Banks-Beware to Advance Funds to Clients Prematurely

When banks advance funds to clients prior to the lodgement of a mortgage bond at the Deeds Office, they must take cognisance of the effect of Section 88 of the Insolvency Act.

Mortgage bonds registered over immovable property serve as security for the monies advanced to a borrower under a loan facility. Normally, the bank will only advance these funds to a borrower after the bond has been registered at the relevant Deeds Office.  However, there might be instances where the bank is pressurised to advance funds to the borrower, without the bond first being lodged for registration. This poses a risk to the bank in light of Section 88 of the Insolvency Act.

Section 88 states that, where mortgage bond is lodged at the Deeds Office for registration more than two months after the loan or any part thereof had already been paid to the borrower, the bank will not have a preferential claim if the borrower is sequestrated within a period of six months following the date on which the bond was lodged. A preferential claim refers to the right of a creditor to claim first from the estate of the insolvent. The bank will still have a claim against the borrower’s estate but it will have to give way to other creditors who have preferential claims over that of the bank.

Section 88 is intended to prevent a creditor from registering a mortgage bond over the property of its debtor, with the intention or hope of having a preferential claim over that property, in anticipation of the sequestration of the debtor.

If the borrower is sequestrated after the period of six months following lodgement of the mortgage bond, the bank will retain its preference over the borrower’s estate in the event that the borrower is sequestrated. Section 88 might have severe financial implications for banks if careful consideration is not given when advancing funds to clients before lodgement of mortgage bonds at the Deeds Office.

Adams & Adams

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