In a recent Supreme Court of Appeal decision [1], the court dealt with a scenario in which Nedbank Limited had entered into a loan agreement with a trust.
In terms of the Trust Deed, for the trust to do business it was a requirement that there should be no fewer than three trustees at all times. Notwithstanding all kinds of official looking documents (i.e. resolutions), at the time of the transaction, the trust concerned had only two trustees.
Nedbank paid over the loan, registered a covering mortgage bond [2] over a property owned by the trust as security for the loan, and for quite a while received payment of the monthly instalments.
The difficulties arose, when the trust stopped paying its instalments. Nedbank sued and only then discovered that when the loan was made and the various agreements were entered into between the trust and Nedbank, the terms of the Trust Deed had not been complied with.
The consequence was that the transaction was invalid and that all the relevant agreements were accordingly set aside, including the covering mortgage bond.
Nedbank was then placed in the position where it had loaned a large amount of money but suddenly had no documentation upon which it could rely for the recovery thereof.
Fortunately, all ended well, as in our law a party is not entitled to be unlawfully enriched through the error of a third party, provided however, such error was not negligent. On the facts of the matter, the court found for various reasons that Nedbank had not acted negligently and ordered in its favour.
Notwithstanding the order for repayment of the balance by the trust, a hugely negative consequence was that Nedbank lost its covering mortgage bond. This of course placed the bank in the precarious position that were the trust to be trading in insolvent circumstances, the bank would not have been a preferent creditor and would have stood in line in the vulnerable position of all other creditors.
[1] Mhlari NO and Others v Nedbank Limited 2024 JDR 1431 (SCA)
[2] A covering mortgage bond is the description used where a mortgage bond is registered over a property in respect of a loan by the mortgagee where such loan is not related to the acquisition of the property.