Surety and Other Forms of Security PDF

Surety and Other Forms of Security: Unit 13 Chapter 25 Introduction A creditor usually requires some form of security as protection against the possibility of the debtor not performing his obligation to pay. There are 2 types of security are: Personal Security for example,...

Surety and Other Forms of Security: Unit 13 Chapter 25 Introduction A creditor usually requires some form of security as protection against the possibility of the debtor not performing his obligation to pay. There are 2 types of security are: Personal Security for example, Suretyship (A third party can be requested to bind himself contractually for the performance of debtor’s obligation to pay.) This creates a personal right to claim payment. Real Security for example; Mortgages, pledges, liens and hypothecs (Debtor can be requested to bind his assets as security of debt.) This creates a real right over a specific thing to secure payment. What is a suretyship? It is an agreement between a creditor and a surety that binds the surety to meet the obligations of the debtor, should the debtor fail to pay. The PARTIES TO A SURETYSHIP CONTRACT are: The Creditor and Surety. The Debtor is called the Principal debtor (and NOT a party to the contract of suretyship). Example: Danny applied for a student loan to the sum of R150 000, 00 at ABSA Bank. ABSA Bank requested that Danny provides security, should he fail to pay his debt. Danny asked his mother to assist him and she entered into a contract of suretyship with ABSA bank. Contract of Suretyship Note: A contract of suretyship is separate from the loan. (BUT Does not terminate the debtor's obligation to pay.) It is an accessory to the principal debt; and ONLY EXISTS BECAUSE OF THE ORIGINAL CONTRACT (principal debt) Therefore should the principal debt terminate, the suretyship contract terminates as well.  The Principal debt must be a valid debt and the surety is only liable for the portion the debtor fails to pay (Surety’s liability will never exceed that of the principal debtor)  An Invalid debt renders a contract of suretyship invalid. The surety’s obligation to pay the creditor only arises when the principal debtor fails to pay the debt. Principal debtor’s defenses against the creditor is also available to surety (example: creditor failed to deliver and then the debtor refuses to pay). Except the creditor’s personal defenses (example: Minor that requires assistance to conclude a valid contract.) Formation of a suretyship contract: Note the following below: It is an agreement between CREDITOR and SURETY. Principal debtor NOT INVOLVED. CREDITOR and SURETY reaches CONSENSUS on all the terms of the contract. FORMALITY: MUST BE REDUCED TO WRITING & SIGNED BY THE PARTIES TO BE VALID. MATERIAL TERMS OF A SURETYSHIP CONTRACT: 1. Names of the SURETY, CREDITOR and PRINCIPAL DEBTOR. 2. NATURE & AMOUNT OF PRINCIPAL DEBT If a contract of suretyship is signed blank or terms are omitted, the contract is VOID. A contract of suretyship can not be varied orally. Rights of Parties to a contract of Suretyship Creditor 1. Right to Claim payment from the surety ( Creditor has a personal right to claim payment. The principal debtor and surety are jointly and severally liable) – the right only arises as soon as principal debtor defaults in payment. 2. Right to cede the right to claim for payment to a third party. Surety 1. Right to not be held liable for more than what is expressed in the contract. (Contract “speaks for itself” and A contract of surety is “interpreted to limit, rather than to extend liability”) 2. The Right to raise any defense available to principal debtor & has special rights and benefits. Rights of Surety 1. Excussion (beneficium excussions) – the right to insist to claim from principal debtor before claiming from surety. Provided that the debtor is in the country and not finally sequestrated or liquidated. If the surety signs the suretyship contract as surety and co-principal debtor, impliedly renounces the benefit of excussion. 2. Benefit of division (beneficium divisionis) – the right to demand that creditor sue all sureties for their pro rata share of the debt. Applicable when there are more than 1 surety (co-sureties) for the same debt. A co-surety who is insolvent or outside of the jurisdiction of the court at time of division will be disregarded. 3. Benefit of cession (beneficium credendum actionum) – The surety can demand creditor to cede the right to claim the debt from the principal debtor.  Applicable when the surety pays the debt outstanding to the creditor. Termination of a contract of Suretyship 1. Extinction of the principal debt, extinguishes the suretyship. 2. Payment made or offered and wrongfully refused by creditor. 3. Not by bound by new contract – material alterations to the old debt results in novation and surety will only be liable for obligations in terms of the old debt. 4. Creditor discharges or releases the principal debtor. 5. Creditor delays in collecting money from debtor and now no longer can collect due to creditor’s own fault. 6. Surety bound for a given time and the time lapsed OR contract provides that notice can be given by surety to terminate the contract and notice is given. Other forms of Security:i.e. Real Securities Mortgages and Pledges. All real rights and forms of security. The Debtors property serves as security. Mortgage It is a form of security registered over immovable property. Here, the creditor obtains a limited real right over the immovable property of the debtor. The property is used to secure payment of a debt. Eg You could take out a loan with the Bank over immovable property provided you comply with the requirements of a mortgage set out below. PARTIES to the Morgage: CREDITOR =MORTGAGEE DEBTOR =MORTGAGOR A mortgage is created by way of agreement and registration (public act) - Both parties must have the intention to create a mortgage. Mortgage MORTGAGOR MUST BE THE OWNER And there must be no restriction to mortgaging the property. Bond must be registered at deeds office against the title deed. Creditor DOES NOT become the owner. The immovable property merely serves as real security for debt. Debtor still has use and enjoy property. Bank, ie Creditor (any employee) not entitled to live in the house or visit without permission. ADVANTAGES OF A MORTGAGE BOND The Creditor is entitled to sell the property in execution, if the debtor fails to pay the debt. However, a Court order must be obtained, unless the Pledge It is a a form of security, whereby the Creditor has a limited real right over the debtor’s moveable property to secure a debt. E.g. You could pledge anything of value to your Creditor to secure a Loan but it must comply with the requirements set out below. PARTIES to a Pledge: CREDITOR = PLEDGEE. DEBTOR =PLEDGOR Can be a Written or oral agreement. The process of a Pledge, that is: 1. Delivery of pledged goods to the pledgee is a pre-requisite for pledge. The pledgor has duty to deliver the goods to the pledgee. After delivery of the pledged goods, the pledgor remains owner of goods. The pledgee cannot use and enjoy the goods. The pledgee must take care of goods whilst in his possession. 2. The Goods are returned after fulfilling obligation to the pledgee. 3. If pledgor fails to comply with his obligations, pledgee may sell the goods and recover what is owed to him. 4. If pledgor declared insolvent, pledgee preferential claim to proceeds. 5. Incorporeal property e.g. shares may be pledged. Delivery takes place by giving document showing the incorporeal right. E.g. share certificate. Termination of mortgages and pledges 1. Debt discharged. 2. Renunciation the mortgagee and pledgee. 3. Novation, where a new agreement comes into place. 4. Extinction of title (ie when debtor loses title to property). 5. Alienation. 6. Destruction of property (property is destroyed in its entirety). 7. Prescription ( applies to Mortgages only – 30 years). 8. Decree of court (fraud) (court may set aside agreement). 9. Execution and Insolvency. Hypothec This occurs when the creditor obtain security over a portion of the debtor’s property until creditor is paid.. No agreement is required and No judicial attachment order is required. E.g.LANDLORD’S TACIT HYPOTHEC FOR RENT Landlord has security over all movable property on the leased premises in respect of arrear rent. Hypothec comes into operation day after rent has not been paid. Valid, if goods remain on the premises; and The rent is outstanding. If the debtor / lessee removes the goods – can only be stopped with an automatic rent interdict from a competent court Hypothec continued… Third party goods can also be Subject to Hypothec, provided – 1. The landlord did not know they belong to a 3rd party; and 2. Goods were brought onto the premises with 3rd party’s consent & to remain on the premises permanently. Hypothec terminates, if the goods are removed from the premises. Liens Is a “Right of Retention tacitly conferred upon a creditor who is in possession of a property owned by the debtor and who incurs expenses in respect of the property. This a right of retention, occurs by the: Spending money or Labour on the property by the creditor. Two types of liens: Debtor and creditor lien; and Enrichment liens Debtor & Creditor Liens Creates a personal right for the creditor. Creditor spends money on the debtor’s property either with express or implied consent from the debtor: May retain property until debtor pays. Requirements 1. There must be an agreement about the services to be rendered. 2. The creditor must do the agreed work properly. 3. The creditor must retain debtor’s property in his possession. Example: Builder builds a house for the debtor and debtor fails to pay. The creditor can retain the house up until payment is made OR Garage repairs a car and the debtor fails to pay for repairs. The creditor (garage) can retain the car up until payment is made. ENRICHMENT LIEN Creates a real right. Person incurs necessary or useful expenses on the property of another. Lien over property until paid. Luxury expenses not included. (expenses that do not preserve or increase value of the property) TWO TYPES of Enrichment Lien: Salvage Lien Improvement Lien Salvage Lien A person incurs necessary expenses for the preservation or protection of property. Salvage Lien until expenses are paid. Total amount spent can be recovered. Example: House sitting, water pipe bursts and the creditor paid the plumber for repairs. Debtor fails to reimburse the creditor; creditor can retain the property up until payment is made.  Improvement Lien A person incurs useful expenses that increases the market value of the property. Improvement lien until expenses are paid. Increased value is a question of fact. Can only recover monies for expenses of material and not labour. Bona Fide Possessor – entitled to Salvage and Enrichment lien. A person who think he is the owner OR contracting with true owner OR has the right to occupy. Mala Fide Possessor –entitled to Salvage lien but courts unclear as to whether also entitled to Enrichment lien. A person who knows he is not the owner but intends to become the owner. Liens TERMINATION A Lien terminates, if debt terminates; or A Lien-holder – voluntarily surrenders property.