Sham Cession – Answer Guide
§ Hippo; Skjelbreds; SARS v NWK; Roshcon; Basson
STEP 1: Set out the law
A simulated or fictitious cession is legally inoperative: the subterfuge is disregarded and the
transaction is treated either according to its true tenor, if simulated, or as a nullity, if fictitious
(Hippo). When a cession, ostensibly valid, is resisted on this ground, the test is to determine
the true intention of the parties to it (Hippo). This is a factual inquiry. This approach is
encapsulated by the ‘substance-over-form’ doctrine.
In Hippo, the court emphasised, motive & purpose differ from intention. If the purpose of the
parties is unlawful, immoral or against public policy, the transaction will be ineffectual even if
the intention to cede is genuine – that is a principle of law. Conversely, if their intention to
cede is not genuine because the real purpose is something other than cession, their ostensible
transaction will likewise be ineffectual – this is because the law disregards simulation. This
test is applied irrespective of what the parties’ purpose for entering into that transaction is, but
purpose is a factor used to determine what the parties’ true intention is.
Importantly, a transaction arranged as an authentic means to a legitimate end must be
distinguished from a transaction that has been feigned in order to disguise an ulterior or
dishonest purpose (Hippo). The court in Basson confirmed that, as Hippo demonstrates, a
cession is not unlawful because the parties thereby obtain some advantage which would not
otherwise have been available. This accords with the general principle that the law permits
parties to arrange their affairs so obtain a benefit that a different arrangement would not have
permitted or to avoid a prohibition which the law imposes (Roshcon). Similarly, in Roshcon,
the court held that a transaction devised for commercial purposes, if the parties honestly intend
for it to have effect according to its tenor, is perfectly legitimate & cannot be said to be a
simulation. The Basson court did, however, note that heightened scrutiny into the genuineness
of a transaction may be called for where it achieves some legal advantage which would not
otherwise have been available, for it may provide a motive for the parties to go through the
motions of a transaction without really intending it to take effect.
In SARS v NWK, the SCA seemingly revised the test to determine simulated transactions by
stating that when considering simulation, one cannot simply have regard to whether the parties
had an intention to give effect to the contract in accordance with its terms, but instead, one
,should further regard whether the transaction lacks commercial sense. This approach is
significantly different from the traditional approach followed in a long line of cases decided
before it & thus resulted in great deal of uncertainty as regards the application of the substance-
over-form doctrine. However, in light of Roshcon, the view is that there are no deviations from
the established principles & an inquiry as to simulation will place emphasis on the manner in
which the parties to a transaction intend to implement such transaction.
STEP 2: Who bears the onus of proof?
• The onus is on the party who relies on the cession, but if he produces an apparently
regular & valid written cessionary agreement, the evidentiary burden shifts to his
opponent to show that the document in reality is not what it purports to be because there
was no genuine intention to cede (Hippo; Skjelbreds; Basson).
§ If the act of cession is concluded in writing, it becomes a matter of interpretation
(Picardi). If it is concluded tacitly or by conduct, it becomes a matter of inference
(Fick).
• There is a reverse onus in the case of regulators: the party who relies on the document
must prove that it is genuinely what it purports to be (SARS v NWK).
§ In SARS v NWK, the court confirmed that in tax appeals, the onus of proof rests with
the taxpayer, by virtue of the Tax Administration Act, to show that the transaction
is not simulated, i.e. that the parties honestly & legitimately intended for the
transaction to be implemented in accordance with the nature & meaning thereof.
STEP 3: Determine the genuine intention of the parties (substance over form)
1. Purpose or motive for the transaction
• To found jurisdiction to collect a debt (Hippo; Skjelbreds).
• To gain a tax advantage (SARS v NWK).
• Sound commercial purpose (Roshcon).
• To avoid joint & several liability under a co-suretyship agreement (Basson).
• To avoid the debt falling into the cedent’s insolvent estate when it is liquidated or
sequestrated (Ruskin).
• To avoid a counterclaim (Nedcor).
• Done as a “favour to a friend” (SARS v NWK).
• To securitize a debt (Grobbelaar; Picardi).
2. Whether there was an incentive for the parties to create a simulated contract (Basson)
, • Does the law prohibit the transaction from taking place? (Roshcon)
• Was the cedent entitled to cede the right to the cessionary?
• Did the cession obtain some advantage which would not otherwise have been
available? (Skjelbreds; NWK; Hippo)
3. Relationship between the parties to the cession (cedent and cessionary)
• Commercial relationship (Hippo)
• Relationship of mandate or a principal-nominee relationship (Skjelbreds)
• A trust-beneficiary relationship (Ruskin)
• Subsidiary-parent company relationship (Hippo; Skjelbreds; Basson)
• Distinguish: In Basson, the court noted that, unlike in Skjelbreds, the fact that there
was an arm’s length relationship between the cedent (Investec) and the cessionary
(OPPL) indicated that the latter is not a nominee for the former.
4. Whether the cessionary had an economic interest in the cession, despite being a wholly
owned subsidiary
• Distinguish: In Basson, the fact that OPPL was a wholly owned subsidiary of
Orcrest militated against, rather than strengthened the fraud case. Had the cession
had been in favour of an entity in which the Orcrest parties held no economic
interest, the settling of the purchase price on its behalf by Orcrest would have raised
eyebrows (as it did in Skjelbreds). But because OPPL was a wholly owned
subsidiary of Orcrest, the Orcrest parties suffered no economic disadvantage
through the cession of the claim to OPPL. Needless to say, the fact that Orcrest held
all the shares in OPPL does not entitle one to disregard their separate corporate
personalities and to say that any act by OPPL is in truth an act by Orcrest.
• In Hippo, Skjelbreds and SARS v NWK, the fact that the cedent or cessionary was
an associated company and had no economic interest in the cession indicated that it
was a simulation.
5. Consideration for the cession or objective commercial benefit to the cedent (Hippo)
• To avoid joint & several liability in the case of a co-suretyship (Basson).
• Where deed of cession records a substantial purchase price for the right and cedent
in fact received the purchase price, it will indicate that it is not a sham (Basson).
• In Basson, the court noted that, in regard to the settlement of the purchase price, it
is very common for holding companies to lend money to subsidiaries.
6. Commercial or business sense (Roshcon)
§ Hippo; Skjelbreds; SARS v NWK; Roshcon; Basson
STEP 1: Set out the law
A simulated or fictitious cession is legally inoperative: the subterfuge is disregarded and the
transaction is treated either according to its true tenor, if simulated, or as a nullity, if fictitious
(Hippo). When a cession, ostensibly valid, is resisted on this ground, the test is to determine
the true intention of the parties to it (Hippo). This is a factual inquiry. This approach is
encapsulated by the ‘substance-over-form’ doctrine.
In Hippo, the court emphasised, motive & purpose differ from intention. If the purpose of the
parties is unlawful, immoral or against public policy, the transaction will be ineffectual even if
the intention to cede is genuine – that is a principle of law. Conversely, if their intention to
cede is not genuine because the real purpose is something other than cession, their ostensible
transaction will likewise be ineffectual – this is because the law disregards simulation. This
test is applied irrespective of what the parties’ purpose for entering into that transaction is, but
purpose is a factor used to determine what the parties’ true intention is.
Importantly, a transaction arranged as an authentic means to a legitimate end must be
distinguished from a transaction that has been feigned in order to disguise an ulterior or
dishonest purpose (Hippo). The court in Basson confirmed that, as Hippo demonstrates, a
cession is not unlawful because the parties thereby obtain some advantage which would not
otherwise have been available. This accords with the general principle that the law permits
parties to arrange their affairs so obtain a benefit that a different arrangement would not have
permitted or to avoid a prohibition which the law imposes (Roshcon). Similarly, in Roshcon,
the court held that a transaction devised for commercial purposes, if the parties honestly intend
for it to have effect according to its tenor, is perfectly legitimate & cannot be said to be a
simulation. The Basson court did, however, note that heightened scrutiny into the genuineness
of a transaction may be called for where it achieves some legal advantage which would not
otherwise have been available, for it may provide a motive for the parties to go through the
motions of a transaction without really intending it to take effect.
In SARS v NWK, the SCA seemingly revised the test to determine simulated transactions by
stating that when considering simulation, one cannot simply have regard to whether the parties
had an intention to give effect to the contract in accordance with its terms, but instead, one
,should further regard whether the transaction lacks commercial sense. This approach is
significantly different from the traditional approach followed in a long line of cases decided
before it & thus resulted in great deal of uncertainty as regards the application of the substance-
over-form doctrine. However, in light of Roshcon, the view is that there are no deviations from
the established principles & an inquiry as to simulation will place emphasis on the manner in
which the parties to a transaction intend to implement such transaction.
STEP 2: Who bears the onus of proof?
• The onus is on the party who relies on the cession, but if he produces an apparently
regular & valid written cessionary agreement, the evidentiary burden shifts to his
opponent to show that the document in reality is not what it purports to be because there
was no genuine intention to cede (Hippo; Skjelbreds; Basson).
§ If the act of cession is concluded in writing, it becomes a matter of interpretation
(Picardi). If it is concluded tacitly or by conduct, it becomes a matter of inference
(Fick).
• There is a reverse onus in the case of regulators: the party who relies on the document
must prove that it is genuinely what it purports to be (SARS v NWK).
§ In SARS v NWK, the court confirmed that in tax appeals, the onus of proof rests with
the taxpayer, by virtue of the Tax Administration Act, to show that the transaction
is not simulated, i.e. that the parties honestly & legitimately intended for the
transaction to be implemented in accordance with the nature & meaning thereof.
STEP 3: Determine the genuine intention of the parties (substance over form)
1. Purpose or motive for the transaction
• To found jurisdiction to collect a debt (Hippo; Skjelbreds).
• To gain a tax advantage (SARS v NWK).
• Sound commercial purpose (Roshcon).
• To avoid joint & several liability under a co-suretyship agreement (Basson).
• To avoid the debt falling into the cedent’s insolvent estate when it is liquidated or
sequestrated (Ruskin).
• To avoid a counterclaim (Nedcor).
• Done as a “favour to a friend” (SARS v NWK).
• To securitize a debt (Grobbelaar; Picardi).
2. Whether there was an incentive for the parties to create a simulated contract (Basson)
, • Does the law prohibit the transaction from taking place? (Roshcon)
• Was the cedent entitled to cede the right to the cessionary?
• Did the cession obtain some advantage which would not otherwise have been
available? (Skjelbreds; NWK; Hippo)
3. Relationship between the parties to the cession (cedent and cessionary)
• Commercial relationship (Hippo)
• Relationship of mandate or a principal-nominee relationship (Skjelbreds)
• A trust-beneficiary relationship (Ruskin)
• Subsidiary-parent company relationship (Hippo; Skjelbreds; Basson)
• Distinguish: In Basson, the court noted that, unlike in Skjelbreds, the fact that there
was an arm’s length relationship between the cedent (Investec) and the cessionary
(OPPL) indicated that the latter is not a nominee for the former.
4. Whether the cessionary had an economic interest in the cession, despite being a wholly
owned subsidiary
• Distinguish: In Basson, the fact that OPPL was a wholly owned subsidiary of
Orcrest militated against, rather than strengthened the fraud case. Had the cession
had been in favour of an entity in which the Orcrest parties held no economic
interest, the settling of the purchase price on its behalf by Orcrest would have raised
eyebrows (as it did in Skjelbreds). But because OPPL was a wholly owned
subsidiary of Orcrest, the Orcrest parties suffered no economic disadvantage
through the cession of the claim to OPPL. Needless to say, the fact that Orcrest held
all the shares in OPPL does not entitle one to disregard their separate corporate
personalities and to say that any act by OPPL is in truth an act by Orcrest.
• In Hippo, Skjelbreds and SARS v NWK, the fact that the cedent or cessionary was
an associated company and had no economic interest in the cession indicated that it
was a simulation.
5. Consideration for the cession or objective commercial benefit to the cedent (Hippo)
• To avoid joint & several liability in the case of a co-suretyship (Basson).
• Where deed of cession records a substantial purchase price for the right and cedent
in fact received the purchase price, it will indicate that it is not a sham (Basson).
• In Basson, the court noted that, in regard to the settlement of the purchase price, it
is very common for holding companies to lend money to subsidiaries.
6. Commercial or business sense (Roshcon)
