A bridge too far – Conveyancers and simulated credit transactions

February 1st, 2013
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By Jerome Veldsman

Commercially and financially, a discounting agreement and a loan agreement can be substantially similar, but they are distinct legal phenomena.

A discounting agreement is not a credit agreement for the purposes of the National Credit Act 34 of 2005 (NCA) (see Bridgeway Ltd v Markam 2008 (6) SA 123 (W); Renier Nel Inc and Another v Cash On Demand (KZN) (Pty) Ltd 2011 (5) SA 239 (GSJ) and Rodel Financial Services (Pty) Ltd v Naidoo and Another (KZD) (unreported case no 13335/2009,18-2-2011) (Seegobin J)).

A discounting agreement records a financial transaction in terms of which a creditor (the discounter) sells its due, but not yet payable, rights (the merx) against its debtor to a third party (the discountee) for immediate payment of the purchase price (the pretium), which is determined at a discount to the quantum of the merx. Such a sale of rights occurs by way of out-and-out cession. The question whether such rights are susceptible to sale has been settled in the affirmative (see First National Bank of SA Ltd v Lynn NO and Others 1996 (2) SA 339 (A) and Headleigh Private Hospital (Pty) Ltd t/a Rand Clinic v Soller & Manning Attorneys and Others 2001 (4) SA 360 (W), which was approved of in Byron v Duke Inc 2002 (5) SA 483 (SCA)).

For many years discounting agreements have played a significant role in commercial funding, but not as much in personal funding, the latter traditionally occurring under agreement.

Registration-linked agreements

There are financial products in the form of registration-linked agreements – often marketed as bridging finance – that are available in the form of discounting agreements and which are applied predominantly for personal funding. The merx is connected to a deeds office registration and thus involves a conveyancer. The merx is, for instance, the rights, or part of the rights, of a seller (the discounter – assume a natural person) under a deed of sale of immovable property against the purchaser (the debtor) to receive the proceeds of the sale against transfer; or the rights, or part of the rights, of a borrower (the discounter) under a loan agreement, supported by a mortgage bond over immovable property, to receive the loan advance. The merx may also be ceded in security to the discountee.

Parties to a registration-linked agreement do not treat it as a credit agreement for purposes of the NCA. Indeed, in many instances, for one or both parties, avoiding the NCA is the sole or main reason for favouring a registration-linked agreement over a loan agreement. In many instances registration-linked agreements may be uncontroversial, but in some instances there could be a risk of a registration-linked agreement embodying a simulated transaction.

Simulated transactions

A simulated transaction is where the parties conceal the transaction’s true nature (X) by disguising it and giving it some form (Y) different to what they really intend. Such a disguise constitutes a simulation and a court will give effect to X (the substance) notwithstanding Y (the form).

A transaction can constitute a simulation even if the parties are innocent of any fraud or other dishonesty and if the parties perform fully in terms of the relevant agreement. If the commercial sense of a transaction (its real substance and purpose) is to achieve an object that allows for the evasion of a peremptory law, it is a simulated transaction (Commissioner for the South African Revenue Service v NWK Ltd 2011 (2) SA 67 (SCA) at para 55).

If, for instance, it is known upfront or is readily ascertainable by one or both parties to a registration-linked agreement that, in law, the discounter cannot duly deliver the merx, the parties cannot realistically have the intention to enter into a discounting agreement. If they nevertheless enter into a registration-linked agreement (an affected registration-linked agreement), the commercial sense of the resultant transaction will not be that of a discounting agreement. As there is no real merx, the basic mechanics of the resultant transaction will simply be that on or about the date of entering into the affected registration-linked agreement, the discountee must pay an amount (the purported pretium – eg R 75) to the discounter and on the transfer/registration date the discounter must pay an amount (the purported merx – eg R 100) to the discountee.

What will be the commercial sense of the resultant transaction? On or about the date of entering into the affected registration-linked agreement, the discountee must pay R 75 to the discounter, which amount the discounter must repay, but only on the later transfer/registration date (thus a deferred payment), and the discounter must also pay an additional amount (R 25, being R 100 less R 75) to the discountee.

In brief, the substance of the transaction will be one of money lending rather than one of sale of an asset, notwithstanding the form of the affected registration-linked agreement being that of a discounting agreement.

What will be the consequence of such commercial sense? The definition in s 8(4)(f) of the NCA of one of the forms of a ‘credit transaction’, which is in turn one of the forms of a credit agreement, reads as follows: ‘[A]ny … agreement … in terms of which payment of an amount owed by one person to another is deferred, and any charge, fee or interest is payable to the credit provider …’.

It is arguable that an affected registration-linked agreement will be a credit transaction and the whole arrangement will be in fraudem legis of the NCA.

Why would a discountee run this risk? The implied rate of return on a registration-linked agreement is usually attractive. The discountee will usually only pay over once it is fairly certain that the purchase price/loan advance will be paid on transfer/bond registration and, as the conveyancer controls the cash flow to and from the discounter, effectively a form of ‘security’ for the discountee, the risk of non-payment by the discounter is slight. So, for some discountees, the legal aspects may be of lesser import.

Indicators of a simulated transaction

In, for instance, the Renier Nel Inc judgment, the question of simulation is mentioned, but there has been no meaningful judicial scrutiny of a registration-linked agreement, as far as I am aware. In the Rodel Financial Services judgment, for instance, the question of simulation is not mentioned.

Under what circumstances will the discounter not be able to duly deliver the merx, and will there consequently be a risk of a simulated transaction?

If parties to an agreement specifically agree (in a no-cession clause) that one or both of them will not be entitled to cede his rights under the agreement to a third party, such limitation is valid and binding and a cession of rights contrary to a no-cession clause is invalid and of no force and effect (Capespan (Pty) Ltd v Any Name 451 (Pty) Ltd 2008 (4) SA 510 (C)). If the relevant deed of sale/loan agreement contains a ‘no-cession clause’, the discounter cannot duly deliver the merx and the registration-linked agreement will not be a discounting agreement. An agreement for the sale of immovable property may well contain a no-cession clause barring the seller from ceding the rights to receive the purchase price and it would be most unusual for a loan agreement not to contain a no-cession clause barring the borrower from ceding the rights to receive the loan advance.

Unless parties to an agreement specifically agree (in a splitting clause) that one or both of them will be entitled to split his claim against the other, a splitting of the claim is invalid and of no force and effect (Van der Merwe v Nedcor Bank Bpk 2003 (1) SA 169 (SCA)).

If the merx is only part of the rights of the discounter to receive the purchase price/loan advance, if the relevant deed of sale/loan agreement does not contain a splitting clause, the discounter cannot duly deliver the merx and the registration-linked agreement will not be a discounting agreement. A splitting clause in favour of the seller under a deed of sale, or the borrower under a loan agreement, would be most unusual.

There is a further aspect if the immovable property being sold is subject to an existing bank mortgage bond. Typically, the (now) seller (the discounter) borrows money from the bank and his obligations are credit supported by the mortgage bond. The standard documentation contains a cession in security by the discounter of his right to receive the (future) purchase price from a sale of the immovable property. In such an instance, as the discounter has already ceded in security his right to receive the purchase price, he retains only a reversionary interest or right and accordingly the merx will at best be significantly tainted.

Conclusion

A conveyancer may be at risk, one way or another, if he facilitates an affected registration-linked agreement. Factors such as the indifference of the discountee to whether or not the relevant deed of sale/loan agreement contains a no-cession clause, if it contains a splitting clause or whether or not an existing bank mortgage bond contains a cession in security could indicate the risk of a simulated transaction.

The controversy around registration-linked agreements and the NCA may not yet be over.

Jerome Veldsman BCom LLB (Stell) is an attorney at Walkers Inc in Cape Town.

This article was first published in De Rebus in 2013 (Jan/Feb) DR 30.

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