A Builder’s Lien – Where Does It Rank In Insolvency?

What is the legal and practical effect of a builder’s lien over fixed property during the liquidation process?

Section 47 of the Insolvency Act, 24 of 1936, provides that a lien holder who delivers property subject to his or her lien to the trustee of the owner’s insolvent estate, at the trustees request, does not lose the security afforded to him by his right of retention if, when delivering the property, he notifies the trustee in writing of his rights and in due course proves his claim against the estate.  (These provisions apply mutatis mutandis to companies and liquidators).

Nature Of Lien (Or Right Of Retention)

Our law provides that a person has a lien (or right of retention) over the property of another if he (the lien holder) has expended labour or incurred expenses in respect of the property.  There are two main categories of lien, namely:

• a debtor and creditor lien, which is based upon contract.  It extends to all expenditure which the lien holder has incurred upon the property in terms of a contract, express or implied, with another party.  The lien holder may retain the property as against the other contracting party (but not against third parties) until he has been compensated for the work done and costs incurred;

• an enrichment lien, which is based upon unjustified enrichment, which is again subdivided into:

  • salvage liens, which is the right of retention over property for expenses necessarily incurred on it, in other words expenses without which the property would either have been destroyed or would have depreciated in value;
  • improvement liens, which is the right of retention over property for expenses incurred which have enhanced the value of the property.  The holder of an enrichment lien may retain the property until compensated for his expenses and labour, but he cannot insist on receiving more than the amount by which the owner of the property has actually been enriched.

A real lien over immovable property ranks in preference over all mortgage bonds passed over the property, even if such mortgage bonds have been passed before the establishment of the lien.  The holder of a real lien over immovable property therefore enjoys the strongest possible protection, outranking all other forms of security, including the security afforded to the holder of a statutory instalment sale hypothec, a pledge and a landlord’s hypothec.

Whilst debtor and creditor liens are not forms of real security and thus cannot afford preference against mortgagees, they do, by virtue of Section 95(1) of the Insolvency Act (referred to above) secure the lien holder’s claim vis-à-vis the insolvent debtor’s concurrent creditors (see D. Glaser & Sons (Pty) Ltd v The Master 1979(4) SA 780 (C)).  A debtor and creditor lien would therefore rank only after e.g. a landlord’s tacit hypothec.

The difference between secured and preferent creditors is essentially that a secured creditor is one who holds real security for his claim.  He is entitled to be paid out of the proceeds of the property which is subject to the security; his preferent right arising from a security interest in specific property.  A preferent creditor, on the other hand, does not hold any security for his debt, but, in terms of the Insolvency Act, he is entitled to payment of his claim before concurrent creditors.  His preferent right arises from the provisions of the Act.

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