Study Unit 5: Part 1
SECURITY
Introduction
To ensure debtors fulfil obligations creditors demand form of security to ensure money is paid.
Two forms of security:
- Real security
o Debtor’s property serves as security
o Debtor doesn’t pay creditor = creditor has real right to property
o Creditor gets property and debts settled with proceeds from property
o Insolvency? Mortgage provides creditor with preferred & secured claim to debt.
o Real security is best form of security
- Personal Security
o 3rd party undertakes to fulfil debtor’s obligations if debtor fails to do so
o Creditor obtains personal right against 3rd party
o WEAKER FORM OF SECURITY
Real and personal rights to security are dependent on debt obligation.
- Thus, debt void = right of security void.
- Debt satisfied = security terminated.
- Right to security void/cancelled without obligation satisfied, debt becomes unsecured, i.e.
no security attached to debt – same if object of security destroyed.
National Credit Act 34 of 2005, regulates security.
Real Security
1. Mortgage bond over immovable property
Only relates to immovable property (land, buildings etc)
Can be the whole property or a share of the property
Agreement between debtor & creditor
Grants creditor a limited real right in the immovable property for security of debt
Real right is obtained through registration at Deeds Office
Property sold = Registrar of Deeds will not transfer ownership unless mortgage bond
cancelled OR property released from mortgage bond through written permission
from mortgagee (creditor).
.
Mortgagor (debtor) retains ownership and use of property until mortgage bond is
foreclosed or cancelled.
Creditor should maintain property
Possible to register 1< mortgage over property without consent of first mortgagee
(creditor)
Debt not paid = creditor may take back property and have property sold to satisfy
debts.
, Due to being real security – obtains preferred (debt paid before others) and secured
definite) claim if debtor insolvent – s 88 of Insolvency Act
If debt originated 2< months prior to registration & bond unsecured = no preferent
claim
EXCEPT in case of “kustingsbrief” – mortgage bond registered at same time of
registration of transfer of land to buyer (to secure balance of purchase price).
Bonds can be registered over future & existing debts
Future debts = covering bonds (e.g, bank overdraft) but only to maximum limit –
same function as mortgage bond
Participation bonds = investor lends to investment company, who lends to 3 rd party
2. Real security over movable property
Pledge
o Movable property given to secure debt – eg diamond ring given to secure
debt
o Any existing movable property can be pledged
o Debtor commits to give creditor movable property, followed by delivery
o NO FORMALITIES
o After delivery, debtor does not have use thereof nor does the creditor
o Before delivery = personal right, after delivery = limited real right
o Limited real right = able to sell pledged object if debts are not paid
o Debtor insolvent = preferred and secured claim
o Creditor can sell pledged object without court order, IF contract includes
parate executie (immediate execution clause) – clause VOID if sale
prejudices rights of debtor
Special notarial bond over movable property
o Applies to specified corporeal (tangible) movable assets
o General notarial bond = goods not specifically identified, eg all inventory in
shop
o Different from pledge – requires notarial attestation (proof that goods exist)
and registration at Deeds Office to acquire real right.
o Debtor retains use of property during time of bond
o General notarial bond = NO REAL RIGHT, same as over intangible movables,
eg liquor license)
o Bonded property specified & tangible = limited real right for creditor – only
applies to bonds after 7 May 1993
o Debt not paid = property may be sold and proceeds used to pay assets
o Insolvency = preferred and secured claim for creditor
o General bond & special bond over incorporeal (intangible) property –
creditor will receive preferred but not secure claim to free residue
(remaining proceeds) of insolvent’s estate
SECURITY
Introduction
To ensure debtors fulfil obligations creditors demand form of security to ensure money is paid.
Two forms of security:
- Real security
o Debtor’s property serves as security
o Debtor doesn’t pay creditor = creditor has real right to property
o Creditor gets property and debts settled with proceeds from property
o Insolvency? Mortgage provides creditor with preferred & secured claim to debt.
o Real security is best form of security
- Personal Security
o 3rd party undertakes to fulfil debtor’s obligations if debtor fails to do so
o Creditor obtains personal right against 3rd party
o WEAKER FORM OF SECURITY
Real and personal rights to security are dependent on debt obligation.
- Thus, debt void = right of security void.
- Debt satisfied = security terminated.
- Right to security void/cancelled without obligation satisfied, debt becomes unsecured, i.e.
no security attached to debt – same if object of security destroyed.
National Credit Act 34 of 2005, regulates security.
Real Security
1. Mortgage bond over immovable property
Only relates to immovable property (land, buildings etc)
Can be the whole property or a share of the property
Agreement between debtor & creditor
Grants creditor a limited real right in the immovable property for security of debt
Real right is obtained through registration at Deeds Office
Property sold = Registrar of Deeds will not transfer ownership unless mortgage bond
cancelled OR property released from mortgage bond through written permission
from mortgagee (creditor).
.
Mortgagor (debtor) retains ownership and use of property until mortgage bond is
foreclosed or cancelled.
Creditor should maintain property
Possible to register 1< mortgage over property without consent of first mortgagee
(creditor)
Debt not paid = creditor may take back property and have property sold to satisfy
debts.
, Due to being real security – obtains preferred (debt paid before others) and secured
definite) claim if debtor insolvent – s 88 of Insolvency Act
If debt originated 2< months prior to registration & bond unsecured = no preferent
claim
EXCEPT in case of “kustingsbrief” – mortgage bond registered at same time of
registration of transfer of land to buyer (to secure balance of purchase price).
Bonds can be registered over future & existing debts
Future debts = covering bonds (e.g, bank overdraft) but only to maximum limit –
same function as mortgage bond
Participation bonds = investor lends to investment company, who lends to 3 rd party
2. Real security over movable property
Pledge
o Movable property given to secure debt – eg diamond ring given to secure
debt
o Any existing movable property can be pledged
o Debtor commits to give creditor movable property, followed by delivery
o NO FORMALITIES
o After delivery, debtor does not have use thereof nor does the creditor
o Before delivery = personal right, after delivery = limited real right
o Limited real right = able to sell pledged object if debts are not paid
o Debtor insolvent = preferred and secured claim
o Creditor can sell pledged object without court order, IF contract includes
parate executie (immediate execution clause) – clause VOID if sale
prejudices rights of debtor
Special notarial bond over movable property
o Applies to specified corporeal (tangible) movable assets
o General notarial bond = goods not specifically identified, eg all inventory in
shop
o Different from pledge – requires notarial attestation (proof that goods exist)
and registration at Deeds Office to acquire real right.
o Debtor retains use of property during time of bond
o General notarial bond = NO REAL RIGHT, same as over intangible movables,
eg liquor license)
o Bonded property specified & tangible = limited real right for creditor – only
applies to bonds after 7 May 1993
o Debt not paid = property may be sold and proceeds used to pay assets
o Insolvency = preferred and secured claim for creditor
o General bond & special bond over incorporeal (intangible) property –
creditor will receive preferred but not secure claim to free residue
(remaining proceeds) of insolvent’s estate
