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Summary CML2010S Exam Notes: Security
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textbook and lecture summary of the security section Textbook D Collier-Reed and K Lehmann (eds) Basic Principles of Business Law (2nd ed; 2010)
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4. SECURITY,Introduction to Security
What is security
A means to ensure contractual performance
o By a party
o To a contract
A guarantee
o That you will be paid
Benefits of security
Enforcement of a contract is difficult and time consuming
o Security makes it
Simpler
Quicker
Helps ensure payment if contracted party becomes insolvent
o Secures performance
Places you in preferential position to claim
Relative to other creditors
o Without security
Will be a concurrent creditor
Accessory nature of security
Security is of an accessory nature
Depends on the existence of
o A valid principal obligation between
A debtor
A creditor
If the main agreement is invalid
o The security is automatically invalid
Examples
Mortgage bond on real estate
o Mortgage provides security
Real estate is then fully paid for
o Principle obligation executed
o Security therefore also terminated
,Principle doesn’t apply in reverse
If security
o Disappears
o Is removed
Principle obligation remains
Reason = Principle of accession
o Principle obligation is of a contractual nature
o Contract not dependent on the existence of the security
,Types of security
Real Security
How it comes into being by
The operation of the law
o Security will kick in ITO
Common law
Statute
o Example
Landlord’s tacit hypothetic
Landlord can lock tenants possessions away
Agreement between
o The contracting parties
o Followed by registration
Effect
Asset belonging to the debtor is ‘given’ as security
o To the creditor
o For payment of debt
Exercisable against the world
o Enforceable against anyone
Who interferes with creditor’s right
o Rather than just enforceable against
One or two immediate persons
o Example
I have a real right against Tim’s car
Tim then sells his car to Jim
Jim is a third party
I can still enforce my real right against Jim
Even if Jim didn’t know about my real security over the
car
Does not give rise to ownership
o If creditor defaults
o Debtor can exercise his real right
May execute against the asset
But doesn’t get ownership the asset
Value of security vs damages for breach of contract
o Much quicker and more direct and guaranteed payment.
,Advantages & Disadvantages
Advantage
o Doesn’t matter if the debtor is solvent
Disadvantages
o Inconvenience
o High administrative burden
Examples
Special mortgage bond over immovable property
Forms of real security over moveable property
o Pledge
o Pledge construction of cession in securitatem debiti
o Special notarial bonds over both
Movable property
Corporeal property
Intangible personal property
o Having value
o But lacking physical substance
Examples
o Leases
o Mortgages
o Property rights.
Security by operation of law
o Rights of retention/liens
o Tacit hypothecs
o Judicial mortgages
,Personal Security
How it comes into being
Where a 3rd party
o Binds himself to the creditor
For performance
Of a debtor’s obligations
To that creditor
If the debtor defaults
Effect of a real security
Enforceable only against immediate parties
o The people who agreed to extend the personal right
o Not against 3rd parties
Advantages & Disadvantages
Advantages
Convenient.
Less admin.
More accessible.
Helps if you don’t have any property to your name.
At least you have something.
Disadvantages
Weaker form of security
o Because only enforceable against immediate parties
Example
Bank loan with surety
Gives you a loan
But only if your father co-signs
o Father becomes a surety to your loan
o Bank can seek payment directly from your father
If you default
,Special Mortgage Bond Over
Immovable Property
General
Form of real security
Commonly used
Over applies to immovable property
o House
o Farm
o Land
o Windmill
o Land rights
o Sectional unit
Parties involved
Mortgagee
The creditor
The person receiving the bond
Mortgagor
The debtor
The person giving the bond
3rd Party
Can become the mortgager
o Even though he isn’t the debtor in the principle obligation
If a 3rd party provides the security
o On the loan owed by the principle debtor
o He becomes the mortgager
Examples
Tim obtains a home loan secured by a mortgage bond in favour of ABSA bank
o Mortgagor = Tim
o Mortgagee = ABSA bank
, Formation of a mortgage bond
Requirements
Valid principal obligation
Bond established over property
o Of somebody other than the creditor/mortgagee
Must be true for a bond
Mortgagor is the owner of the property
o This doesn’t have to be the debtor
The property must be immovable
o One can’t take out a bond on movable property
Agreement and Registration
Process
Register mortgage bond at the deeds office (Deeds Registries Act 47 of
1947)
o Property must be fully described
o The bond must give rise to a real right
o Executions by the owner or authorized conveyance
Execution= signed
Moment of registration
What it is?
When the mortgagor signs the bond
Why is this important?
Bonds rank according to date or registration
o If two or more bonds are registered over a property, and the
mortgagee goes insolvent
o The first bond has preference
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