It is often the position that when credit is advanced, debtors are ever so meek and humble, but that can never be said about them when it is time to pay back the credit. This results in a tedious, lengthy and perhaps costly legal process in an attempt to recover the credit.

But do you as a creditor have the time, resources and appetite to be chasing after debtors? Such cannot not be said about many creditors. In this article, for the convenience of creditors who have some book debts, we seek to explore in part, how they can consider legal sale and cession of their book debts to other entities who are perhaps economically and timeously resourceful and have the appetite to chase after debtors.

HOW DOES TRADITIONAL DEBT COLLECTION WORK

Ordinarily, debt collection is embarked upon when an aggrieved creditor seeks to recover due and outstanding debt from defaulting debtors.

The creditor can instruct debt collectors as registered with the National Credit Regulator (NCR) or a law firm to recover the said credit. The debt collectors or attorneys may commence with a soft collection, which includes non-confrontational methods like telephone calls and letters of demands to the debtor to settle or make arrangements to pay the due and outstanding debt.

 Depending on whether it was embarked on or not, when the soft collections method fails, the appointed law firm or debt collectors must follow the legal route. Attorney firms must be instructed to institute action against the debtor and from this, the normal civil processes will be followed until judgement and its execution or the Section 65 procedures are exhausted.

This process, is not so economic or convenient for a creditor who requires credit instantaneously or have quite a restrictive cashflow requirements and expectations. For such creditors, it may be sensible to consider selling the book debts to other entities that are better placed to deal with such.

WHAT IS A SALE AND CESSION OF DEBT(S)?

This is basically an agreement between two entities, the creditor, who is a cedent in this event, and the cessionary, an entity that is purchasing the debt from the creditor. Essentially, the creditor sells all the rights, title, interest and benefit in and to its debtor’s book, to the cessionary, the entity purchasing the debt.

HOW THE SALE AND CESSION OF DEBT(S) WORKS AND ITS ADVANTAGES

This works as follows: A debtor applies for a credit facility with a bank, or purchases services on credit from a school or any service provider. In terms of the law, the debtor must pay for services or credit obtained back to the actual creditor when such becomes due and payable. When the debtor does not honour the agreement and defaults in payment, instead of engaging in a tedious and not so economically and timeously friendly process, the Creditor decides to sell their rights to a third party for an agreed fee.

To demonstrate: A debtor owes R100 000.00 to a creditor. The creditor sells such a debt to a third party for R60 000.00. The third party having purchased such debt will now chase after the debtor to recover the capital debt, interest as well as any collection fees. Consequently, the debtor is now legally liable to the third party and not the initial creditor.

As illustrated above, the sale of debts may prove to be a win-win situation for both parties, the cedent(creditor) and cessionary (person or entity that bought the debt. The creditor gets instant money, albeit a fraction of what it is owed, and is also spared from chasing after the debtors who may or may not be able to pay and the associated legal process. On the other hand, the cessionary having bought the debt will make a handsome profit when it recovers all the debt and the associated interest.

The cession in security of book debts can extend to both existing debts and debts which may arise in the future.

CONCLUSION

It is important for creditors to weigh their options and consider viable means to better manage their cash flow. If you are a creditor that is not interested in chasing after debtors or engaging in legal processes, consider selling your debts. Feel welcome to reach out to us to advise you more fully and accordingly– be it for the sale and cession of your debt or for the drafting of the cession agreement. We are better suited to secure your business needs and interests.

Reference List:

• National Credit Act 34 of 2005.
• Cession confessions: FAQ guide to cession in security. cdhinc.co.za.