Security Flashcards
- Without referring to the specific types of real and personal security, explain the difference between the legal concepts of real and personal security.(4)
•What is personal security?
–where a 3rd party binds himself contractually for the proper performance of the obligation (debt) of the principal debtor (suretyship)
•What is real security?
–where the debtor binds all / some of his assets as security for his debt (eg pledge + mortgage)
- Explain why a creditor may look to obtain security from a debtor.(2)
•Why security?
–debtor/creditor relationships characteristic of all developed societies/legal systems
–protection of the creditor
Why would a creditor consider real security to be more beneficial to him than personal security?(3)
•Why is it better to have real security?
–real security far more advantageous to creditor:
•suretyship: mere additional personal right vs the surety (cr now has personal rights vs principal debtor and vs surety)
•real security (pledge/mortgage): a real right in relation to a thing of value + makes cr a secured creditor (vs concurrent)
- Provide a definition for a contract of suretyship.(3)
•Definition
–3rd party (the “surety”) binds himself to the creditor for the proper performance of the obligation (debt) of the principal debtor
A security agreement is an accessory agreement.” Discuss this statement, and include reference to the implications of the statement.
•What does it mean to say that a security contract is “accessory” in nature?
–security contract is dependant on the existence of a valid underlying principal debt / obligation
–does not create a principal obligation.
- Distinguish a contract of suretyship from a contract providing for delegation.(3)
Suretyship also differs from delegation of obligations where a debtor delegates his liability to another person and is replaced as debtor by the latter. The creditor would then have no right to recover against the delegator (original debtor) if the new debtor fails to pay.
Discuss the formalities that must be adhered to in the conclusion of a contract of suretyship.
In terms of section 6 of the General Law Amendment Act the formalities are as follows:
- In writing;
- Signed by/on behalf of surety;
- Identities of parties and principal debtor;
- Nature of principal debt.
Molly wishes to sign as surety for her brother, Roger, who makes an application to the Bank for a personal loan. In the suretyship agreement, Molly notices a clause stating the following; “The surety hereby waives all benefits available to her under the common law, and confirms that she understands the nature and purport of such waiver.” Molly is unhappy with this clause and wishes for it to be removed, why is she so adamant on it’s removal?
A surety has the following benefits in terms of the CL:
–Benefit of excussion
•surety may insist that cr demands payment from PD first before looking to the surety
–Benefit of division (only where more than 1 surety)
•any surety held liable by the cr may insist that the principal debt be divided pro rata among all the sureties (ie that he is held liable only for his pro rata share)
–Benefit of cession of action
•where surety has performed to the cr, he may demand that the cr cede all securities and personal rights of the cr vs the PD or vs the co-sureties to that surety
–Recourse vs co-sureties
•ex lege claim vs co-sureties for pro rata amount of princ debt
–Recourse vs principal debtor.
A surety may waive the right to such benefits, however in Molly’s case she would not like to waive her right to such benefits and the clause in the agreement waiving her rights to such benefits has not been expressly or tacitly agreed upon.
Assume that the Bank agrees to Molly’s demand and deletes the clause from the version of the agreement eventually signed by Molly. On 31 October 2008, one day after an instalment under the loan agreement became due and payable to the Bank by Roger, the Bank sends one of its employees around to Molly’s workplace to demand payment of the relevant instalment by Molly herself, in terms of the suretyship agreement. Discuss Molly’s legal position under these circumstances.
•surety is liable when due and payable principal obligation (debt) is not met by PD timeously
–unless: cr and surety have agreed otherwise / surety is able to rely on the benefit of excussion.
If the clause is removed, Molly has the benefit of excussion, and in terms of this benefit, the surety (Molly) may insist that the creditor (Bank) demands payment from Principal debtor (Roger) before looking to surety.
Discuss the difference between the legal concepts of pledge and mortgage.(4)
•accessory in nature
–inextricably linked to underlying principal oblig (arising from contract, delict, enr)
•= dual relationship
–(i) agreement to mortgage / agreement to pledge gives creditor the personal right to demand that
(ii) real security be registered (mortgage) / delivered (pledge)
–limited real right (ie real security) then brought about by:
•pledge: delivery of thing pledged
•mortgage: Registration of bond in Deeds Office
- mortgagor / mortgagee — pledgor / pledgee
- subject matter (movable; immov; incorporeal)
Hunter and Morgan enter into a standard agreement of pledge, in terms of which Morgan agrees to pledge her BMW 320i Sport to Hunter as security for a loan of R290,000 made to her by Hunter. Morgan duly delivers the vehicle to Hunter at his house. Two days later, Morgan sees Hunter climbing into the BMW in the parking lot of the local supermarket. She is unhappy, and approaches you for advice. Advise Morgan fully in relation to the given set of facts.
•Pactum antichresis
–allows pledgee to use & enjoy pledged object for the duration of the pledge (often as a substitute for payment of interest
= Valid
–in absence of a pactum antichresis: pledgee commits breach if he uses / enjoys the pledged object.
Therefore Hunter has committed a breach of the pledge agreement between him and Morgan, as there was no Pactum antichresis included in the agreement.
Explain why the conclusion of a mortgage contract alone will not be to the advantage of the creditor.
•= mortgagee (creditor) obtains a limited real right over immovable property belonging to the mortgagor (debtor) or a 3rd party to secure payment of a debt
Agreement to mortgage & registration of bond
•mortgagor and mortgagee conclude a mortgage contract (which creates mortgage right)
- BUT: security constituted by registration of bond in the Deeds Registry.
- NB – must be in writing (formality)
Therefore the conclusion of a mortgage contract alone will not be to the advantage of the creditor, as the contract creates a mortgage right for the debtor, but security is only constituted by registration of a bond in the Deeds Registry. So the creditor must also register the bond in the Deeds Registry.
Discuss the relevance and applicability of section 88 of the Insolvency Act, 1943.
Sec- tion 88 of the Insolvency Act provides that where a special notarial bond or a mortgage bond is passed over assets to secure a previ- ously unsecured debt, which was unsecured for at least two months before the registration of the notarial bond or mortgage bond, and the debtor is liquidated within six months of the registration of the notarial bond or mortgage bond, no preference is recognised under the notarial bond or mortgage bond. Effectively, the creditor loses his or her security.
Discuss whether a clause providing for parate executie will be valid in a contract of mortgage.(3)
•Parate executie
–in principle: invalid (contra pledge)
–will be valid only where mortgagor’s specific consent to such execution is given again to mortgagee after default in performance
Is it possible to cause more than one mortgage bond to be registered over the same piece of land? Explain how such a situation would work in practice.(3)
- possible to have more than 1 bond over same property
* conferral of further bonds? need written consent of mortgagee
