A mortgage is classified as a limited real right and therefore the mortgage limits the rights of ownership of the mortgagor while providing the mortgagee with certain limited rights to the property. The mortgagor may accordingly not sell the property or burden it with servitudes without the mortgagee’s permission but the mortgagor is entitled to lease the property or to subject it to further mortgages.

  •  A GNB is a mortgage by a mortgagor of all of its tangible movable property in favour of a mortgagee as security for a debt or other obligation.
  • A GNB does make the mortgagee a secured creditor of the mortgagor, except for when the movable property is attached before insolvency/business rescue. Therefore a GNB is a method of obtaining a limited statutory preference above the claims of concurrent creditors.
  • In order to become a secured creditor of the mortgagor, the mortgagee must first perfect the security by taking possession of the secured assets under the GNB. This is done by obtaining a court order which directs the sheriff of the High Court to attach the relevant assets. Once the mortgagee therefore takes into possession the secured assets, it becomes a secured creditor with a real right.
  • The secured creditor can then effect a sale of the attached assets, and use the proceeds of such sale towards discharging the principal debt in terms of the term loan facility.
  • Alternatively, a parate executie agreement can be reached whereby the secured assets of the mortgagor may be sold by the mortgagee without first obtaining a court order provided that the mortgagor agrees to thereto.
  • Where a mortgagee under a GNB has not taken possession of the property subject to the bond before the default/liquidation/business recue of the mortgagor, it remains an unsecured creditor until it attached the secured assets pursuant to a court order.
  • The mortgagee is entitled to payment out the realisation of the mortgagor’s movable property before any concurrent and unsecured creditor to the extent that it is a proved preferential claim. Note that this preference only extends in respect of the movable property subject to the GNB.
  • When a security interest is not validly perfected, the mortgagee shall not be deemed a secured creditor for purposes of the secured assets or the proceeds therefrom but shall ranks as a concurrent creditor.
  • In the event however that the secured assets are not attached before liquidation rescue and the security interest is therefore not perfected the mortgagee/security holder shall rank as a preferential creditor in respect of the assets of the mortgagor.
  • When there are more than one GNB registered over the same assets, the creditor or mortgagee who acquires a court order first for the attachment of the secured assets will stand to be the secured creditor, irrespective of who obtained the security interest in terms of the GNB first in time.
  • When a company accordingly defaults with its payment in terms of the term loan facility or goes into liquidation/business rescue, it is essential that the mortgagee obtains a court order entitling it to take possession of the secured property as soon as possible and before any other creditor with a GNB registered over the same property.
  • On a last note, with any liquidation or business rescue proceedings, the terms of the inter-creditor agreement or the business rescue plan will be vital to determine the rights and ranking of the creditors and accordingly needs to be reviewed and considered by all affected parties.