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Last Updated: 4 September 2004
THE SUPREME COURT OF APPEAL
OF SOUTH AFRICA
CASE NO: 77/2003
In the matter between
:
IKEA TRADING UND DESIGN
AG Appellant
and
BOE BANK LTD Respondent
Before: ZULMAN, FARLAM, NUGENT, LEWIS JJA & PONNAN AJA
Heard: 18 MARCH 2004
Delivered: 1 APRIL 2004
Summary: Meaning of s 1(1) of the Security by Means of Movable Property Act 57 of 1993: description of property in a notarial bond must be such that it is readily recognisable from the description alone: resort to evidence that supplements the description is impermissible.
J U D G M E N T
CH LEWIS JA
[1] The meaning of s 1(1) of the Security
by Means of Movable Property Act 57 of 1993 is squarely in issue in this appeal.
The section
provides:
‘1 Legal consequences of special notarial bond
over movable property
(1) If a notarial bond hypothecating corporeal
movable property specified and described in the bond in a manner which renders
it
readily recognizable, is registered after the commencement of this Act in
accordance with the Deeds Registries Act, 1937 (Act 47
of 1937), such property
shall-
(a) subject to any encumbrance resting upon it on the date of
registration of the bond; and
(b) notwithstanding the fact that it has not
been delivered to the mortgagee,
be deemed to have been pledged to the
mortgagee as effectually as if it had expressly been pledged and delivered to
the mortgagee.’
The central issue is whether a bond registered under
the section complied with its requirements such that the
‘mortgagee’
had security in the movable property referred to in the
bond, and thus ranked as a secured creditor when the debtor was
liquidated.
[2] The first respondent, BOE Bank, is the holder of a
general covering notarial bond passed in its favour by Woodlam Industries CC
(‘Woodlam’) over the latter’s assets in 1991. Woodlam was
placed in final liquidation on 28 October 1999. BOE Bank
applied to the Eastern
Cape High Court for an order that the liquidation and distribution account in
respect of Woodlam Industries
CC be redrawn so as to reflect its preference by
virtue of that bond. At the time of liquidation Woodlam owed BOE Bank R2 403
852.20.
The first and second respondents are the liquidators of Woodlam, the
first respondent having been responsible for the drawing of
the distribution and
liquidation account.
[3] The appellant, the third respondent in the
court of first instance, is Ikea Trading und Design AG (‘Ikea’),
which
in 1998 had had registered in its favour a special bond, purportedly under
s 1(1) of the Act, over assets of Woodlam listed in a
schedule to the bond. The
basis on which BOE Bank has attacked this bond is that it did not comply with
the requirements of the section
in specifying and describing the assets referred
to in the bond in a manner which rendered the assets readily recognisable, and
that
the bond accordingly did not confer on Ikea real security over the items
listed. The liquidation and distribution account reflected
the sum owing by
Woodlam to Ikea as R2 619 951.44.
[4] BOE Bank succeeded before Mbenenge
AJ in the court below in obtaining an order (1) directing the first respondent
to redraw the
liquidation and distribution account; (2) declaring that the
descriptions of the assets referred to in Ikea’s ‘mortgage
bond’ did not specify the relevant assets in a manner that rendered them
‘readily recognisable’; and (3) declaring
that the bond registered
in 1991 in favour of BOE Bank conferred a preference on it such that BOE
Bank’s claim was to rank
ahead of Ikea’s, and other preferent
concurrent claims. Ikea now appeals against the order with the leave of this
court.
[5] The principal contention of Ikea on appeal is that the
property listed in the bond that was registered pursuant to s 1(1) of the
Act
can be identified with the aid of extrinsic evidence: thus, it argues, it has a
deemed pledge in them, and accordingly ranks
as a secured creditor in the estate
of Woodlam.
[6] BOE Bank contends, on the other hand, that the assets
must be identifiable from the bond itself, and that extrinsic evidence cannot
be
led to establish what they are. If such evidence were admissible, then creditors
of the pledgor, and of course prospective purchasers,
might well be defrauded.
The purpose of the section, argues BOE Bank, is to create a deemed pledge that
gives to third parties the
same notice as would a real pledge – one that
requires actual delivery of the assets secured to the pledgee. If the bond does
not constitute notice itself – but has to be read with reference to other
documents or identification outside of the bond –
then the object of the
legislation would be defeated.
[7] It is clear that without reference to
invoices and other documents in respect of the items enumerated, or without the
intervention
of some person who is able to say (with or without reference to
Ikea’s documentation) that the particular item listed is subject
to the
bond, the items cannot be identified as those listed in the bond. The assets
allegedly bonded are set out in an annexure to
the bond. It is a schedule with
three columns. The schedule divides the assets into different categories:
‘machinery’,
‘vehicles’ and ‘factory
equipment’. The headings of the three columns for machinery are,
respectively, ‘Description’,
‘Date of Acquisition’ and
‘Supplier’. It is perhaps useful to give some examples, randomly
chosen, at this
stage.
‘Grecon Optimiser: 1 Aug 1991: Grencor
Weinig
Moulder and Infeed: 1 Aug 1990: Weinig
Nipples and Couples: 30 May 1991:
Atlas Airpower
Rip Saw: 1 Aug 1990: Braun Woodwork.’
Vehicles
include ‘Mercedes Truck’; ‘Forklift’; ‘Uno X
2’; ‘Truck with crane’. Factory
equipment includes items such
as ‘3 roller table trolleys’, ‘tube caps and steel
plates’, ’10 T-bar
cramps’. The list of all these items
extends over 12 A4 pages.
[8] How, asks BOE Bank, does one determine
what a ‘Grecon Optimiser’ is, let alone which one (if there is more
than one
item of the same name) is subject to the bond? How does one determine
which Mercedes truck or Uno vehicle is bonded? Ikea responds
by saying that one
must have regard to the invoices for each item, which together constitute an
asset register, and, where necessary,
to the evidence of a former employee of
Woodlam who is able to identify the machinery.
[9] However, it was clear
from the evidence of the manager of BOE Bank and others that even where a
machine could be identified, for
example as a Grecon Optimiser, there was
no way in which one could tell that it was the particular machine referred to in
the bond. Reference
to invoices, or to the suppliers or manufacturers, did not
assist in this regard. Not a single item, contended BOE Bank, could be
determined by reference to the bond alone. Not only were the descriptions in
many instances vague, but there was no means of identifying
even the most
valuable of machinery and vehicles as the ones that had been bonded.
[10] The test for determining whether an item is ‘readily
recognisable’ from the bond in terms of s 1(1), contends BOE
Bank, is
whether third parties can determine the identity of each asset without regard to
extrinsic evidence. This is essential,
it argues, to avoid fraud and
controversy, and leave no room for conflict.
[11] In my view, the
correctness of this test is evident from the wording of the section itself: the
property must be ‘specified and described in the bond in a manner
which renders it readily recognisable’ (my emphasis). Of course the
description of the property in the bond must be related to the reality on the
ground. In dealing
with a contract for the sale of land, where the material
terms are required by statute to be in writing, Watermeyer CJ said in Van Wyk
v Rottcher’s Saw Mills (Pty) Ltd 1948 (1) SA 983 (A) at
990:
‘A contract of sale of land in writing is in itself a mere
abstraction, it consists of ideas expressed in words, but the relationship
of
those ideas to the concrete things which the ideas represent cannot be
understood without evidence. . . . In a Court of law, of
course, in every case
evidence is essential in order to identify the thing which corresponds to the
idea expressed in the words of
the written contract. The abstract mental
conception produced by the words has to be translated into the concrete reality
on the
ground by evidence.’
But evidence of that nature does not
supplement the document. It simply correlates the description with the
property.[1]
[12] In the
present case Ikea seeks to interpose another source of identification of the
property – a person who will say from
his own knowledge, or from reference
to Ikea’s records, whether a particular item was acquired from a
particular supplier on
a particular date. That entails recognition by virtue of
reference to a person or another document, and not recognition from the
bond
itself. That kind of extrinsic evidence is inadmissible because it does not
explain the bond or relate the description to the
property, but seeks rather to
supplement it.
[13] Where one is dealing not just with the interpretation
of a contract between parties, but with an instrument creating a real right,
which avails against third parties, there cannot be anything more added to the
instrument. The third party must be able to take the
document and identify the
‘reality on the ground’ by reference to the document alone,
correlating the description in
it and the property that fits the
description.
[14] This conclusion is reinforced by having regard to
decisions of the erstwhile Natal courts that dealt with similar legislation
applicable, until the passing of the Security by Means of Movable Property Act,
in that province (the Notarial Bonds (Natal) Act
18 of 1932 (the ‘Natal
Act’)). It is not necessary to deal with the history of that legislation
here. Suffice it to say
that in Natal the courts had recognised that a notarial
bond could confer on the holder not only a preference on the insolvency of
the
debtor (as was assumed to be the case elsewhere in the country) but also a
secured right in the assets bonded. The Natal legislation
was passed in order to
restore the rights that bondholders in Natal had held prior to an amendment to
the Insolvency Act 32 of 1916.
The development of the law relating to the Natal
bondholder’s position, and the legislation enacted to restore it, are
fully
discussed in several cases, including In re Umlaas Wool Washing and
Milling Co Ltd (in liquidation) 1934 NPD 18; Rosenbach & Co (Pty) Ltd
v Dalmonte 1964 (2) SA 195 (N) and Nedbank Ltd v Norton 1987 (3) SA
619 (N).
[15] The current Act was intended to extend the availability of
the security made possible by the Natal Act to South Africa as a
whole.[2] Case law dealing with the
Natal Act thus remains of some relevance in interpreting s 1(1) of the current
Act. It is significant,
however, that the wording of the Natal Act is different.
Section 1 provided that the Act applied ‘only to movables situate
within
the Province of Natal, and shall apply to a notarial bond only in so far as such
bond hypothecates movables specially described and enumerated therein: .
. .’ (my emphasis).
[16] In the Rosenbach case, above, Caney
J (delivering the judgment of the full court) stated that the Natal Act was
‘concerned to prescribe safeguards
in the interests of other creditors by
requiring definition of the movables hypothecated ‘in order to render
identification
as easy as possible with a view to shutting the door to frauds
and reducing controversy to a minimum’ (at 201H-202A). The
learned judge
thus held (at 204G-205A) that –
‘[I]t is not a compliance with
the Statute to describe the assets to be hypothecated in wide general terms, as
“goods,
wares, merchandise, stock-in-trade, fixtures, fittings, furniture
and appliances”. It is necessary to know what are the goods,
wares,
merchandise and so on, the nature of them and the types or kind of each of them,
and also the number of them, (eg so many
1 lb tins of A make of jam, so many of
B make, so many 5 lb tins of C make biscuits, so many rolls of suiting material
and of dress
material and so on, as in a stock list) described so that at any
given moment they may be identified; so, also, with the fixtures,
fittings,
furniture and appliances and any other movables. It is necessary to know
particulars of them, of what they consist, in
detail, . . .’
.
[17] In reaching this conclusion the court had regard to several
English cases dealing with bills of sale, governed by a statute that
required an
inventory of chattels ‘specifically described’. In Carpenter v
Dean [1889] 23 QBD 566 Fry LJ said (in a passage quoted in Rosenbach
at 205E-G) that the words ‘specifically described’ were used
‘ . . . to facilitate the identification of the articles enumerated in
the schedule with those found in the possession of the
grantor – that is
to say, to render the identification as easy as possible, and to render any
dispute as to the intention of
the parties as rare as possible, and to shut the
door to fraud and controversy, which almost always arise when general
descriptions
are used. That is to be done as far as possible; by which I mean,
as far as is reasonably possible – so far as a careful man
of business
trying to carry the object of the Act into execution could and would do without
going into unreasonable particulars.’
[18] All the more so should
this be the case where the written document is not merely a contract, but also
an instrument hypothecating
property. The need for certainty from the instrument
itself is not only to achieve clarity for the parties: an instrument that gives
rise to a real right of security also constitutes notice to third parties that
the assets are bonded. For such notice to be effective
third parties must be
able to determine from its terms that the property is subject to another’s
right – that that particular
thing is encumbered.
[19] In my view
the learned judge in the court below was correct in finding that the
legislature, when enacting the Act, must be assumed
to have been aware of the
provisions of the Natal Act, and the cases that interpreted it. The introduction
of the phrase ‘readily
recognisable’, and the use of the words
‘specified and described’ (instead of ‘specially
enumerated’,
the term used in the Natal Act) indicate that the legislature
intended a stricter test to be applied than did the Natal Act. It would
thus not
be sufficient to describe the property by reference to quantity and kind (as was
suggested by Caney J in Rosenbach): the property itself must be
‘specified’.
[20] ‘Specify’, according to the
Shorter Oxford English Dictionary, means ‘To mention, speak of, or name
(something)
definitely or explicitly; to set down or state categorically or
particularly; to relate in detail’. ‘Describe’
means ‘To
set forth in words by reference to characteristics; to give a detailed or
graphic account of’. ‘Readily’
means ‘Quickly, without
delay; also without difficulty, with ease or facility’.
‘Recognisable’ means ‘Capable
of being recognised’, and
‘recognise’ means ‘To know by means of some distinctive
feature; to identify from
knowledge of appearance or
character’.[3]
[21] In my
view, therefore, for property to be pledged in accordance with s 1(1) of the Act
the unique item of property must be readily
recognisable from its description in
the bond. Whether or not expertise is required in order to correlate the
property and the description
is not the point. It must be capable of being done
merely from the description in the bond. Where a generic item is sought to be
pledged it is the unique item that is the subject of the pledge and it is not
enough to describe it only with reference to its generic
characteristics. Nor is
it sufficient to describe generic items with reference to the source or date of
acquisition, as in this case,
for then they are recognisable not from the
description in the bond but rather from an external source. A member of the
public must
be able to establish from the information lodged at the deeds office
whether particular assets of a debtor have been pledged (whether
or not he
requires expert knowledge to do so).
[22] Section 1(1) states that the
movable property bonded is ‘deemed to have been pledged’ as
‘effectually as if
it had expressly been pledged and delivered to the
mortgagee’. In my view, therefore, the bond must, in so far as possible,
have the same characteristics as does a pledge. Third parties must be able to
tell, without reference to extrinsic evidence, that
the creditor has a right in
the property pledged. For a pledge to be valid the creditor (pledgee) must be in
possession of the property.
That is why a pledge cannot be effected by
constitutum possessorium.[4] If
the owner of the property were to remain in possession of the property, the
likelihood that third parties, such as other creditors
or prospective
purchasers, would be deceived would be greatly increased. The fact of actual
physical control of the pledged property
constitutes notice to the world that
someone other than the owner has a right in the property, and in particular, the
power to control
the property. Thus for property to be deemed to be pledged,
under s 1(1) of the Act, the bond in question must, without reference
to the
owner or anyone else, make readily identifiable the property so pledged. Any
person seeking to establish, from information
in a deeds office, whether a
debtor’s property is encumbered, must be able to do so from the bond
itself.
[23] The importance of being able to determine the asset pledged
from the bond itself was emphasised in relation to the Natal Act
in
Durmalingam v Bruce NO 1964 (1) SA 807 (D) at 812G-813B. In holding that
the ‘public generally’ should be able to identify the property
bonded,
without recourse to extrinsic evidence, Friedman AJ stated that the
purpose of requiring movables to be ‘specially described
and
enumerated’ was to ‘give notice to the public generally of the
movables specially hypothecated under the bond’.
Thus, the court held, a
term could not be implied into the bond in question since the implication would
depend on the leading of
extrinsic evidence of facts known only to the parties
– and that would inevitably be to their prejudice.
[24] The
consequence of that is that one cannot simply enumerate items in a bond and
create a deemed pledge without more. The property
must be so described that only
it, and not other property of like kind, can be identified as that which is
pledged. In my view there
should be no difficulty in identifying machinery,
vehicles, even furniture, that is bonded by reference to labels, numbers or bar
codes. The Grecon Optimiser, or the Uno vehicle – each of the assets
enumerated – could be given an identifying mark
referred to in the bond.
The third party would then readily be able to recognise the thing from the
reference in the bond. What is
essential is that each item pledged must be
recognisable from its description in the bond.
[25] The notarial bond
registered by Ikea over the movable property of Woodlam accordingly does not
meet the requirements of s 1(1)
of the Act. The assets enumerated are not
specified and described in the manner required by the section. That some of them
could
be, and indeed were, identified with the aid of extrinsic evidence does
not help Ikea. Third parties – indeed even the liquidators
– were
not able to take the bond and correlate the so-called descriptions with the
assets on the factory floor. In the circumstances
the bond did not create a
deemed pledge over the property of Woodlam, and Ikea was not a secured
creditor.
[26] The appeal is accordingly dismissed with costs.
_____________
C H Lewis
Judge of Appeal
Concur:
Zulman JA
Farlam JA
Nugent JA
Ponnan AJA
[1] See also Vermeulen v Goose
Valley Investments (Pty) Ltd 2001 (3) SA 986 (SCA) paras 6 and 14 and the
cases there cited.
[2] The Act was
passed pursuant to the recommendations of the South African Law Commission
contained in a report entitled ‘Report
on the giving of security by means
of movable property’, published in February 1991. Paragraph 5.5.1 of the
report expressly
states that the notarial bond in Natal should be extended to
the rest of the Republic. See also Bokomo v Standard Bank van SA Bpk 1996
(4) SA 450 (C) at 454E-F and 17 Lawsa (reissue) para 516. Section 1(3)
of the Act regulates the effect of any other notarial bond registered before the
commencement of
the Act (7 May
1993).
[3] These definitions are
appropriate samples of the meanings attributed in the Shorter OED and are not
exhaustive.
[4] See, for example,
Goldinger’s Trustee v Whitelaw & Son 1917 AD 66 and Vasco
Dry Cleaners v Twycross 1979 (1) SA 603 (A) at 611G-612D.
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