Authored by Megan Ayles / 1 May 2024 / Property Law

In the light of the rising debt crisis faced by many South African borrowers and consumers (“consumers”), lenders and suppliers (“creditors”) often seek to implement protective measures to secure themselves in the event of a default by the consumer.

A creditor can secure a debt in a variety of ways, using either immovable or moveable property. When deciding on an appropriate form of security, a creditor will take into account multiple factors such as the value of the transaction, the risk involved, the likelihood of default, and the consumer’s and creditor’s needs and intentions.

Common forms of security for the “everyday” transaction which creditors rely on are pledges, or a cession in securitatem debiti of moveable property, or a deed of suretyships, or a guarantee. Whilst these agreements provide security, they still require creditors to follow certain legal processes to act on them and recover funds in instances of default, exposing the creditor to additional costs and delays.

Creditors may, however, curtail these issues through the inclusion of parate executie clauses where security is held in respect of moveable property. A parate executie clause, also known as a summary execution or immediate execution clause[1], is a cluse which essentially entitles a creditor to ‘self-help’ in the event of default by a debtor.[2] Such ‘self-help’ is achieved through the parties agreeing that in the event of default by the consumer, the creditor is entitled to privately sell the property which has been pledged and delivered to the creditor as security, and therefore the need to obtain a court order authorising the sale first is dispensed with.[3]

This concept is often controversial and has been the subject matter of various court cases. The reason being that the concept of ‘self-help’ in the judicial system is frowned upon given the right of access to courts enshrined in the Constitution of South Africa, 1996, under section 34.[4]

It is as a result of the above right and rejection of ‘self-help’ in the judicial system that led to the 2001 decision of the Eastern Cape Division of the High Court holding in the case of Findevco (Pty) Ltd v Faceformat SA (Pty) Ltd[5] that paratie executie clauses were invalid for infringing on the right to access to courts.[6] However, the position was cleared up by the Supreme Court of Appeal (“the SCA”) in 2004 in two separate judgements, namely, Bock & Others v Dubororo Investments (Pty) Ltd[7] and Juglal NO and Another v Shoprite Checkers (Pty) Ltd t/a OK Franchise Division,[8] where the SCA found that parate ececutie clauses were valid.

The SCA’s reasoning for its decision in these matters was set out in Bock where the SCA found that where security is held over moveable property by way of a pledge (as was the case in Bock), the property is already in the lawful possession of the creditor, and hence, the debtor’s constitutional right of access to court is not infringed.[9] Furthermore, the SCA emphasised that a debtor is able to approach a court and seek protection where a creditor is seen to be acting in a manner that is prejudicial to the interests of debtor when realising the security in terms of such a clause.[10] The SCA made it clear, however, that a paratie executie clause does not authorise a creditor to seize property in the lawful possession of a debtor, and in turn  avoid the courts.[11]

The principle of paratie executie was once again, the subject matter in the recent appeal case of Vantage Goldfields SA (Pty) Ltd & Another v Arqomanzi (Pty) Ltd and Others[12]  brought before the SCA during 2023, although not with regards to its constitutionality this time. The facts of this matter are complex but are summarised herein as far as relevant for purposes of this article.

In Vantage Goldfields SA, certain loan claims were ceded in securitatem debiti by the appellants to a bank as security for funding. In terms of the cession agreements the bank was entitled to sell or otherwise realise the security in the event of a default by the debtor which was not remedied. The debtor defaulted and eventually the bank sold the loan claims to a third party in order to realise its security. Prior to effecting the sale, the bank notified the appellants by way of a letter of demand of their default and its intention to sell the loan claims if not remedied within the appropriate period. The appellants two main arguments were that the sale of the claims by the bank were invalid as they prejudiced the appellants and that the banks reliance on the parate executie clauses in the cession agreements caused them unacceptable hardship.

The SCA found against the appellants and dismissed the appeal.[13] In considering the facts and reaching its decision, the SCA relied on the following:

• It is confirmed that the principle of parate executie entitles a creditor to realise its security over moveable property held in its lawful possession without any judicial process where the debtor has defaulted, provided that in exercising such entitlement, it cannot be done in a manner contrary to public policy. Consequently, the bank as cessionary, was entitled to realise the ceded property, being the loan claims, without following judicial process as a result of the cedent’s (appellants’) default. The bank had also not acted contrary to public policy as it had duly notified the appellants of their default and its plan to sell the security should the default not be remedied. The bank was thus entitled to realise its security when the appellants failed to remedy their breach.

 

• The court also reiterated, as it had held in Bock, that a debtor is not precluded from approaching the court and seeking protection where it can show on any just ground that the creditor was acting in a manner prejudicial to the debtor’s rights when exercising its right in terms of the parate executie However, in this case, the appellants failed to take steps to prevent the sales or to have them declared invalid despite being duly notified by the bank.

 

• The appellants had argued that as a result of the bank realising its security, the identity of the creditor changed, and this was prejudicial. The SCA found that it was to be expected in the ordinary course of realisation of security that the creditor’s identity would often change, and this cannot be considered to be prejudicial.

 

The main principles relating to the operation of parate executie clauses can be distilled from the case law as follows:

• Creditors must be in lawful possession of the moveable property subject to a security agreement in order to exercise its powers in terms of the parate executie clause;

 

• Creditors cannot act contrary to public policy in realising the security. This predominately means that the security cannot be retained by the creditor in settlement of the debt but must be realised through private sale to a third party for a fair price; and

 

• Debtors are not deprived of the constitutional right of access to courts where they can show on any just ground that the creditor has acted prejudicially towards them in realising the security.

 

In conclusion, whilst parate executie clauses are a powerful tool for a creditor to secure itself against a potential debt, a creditor’s powers are not unlimited, and consumers are still afforded protection through the courts where a creditor acts prejudicially in realising its security. The SCA has reinforced the principles for creditors and consumers, and in turn provided the much needed clarity, particularly in the context of South African debt crisis.

[1] Anne Pope, Elmien du Plessis (eds) & Pieter Badenhorst et al The Principles of the Law of Property in South Africa 2 ed (2020) at 330.

[2] Ibid.

[3] Ibid.

[4] The Constitution of South Africa, 1996, section 34.

[5] Findevco (Pty) Ltd v Faceformat SA (Pty) Ltd 2001 (1) (SA) 251 (E).

[6] Ibid.

[7] Bock and Others v Duburoro Investments (Pty) Ltd 2004 (2) SA 242 (SCA).

[8] Juglal NO and Another v Shoprite Checkers (Pty) Ltd t/a OK Franchise Division 2004 (5) SA 248 (SCA).

[9] Bock and Others supra note 7.

[10] Ibid.

[11] Op cit note 1 at 331.

[12] Vantage Goldfields SA (Pty) Ltd & Another v Arqomanzi (Pty) Ltd and Others 2023 (3) All SA 667 (SCA).

[13] Ibid.