A synopsis is provided here to facilitate the understanding of real security law, but it must be read with section 6.6 (The pledge theory). A pledge is a limited real security right over the debtor's movable property.498 A pledge is constituted by the pledgor
485 Panamo Properties 103 (Pty) Ltd v Land and Agricultural Development Bank of South Africa 2016 (1) SA 202 (SCA) paras 29–31.
486 Ibid.
487 Ibid para 31.
488 Mars 'The Law of Insolvency in South Africa' 10 ed (2019) para 20.1.
489 Dendy 'Mortgage and Pledge' LAWSA vol 29 3 ed (2020) para 328.
490 Section 54 of the Deeds Registries Act 47 of 1937.
491 See n 771 and section 4.9 The realisation of security.
492 Section 102 of the Deeds Registries Act.
493 Dendy 'Mortgage and Pledge' LAWSA vol 29 3 ed (2020) para 398.
494 Section 50(2) of the Deeds Registries Act.
495 Mars The Law of Insolvency in South Africa 10 ed (2019) para 20.1.
496 The pledge of movable property is discussed in section 6.6 The pledge theory under the heading A comparison between the pledge of movable corporeal property and cession in securitatem debiti.
497 Section 51(1) of the Deeds Registries Act.
498 Dendy 'Mortgage and Pledge' LAWSA vol 29 3 ed (2020) para 405; Mars The Law of Insolvency in South Africa 10 ed (2019) para 20.5.
delivering its movable property that is the subject of the pledge to the pledgee, to possess for the duration of the pledge.499 The parties enter into a pledge agreement to this effect.500 The pledge agreement, like a mortgage, contains 'contractual and hypothecary aspects.'501 The contractual aspect relates to the pledge agreement, and the consequent rights and obligations, while the hypothecary aspect relates to the pledge relationship.502 The pledgee is a secured creditor on the pledgor's insolvency.503 Dendy indicates that pledge and mortgage have many common characteristics.504
A landlord's tacit hypothec is a hypothec over the movable property present on the leased premises that automatically comes into existence if the tenant is in arrears in paying its rent.505 The movable property covered by the hypothec is all movable property, whether belonging to a tenant, a sub-tenant if it owes rent to the tenant, or third parties.506 The accessorial principle, namely, that a security right must be accessory or ancillary to a valid principal obligation, is the reason why the hypothec (security) comes into existence as soon as the tenant defaults on its rental obligation.507 For the same reason the hypothec terminates when the tenant remedies its default by paying the arrear rent.508 The hypothec must be perfected through a court order to attach the movable property in order to create a limited real right for the landlord.509 The hypothec serves as security for unpaid arrear rent,510 but there are conflicting academic and judicial views as to whether it includes other debts owed to the landlord, such as damages.511
As is evident from the aforegoing analysis, the hallmark of real security is that an asset is appropriated to a debt or, put differently, ring-fenced to satisfy a debt.512 The secured creditor enjoys a right of preference to be paid if the asset or property is realised.513 Unsecured creditors, on the other hand, derive comfort from the fact that applying the paritas creditorum (equality of creditors) principle will result in their claims being settled proportionately and equally.514 Real security rights create payment priorities for secured creditors over unsecured creditors, ranking secured creditors in preference to unsecured creditors, which effectively back-ranks the paritas creditorum principle.515 Syndicate lenders in South Africa, in my experience, prefer real security516 as the core of their security, but compliment it with forms of personal security such as
499 Ibid.
500 Ibid.
501 Dendy 'Mortgage and Pledge' LAWSA vol 29 3 ed (2020) para 405.
502 Ibid.
503 Ibid. See the definition of security in s 2 of the Insolvency Act.
504 Ibid.
505 Silberberg and Schoeman's The Law of Property 6 ed (2019) para 17.2.
506 Ibid.
507 Brits Real Security Law (2016) 437 para 6.9.2.
508 Ibid.
509 Silberberg and Schoeman's The Law of Property 6 ed (2019) para 17.2.
510 Ibid; Brits Real Security Law (2016) 437–440 para 6.9.2.
511 Brits Real Security Law (2016) 437.
512 Gullifer Legal Problems of Credit and Security (2013) 1 para 1-101; Zimmermann The Law of Obligations (1990) 115;
Moorcroft Banking Law (2021) para 26.1; Silberberg and Schoeman's The Law of Property 6 ed (2019) para 16.1(a).
513 Silberberg and Schoeman's The Law of Property 6 ed (2019) para 16.1(b); Insolvency Act.
514 Brits Real Security Law (2016) 2.
515 Ibid 5.
516 Zimmermann The Law of Obligations (1990) 115 is of the same opinion.
guarantees and, rarely, suretyships, as analysed in section 4.11 (Security structure and security rights of syndicate lenders).
4.5.2 The registration of security rights
The registration of security rights in an asset or property with governmental authorities is regarded as the publication or notice of the encumbrance that makes the security rights effective against third parties.517
South African law does not require the registration of either personal or real security rights with any governmental authority, except in the following instances: (i) different types of bonds over immovable property or movable property, in terms of the Deeds Registries Act;518 (ii) listed, uncertificated securities;519 (iii) aircraft in terms of the Convention on the International Recognition of Rights in Aircraft Act;520 (iv) ships in terms of the Ship Registration Act;521 (v) registered trademarks in terms of the Trademarks Act;522 and (vi) prospecting rights or mining rights in terms of the Mineral and Petroleum Resources Development Act.523
Section 39 of the Financial Markets Act524 requires the registration of a pledge or cession in securitatem debiti of uncertificated securities, or an interest in uncertificated securities, in the central securities account or the securities account. Securities (shares and similar) that are not listed or registered in the central securities account or the securities account are automatically excluded from the registration requirement in section 39. Uncertificated securities are defined as (i) securities not evidenced by a certificate or written instrument; or (ii) certificated securities held in collective custody by a central securities depository or its nominee in a separate central securities account, both of which are transferable by entry without a certificate or written instrument.525 The definition applies only to uncertificated securities held by a central securities depository, participant, authorised user or nominee.526 The name of the pledgee or cessionary, the number or nominal value of the uncertificated securities, the interest ceded or pledged, and the date of entry are required for registration.527 The basis is that there is consensus between the pledgor or cedent and the pledgee or cessionary to create a security interest in the securities. Strate528 views electronic registration or flagging (as it is known) of listed securities as sufficient compliance with section 39 of the Financial
517 See, for example, recommendations 42 and 43 of the UN Guide and s 39(1)(d) of the Financial Markets Act.
518 Deeds Registries Act 47 of 1937.
519 Financial Markets Act 19 of 2012. See also the discussion in the paragraph that follows.
520 Convention on the International Recognition of Rights in Aircraft Act 59 of 1993.
521 Ship Registration Act 58 of 1998.
522 Trademarks Act 194 of 1993.
523 Mineral and Petroleum Resources Development Act 28 of 2002.
524 Financial Markets Act 19 of 2012.
525 Section 1 of the Financial Markets Act.
526 Section 39(1)(a) of the Financial Markets.
527 Section 39(1)(a)(i) and (ii) of the Financial Markets Act.
528 Strate is South Africa's central securities depository. It is a regulator-licensed financial market infrastructure company that owns technology to securely hold equities, bonds and money market securities in electronic form so that purchasers and sellers can exchange ownership of these securities once they are successfully traded.
Markets Act to perfect the pledge of such listed securities.529
A pledge or cession in securitatem debiti of securities is, once registered in terms of the Financial Markets Act, effective against third parties, and there is an express prohibition, presumably on the pledgor or the cedent, against dealing with or transferring uncertificated securities or an interest in uncertificated securities that have been so pledged.530 The exception is that if a person is entitled by operation of law to have a pledge or cession in securitatem debiti in uncertificated securities or an interest in uncertificated securities registered in his or her name, then the central securities depository or participant is empowered to effect the same.531 The position at common law in respect of unlisted securities is similar yet different. It is similar in that the pledgee can, because it possesses the securities, prevent third parties from acquiring possession or ownership of the pledged securities by a court interdict, and the pledgor cannot deal with or transfer such securities; and the pledge and cession in securitatem debiti of listed securities (governed by legislation) and the pledge and cession in securitatem debiti of unlisted securities (governed by the common law) both create rights in rem. The position is different in that there is no central, public register in which the cession in securitatem debiti of unlisted securities is registered, and this, it is submitted, is a deficiency as potential lenders are unable to obtain information about the cession from such a central register.
Security rights in aircraft and ships is governed by special laws for hypothecating rights to aircraft and ships. Hypothecating rights to aircraft and ships must be registered with governmental authorities and are real rights. In terms of the Convention on the International Recognition of Rights in Aircraft Act,532 an aircraft or share therein may be mortgaged as security for a loan or other debt by a deed of mortgage executed in the prescribed form. The prescribed form is contained in the Mortgaging of Aircraft Regulations, 1997. The Mobile Equipment Act533 has given the Convention on International Interests in Mobile Equipment 2001 and the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment 2001 the force of law in South Africa. The effect of this is that security interests in aircraft have been made an 'international interest', which is a defined term that means an interest held by a creditor to which Article 2 applies. Article 2 provides for the 'constitution and effects of an international interest in certain categories of mobile equipment and associated rights', which includes an interest 'granted by the chargor under a security agreement' in respect of aircraft.534 Security interests in aircraft are then, on producing the deed of mortgage and payment of the prescribed fee, recorded
529 On 23 February 2018 Strate responded to my query as to whether the electronic registration or flagging is sufficient to constitute the pledge, or if Strate requires any further statutory notices to be given. Strate requires no further statutory notices to be sent, other than that the pledge must be reflected in the statement to be sent by the central securities depositary participant to its clients at least every six months in terms of rule 5.8.5 read with rule 7.6.1.3 of the Strate Rules.
530 Section 39(1)(b) and (d) of the Financial Markets Act.
531 Section 39(1)(e) of the Financial Markets Act.
532 Convention on the International Recognition of Rights in Aircraft Act 59 of 1993.
533 Convention on International Interests in Mobile Equipment Act 4 of 2007.
534 Ibid art 2(1), (2) and (3).
by the Commissioner for Civil Aviation in a register.
No statutory registration requirements exist to register rights in rem created by cessions in securitatem debiti of personal rights to accounts, debtors' books, unlisted shares, insurances and intellectual property (other than registered trademarks in terms of the Trademarks Act 194 of 1993), nor is the enforcement of such cessions prior to the cedent's insolvency governed by statute. As with unlisted shares, there is also no central, public register that lenders can consult to establish if rights to accounts, debtors books, insurances and intellectual property have been ceded in securitatem debiti or to whom they were so ceded. Lenders must therefore conduct due diligence exercises to identify security rights and risks and rely on the borrower to disclose existing cessions and security interests.535 This is not ideal and is not conducive to creating an investment environment of certainty, and may even be disastrous if there are errors in the due diligence or the borrower's disclosures turn out to be false.
The terms of the security cession will have to be alleged and proven if they are to be enforced in a court.536 However, the enforcement of security rights in listed securities appears to be easier and less burdensome than for unlisted securities, given that security rights in listed securities are registered in terms of the Financial Markets Act, which is at least prima facie evidence of the cession.537 The registration assists in proving that a security cession exists. Enforcement of security rights in unlisted securities is somewhat more cumbersome, as the cessionaries or pledgees would need to allege and prove their rights by leading evidence as to the validity and enforceability of the obligationary agreement and the cession agreement, their security rights in the securities, the authenticity of the securities certificates, the securities register, and other matters, as opposed to relying on a statutory register as prima facie evidence of their security.
The Companies Regulations538 contain a publicity or disclosure requirement in respect of loans and security rights held in a company. A company issuing a prospectus in terms of regulation 56 of the Companies Regulations539 must, in that prospectus, describe any loans made to or by the company, and, in the case of loans made to the company, must provide details of any security interests. The disclosure obligation provides investors with material information about the company's borrowings, security interests granted, and loans advanced to enable investors to decide if they wish to
535 Hewko 'Foreign Direct Investment in Transitional Economies: Does the Rule of Law Matter' (2002) 11(4) East European Constitutional Review 71 at 72.
536 Herbstein & Van Winsen Civil Practice of the High Courts and the Supreme Court of Appeal of South Africa 5 ed (2012) ch 34, section VII. The cessionary also relies on the cedent to assist it to prove its ceded rights: see Lubbe 'Cession' LAWSA (2013) 126 para 170.
537 Prima facie evidence means evidence that, if uncontroverted, is sufficient to persuade a reasonable person in the position of the party who has the onus or burden of proving that position. See Alli v De Lira [1973] 4 All SA 547 (T) at 551; Ex Parte Minister of Justice: In re Rex v Jacobson and Levy 1931 AD 466 at 478. The case law does not appear to distinguish between the standard required for evidence to constitute prima facie evidence in civil matters and in criminal matters and for that reason the former civil case (Alli) approves of the latter criminal case (Ex Parte Minister of Justice) insofar as it defines the meaning of prima facie evidence.
538 Companies Regulations, 2011.
539 Ibid.
The accessorial principle applicable to security rights is integral to secured lending transactions. It determines the nature of security rights in relation to the secured debt. In Roman law times, the principle was expressed as accessorium sequitur principale, which can be translated as 'the security interest follows or depends on the obligation it secures'.540
In South Africa, the accessorial and related principles were first applied by the Transvaal Provincial Division in 1921 in Ex Parte The Master, Re Dutton and Seymour,541 and the Appellate Division in 1931 in Kilburn v Kilburn ('Kilburn').542 The principles were confirmed in a number of later judgments, including in the seminal 2009 judgment in Grobler v Oosthuizen543 ('Grobler') and, most recently, by the Supreme Court of Appeal in 2016 in Panamo Properties 103 (Pty) Ltd v Land and Agricultural Development Bank of South Africa.544
In South African law, a security right must be accessory or ancillary to a valid principal obligation (the secured debt), that is, the existence of a security right depends on the existence of a valid principal obligation; without a valid principal obligation, the security right does not, and cannot, exist.545 Brits states that a limited real right must relate to a valid principal obligation, and that its effectiveness is dependent thereon. To illustrate the point in relation to mortgages, Brits states that an extinguished or invalid principal debt would likewise extinguish or invalidate the mortgage.546 Scott states that the security right depends on a valid principal debt existing and, if there is no such debt or it was discharged, the security right is ipso iure cancelled.547 Silberberg and Schoeman consider the effect of the accessorial principle on the cessionary's right of pledge by stating that it lapses automatically once the secured debt is discharged.548 Tajti, in analysing whether Continental Europe would adopt a system similar to Article 9 of the Uniform Commercial Code in American law,549 considers the position of the accessorial principle in civil-law systems. He contends that accessoriness can be framed in tripartite form. First, its existence means that a security interest is created, follows, extinguishes and is capable of
540 Tajti 'Could Continental Europe Adopt a Uniform Commercial Code Article 9-Type Secured Transactions System? The Effects of the Differing Legal Platforms' (2014) 35 Adelaide Law Review 149 at 169.
541 Ex Parte The Master, Re Dutton and Seymour 1921 TPD 347.
542 Kilburn v Kilburn 1931 AD 501.
543 Grobler v Oosthuizen 2009 (5) SA 500 (SCA).
544Panamo Properties 103 (Pty) Ltd v Land and Agricultural Development Bank of South Africa 2016 (1) SA 202 (SCA).
Interestingly, the Panamo judgment also held that an act or contract that contravenes a statute may not necessarily be rendered invalid, but if recognising the act or contract will defeat the statute's purpose, the act or contract will be void. It is submitted that contravening a statute results in unlawful conduct, but that does not always render the conduct void.
545 Kilburn v Kilburn 1931 AD 501; Thienhaus NO v Metje & Ziegler Ltd and Another 1965 (3) SA 25 (A) at 32 and 43; Lipschitz NO v UDC Bank Ltd 1979 (1) SA 789 (A) at 807; Panamo Properties 103 (Pty) Ltd v Land and Agricultural Development Bank of South Africa 2016 (1) SA 202 (SCA) para 28. This is the position in both our common law and statute. Regarding statute, see, for example, the definition of 'security' in s 2 (titled Definitions) of the Insolvency Act, s 66 (titled Restrictions on borrowing, guarantees and other commitments) of the Public Finance Management Act 1 of 1999, and s 48 (titled Security) of the Local Government: Municipal Finance Management Act 56 of 2003. In each of these sections, security is accessory to a principal debt. Also see Scott 'Cession of Insurance Rights' 2003 Stellenbosch Law Review 102.
546 Brits Real Security Law (2016) 20.
547 Scott on Cession (2018) 381–382 and 438 para 9.2.3.1.
548 Silberberg and Schoeman's The Law of Property 6 ed (2019) para 16.6.3(e).
549 Article 9 of the American Uniform Commercial Code is analysed in chapter 7 Cession of Personal Rights: Lessons from International Instruments, the United Kingdom and the United States of America.
enforcement for as long as the underlying obligation exists. Second, its scope means that the amount of the obligation that it secures determines the amount of the security interest.
Third, its identity means that the person entitled to claim the security interest is also the secured creditor.550
If the principal obligation is invalid, the security right cannot exist, but invalid security rights do not negate a valid principal obligation such as a loan.551 The principle applies to real security rights created by agreement between parties and real security rights created ex lege.552 The principal obligation can be claimable or contingent, present or future, as long as there is or will be an obligation to which hypothecation is accessory. For this reason, the principle has come to be known as the 'accessorial principle'. The obligation need not exist when the security right is created, as long as the obligation exists when the creditor seeks to enforce its security right.553 The security right may be created prior to, and in anticipation of, an obligation coming into existence. In practice, the security right is typically created to secure the fulfilment of an existing obligation.
The obligation must be a real and genuine obligation, not a simulated one parading as an obligation designed to defeat creditors' rights. A court will consider the true nature and substance of the transaction, not the veil in which it is wrapped. In the case of a loan, the debt must therefore be a real debt, whether claimable or contingent, present or future. In South African law, if the secured debt is invalid, the security right fails. The latter principle applies to notarial and mortgage bonds, but it can be applied to all security rights.
In contrast, a guarantee, on the other hand, operates on different principles. In South African law, a guarantee is a promise to pay the debt of a third person in case of its default.
A guarantee creates a principal obligation, as opposed to an accessory obligation, that is independent of the main transaction and does not depend on the validity thereof to be enforceable. A guarantee is thus not accessory to another obligation but is itself a principal obligation.554 The accessorial principle accordingly does not and indeed cannot apply to guarantees. A guarantee is typically coupled with an indemnity by the guarantor in favour of the lender,555 whereby the guarantor indemnifies the lender on demand against any cost, liability or loss it may incur.556 The guarantor's obligation to pay the lender its cost, liability
550 Tajti 'Could Continental Europe Adopt a Uniform Commercial Code Article 9-Type Secured Transactions System? The Effects of the Differing Legal Platforms' (2014) 35 Adelaide Law Review 149 at 169–170.
551 Ibid. See also the judgment of the court a quo in UDC Bank Ltd v Lipschitz NO 1977 (1) SA 275 (W) at 286 para 6, with which the Appellate Division, in the appeal, concurred.
552 As to the application of the accessorial principle to the landlord's tacit hypothec, a real security right is created ex lege. See Brits Real Security Law (2016) 437 para 6.9.2.
553 Kilburn v Kilburn 1931 AD 501; Scott 'Cession of Insurance Rights' 2003 Stellenbosch Law Review 102.
554 In Lombard Insurance Company Ltd v Landmark Holdings (Pty) Ltd CTA 2010 (2) SA 86 (SCA) the Supreme Court of Appeal held at para 20: 'The guarantee by Lombard is not unlike irrevocable letters of credit issued by banks and used in international trade, the essential feature of which is the establishment of a contractual obligation on the part of a bank to pay the beneficiary (seller). This obligation is wholly independent of the underlying contract of sale and assures the seller of payment of the purchase price before he or she parts with the goods being sold. Whatever disputes may subsequently arise between buyer and seller is of no moment insofar as the bank's obligation is concerned. The bank's liability to the seller is to honour the credit. The bank undertakes to pay provided only that the conditions specified in the credit are met. The only basis upon which the bank can escape liability is proof of fraud on the part of the beneficiary.' Also see First Rand Bank Limited v Brera Investments CC 2013 (5) SA 556 (SCA); Coface South Africa Insurance Co Ltd v East London Own Haven t/a Own Haven Housing Association (050/13) [2013] ZASCA 202. In Nedbank v Procprops (108/13) [2013] ZASCA 153 the Supreme Court of Appeal in November 2013 confirmed the judgments in Lombard and First Rand.
555 The LMA's Term Facilities Agreement, clause 17 (Guarantee and Indemnity).
556 The LMA's Term Facilities Agreement, clause 17 (Guarantee and Indemnity) (1)(c).