The impact of the capacity provisions in the Companies Act 71 of 2008 on the insolvency-remoteness of limited capacity special purpose vehicles used in securitisation schemes

• Jurisdiction: South Africa
• Date: 31 March 2021
• Citation: (2020) 6(2) JCCL&P 82
• Author: Olivier, E.A.
• Pages: 82-111
• Published date: 31 March 2021
• DOI: https://doi.org/10.47348/JCCL/V6/i2a3

https://doi.org/10.47348/JCCL/V6/i2a3 82

THE IMPACT OF THE CAPACITY

PROVISIONS IN THE COMPANIES

ACT 71 OF 2008 ON THE

INSOLVENCY-REMOTENESS OF

LIMITED CAPACITY SPECIAL

PURPOSE VEHICLES USED IN

SECURITISATION SCHEMES

Etienne A Olivier*

LLD Candidate, University of the Western Cape†

ABSTRACT

The insolvency-remoteness of a special purpose vehicle (SPV) used in

a securitisation scheme is of critical importance, because insolvency

of the SPV can interrupt the payment streams due to the investors

in such schemes. Several contractual methods are implemented to

achieve insolvency-remoteness. In this article, it is argued that pacta

de non petendo (non-petition clauses), limited recourse provisions,

and subordination clauses, all common insolvency-remoteness

provisions, do not violate public policy. It is also argued that the

capacity provisions in the Companies Act 71 of 2008 (the Act) do

not reduce the insolvency risk of a limited capacity SPV used in a

securitisation scheme. The fact that ultra vires contracts concluded by

limited capacity companies will be provisionally valid under the Act

means that provisions in a company’s MOI that limit a company’s

capacity will have very little external significance. It is argued that

the right to restrain ultra vires contracts in terms of s 20(5) of the

Act, in conjunction with the right to ratify such actions in terms of

s 20(2), do not provide reliable legal certainty or protection to the

investors in assets securitised through a limited capacity SPV.

Keywords: securitisation; special purpose vehicle; insolvency-

remoteness; public policy; corporate capacity.

* LLB LLM (cum laude) (Western Cape).

† This article is based on the research supported wholly by the National Research

Foundation of South Africa (Grant number: 11875). I am also indebted to Dr BM

Mupangavanhu and Prof MS Wandrag for their valuable comments on earlier

drafts of this article. Comments and criticism will be most welcome; they may be

sent to eaolivier@uwc.ac.za.

(2020) 6(2) JCCL&P 82

© Juta and Company (Pty) Ltd

83

THE IMPACT OF THE CAPACITY PROVISIONS IN THE COMPANIES ACT 71

OF 2008 ON THE INSOLVENCY-REMOTENESS OF LIMITED CAPACITY

SPECIAL PURPOSE VEHICLES USED IN SECURITISATION SCHEMES

https://doi.org/10.47348/JCCL/V6/i2a3

I INTRODUCTION

The raising of capital to fund operations is an important aspect

of managing a business. Sometimes, a commercial company may

want to, or be required to, access alternative means of financing to

traditional methods. Securitisation may be the answer. By making

use of securitisation, a firm can sell its receivables to obtain financing

directly from the capital markets.1

Special purpose vehicles (SPVs) are entities with limited powers

which are established specifically to fulfil a particular function.2

In theory, an SPV could take the form of a trust, corporation or

partnership. However, this article will assume that the SPV under

discussion is a company registered under the Companies Act 71 of

2008 (the Act). SPVs are used as conduits in securitisation schemes

and other structured finance transactions.3 It is important for the

success of South African securitisation schemes that the risk of

securitisation SPVs being affected by insolvency or liquidation

proceedings is reduced as far as possible; in other words, the

SPV must be ‘insolvency-remote’.4 Practitioners employ several

techniques to achieve insolvency-remoteness. One strategy used to

achieve insolvency-remoteness is the practice of inserting capacity

restrictions in the SPV’s constitution.This contribution will analyse

the role of SPVs in a securitisation scheme and the techniques used

to ensure that securitisation SPVs are insolvency-remote. First, it is

necessary to contextualise the topic by briefly analysing the concept

of structured finance. Thereafter, the article will describe the two

types of securitisation schemes regulated by South African law, and

1 S L Schwarcz et al Structured Finance: A Guide to the Principles of Asset Securitization

3 ed (2002) at 2.

2 I Lubbe, G Moddac & A Watson Financial Accounting: GAAP Principles 3 ed (2011)

at 555–6; J R Basu ‘Accounting for and Disclosure of Special Purpose Entities

by Financial Holding Companies: Lessons from PNC Financial Services’ (2003)

7 North Carolina Banking Institute 177at 177. See also W C Powers, R S Troubh &

H S Winokur ‘Report of Investigation by the Special Investigative Committee of

the Board of Directors of Enron Corp.’ (2002) (hereinafter ‘Powers Report’) at

37–8.

3 N Locke ‘The legislative framework determining capacity and representation of a

company in South African law and its implications for the structuring of special

purpose companies’ (2016) 133 SALJ 160 at 160.

4 The regulatory instrument of securitisation schemes in South Africa takes the

form of a Schedule to the Banks Act 94 of 1990, namely Schedule to the Banks

Act 94 of 1990: Designation of an activity not falling within the meaning of

‘The Business of a Bank’ (Securitisation scheme) GG 30628 of 1 Januar y 2008

(hereinafter ‘Securitisation Notice’). Paragraph 1 of the Securitisation Notice

defines a ‘special-purpose institution’, which can be taken to be synonymous with

SPV or Special Purpose Entity (SPE), as ‘a company or trust, insolvency remote,

incorporated, created or used solely for the purpose of the implementation and

operation of a traditional or synthetic securitisation scheme’.

© Juta and Company (Pty) Ltd