There are two main categories of real security.
o 1. The kind of security that is provided for when parties enter into an agreement –
thereby constituting negotiated real security.
o 2. Where security enters into the picture without the parties entering into any kind of
agreement – this constitutes tacit real security or security by operation of law.
Where there is no negotiated security or no security by operation of law a third category
emerges.
o 3. Judicial real security.
INTRODUCTION:
Parties: Creditor & Debtor
Risk that debtor will not repay the loan
o Whenever a bank or other financial institution (the creditor) lends money to a person
(debtor) the creditor risks that the debtor may not repay the loan.
o To reduce this risk, the law has created a process that provides some protection for the
creditor.
Creditor can take steps where debtor unwilling or unable.
o In the case where the debtor cannot or will not pay the debt – the creditor can take steps to
recover the money still owed to repay the debt.
o This process distinguishes between cases where the debtor is unwilling and those where the
debtor is unable.
o Question is, what steps can the creditor take to enforce the repayment of the loan where the
debtor is either unwilling or unable.
Unwilling: court order, writ of execution, attach assets, sell, proceeds used to pay debt.
o Where the debtor is unwilling to pay the loan, the creditor may apply for a court order that
instructs the debtor to repay the loan.
o If the debtor then still fails to pay the loan the creditor can enforce the court order by issuing
a writ of execution – the writ instructs the sheriff to attach the debtor’s assets to the value of
the debt owned, to sell them at a public auction and to use the proceeds to repay the debt.
, Unable: insolvent
o Where the debtor is unable to repay the loan, the creditor may apply for a court order that
declares the debtor insolvent.
o Where a debtor is declared insolvent by the court – ownership of his assets is transferred to
the court appointed trustee of the insolvent estate.
o The remaining assets are then sold, and the proceeds are used to pay the debtor’s creditors.
BUT! Still many risks/disadvantages even if these steps are taken.
o Although these processes make it possible for a creditor to be repaid at least in part, they do
not guarantee repayment and there are many risks/disadvantages even if these steps are
followed.
o For example, the debtor may have disposed of all their estates making it practically useless
for the creditor to use a debt recovery process – because there are no assets to sell. Or the
liabilities of the debtor may exceed his assets – the sale of the assets cannot cover the
amount of the debt.
There may also be more than one creditor, which means that the proceeds must be
shared equally between creditors.
THEREFORE: creditor asks for security
o For the creditors to protect themselves, many creditors lend money to a debtor only if they
are willing and able to provide security for the repayment of the loan (the principal debt).
Where you give a creditor real security in either the form of a mortgage or pledge for example, it
gives the secured creditor, a right of first preference over the property in question. What does this
mean?
o There are secured creditors.
Secured creditors get preference or get paid first.
o Preferent creditors
o Concurrent creditors.
o Where the debtor is unwilling to repay the principal debt, the secured creditor can, after the
property has been attached and sold in execution claim the proceeds from that sale before
any other creditor.
o The right of first preference also applies in cases when the debtor is insolvent. In other
words, after the trustee has sold the debtor’s assets, the secured creditor can claim the
proceeds from the sale of the property before any other creditor may do so.
FUNCTIONS OF REAL SECURITY:
Apart from conferring a right of first preference on a secured credit granter – real security also
performs a number of other functions.
Right of first preference
Creditworthy
o It helps the creditor to distinguish between debtors who are credit worthy and those who
are not.
o For example: a debtor who is willing to provide security for a loan (like his car) is more likely
to be credit worthy.
Debtor prioritizes secured debts
o A real security right also enforces the debtor to prioritize their obligations to the creditor.
o For example – a debtor who has given their home as security is more likely to repay the
secured debts first before unsecured debts are paid.
o The threat of loss of the assets acts as an incentive to repay the principal debt.
Limits debtor’s ownership entitlements
, o Until the creditor is paid, the creditor can restrain the debtor from some of his ownership
entitlements.
o A real security right gives the creditor the power to prevent the debtor from selling or rather
disposing of a security object. The fact that the debtor cannot dispose of the property
without the creditor’s cooperation preserves the creditor’s rights and interests in the object.
INTRODUCTION (AGREEMENTS):
For the creditors to protect themselves – many creditors lend money to a debtor only if they are
willing and able to provide security for the repayment of a principal debt (a loan).
The creditor asks you what you can give them to ensure that you will repay the loan. Therefore, there
are normally two agreements.
2 agreements:
o Credit agreement
1. Credit agreement or the loan which establishes the principal debt between the
creditor and the debtor.
o Security agreement
2. Sets out the intention of the parties to create a real security right in the property
of the debtor or sometimes in the property of a third party.
AND the act that creates the real security right (registration or delivery)
o A further act is also needed to create the real security right – either registration or delivery.
NOTE: accessory principle- what does this mean? (see page 300 of the Principles of the Law of
Property Textbook)
o The continued existence of real security rights depends on the existence of a valid underlying
principal debt.
o If there is no principal debt, then there can be no real security right.
o In other words, the principal debt and the real security right are inextricably linked. This
means that if the underlying debt is invalid, the real security right will not come into
existence and if the principal debt is extinguished (you have paid the creditor in full) then the
real security right is automatically terminated.
Distinguish between
o The security agreement itself, can take the form of either a personal security right or a real
security right.
o Real security right
o Personal security right
DIFFERENT FORMS OF SECURITY:
There are different forms of security: personal and real security rights.
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