Introduction
In commercial transactions, creditors often rely on collateral to secure their lending. Despite its frequency, there remains significant confusion around the different types of security used in such arrangements. One of the most common forms of security in Lesotho is the cession. This article explores what a cession entails, the two types of cessions practiced in Lesotho, and key considerations for both lenders and borrowers.
1. What Is a Cession?
A cession is broadly defined as a “bilateral juristic act whereby a right is transferred by mere agreement between the transferor, known as the cedent, and the transferee, referred to as the cessionary.” Essentially, it is a legal mechanism allowing for the transfer of intangible rights—often claims or debts—from one party to another.
2. Types of Cessions Used in Lesotho
There are two main forms of cession recognized in Lesotho:
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- Cession in Securitatem Debiti (Cession in Security)
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- Out-and-Out Cession
2.1 Cession in Securitatem Debiti
Often simply called a cession in security, this type of cession creates a security interest over a right—commonly claims against third parties—without transferring ownership of the right to the cessionary.
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- When Rights Can Be Enforced: The cessionary (the party receiving the security interest) typically only enforces its rights under the cession after the cedent (the party pledging the right) has defaulted on its obligations.
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- Ownership: Ownership remains with the cedent until there is a default. After default, the cessionary can enforce its rights to recover the debt.
2.2 Out-and-Out Cession
An out-and-out cession involves the complete transfer of ownership in the right being ceded.
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- Re-Cession Obligation: Usually, this arrangement includes an obligation to re-cede the right back to the original owner upon fulfillment of the underlying agreement. Essentially, the cessionary will hold those rights outright until the deal has been finalized or the debt has been repaid, at which point the rights revert to the cedent.
3. General Elements of a Cession
Regardless of whether it is an out-and-out cession or a cession in securitatem debiti, three common elements typically apply:
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- Act of Transfer: There must be a clear transfer of a right from one party to another.
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- Transfer of a Right: The subject matter of the cession is a specific right (e.g., a claim to money).
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- Agreement Between Cedent and Cessionary: The cedent and cessionary must consent to the terms that govern the cession.
4. Why Cession in Securitatem Debiti Is Preferred
For both borrowers and lenders, cession in securitatem debiti often proves more attractive:
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- No Immediate Transfer of Ownership: The cedent retains ownership until an event of default.
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- No Need to Re-Cede: Upon repayment or fulfilling the underlying obligation, there is no requirement for the cessionary to re-cede the rights back to the cedent, simplifying the process.
This arrangement is particularly helpful in commercial lending, where creditors wish to secure their interest without taking full ownership of the cedent’s claims.
5. Practical Considerations
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- Documentation: It is crucial for both parties to properly document the terms of the cession, specifying the trigger events (e.g., default) that allow the cessionary to enforce its rights.
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- Enforceability: In the event of a legal dispute, courts generally uphold cessions where the elements of consent, clear identification of the right, and due execution are present.
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- Notice to Third Parties: Depending on the nature of the right being ceded (e.g., debt claims), notifying the relevant third party may be necessary to fully protect the cessionary’s interest.
Conclusion
A cession—whether in securitatem debiti or out-and-out—is a powerful tool for securing loans and obligations in Lesotho. While an out-and-out cession transfers ownership immediately, a cession in securitatem debiti merely establishes a security interest until a default occurs. Understanding the differences between these two forms, along with their respective advantages and limitations, is vital for any party entering into a secured lending agreement.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. For specific guidance on cession agreements or any secured lending matters, consult a qualified attorney or legal professional experienced in Lesotho commercial law.