Security/Insolvency

Question 1

what is the definition of insolvency

Answer 1

person is insolvent when their liabilities exceed their assets (‘balance sheet insolvency’). From a legal point of view, a person only has the status of being legally insolvent once this has been confirmed by the High Court.

Question 2

what is sequestration

Answer 2

The process by which a High Court declares a natural person insolvent

Question 3

what is liquidation

Answer 3

winding up of an insolvent company

Question 4

what is concursus creditorum

Answer 4

judicial proceedings with the object of lawfully distributing the insufficient assets in the estate of the debtor among a number of pressing creditors in accordance with the rights of priority of each creditor.

Question 5

what are the sources of insolvency law

Answer 5

• the insolvency act (ranking of crediotrs)
• the companies act - s339
• the common law

Question 6

what is commercial insolvency

Answer 6

This is where a company is unable to pay its debts as they fall due, regardless of the value of its assets.

Question 7

what is a secured creditor

Answer 7

a person who holds a security interest over property

Question 8

what is a concurrent creditor

Answer 8

Unsecured creditors hold no security and are not granted any kind of statutory preference in the Insolvency Act. Unsecured creditors will only be paid once secured creditors and preferent creditors have been paid. Unsecured creditors may only receive a fraction of the debt owing to them as a result.

Question 9

Explain the commercial necessity for securing transactions.

Answer 9

One takes security for a credit agreement in order to protect yourself against the debtor’s default.

Question 10

difference between real and personal security

Answer 10

real security = involves taking a security interest in an item of the debtor’s property

personal security = involves entering into a contract with a third party who will pay the debtors debt if they do not

Question 11

Explain what is meant when it is said that a security obligation is ‘accessory’ to the principal debt.

Answer 11

The contract creating the security interest depends on the underlying contract of debt for its existence (and hence is accessory to it). This means that should the underlying debt come to an end (for example because it has been paid off) the accessory security interest should come to an end too.

Question 12

what are the formalities necessary to create a suretyship?

Answer 12

Jurgens v Volkskas Bank Ltd

a) The terms of the suretyship agreement must appear in writing;
b) This document must be signed by the surety.

Question 13

what are the formalities necessary to create a suretyship?

Answer 13

s6 of GLAA and Jurgens v Volkskas Bank Ltd

a) The terms of the suretyship agreement must appear in writing;
b) This document must be signed by the surety.

Question 14

what is the effect of the formalities on a deed of suretyship where there are multiple sureties and one has not signed the deed of suretyship

Answer 14

In Industrial Dev Corp of SA Ltd: answer to this question required an interpretation of the deed of suretyship as a whole – it was a question of interpretation whether the other sureties intended to be bound on these facts, rather than one of formalities.

Question 15

what if there are blank spaces on the deed of suretyship when it is conveyed to the creditor?

Answer 15

Wizard Holdings - blank space did not invalidate the agreement based on the in writing requirement. Failure to complete the clause indicated an intention not to impose a limit on their liability.

Question 16

how does cession of a principal debt affect an accessory contract of suretyship?

Answer 16

In Pizani , the Appellate Division held that when there is an agreement in terms of which the principal debt is ceded, the accessory suretyship agreements would automatically follow the principal debt without the need for a separate cession of the suretyship agreements. This is provided that there is nothing in the wording of the suretyship agreement which expressly prevents it from being transferred in this way.

Question 17

what is the benefit of excussion

Answer 17

When the surety is sued by the creditor for payment, the surety may invoke the benefit of excussion. This requires the creditor to first execute against the debtor in full before pursuing the surety for payment

Question 18

what is the benefit of division

Answer 18

In a situation of multiple sureties, each co-surety is liable only for her pro rata share of the outstanding debt

Question 19

Surety and co-principal debtor’

Answer 19

when you sign as ‘surety and co-principal debtor’ this phrase automatically implies that you are renouncing the benefits of excussion and division.

Question 20

There are multiple co-sureties and one pays in full. What proportion of the debt may the paying surety receive from the next surety in terms of her right of recourse or by taking cession of actions?

Answer 20

Right to a contribution from co-sureties: In a situation where a surety is one of several co-sureties and that surety has been required by the creditor to settle the outstanding principal debt in full, after she has paid the debt in full, the paying surety may sue the other non-paying sureties for a pro-rata contribution to her costs. This right exists even if the paying surety has bound herself as ‘surety and co-principal debtor’ and has renounced the benefits of excussion and division.

Question 21

What if the underlying debt owing by a company to a creditor is extinguished or compromised during business rescue proceedings – how does this affect the accessory obligations of a surety of the company?

Answer 21

sureties remain liable - New Port Finance Co

Question 22

Does prejudice to the surety caused by the actions of the creditor release that surety from her obligations?

Answer 22

In sum, a surety will not be discharged on the grounds of the creditor’s actions causing prejudice to it.

Question 23

parate executie

Answer 23

clause in a real security agreement which states that if the debtor defaults, the creditor may take the property in question and sell it to a third party without recourse to a court in order to obtain the outstanding balance owing.

Question 24

Pactum commissorium

Answer 24

clause in a real security agreement which states that should the debtor default, the creditor may simply keep the item of property in question (which the creditor holds as security). This type of clause is considered against public policy in South Africa (

Question 25

conditional sale

Answer 25

the contract creating the security interest in favour of the creditor says that should the debtor default the creditor may purchase the item of property from the debtor at fair value and any balance that is owing/outstanding then the creditor may still look to the debtor BUT if there is a surplus the creditor must return it to the debtor

Question 26

Does a parate executie clause infringe a debtor’s right of access to a court or any other constitutional right in a way that may lead to invalidity

Answer 26

But then in 2001 Froneman J ruled that parate executie clauses were unconstitutional on the basis that they infringe the s34 right of access to court as it constitutes unlawful self help (see discussion on Findevco v Faceformat).

Question 27

how has the SCA defended parate executie clauses

Answer 27

Bock = establishes you can have a parate executie clause in a pledge over movables.

Question 28

Explain the interplay between the right to housing in the Constitution and the creditor’s right to foreclose on immovable property in the event of the debtor’s default.

Answer 28

difficult to attach someone’s primary residence - sometimes need to execute immovable property which is the debtor’s home

Question 29

If summary judgment is granted in a foreclosure case may the registrar of the High Court issue a writ of execution without a hearing?

Answer 29

The Constitutional Court held in Gundwana that it was unconstitutional for the Registrar to simply issue a writ of execution under the default judgment procedure in URC 31(5) without a hearing before a cour

Question 30

Is it ever possible to ‘reinstate’ a mortgage where the debtor has fallen into arrears? How much must be paid in order to reinstate?

Answer 30

yes it is - can be reinstated up until the proceeds of the sale in execution are realized. They do not have to pay the full outstanding balance - only arrear repayments.

Question 31

Must a sale in execution of immovable property be done subject to a ‘reserve price’? e. What if a buyer in execution wishes to evict a previous mortgagor of the property who has remained in possession of the premises?

Answer 31

yes courts must set a reserve price which takes into account whether the property is occupied and whether there would likely be eviction expenses for the buyer in execution

Question 32

Explain how a general notarial bond may be converted into a pledge?

Answer 32

A general notarial bond may be perfected if the creditor attaches the debtor’s movable assets (prove that there is debt owed and the debtor is not paying). Upon attachment, the creditor obtains rights in the movables which are analogous to a pledge of those assets. This means that upon attachment, the creditor obtains a limited real right in the attached property and will thereafter rank as a secured creditor in the distribution of the debtor’s insolvent estate.

Question 33

Does the principle of ‘first in time, stronger in law’ apply if there are multiple general notarial bonds?

Answer 33

Contract forwarding

With competing general notarial bonds, South African law holds that ‘the law protects those who are vigilant and not those who sleep’. The vigilance of Contract Forwarding in swiftly acting to perfect their bond should thus be rewarded at the expense of Chesterfin.

Question 34

what was the role of the doctrine of notice in contract forwarding

Answer 34

A general notarial bondholder is, however, protected by the doctrine of notice. It would not be possible for a later bondholder to attach the debtor’s movables if it KNEW of the prior bondholder’s rights. HOWEVER: the knowledge in question has to be actual knowledge. It is not possible to rely on constructive knowledge based on the fact that a prior bond is registered in the Deeds Registry [

Question 35

what is the commercial utility of a special notarial bond

Answer 35

they get a limited real right - provides security over movable property in a way which would include the creditor among the class of secured creditors on the debtor’s insolvency

Question 36

how is a special notarial bond ranked upon insolvency

Answer 36

Since a special notarial bond is now akin to a pledge, it renders the bondholder a secured creditor upon insolvency of the debtor in the same way that a pledge would.

Question 37

what is the theoretical construction of securitatem debiti

Answer 37

pledge construction

Question 38

is paratie executie permitted in security cession

Answer 38

yes because possession is not an issue here

Question 39

what is a debtor/creditor lien

Answer 39

a contractual debt - retain possession of thing until you pay , amount is quantified with reference to the agreed contract price.

Question 40

what is an enrichment lien

Answer 40

where you improved someones thing, retain possession until paid - strongest form for creditor - create a limited real right which can be enforced against anyone and will rank higher than a debtor/creditor lien and also rans higher than any other competing real security interest in the same asset.