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).
or loss arises when the lender incurs the liability for such amount(s), as opposed to when the lender pays it.557
It is necessary to understand the common law as it applies to the accessorial principle, given its importance in South African secured lending law. In the seminal case of Kilburn v Kilburn,558 the Appellate Division held that, in South African law, security is accessory to a valid main obligation. Henry Kilburn, an electrical engineer, wished to marry Emma Lorimer, and agreed to pay her £500 prior to the marriage. As he did not have the funds, he acknowledged his indebtedness to her and caused a notarial bond to be registered over his movable property, which comprised book debts, cash in the bank, plants, machinery, fixtures and fittings, stock-in-trade, and all other business assets. After 22 years of marriage, he was sequestrated. The court a quo held that the spouses never considered the £500 to be a debt owed by the husband to the wife, but that the bond merely secured
£500 for the wife out of the husband's estate should he become insolvent. Accordingly, his wife could not use the bond in a concursus creditorum as a secured creditor. Amongst her claims rejected by the Master of the High Court and the court a quo was a claim for £500 secured by the bond. On appeal against the decision of the Natal Provincial Division, the Appellate Division, responding to the wife's counsel's contention that her claim secured by the bond was a settlement by a right secured in the case of insolvency, held that it was meaningless to divorce security from the obligation which it secures. The court held further that it is possible to secure any obligation, claimable or contingent, present or future, and the security is accessory to the obligation. Although the security may be suspended until the obligation comes into existence, there must always be an obligation to which the security is accessory. The Appellate Division accordingly held that as the £500 was never intended by the spouses to be a debt owed by the husband to the wife, there was no obligation secured by the bond. The spouses had instead intended that, should the husband become insolvent, the wife would be entitled to £500 from his estate. The appeal was dismissed with costs.
In 2009, in Grobler, the Supreme Court of Appeal dealt with a number of important legal issues, including the legal effect of settling a fixed debt (the secured debt) on a claim ceded in securitatem debiti that constituted security. Thus, the court considered how settling a loan affects the security. It held that 'a claim ceded in securitatem debiti automatically reverts to the cedent once the secured debt is extinguished and that in such event a re- cession by the cessionary is not required'.559 Grobler was an appeal against a dismissal of a special plea of prescription that centred on the nature of the cession of insurance policies as security for the payment by the purchaser of the purchase price for a property, as the deed of sale was ambiguous on this issue. The Supreme Court of Appeal was clear about the fact that, once the secured debt is settled, no further act is required to fully restore the ceded claim, that is, the right of action, to its owner, the cedent. The ceded claim is,
557 In Taurog and Others NNO v General Accident Insurance Co of SA Ltd [1978] 3 All SA 543 (W) the court held at 547 that, depending on the wording used in an agreement, the indemnified party could require the indemnitor to indemnify it before the indemnified party is itself required to pay the principal creditor.
558 Kilburn v Kilburn 1931 AD 501.
559 Grobler v Oosthuizen 2009 (5) SA 500 (SCA) para 20.
according to the Supreme Court of Appeal, therefore automatically restored. The rationale is that the security was accessory to a principal obligation, and if the latter is extinguished by settlement, the ceded claim is automatically restored to the cedent.