Article written by Stefano de Gouveia, Candidate Attorney, checked by Simone Jansen van Rensburg, Associate and released by Pierre van der Merwe
04 November 2021
Notarial bonds are a special form of security which may be utilised in addition to the traditional forms of security, such as mortgage bonds, pledges, suretyships or cessions to provide a creditor with a diverse set of security.
A notarial bond is a bond that has been attested by a notary public hypothecating movable property (either specifically or generally, or in some instances both specially and generally) which is registered in the Deeds Registry. In terms of a notarial bond, the mortgagor (i.e. debtor) undertakes and consents that the fulfilment of a legal obligation to the mortgagee (i.e. creditor) is secured and that the obligation may be discharged by the proceeds of the movable property hypothecated in the notarial bond.
A notarial bond allows a debtor to use movable property (corporeal or incorporeal) owned by the debtor as security without depriving the debtor of possession of the movable property. Put differently, the movable property of the debtor need not be delivered to the creditor as the case would be with a pledge, allowing the debtor to continue possession of the movable property (unless and until the notarial bond is perfected, as discussed below).
CLASSES OF NOTARIAL BONDS
There are several classes of notarial bonds that can be registered, namely:
- Ordinary Bonds (used as security for the due fulfilment of the debtor’s existing debt or obligations);
- Covering Bonds (used to secure a future debt or an existing and future debt);
- Collateral Bonds (to serve as additional security for a debt or obligation in instances where the creditor already has security either in the form of an existing mortgage bond or notarial bond);
- Surety Bonds (registered by third-parties in order to provide security for the debt or obligation of someone else who is the principal debtor);
- Indemnity Bonds (a type of surety bond where the principal debtor indemnifies a surety in respect of a surety bond against the creditor/s of the principal debtor); and
- Notarial Debenture Bond (a notarial bond which secures the obligations of a company towards debenture holders).
GENERAL AND SPECIAL NOTARIAL BONDS
For the purposes of this article, we will focus on the distinction between general notarial bonds and special notarial bonds, which distinction is applicable to the above listed notarial bonds.
Special Notarial Bond (“SNB”)
The security provided under a SNB is that of a deemed pledge, which confers a real right of security on the creditor in respect of the specific movable property upon the registration of the SNB in the deeds registry. An SNB does not require that the movable property be delivered to the creditor, as long as the specific movable property is described in accordance with the provisions of the Security by Means of Moveable Property Act 57 of 1993 (“Act”).
Section 1(1) of the Act provides that the moveable property which is specifically hypothecated in a SNB must be described in a manner which renders the movable property ‘readily recognisable’ by a third party on the basis of the description in the bond alone, without requiring the use of extrinsic evidence. It is therefore critical to describe the respective moveable property clearly.
Where the debtor fails to fulfil its obligations to the creditor or fails to repay its debt to the creditor, the creditor can have the hypothecated movables sold and can then receive payment from the proceeds in settlement of the debt in preference to the debtor’s other creditors. Further, in insolvency, a creditor who holds a SNB will have a secured claim in respect of the assets hypothecated under the SNB.
Importantly, other creditors of the debtor cannot attach the movable property which has been secured under a SNB by the principal creditor. The holder of an SNB will have a preference on the proceeds generated from the asset sold. Further, should a debtor wish to register subsequent notarial bonds over the specific property already secured under a SNB, the debtor will require the consent of the bondholder which provides increased protection to the bondholder whose bond was registered first in time.
General Notarial Bond (“GNB”)
A GNB is registered in respect of all of the movable property belonging to the debtor. An important distinction between an SNB and GNB is that a GNB does not provide the creditor with a real right of security concerning the movable property hypothecated thereunder.
Should the debtor fail to fulfil its obligations or fail to repay its debt to the creditor, the creditor will be required to ‘perfect’ its GNB in order to enforce its security. A typical GNB contains a perfection clause which entitles the creditor to take possession of the movable property over which the GNB has been registered. A perfection clause allows a creditor to take possession of the movable property to acquire a real right to the bonded property which would then constitute a right of pledge.
In order to perfect a GNB, the following needs to occur:
- the debtor needs to voluntarily transfer the movable property to the creditor; or
- in the event that the debtor does not wish to voluntarily do so, the creditor needs to make a successful application to the High Court for an order that such property be attached and possession of the property must be obtained through attachment by the sheriff.
Only once the creditor has gained possession of the movable property will the GNB be considered to be perfected.
Where a creditor has perfected its claim in terms of a GNB prior to the insolvency of the debtor and the debtor later becomes insolvent, the creditor will have acquired a real right of security and will have a secured claim against the insolvent estate of the debtor. If the GNB is unperfected at the time of insolvency, the creditor will not have a secured claim against the insolvent estate of the debtor and will only have a preferential claim to the free residue of the insolvent estate of the debtor, which ranks after secured claims but before concurrent claims.
The registration of a GNB does not prevent a debtor from registering further GNBs over its movable property. However, where a debtor has registered more than one GNB, the date of perfection rather than the date of registration will determine the ranking of the bondholder’s claims.
It is also important to note that a notarial bond may hypothecate specific movable property (i.e. SNB) as well as all of the movable property of the debtor (i.e. GNB) in one single document. This is known as a special and general notarial bond and provides better security for the creditor without incurring the costs of registering a SNB and GNB separately.
TERMINATION OF NOTARIAL BONDS
Notarial bonds may be terminated by, amongst others, the extinction of the principal debt, a merger of title, execution or sale of the encumbered movable property, the cancellation of the bond, or lastly the destruction of the encumbered movable property.
While the process of termination may seem straightforward in respect of some of the aforementioned methods, it is necessary to note the effect of selling and destroying the movables which are hypothecated under the notarial bond. When there is realisation of the asset through execution, the asset sold will be transferred free of the encumbrance. In circumstances where an encumbered asset is destroyed, the SNB is extinguished.
In conclusion, it is clear that a notarial bond is an effective, recognised and practical manner of securing a debt or obligation in circumstances where debtors only have movable property to put up as security. Depending on the creditor and their security requirements, consideration needs to be given to the debtor and the debtor’s assets in order to ensure that the creditor has sufficient security. A notarial bond, whether it is a GNB or SNB can widen the scope of security for both creditors as well debtors, which in turn allows for more transactions to be concluded in a financially secure way.
This article gives a brief oversight of the commercial utility of notarial bonds. A notarial bond is an effective, recognised and practical manner of securing a debt or obligation especially in circumstances where debtors only have movable property registered in their names.
[Please note this article is meant for information purposes only and does not constitute legal advice. In the event that you are considering registering a notarial bond as a means for security, you should consult an attorney to consider all relevant legal aspects.]