Security (1)

Security (1)

Introduction
1. What is Security?
  1. To ensure contractual performance
2. Benefits of security?
  1. Enforcement of contract may be difficult & time consuming, as you have to go to court etc. Security avoids this.
3. Accessory in Nature
  1. Depends on the existence of a valid principal obligation between debtor & creditor, eg. Loan
    1. THEREFORE: If principal obligation fails (if unlawful), security (agreement) fails
      1. Extinction/fulfilment of principal obligation leads to termination of security
        NOTE: If subject of security is destroyed, principal obligation will still remain
4. Types of Security
  1. Real
    1. Forms of real security
      1. Special mortgage bond over immovable property (mortgage bond)
        Creditor obtains registration of bond over immovable property mortgaged as security by debtor / 3rd party
        NOTE: Creditor = ‘mortgagee’, Debtor = ‘mortgagor’, who owns the property
        Formation REQUIREMENTS
        1. Valid principal obligation
        2. Bond established over property of somebody other than creditor/mortgagee
        3. Mortgagor must be owner of property
        4. Property must be immoveable
        5. Registration
        Once fully registered, it will be deemed to give rise to a limited real right
        Registration is vital as bonds rank according to date of registration
        Execution by owner / authorised conveyancer
        Mortgage Bonds for future debts (eg. medical expenses)
        'Covering Bond' - May register mortgage bond to secure future debt
        Requirements
        1. Specify future debts which MB intended to cover
        2. Fixed sum covered by bond Can’t be floating amount
        Features and Effects of Mortgage Bonds
        Mortgagee acquires (ltd) real right in , but THEY ARE NOT EQUIVALENT TO AN OWNER
        Result of this is that If you are not the owner, you cannot pass on the rights of ownership. You cannot transfer greater rights than you have. Linked to this, is that you cannot dispose of the property if you are a mortgagee without recourse to the courts or without the owners permission.
        HOWEVER where the mortgagor’s estate has been sequestrated or the principal obligation is not discharged, the mortgagee may approach the court, and without the owners consent, obtain a order for execution from the court on the property.
        Position of M/ee where other creditors attach mortgaged property?
        Because it’s a real right, it means it is enforceable against third parties
        Debtor Solvent
        If there was an attachment by other creditors, and the property were sold as a result of that attachment, and money is brought in, then the mortgagee has a preference to that money. So they will be paid before the other creditors, and if there is anything left over, the mortgagor will receive the rest. So the mortgagee is a secured creditor in the case of insolvency or solvency.
        Debtor Insolvent
        Mortgagees are secured creditors in the estate, so they will be paid before the preferent and concurrent creditors.
        Limitations on M/or’s ownership of property? The mortgagor can still use the property, and continue to live on it/use it as business premises, however if it comes to the mortgagees attention that the mortgagor is doing something that diminishes the value of the property, then the mortgagee can approach the courts for relief
        When will Mortgagee NOT be secured?
        Requirements
        1. Security is a mortgage bond
        2. Parties purport to secure a previously unsecured debt that is older than 2 months
        3. Debtor is declared insolvent within 6 months of lodging of bond
        IF ALL REQUIREMENTS MET: mortgage bond will not be valid, and it will NOT give rise to security.
        When will a mortgage bond be terminated?
        1. Discharge / failure of principal obligation
        2. Destruction of property
        3. Release by Mortgagee
        4. Set-off btwn 2 principal obligations
        5. Order of court
        6. Prescription --> 3 years from date payable
      2. Forms of real security over MOVEABLE property (All NEED AGREEMENT, PLEDGE ALSO DELIVERY)
        Pledge
        Pledge
        Moveable property --> Any ‘thing’ BUT NOT ‘future things’
        Creditor = ‘pledgee’ Debtor / 3rd party owner of property = ‘pledgor’
        If you have the requirements of agreement and delivery this will give rise to a ltd real right
        FUNCTIONS OF DELIVERY
        Gives rise to physical control so pledgee can protect their security
        Notifies public lets public know that they can’t trade for this property
        No delivery?
        Pledge is VALID btwn parties BUT… if 3rd party bona fide (in good faith) obtains real rights in property, then pledgee NOT secured
        What happens if there is delivery, but pledgor/debtor is declared Insolvent?
        Just like a mortgage bond, the pledgee will have a preference (preferent creditor) to the proceeds of the sale of the property
        AND IF proceeds insufficient to settle principal obligation, pledgee = concurrent creditor
        Forms of Delivery
        Real Delivery
        Object is physically handed over to pledgee
        Constructive 'deemed' Delivery
        Object not handed over to pledgee physically BUT: Pledgee still exercises control over object
        POSSESSION
        So pledgee must have POSSESSION of property, whether physical/mental possession
        Pledgee may retain possession of object UNTIL debt discharged
        The main things that distinguish a pledge from a m.bond, is that it is moveable property, and that there is no requirement of registration, but rather a requirement of delivery, and thirdly, the fact that the pledgee has to possess the property.
        Rights & obligations of pledgee
        Required to care for property (reasonable person std) BUT disbursements (expenses) necessary for reasonable preservation (to preserve) & expenses incurred = covered / secured by pledge
        Liable for damage
        NOT entitled to use & enjoyment of property
        MUST restore object & fruits of that object to pledgor
        NOTE: Agmt that pledgee may keep property IF debtor defaults IS NOW INVALID IN SA
        On default of pledgor / debtor, pledgee may apply to court to obtain judgment & to execute (sell) on pledged property
        UNLESS paratie executie clause, which allows them to execute without courts approval
        Termination of Pledge
        Discharge / extinction of principal obligation, as the pledge is accessory to the PO.
        Voluntary dispossession of object
        Involuntary dispossession of object (someone steals the property)
        Rights revived if possession restored
        Destruction of property
        Damage to property
        Real right in the property will be lost indefinitely & CANNOT be revived by repossession
        Special notarial bonds over moveable & corporeal property
        Notarial bonds
        ‘Bond attested by a notary public hypothecating (securing) a specific moveable asset, or all of the assets, of a debtor and registered in the Deeds Registry by the Registrar of Deeds’
        Very similar to a pledge, but the difference is that instead of delivering the property, you register a bond over the property.
        Requirements?
        1. Agreement
        2. Registration
        NOTE: NO DELIVERY REQUIRED
        Serves the same purpose as delivery, which is to notify the public of the fact that the particular property forms the subject of security.
        Requirements for Registration:
        1. Bond must be attested to (approved) by a notary public
        2. Must be registered with the registrar at the deeds office.
        3. Between the time when the bond is attested to by the notary public and its registration must not be more than three months.
        4. Must be registered at the deeds office where the debtor resides or where they conduct business.
        Types
        General Notarial Bond
        Covers a whole range of property items belonging to the debtor common example is all of the household goods (very general, non specific)
        What happens if the debtor is insolvent?
        They are entitled to first preference to sale of the free residue of the insolvent estate (so they get paid before concurrent creditors, but only out of the pool of money left after secured and preferent creditors are paid.
        Special Notarial Bond
        The items that form the subject of the bond are specific, and are specifically stated in the bond.
        Effects
        As long as they’re not incorporeal property, they will give rise to real rights.
        Solvent debtor?
        If the debtor is solvent and they sell the property to a 3rd party, or a creditor executes on the property, because the bond holder has REAL RIGHTS, he can claim from that 3rd person or that creditor.
        Insolvent debtor?
        If there is a insolvent debtor, the property vests in the trustee, however unlike a general notarial bond, the holder of a special notarial bond is a secured creditor, and will be paid first from the proceeds of the sale from the SPECIFIC property that acted as security.
        Section 88 of the Insolvency Act
        This section says that a bond will be invalid if the bond tries to secure a debt that is older than 2 months, and where the bond is lodged for registration within 6 months of the debtors insolvency as invalid wont give rise to valid security.
        Which rights arise following agmt & registration?
        Following AGREEMENT, you will only have personal rights. Following registration, which occurs after agreement, there will be real rights arising from the notarial bond, but this will only happen if the bond is a SPECIAL NOTARIAL BOND. So from GENERAL NOTARIAL BONDS you get personal rights, SNB’s you get real rights. In this, with SNB’s if you want a real right you must have CORPOREAL PROPERTY forming the subject matter of the bond.
        Termination
        Failure / discharge of principal obligation
        Destruction of property
        Damage to property
        Cession in securitatem debiti
        Cession in securitatem debiti
        Property is INCORPOREAL (personal right). Personal rights are conveyed from one person (the ‘cedent’), who is the holder of the right to another 'the ‘cessionary’’. Eg. IOU.
        How does CISD function as security?
        Rights transferred by cession
        IF Purpose of cession is to secure debt, then cession = cession in securitatem debiti
        NO registration & NO delivery required
        Effect of CISD depends on construction
        Out & out’ cession, with agreement to re-cede right(s)
        Complete transfer of rights with contractual entitlement to claim return of rights on discharge of principal obligation/debt
        EFFECT: Cedent loses ownership of right(s) - Rights vest in cessionary
        CREATES PERSONAL RIGHT ONLY
        Pledge
        Ceded rights pledged as security for debt owed BUT ownership of rights remains vested in cedent
        This is a reversionary right --> Entitles cedent to reversionary interest & claim for re-cession of rights
        EFFECT: Cessionary has rights of pledgee , and cessionary may not compromise ccedents position
        Insolvency of cedent? Rights vest in insolvent estate BUT cessionary becomes secured creditor
        Insolvency of cessionary? Cedent entitled to return of rights
        Debtors Rights
        Debtor’s consent to CISD: Required ONLY IF debtor’s obligations to perform affected by performance to cessionary
        Termination
        Principal obligation terminates / is discharged
        Court orders that cession = invalid / cedent lacked capacity
      3. Security by operation of law
        Rights of retention/liens
        Rights of retention / liens
        A person who spends money on somebody elses property where that person is in possession of the property then the money spender can keep the property until the money that they have spent has been repaid.
        Legal Nature
        Ltd real right to retain property until compensated IF in possession
        Lien terminates in case of dispossession, so you HAVE TO HAVE POSSESSION to have a lien.
        If the disposition is voluntary, then the lien can’t be revived.
        If it’s involuntary, such as when the owner steals the piece of property back, then then you can go and reclaim possession, then the security would be restored.
        Types
        Enrichment Liens
        Salvage Liens
        No requirement that there is any contract between the parties, but gives rise to a limited real right, and the person who spent the money can usually claim whatever the cost of the enrichment was.
        Claim available to the lienholder:
        They can claim everything that they spent on NECESSARY expenses, in the sense that the expenses were required for the preservation or protection of the property.
        Necessary expenses are expenses which are necessary to prevent the property from being seriously damaged or destroyed completely
        Improvement Liens
        Expenses are NOT necessary for the preservation of the property, they are just useful to the property by increasing its value. Luxurious expenses are NOT included.
        Claim available to the lienholder:
        The lien holder is secured even for the full amount spent, or for the value which has been added to the property, WHICHEVER IS LESS.
        Lienholder must be possessor / occupier
        Doesn’t matter whether you act in good faith or bad faith, lawfully or unlawfully, you will still have the right to hold onto the property.
        Debtor/Creditor Liens
        There is a contract between the parties in terms of which one party is going to make changes/increase value (do work) on the other parties property. THIS ONLY GIVES RISE TO A PERSONAL RIGHT.
        TERMINATION: Debtor alienates (sells) property & buyer is bona fide (takes property in good faith)
        Rights of lienholder?
        Necessary AND luxorious are covered, provided that it is in terms of a contract between the parties. If it is, the lien holder can hold onto property until the full contract price is paid.
        If the debtor in terms of the contract is not the owner of the property then the creditor can only hold the property/keep the property from the debtor, and if the owner comes along and demands to have the property back, then you have to give the property back.
        If owners estate is sequestrated, the lien holder will have a preference to the proceeds of the sale of the property.
        Where the debtor is solvent, the lien holder can go to court and have the property sold in execution in the underlying claim
        LH’s right to obtain judgment once they obtain judgement against the debtor, then a judicial mortgage arises. These secure the LH rights, and the LH no longer has to be in possession of the property to uphold the lien.
        Responsibilities/Rights of Lien Holder
        To eep the property in good condition. Liable for any damage caused by negligence, however if it costs them money to maintain the property, then that amount of money to pay the security guard is also secured by the lien.
        Termination
        Cause of action (principal debt) extinguished
        Object destroyed
        Holder abandons rights
        Holder loses possession VOLUNTARILY
        Alternative form of security offered & court order saying that the LH must accept that kind of security instead.
        Tacit hypothecs
        Judicial mortgages
    2. Comes into being by operation of law (an act) or an agreement between parties (WITH REGISTRATION AND DELIVERY)
      1. Asset is ‘given’ as security to creditor for payment of debt
        Ltd real right (NOT OWNERSHIP, less than ownership) = enforceable against everyone
        Failure to pay in terms of principal obligation? Creditor may execute against asset
    3. < Advantages / Disadvantanges >
      1. Very strong form of security as it is enforceable against everyone
        There is a physical asset that forms your security, you as a creditor will not be prejudiced by the insolvency.
      2. Say car is security: The debtor has to give you the car for safe keeping. You as the creditor has to store that car, and the debtor is not allowed to use that car. Hence the disadvantage of real security is that it can be inconvenient.
        The amount you can claim from security is directly linked to the value of the asset. If the asset deteriorates in value, your security will deteriorate in value.
        People might not have any assets that they can put up as security.
  2. Personal
    1. Comes into being by agreement between parties
      1. Person (3rd party) other than debtor undertakes to pay if debtor does not (Like a surityship)
        Personal right is enforceable against party to agreement ONLY
    2. < Advantages / Disadvantanges >
      1. The fact that it is only enforceable against the party in the agreement, means that if that person dies or is declared insolvent, or disappear, your security falls away.
      2. More convenient to have a piece of paper which says so and so will pay you, than having to look after someones car.
        More accessible way of providing security, so students may have a wealthy family member who is willing to stand surety, who will pay if the student defaults.
5. Impact of the NCA
  1. Imposes duty on credit providers to assess creditworthiness of mortgage applicants
    1. Failure to do so may lead to mortgage bonds being declared ‘reckless credit agmt(s)’ the agreement can be set aside in whole or in part
      1. AND IF mortgage applicant also over-indebted entire agreement can be suspended.
    2. Creditor may not enforce agreement / security UNTIL:
      1. Consumer is in default AND Debt review application dismissed OR Court finds debtor is not over-indebted OR Debtor defaults on debt re-arrangement

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	Created by Daniel Freedman about 9 years ago