In last weeks’ blog post we looked at cession law in general in Zimbabwe and its practical meaning for parties entering into such agreements. This week we look into how cession may be used to finance corporates. There are various options that companies have at their disposal to finance operational, capital, and other types of expenditure activities. One of the many ways in which companies can finance their activities is through the use of cession agreements. Before we consider the various ways in which cession may be used to finance a corporate, we will discuss the two types of cessions that exist in law.
Types of cession
Cession is a bilateral juristic act used to sell movable incorporeal rights under Zimbabwean law. There are two types of cession, specifically an outright cession, also known as an out-and-out cession and the cession in securitatem debiti, also known as the security cession. The outright cession occurs when the ceded rights are transferred completely to the cessionary (person receiving the rights) with no rights remaining with the cedent (person giving up the rights). This is an irrevocable cession. The security cession on the other hand occurs when the personal rights are transferred, to the cessionary, to serve as security for a debt obtained by the cedent from the cessionary, until the debt so secured has been repaid. In this instance, the personal rights are not transferred irrevocably; therefore, if the cedent repays the cessionary, the personal rights will revert back to the cedent. The agreement of cession should in either circumstance, clearly specify the type of cession being entered into by the parties.
Cession to finance your business
Where a company has a number of trade debtors or numerous income streams, these may be ceded to interested third parties for an agreed price. Under Zimbabwean law, rights or claims are transferred using cession. Cession agreements can therefore be used in the sale of debt claims, e.g. in the sale of a company’s trade debtors or in the sale of rights to income streams in transactions like factoring, invoice discounting or securitisation. Book debts and income streams are considered assets of the companies, which if sold, may improve the short-term cash flow of the company. Businesses may therefore sell book debts before they become payable, to interested parties, using cession to generate funds.
Factoring is a method used by small to medium sized entities to raise finance; it is done by selling/ceding the book debts to factoring houses[1] or other interested parties, who pay an agreed amount and take ownership of the book debts. In a factoring transaction, the owner of the receivables[2] cedes the receivables to a buyer at a discounted amount. Transfer of the receivables is done through an outright cession of the rights in the receivables being sold. Resultantly, the ownership of the receivables passes irrevocably to the buyer cessionary.
Invoice discounting is another method which can be used by corporates to raise finance; it is a method of receivables financing where invoices are sold to an interested third party or financier. Invoice discounting is similar to factoring; however, it is different in that here the seller is not completely divested of his rights in the invoices. It is therefore effected through a security cession. Practically it entails the cedent/seller collecting its invoices after sales every day and giving them to a buyer/cessionary for financial remuneration, albeit at a discounted price. The buyer keeps the difference between the discounted price and the actual value of the invoices as his commission. The seller remains responsible for collecting the invoice and retains the control over the administration of its sales ledger.
Corporates may also utilize securitization as a method of raising capital. This structure is less common in Zimbabwe, it is nonetheless a possibility for corporates seeking financing. Securitization is a complex structure with many different facets. However simply put, securitisation is the technique of converting income streams into tradable securities, through the selling of debt claims, for example book debts, mortgage bonds etc, to a special purpose vehicle (SPV). It involves the transfer of the sellers’ (originator’s) claims against third party debtors to the buyer (cessionary), SPV which takes place by means of cession. To fund the purchase of the debt claims, the SPV then issues commercial papers to investors with the payment of the commercial notes arising from the third-party debtors. In this manner the income streams become tradable, and the investors hold personal rights against the SPV for payment. The SPV then sets up a subsidiary company called the security SPV owned by a trust. The SPV thereafter cedes, through a security cession, the debt claims, and the underlying security, to the security SPV, which provides guarantees to the investors that the SPV will pay the investors. The SPV simultaneously indemnifies the security SPV from claims under the guarantee and secures the indemnity with all the rights that it has to the underlying security. The security SPV represents the interests of the investors, as security for the repayment of the SPV’s debts to the investors. The sums collected from the originators’ debtors, are then used to satisfy the investment by the investors and interest of the investors.
A number of income streams may be sold in this manner including residential mortgage loans, credit card receivables, vehicle loans or leases, equipment leases and trade receivable, commercial mortgages, and commercial loans to companies. Cession is an important element in securitisation because it is, inter alia, in this manner that rights, are transferred from the originator to the buyer SPV. Cession is also used by the SPV to transfer the rights in the income stream to the security SPV, which provides security to the investors. The general requirements for cession apply equally to securitisation, and the other forms of financing discussed above.
In conclusion, the possibilities with cession agreements are endless. However, it is key, for parties, before undertaking to enter into such an arrangement, to engage a lawyer, who is well versed in the area of law, to adequately capture the intention of the parties as well as to safeguard both parties from any pitfalls.
The information and opinions expressed above are for general information only. They are not intended to constitute legal or other professional advice. For clarification, assistance or any questions please contact the author Beatrice Moyo, on email at: beatricejoycemoyo@gmail.com
[1]A factoring house is a bank or specialized financial firm that performs financing through the purchase of invoices or accounts receivable.
[2] Receivables are monies owed to a business by its clients and shown on its balance sheet as an asset.
Lex Amicus 