By Dr Analise Magri – Junior Associate
Amongst the various forms of guarantees available to a creditor, hypothecs are commonly resorted to as a safeguarding mechanism in view of debts owed by a debtor. Hypothecs may take either of two forms: a) General Hypothecs (burdening all the assets both present and future of a debtor) or b) Special Hypothecs (burdening one particular asset of a debtor).
Whilst both general and special hypothecs rank according to their date of registration, special hypothecs enjoy advantageous features for a creditor for they attach to a particular property encumbering it burdensomely to the extent that they remain operative even vis-à-vis third parties. This important feature of special hypothecs, which does not apply for general hypothecs, finds benefit when the property originally burdened by a special hypothec is transferred to a third party.
In order to properly understand what happens in the latter scenario, it is best to exemplify it by means of a practical example. Kickstarting the action is a relationship between two parties, a common creditor-debtor relationship who are tied together by an existing debt. In order to secure the debt, the principal debtor guarantees by means of a special hypothec in favour of the creditor. At this stage, even though the encumbered property is guaranteeing a debt, it remains in the hands and full ownership of the principal debtor. Another essential figure in the relationship is a third party who comes into the picture when the burdened property passes into his hands.
What happens in this scenario? Can the creditor go ahead and take over the property which has been securing the debt immediately?
In a situation of the sort, the long awaiting creditor would have to exercise an action, known under civil law as the actio ipotecaria. The crux of the action in fact comes to fruition when the existing debt between the creditor and principal debtor falls due and the latter has failed to rectify the same debt. In this situation, the creditor would be able to satisfy his claim by taking over the property secured by the hypothec or privilege, which is effectively in the hands of someone else.
Before exercising the action, the process is kick started by means of a judicial intimation, i.e. by serving the third party and the debtor with a judicial act calling on the same third party to discharge and release the hypothecated property in his favour or otherwise to pay off the debt. If the third party in possession of the hypothecated property has failed to discharge the debt or surrender the property and thirty days would have elapsed from when the creditor has served the debtor and the third party by a judicial act, the creditor has no other option but to institute the so called actio ipotecaria against the third party in possession by means of a sworn application before the First Hall of the Civil Court.
Having brought the actio ipotecaria, the third party does not become the creditor’s debtor, however he would have to either discharge the property which had been hypothecated by means of a special hypothec or otherwise pay off the debt from his own means. However, the third party is not obliged to monetarily pay the debt due to the creditor for his only obligation is limited to surrendering the property under Court Authority and give up its possession. It is only when the property is surrendered that his liability ceases even though the third party remains the owner until the property is sold. Up till the stage when the property has been sold by the creditor, the third party may decide to pay the debt due and regain possession of his property.