Funding Empowerment and Secured Lending Issues in Africa (A South African and In

- By Philip Webster

A South African and International Legal Perspective

Presented by:

Philip Webster

Websters’ Legal Consulting (Pty) Ltd

Philip Webster, an English qualified solicitor and
International corporate adviser practising in South Africa
with Websters’ Legal Consulting (Pty) Ltd.


Philip Webster commenced his legal career in London, in 1987, with the leading City
of London firm, Norton Rose, where, as a member of the Banking and Capital
Markets Group, he specialised in commercial property and project finance
transactions. In the mid-90’s, he moved to Paris and the French merchant Bank,
Société Générale, where he was employed as Senior Counsel. Thereafter, he was
employed as General Counsel with Société Générale Enérgie. During this period, he
continued to specialise in project finance and finance related transactions with a
particular emphasis on the sectors of energy, oil and gas and commodity linked
derivative transactions. He returned to London after six years in Paris, with the
English bank, NatWest Markets, where he remained for a year before moving to
Johannesburg via the London office of White & Case LLP, a leading U.S. law firm.
After three years with the corporate finance Department of White & Case, he joined
the South African office of U.S. law firm, LeBoeuf, Lamb, Greene & MacRae in 2000.
After three-and-a-half years with LeBoeuf, in July 2004 he joined the South African
office of Fasken Martineau DuMoulin (Pty) Ltd. as a Director where he specialised in
project finance and general international corporate and cross-border transactions,
including the financing of mining transactions in South Africa and throughout the rest
of sub-Saharan Africa. In January 2006,he left Fasken Martineau and established
Websters’ Legal Consulting (Pty) Ltd., ”Websters’Legal”, which provides similar
services to those above mentioned as well as lobbying advice and ancillary services.

Empowerment Financing?

The underlining financing criteria, relevant in the funding of empowerment transactions, is
no different from any other transaction. In effect, funders require the certainty of knowing
that the proposed transaction is economically feasible and the expected returns on the
investment accord with the financial parameters upon which the relevant funder generally
invests. Of course, the funder is required to build into the financial model, certain risk
factors which will necessarily affect the structure of any proposed funding and, notably, in
the case of debt financing, the interest rates which the funder will expect from any
financing provided. In transactions where an equity participation is envisaged, risk factors
will necessarily affect the degree of control which the funder will attempt to obtain,
particularly at the managerial level, to mitigate to the extent possible, such risks.
If, despite the transaction provisions, debt is not repaid as provided for in loan
agreements, invariably, the funders will have no option but to rely on the security
provisions underpinning the transaction documentation.

Empowerment: Opportunities for the International Investor

Investors, and particularly international investors, desiring to invest in the mining industry
in South Africa, will invariably see recent empowerment legislation as presenting both an
opportunity to accede to markets previously inaccessible or very difficult to access, but
also, bearing in mind traditional financial criteria, presenting added risk factors. ‘Black
Economic Empowerment’ is a relatively new concept, not often understood, particularly
outside of South Africa. For certain, the concept, as often described, does not lend itself
easily to the rigours of traditional financial criteria. Investors will also look to recent
empowerment precedents to gauge the success of empowerment models which have
been promoted to date. The actual and/or perceived success or otherwise of these models
will necessarily be factored into financial models and the terms upon which funders will
propose funding similar ‘empowerment’ transactions. However, any perceived risk factors
inherent in empowerment transactions will be counter-balanced by the undoubted
perception which will be held by the international investor that the empowerment
requirements of a transaction is, in effect, permitting such investor to enter into a market
previously inaccessible. This factor alone, does and will encourage the properly advised
international investor to seek, as far as possible, to ensure that such international
investment is provided in a manner which both preserves the financial viability of the
proposed transaction, as well as ensuring the success of the ‘empowerment’ nature of the
transaction. It is only in this way that such ’foreign’ investment will continue to be
welcomed as a viable tool in the transformation process. For those who support the
Government policy of Black Economic Empowerment, the intention must be to create a
‘win-win’ situation, i.e. on the one hand providing that Black empowerment promoters who
have been unable to access finance in the traditional manner in the home market, should
now have an alternative source of finance by accessing the international investor and on
the other, ensuring that international investors who have previously been denied access to
certain markets in South Africa, welcome the opportunity to access such markets in a way
which promotes the general well-being of South African society and the stated Black
economic transformation aims of the Government.

Stimulating Competition

International investment will also stimulate the local investment market by encouraging
competition within and among various funding institutions, both on national and
international levels. Empowerment transactions are encouraging all stakeholders to seek
competitive solutions in what has traditionally been a somewhat uncompetitive market in
which financial parameters have often been dictated by the needs of a few major locally
established institutions, rather than the legitimate concerns, whether they be
empowerment or otherwise of the young, undercapitalised, local entrepreneur.

Project Finance

In order to reconcile what may, at times, appear to be the conflicting aims of established
business institutions and those of budding entrepreneurs, project finance is increasingly
seen as the only viable means of financing capital intensive mining projects. However,
while project finance does provide a viable alternative option for the undercapitalised
entrepreneur seeking finance, it also presents its own challenges. Project finance is often
not understood by local established institutions and/or young entrepreneurs who have no
capital, but a good idea and maybe good political contacts. Project finance is not an easy
option and is invariably inexpensive. However, it is often the only viable economic option
open to the empowerment entrepreneur and will succeed if properly promoted and
thereafter managed. Project financing invariably requires substantial work to be carried
out by the promoters of a project.

Feasibility Study

An empowerment company, group or consortium wishing to interest funders such as the
banks and development banks in a project, will necessarily be obliged to present such
institutions with the following: a detailed feasibility study which provides satisfactory
evidence of the existence of mining permits and/or the likelihood of mining permits being
attained; the existence of a coherent legal entity, whether it be a company or partnership,
able to benefit from such rights and enter into agreements with third party funding entities;
a detailed business and financial plan which shows how such rights might be exploited
financially; and written evidence of how legitimate concerns, whether they be political,
environmental, social and the like, are to be addressed. The importance of a feasibility
study should not be underestimated. Unfortunately, the importance of the feasibility study
is invariably underestimated by many empowerment groups.

The natural inclination to “assume one’s desires represent reality”, often leads such
groups to presume that the financial community will necessarily be as enthusiastic as they
are about “the brilliant deal” which they have been able to put together. This misplaced
confidence is often reinforced by a belief that political connections alone and support, is
sufficient. Unfortunately, it is not. Political connections may, in certain cases, facilitate the
opening of doors, it very rarely, alone, closes them.

The reality of this situation leads one to the economic commercial issue. How do
entrepreneurs, without finance, fund the preliminary steps of putting together a feasibility
study which will enable a project to pass the first hurdle of being considered as a project
which may be financed?

Preliminary Funding

Unfortunately, I can do no more in this conference than raise the problem as one which
needs to be seriously considered by all those genuinely interested in providing access to
funding, particularly to young miners. Entrepreneurs who are unable to raise the
necessary finance to present the feasibility study, will often invariably find it impossible to
raise finance within the established banking sector. Alternative large mining
establishments may or may not provide finance in the event that they already “know” of the
viability or otherwise of the proposed project. However, “there are no free lunches” and
groups which receive finance without having to provide a detailed and comprehensive
feasibility study evidencing the viability of the proposed project, will invariably receive such
finance on prohibitive terms. Perhaps, the most viable alternative for such groups is to
access international finance promoted by mining groups and institutions with no or very
little current exposure to the South African market, but which have an in-depth knowledge
of the mining terrain in South Africa and are prepared to take a calculated risk and even
provide assistance, if needs be, at the feasibility study stage in order to gain access to the
market. Indeed, certain groups may even aid entrepreneurs in the drawing up of a
feasibility study and business plan and access to finance. However, such assistance will
generally depend on entrepreneurs being at least able to reassure the proposed investor
that they have relevant rights evidenced by prospecting permits. Such groups will also
need to convince the investor that there is no legislative, regulatory, legal or political
reason why a project finance project may not go ahead. Groups such as those providing
alternative forms of finance are now accessing the South African market, particularly in
view of the Mining Charter and the Financial Sector Charter, which opens up opportunities,
which otherwise were not available, to those willing to commit to finance.

Secured Lending Imperatives

Of course, while a decision to invest in a project should primarily be based on the revenue
generating potential of the project, the investor will, nonetheless, in practice, still require
the comfort of adequate security provisions. Any financial institution’s credit committee or
the well-advised individual investor will, whatever the merits of the project, require a
reasonable degree of certainty as to the likely effectiveness of enforcement provisions
should the project company (“NewCo”) fall into serious financial difficulties or default under
its lending arrangements.

Debenture with Fixed and Floating Charge

One misconception that many overseas lawyers and investors have regarding South
Africa, is that its legal system is but a carbon copy of the common law system as practised
in England. While this is true in some respects, particularly in regards to general
commercial and corporate law, the influence of Roman-Dutch legal precepts and fifty
years of isolation following the establishment of an apartheid regime, together with
consequent sanctions, has meant that in many areas, South African law has not evolved in
the same manner as that of other Commonwealth countries in Africa. The law relating to
securities is a case in point. For example, there is no provision in South African law
equivalent to the basic English legal security instrument of the debenture and “floating

In “Evans v. Rival Granite Quarries Ltd.” [1910] 2 K.B. 979, Buckley L.J. states:

“A floating charge is not a Future security; it is a present security, which presently affects
all the assets of the company expressed to be included in it … A floating security is not a
specific mortgage of the asset, plus a licence to the mortgagor to dispose of them in the
course of his business, but is a floating mortgage applying to every item comprised in the
security but not specifically affecting, any item until some event occurs or some act on the
part of the mortgagee is done which causes it to crystallise into a fixed security.”
The nearest equivalent under South African law to the debenture and floating charge is
perhaps the general notarial bond. However, in the absence of delivery of the bonded
article to the bondholder, the bondholder obtains only a preference as against the
unsecured creditors over the bonded articles as are in possession of the debtor at the date
of the sequestration of the debtor. In contrast, the floating charge creates, on
“crystallisation”, a fixed charge over the asset of a business. Moreover, before a
bondholder can execute against a general notarial bond, a court order as well as
possession, is required.

Notarial Bonds

In order to obtain a secured interest over moveable assets under South African law, it is
necessary to register a special notarial bond over specific assets, such that the bond will
be deemed to be a pledge under the Moveable Property Act 57 of 1993. The difficulty is
that, in most cases, all the assets will not be known or even exist at the time the special
notarial bond/pledge is registered and thus, further re-registration (and expense) will be
required at a later date if security over moveable assets acquired after the registration of
the special notarial bond is to be obtained.

Again, this provision contrasts unfavourably with the floating charge which provides a legal
security over assets of a business from time to time. The debenture and floating charge is
a legal instrument created specifically to allow, on the one hand, the debtor to manage the
business as a going concern, and on the other, to provide the creditor with the security of
knowing that should crystallisation occur due to an event of default or for reasons
prescribed by law, the floating charge will automatically convert to and be treated at law as
a fixed charge.

A further advantage of the floating charge is that if loans made by a lender are secured by
a charge which was created as a floating charge (or by a floating charge and other
securities interests) and such charge (or charges) are over the whole (or substantially the
whole) of the chargor’s property, then any receiver appointed by that lender will be an
administrative receiver (see S.29(2)(a) of the English law – Insolvency Act 1986), and if
such a receiver is appointed over a company’s assets, a court is bound to dismiss a
petition for the appointment of an administrator in relation to that company (see S.9(3) of
the Insolvency Act 1986). The important advantage here is that a lender who has the
benefit of a floating charge over all or substantially all the assets of the company, does
then have the ability to control receivership of that company, and an administrator cannot
be appointed by the court if the lender has already appointed its administrative receiver.
This clearly lender/creditor-biased debenture and floating charge provision does not exist
in South Africa, where the court’s jurisdiction may not be ousted in this way. In some
respects, the principle underpinning the South African system is similar to that evidenced
in the United States of America where, under Chapter 11 proceedings, the bankruptcy
procedure actually prohibits secured creditors running a debtor’s business effectively for
their own account.


Not surprisingly, in view of the inadequacies of the notarial bond and the absence of a
floating charge or equivalent provision, the lending bank or institution in South Africa will
often take security over shares in the borrowing company by a procedure known as
“cession in securitatem debiti”. The problem with enforcing security over shares is the
direct risk that is assumed as a shareholder in a company and which is necessarily
heightened in the vent that such company is in financial difficulty. If the extent of such risk
is appreciated, this form of security is not necessarily one which lenders would, in most
cases, prefer to enforce.
Although security over the shares in the quoted company may be capable of delivering
control of the company and hence of the project to the lenders, it will not afford them any
priority over the project company’s other creditors (but only over those of the charging
shareholders). This is to be contrasted with the priority which may be obtained by a lender
under a debenture and floating charge (usually with a fixed charge element as well).


Given the security provisions currently available to the investor in South Africa, it will be
interesting to see how the existing law evolves in the context of empowerment legislation
and practice which has now become an intrinsic feature of the South African legislative
and legal landscape. The Mining Charter and Financial Sector Charger impose minimum
shareholdings for the benefit of ‘Black’ South African citizens.
While much of this newly enacted empowerment legislation has yet to be tested in the
courts, it may well be difficult for ‘non-empowerment’ shareholders (i.e. shareholders who
are not considered by law to be ‘Black’ (whether they be people termed black, coloured or
asian in current parlance) to enforce security over shares which would enable them to hold
in excess of the relevant limits. Indeed, while the regulatory framework of any legal
regime is necessarily a matter with which the secured lender must contend, the new wave
of actual and proposed empowerment legislations, does add a new and still relatively
imprecise, rapidly evolving and politically controversial layer of regulatory and legal
provisions to project finance transactions in South Africa. The well-advised lender should
factor such issues into investment decisions and provide for the consequences thereof in
appropriately drafted legal documentation.

Inadequate Legal Security Framework

It is perhaps thus worth noting that ‘empowerment’ structured deals are not facilitated by
the current legal security framework in South Africa. As mentioned above, the legal
security framework encourages lenders to take security over equity rather than taking a
position on underlying cash flows. Historically, in South Africa, many empowerment deals
have been funded mainly through preferred equity. While this may undoubtedly also be
due to a mispricing of debt, a legal analysis of many of the deals would undoubtedly
highlight the importance placed by investors lending to empowerment consortiums on
taking security over equity under relatively inflexible arrangements which invariably result
in such equity reverting to the lender in a way which the neutral observer would be
tempted to deduce, undermines the empowerment objectives which the lending
arrangement was ostensibly intended to promote.

Bankruptcy and Set-off

Bankruptcy set-off rules is another area of legal concern which should be borne in mind.
But for certain exceptions as regards previous metals and derivative instruments, English
law set-off rules which also apply in most of the former British colonies in Africa, do not
apply in South Africa. The consequence of this is that in the event of bankruptcy, creditors
are unable to automatically offset amounts due to them from amounts which they may owe
to the debtor in bankruptcy. This is an important point when assessing the risk profile of a
particular transaction. The advantage to a lender of a “set-off” friendly legal regime is also
a matter to consider when determining contractual choice of law provisions and the
appropriate legal jurisdiction for setting up an offshore escrow account or even, if
regulatory provisions allow, the location of the special purpose vehicle project company,
through which the majority of the funding is likely to be channelled.


Exchange control regulations have been relaxed as regards foreign investors in South
Africa, but the foreign company investing in South Africa may be obliged to establish a
South African entity, if only for regulatory reasons. Money received or funds raised by
such a company will be subject to exchange control regulations. Exchange control
regulations hamper not only inward investments, but also outward investments.
Regulations relating to royalties and the like, are of crucial importance to investors. The
economic viability of a mining project will, in certain instances, be dependent on the
manner in which royalties are set.
The provision of guarantees is one further essential aspect of a project finance


‘Pure project’ financing, with which the South African market is still relatively unfamiliar, is
not dependent upon guarantees in the strict legal sense. A project in respect of which
funders rely essentially on the balance sheet of a participant, rather than the economic
feasibility of the project, should accurately be described as being a corporate finance
transaction, rather than a project finance transaction. Indeed, project sponsors who have
managed to put together a comprehensive feasibility study, clearly evidencing a viable and
credible basis for anticipating a sufficient income stream to reimburse a loan, should resist
giving corporate guarantees or limit any such guarantees that are given, to a minimum
level. The result of such negotiation is often a ‘limited-recourse’ project finance deal which
may be described as a transaction somewhere between ‘project finance’ and ‘corporate
finance’. Indeed, greater emphasis should, under project financing transactions, be given
to the provision of adequate loan coverage ratios in the loan documentation and the
installation of ‘state of the art’ mining techniques (to ensure maximum revenue return),
rather than relying on corporate guarantees and balance sheets which have negligible
links to the project in question.


The ‘trust’ is, of course, another important security instrument within the financing
framework of most project finance transactions. Syndicated project finance lenders will
often enforce their lending rights via a trust instrument of one sort or another. In South
Africa, while the trust instrument does exist, South African rules of causae require special
drafting provisions if the trustee is to be able to take action to enforce lenders’ rights under
the trust. As a general rule, the problem does not arise in other common law jurisdictions
in African, such a Nigeria, Tanzania, Uganda, Kenya or Ghana, which invariably follow
English legal precedent and practice.
However, a word of warning – in African countries, subject to a legal system based on the
Napoleonic Civil Code (e.g., in most French and Portuguese speaking countries), the
concept of a trust, as understood by the common law trained lawyer, will, in most cases,
not exist. In such a situation, other forms of security instruments will need to be created,
combining agency and fiduciary principles (creating “trust-like instruments”), with
traditional forms of security such as (in French law jurisdictions) the natissement du fonds
de commerce, natissement d’outillage et du matériel d’équipement, natissement de
créances, délegation and various forms of hypothèque.

Common and Traditional Rights

Finally, a word or two should be devoted to the importance of customary law, or informal
rights often evidenced in Africa by the role of tribal chiefs. As in Europe, where the
establishment of the European Union has paradoxically given rise to a heightened sense
of regional (as distinct from state) identity, likewise in Africa, tribal identity (already an
important social institution) is likely to assume even greater importance with the recent
birth of the African Union.
In the mining industry in South Africa, investors must contend not only with proposed
mining chargers intended to promote empowerment essentially of Black South Africans,
but also legislation such as the Interim Protection of Informal Land Rights Act, 31 of 1996
which, inter alia, provides that tribal authorities in occupation of land should be consulted
and their consent to prospect, obtained. The Communal Land Rights Bill provides further
proposed legislative backing for the traditional rights of tribal chiefs and other traditional
rights which have often been overlooked in the past. Moreover, and perhaps most
importantly, the recent decision of the Constitutional Court affirming the legal claim of the
Richtersveld communities in the Northern Cape, provides ample evidence, by the highest
court in the land, that participants in a mining transaction and their legal advisers must pay
serious heed to communal rights. Whether or not such decisions affect the ‘risk profile’ of
future transactions and thus, the likelihood and/or cost of raising finance to fund mining
transactions in such areas, remain to be seen.


In order to further facilitate international investment, there is a serious and fundamental
need to amend the present South African law of Arbitration. The Arbitration Act 42 of
1965, is based on band English law, which was immediately repealed in England soon
after it was introduced, due to the negative effect it would have on London as a location for
the resolution of disputes by arbitration. In Working Paper 59, Project 94, published by the
South African Law Commission, Professor Christie is quoted as stating that “The present
South African law of arbitration is, however, not suitable for international arbitration.”
According to Professor Christie, “A businessman would be ill-advised to sign an
international contract containing an arbitration clause that specified South Africa as the
place of arbitration.” There are various reasons given for this, but most notably are cited:
(a) the Arbitration Act 42 of 1965 (the “Act”) contains no provisions which expressly
deal with international arbitration. The Recognition and Enforcement of Foreign
Arbitral Awards Act 40 of 1977, is limited to the enforcement of foreign awards
only; and
(b) under Section 20(1) of the Act, a petitioner may compel the arbitrator to refer the
matter to the court by stating a case on a question of law.
The consequence of the above provisions is that, in effect, the whole arbitration matter,
despite being decided at the arbitration level, is at risk of being re-opened and redetermined
by the court, with all the expense and publicity that arbitration is often intended
to avoid. Hence, the basic purpose for going to arbitration in the first instance, is
undermined, as there is always a strong likelihood (financial means permitting) that the
“losing party” will cry foul and state a case on a question of law. Thus the “full and final”
binding nature of an arbitration decision is always in doubt. Decision makers in business
abhor uncertainty. The existing South African law of Arbitration clearly needs to be
changed quite fundamentally, if South Africa is to assume importance as a regional centre
for arbitration in Africa.


Black Economic Empowerment undoubtedly presents many challenges, but also
opportunities. Black South African citizens now have rights and access to transactions
which would have been inconceivable prior to 1994. Likewise, due to the need to access
capital to exercise such rights, South African mining entrepreneurs, whether black or
white, due to the impetus of and trends being set by current empowerment-enabling
legislation, are now no longer restricting themselves to accessing finance purely in the
home market. This present opportunities for the international investor to collaborate with
such entrepreneurs in the mining industry and thereby access markets, previously
inaccessible to the international investor. A salutary effect of the introduction of new
participants into the mining industry, is that the established South African financial
community and mining houses, jolted by competition, are becoming increasingly creative
in order to reconcile the need to comply with newly introduced Black Economic
Empowerment legislation and the desire to retain a healthy share of the domestic market.
And finally, on the legislative front, the inadequacies of certain existing legal provisions will
undoubtedly, in due course, encourage a review and in many cases, improvements to
security law and arbitration law, such that many of the stated governmental aims for
economic transformation might be more readily implemented within the legal framework,
as well as encouraging international investors, particularly in Africa, to opt for South Africa
as a regional centre for arbitration.