By Pierre van der merwe and Simone jansen van rensburg
A creditor is often faced with the decision of what form of security for the due and proper performance by the debtor of its obligations under, for example, a loan agreement, would be most beneficial to the creditor.
Common forms of security include suretyships, guarantees, pledges, mortgage bonds (if the debtor owns immovable property) and notarial bonds (“Bond/s”) (if the mortgagor owns movable property).
Bonds are a lesser known form of security and under-utilised in commercial practice. Bonds may be used in conjunction with other forms of security, depending on the transaction.
The purpose of this article is to shed some light on what a Bond is, how it can be used as security, assets which may be secured under a Bond and miscellaneous aspects not often discussed.
2. What is a mortgage bond?
A mortgage bond is registered in the Deeds Office to secure an obligation on the part of the debtor (mortgagor) towards the creditor (mortgagee) for the due and proper performance by the debtor to the creditor by securing certain assets of the debtor under the Bond. In the event of non-performance by the debtor, the creditor may approach the court for an order which allows the creditor to attach and sell the secured property and for the proceeds to be utilised to settle the creditors claim against the debtor.
Importantly, only immovable property (i.e. land and buildings) may be secured under a mortgage bond.
3. WHAT IS A NOTARIAL BOND?
A Bond, on the other hand, performs the same function as a mortgage bond but is registered over the debtor’s movable property as security for the debtor’s obligations towards the creditor.
Broadly speaking, there are two categories of Bonds, general notarial bonds and special notarial bonds.
Briefly, a general notarial bond (“GNB”) is a Bond that secures all the debtor’s movable property generally (including all corporeal and incorporeal movable property of every nature, examples of which are given under section 5 of this article).
A special notarial bond (“SNB”) is a notarial bond registered over movable property that is described in the Bond in such a manner that renders the movable property “readily recognisable” in accordance with the requirements of section 1(1) of the Security by Means of Movable Property Act, 1993 (“SMMPA”).
A GNB and SNB may be incorporated in the same Bond, thereby providing the best possible security for a creditor.
4. Benefits of a notarial bond
The creditor’s right to claim from the debtor, if the debt arises from a SNB, persists for a period of 30 years and does not prescribe within a period of 6 years, as is the case with a notarial contract, or within the normal 3-year period, as with an ordinary debt. Ordinarily, prescription begin to run from the date when the debt is due in terms of the Prescription Act, 1969.
The debtor is ordinarily responsible for the registration costs of the Bond. The cost of registration is calculated per tariff on a sliding scale, based on the value of the Bond registered. The costs are not calculated based on the value of the movable property which is secured. The fee tariff is the same tariff applicable to the registration of mortgage bonds.
In terms of a GNB, the creditor will have a real right over the hypothecated property once he has perfected the Bond (i.e. either taken the property into possession or obtained a court order directing that the property be attached and entitling him to take possession of the property). Prior to perfection, the mortgagee only acquires a preferential claim, which shares in the free residue of the insolvent estate, prior to concurrent claims.
A SNB is a ‘deemed pledge’ and creates a real right of security in favour of the creditor. The legal position of the creditor is thus placed on equal footing as that of a pledgee, due to the fact that the creditor is deemed to be in possession of the property. A SNB affords a creditor a secured claim against the debtor in insolvency proceedings, where the encumbered property is sold in execution, in accordance with section 95 of the Insolvency Act,1963.
Bonds may also include the fruits of the movable property – by way of example, the future offspring of an animal may be encumbered in the same bond, thereby providing additional security to the creditor.
v. Debtor’s access to assets
A Bond allows a debtor to retain possession of its movable property while simultaneously affording the creditor security. Debtors generally have easier access to movable property, as opposed to immovable property, and are likely in a better position to provide the requisite security over their movable assets. Debtors are also able to keep their property safe, by virtue of the property remaining within their possession, whilst simultaneously repaying their debt. Creditors do not need to store or maintain the movable property, as may be the case with an ordinary pledge.
vi. Secure in law
Credit providers and lenders in South Africa are encouraged to utilise Bonds over movables because it affords creditors strong security rights.
5. Movable property commonly secured under a notarial bond
A Bond can be registered over corporeal movable property (e.g. furniture, vehicles, jewellery, art, Krugerrands, goods or equipment of a business, animals and even the future accrual of offspring of animals and stock in trade on the shelves of a retailer, including the subsequent replacements) and incorporeal movable property (e.g. unregistered long lease or sublease of immovable property, liquor licence, water use license, site permit, shares in a company, book debt and goodwill of a business).
6. Other movable property capable of being secured under a GNB or SNB
Bonds may also be registered over the following:
- Mineral stockpiles (if the stockpile has not acceded to the immovable property);
- Processing plants (mineral or other)/factory equipment;
- Mining equipment;
- Future things (Movable property that the Mortgagor will own in the future)
Should you require more information on these types of assets (and assets which cannot be secured under Bonds), please see our article titled “The Ins and Outs of the Assets that may be Secured in Notarial Bonds” which can be found on the Schindlers website (www.schindlers.co.za).
7. Ranking of a notarial bond
In terms of South African law, registration in the Deeds Office of a Bond is considered to constitute notice to creditors and other interested parties.
The creditor who registers a Bond first (the earliest date) in respect of a debtor’s movable property will rank first in respect of receiving proceeds from the sale of the secured movable property to satisfy the first ranking creditor’s claim.
Subsequent Bonds may be registered in respect of the debtor’s movable property, but these subsequent creditors will rank second, third and so forth (depending on the date of registration of the respective Bonds) to the first ranking creditor.
Notwithstanding the above, it is possible for a subsequent Bond to rank pari passu (i.e. equally) to the first ranking Bond. For this to occur, the first ranking creditor will need to waive its preference, which waiver of preference is also registered in the Deeds Office.
8. Foreign creditors and debts in foreign currency
i. Foreign Creditors
A foreign creditor may be a mortgagee under a Bond in respect of movable property located in the Republic of South Africa and which Bond is registered in a South African Deeds Office.
A foreign company does not need to be registered as an external company (provided it meets certain requirements).
ii. Debts in a foreign currency
Transactions involving foreign creditors are often for amounts expressed in foreign currency. The Bond securing the underlying obligation may also be for an amount expressed in a foreign currency.
9. Notarial bonds as a useful tool in the South African credit market
In the current economic climate, not all debtors own immovable property which may be secured for their due performance. However, most debtors own movable property which may be secured for this very purpose.
Creditors who wish to register Bonds should consider the value of the movable property sought to be secured under the Bond, to ensure that adequate security is obtained should it become necessary to execute against the movable property on default by the debtor.
While we have seen an increase in the use of Bonds in the credit market in recent years, Bonds still remain a largely underutilised form of security.
We urge creditors to consider Bonds as a form of security. Should you require assistance or advice in this regard, please do not hesitate to contact our offices.