Continuing covering security: How good is your cover?

Sometimes a creditor thinks it holds sufficient security only to find out it was mistaken. In the recent matter of Thomani And Another V Seboka No And Others 2017 (1) SA 51 (GP) the court had to determine the extent of sureties’ liability and whether such liability was adequately secured. 

In this matter the applicants, Mr and Mrs Thomani, bound themselves as sureties and co-principal debtors in favour of a company called Abrina 1591 (Pty) Ltd (Abrina). Abrina was at all relevant times indebted to ABSA Bank Limited (ABSA), the fourth respondent. Abrina defaulted on its payment obligations to ABSA.

The applicants, unrelated to the suretyship signed in favour of ABSA, had a personal home loan with ABSA. As security for the repayment of this home loan, ABSA registered what is commonly known as a sectional mortgage bond hypothecating a unit (Bond) over the applicants’ sectional title property.

Clause 4 of this bond provided as follows:

Continuing covering bond

The bond shall remain in force as continuing covering security for the capital amount, the interest thereon and the additional amount, notwithstanding any intermediate settlement, the bond shall be and remain of full force, virtue and effect as a continuing covering security and covering bond for each and every sum in which the mortgagor may now or hereafter become indebted to the bank from any cause whatsoever to the amount of the capital amount, interest thereon and the additional amount.

ABSA issued summons against the sureties pursuant to the suretyship and obtained default judgment. Relying on the bond, it attached the applicants’ property and caused it to be sold in execution. 

The applicants applied for rescission of the default judgment and for an order setting aside the sale of their property. The main defence raised by the applicants was that they stood surety for Abrina, whereas the bond on which ABSA relied was a normal housing bond over the applicants’ sectional unit and not a surety bond.

The court had to determine whether the phrase “for each and every sum in which the mortgager may now or hereafter become indebted to the Bank from any cause whatsoever”, could be construed to cover the applicants’ liability to ABSA in terms of the suretyship. 

The court considered case law and made a distinction between amounts payable under the bond and amounts secured by the bond, the first referred to as the obligatory part of the bond.

The court found that it was clear from the wording of the clause in the bond, which was registered in respect of the applicants’ home loan, that it related to the obligatory part of the bond — namely the capital amount, the interest thereon and the additional amount payable in respect of the home loan. 

The phrase “any cause whatsoever”, so the court found, was also limited to the amount of the capital amount, interest thereon and the additional amount, and could not be relied on by ABSA for payment of any of the applicants’ obligations in terms of the suretyship.

The court in its judgment noted that clause 5 of the suretyship referred to the “obligations of the principal debtor” and that the security which ABSA obtained for the payment of Abrina’s debt was the suretyship and not the bond.

The court held, after consideration, that the bond which was registered as security for the applicants’ home loan, could not be used as security for a loan to Abrina, which was one of the reasons the court rescinded the judgment granted against the applicants and set aside the sale in execution.

This finding highlights the importance for all lenders, not limited to banks, to ensure that proper security is obtained for the liabilities of debtors, to avoid the proverbial unscrambling of the egg, when challenged.