentum Group LTD v Van Staden NO and Another (187/2008) 60 [2009] ZASCA (29 May 2009), while dealing with a cession of insurance policy, did raise another issue which all cessionaries should bear in mind - the question of whether after cession, payment by a debtor to the cedent immunised the debtor from a claim by the cessionary. In this case the court held that a debtor will be absolved by performance or any other form of discharge rendered to the cedent if he genuinely and reasonably believed the cedent to be their true creditor.

Thus, whilst notice to a debtor is not a pre-requisite for the cession of book debts, notice thereof protects the cessionary against a claim by the debtor that they have been absolved by their performance to the cedent. So if you are a creditor that has and intends to exercise a cession of book debt, particular where it is a single large debt owed to the cedent/debtor, it is important that you notify the relevant debtor(s) of your debtor, as soon as possible as if they pay your debtor without knowledge of your cession they are absolved from your claim for payment against them.

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