NOTARIAL BONDS – Can they save your business?

• Does your business sell goods/services on Credit?
• Does your business buy goods/services on Credit?
• How do you secure that Risk?
• In these COVID times, the security that a creditor will hold will be of EXTREME importance.

Notary Public

1. BENEFITS OF NOTARIAL BONDS

Debtors generally have easier access to movable property, as opposed to immovable property. Many debtors have movable property that can be used as security but they are unable to “unlock” the value of these movables because most lenders only want security over land. 

A lender who is willing to take security in the form of a notarial bond over movables (which is just as secure in law as a mortgage bond over immovables) will have a much wider target market.

The second reason that notarial bonds are particularly useful in the South African context is that the debtor remains in possession of the movable property even though it has been bonded in favour of the creditor. 

This means that more debtors are willing to bond their movables because the debtors can keep the property safe in their possession whilst they are repaying the loan

With a special notarial bond, the Creditor gets a limited real right in respect of the moveable property specified and described in the bond

The prescription period under a special notarial bond is 30 years (and not after 3 years as the case with most normal loan agreements that are not secured).

The registration cost of notarial bonds is ordinarily based on the value of the movable property, and which means that the cost is usually affordable to the debtor (who is most commonly made responsible for bearing the cost of the registration of the notarial bond).

A notarial bond can encumber not only the movable property itself but any fruits of the movable property – like rental earned on the lease of the movable property, or if the movable property is the kind of thing that would produce young (like a flock of sheep, of a herd of cows), then the offspring of the movable property can also be encumbered. 

This gives the creditor additional security over and above the value of the movable property on its own and it is not necessary for a creditor to register further notarial bonds over the fruits as and when they come into existence.

2. BASIC REQUIREMENTS

The following elements contained in a notarial bond are essential:

The cause of debt refers to the circumstances necessitating the registration of a notarial bond. This emanates from an agreement. Typical causes of debt include monies lent and advanced in accordance with the terms of a loan agreement, a credit facility or a guarantee provided for the debts of a third party in accordance with the terms of a guarantee agreement.

The power of attorney is a unilateral document, signed by the borrower and two witnesses. A draft notarial bond is attached to the power of attorney as an annexure. 

By signing the power of attorney, the borrower authorises an agent, to appear before a notary public in his place and stead and to encumber his movable property in favour of the bondholder, in accordance with the terms of the draft notarial bond attached. 

In the event that the mortgagor does not wish to sign a power of attorney, the mortgagor may appear before the notary public and execute the notarial bond in the notary public’s presence.

Copies of the relevant resolutions and the power of attorney are filed in the notary public’s protocol for verification purposes.

Section 61 of the Deeds Registries Act 47 of 1937, requires every notarial bond to be registered in a deeds registry within a period of three months after the date of its execution or within such extended periods as the court may on application allow

            Registration in respect of different Entities

• Natural Person

The application of section 61(3)(b) of the Act creates no problem where natural persons are concerned.

• The Partnership or Trust

If the mortgagors are described as carrying on business in partnership, or as a trust, section 61(3)(b) of the Act must be complied with in respect of all the partners of the partnership or trustees of the trust (RCR 16 of 1954).

• The Company with Limited Liability

Nothing prohibits the bond from being registered in any of the other Deeds Registries within the prescribed period of time (see RCR 38 of 2006). 

The registered registry of the company or close corporation is regarded as the place of “residence” of the company or close corporation for the purpose of section 61(3)(b) of the Act.

Section 62 of the Deeds Registries Act, 1937, stipulates –

For companies (and cc’s) the notarial bond must be registered in the Deeds Registry for the area in which the registered office of the company or cc is located and shall be effective as registration for the whole of the Republic of South Africa.

A special notarial bond must meet the requirements set out in the Security by Means of Movable Property Act, 1993, the most important of which is that all assets covered by a special notarial bond must be described clearly and accurately in order to ensure that, upon enforcement of the applicable security, such assets are specifically identifiable through reference to the bond only, without the need for additional extrinsic evidence.

3. GENERAL VS SPECIAL NOTARIAL BONDS

• General Notarial Bonds

A general notarial bond does not confer a real right on the Creditor in respect of the moveable property encumbered by the bond. Only once the general notarial bond is perfected will a limited real right be created in favour of Creditor in respect of the moveable property encumbered by the bond.

The perfecting of a general notarial bond requires the taking of possession of the movable property under the bond pursuant to a Court order.

It is important to remember that a Debtor can register more than one general notarial bond over his or her movable property and that the date of perfection will determine the ranking of the Creditor’s claim (not the sequence of the registration of general notarial bonds).

Where a creditor of a general notarial bond perfects his or her claim before sequestration/liquidation of the Debtor, the Creditor will enjoy a secured claim against the insolvent estate. If the general notarial bond is unperfected at the time of liquidation/sequestration, then despite the general notarial bond having been successfully registered, the Creditor will not have a limited real right and therefore no secured claim against the insolvent estate (Development Bank of Southern Africa v Van Rensberg).

After the sequestration/liquidation of the Debtor, the Creditor can no longer perfect the bond and the Creditor will rank as a concurrent creditor with a preferential claim against the free residue of the insolvent estate (Trisilino v De Vries).

• Special Notarial Bonds

With the registration of the special notarial bond, the Creditor gets a limited real right over the movable property encumbered by the special notarial bond. Unlike a general notarial bond, there is no need to take possession of the movable property under the special notarial bond to create the limited real right (see s.1 of the Security by Means of Movable Property Act, 1993).

The ranking of claims when it comes to special notarial bonds also differ from general notarial bonds. When there is more than one special notarial bond registered over a particular movable asset, the special notarial bond registered first will have priority.

Another advantage of a special notarial bond is that it will rank above a landlord’s tacit hypothec if the landlord’s tacit hypothec is unperfected at the registration date of the special notarial bond.

4. TYPES OF NOTARIAL BONDS

Security serving under a notarial bond may be corporeal movable things, such as furniture, the goods of a business, animals, etc., and/or incorporeal things such as e.g. an unregistered lease, a short term lease of immovable property, a liquor license, shares in a company, etc. (see RCR 15 of 2004). 

If stock-in-trade is mortgaged under a special notarial bond, not only the original articles will be covered (if unsold), but also subsequent replacements and additional stocks will serve as security.

Sections 81, 82 and 83 of the Deeds Registries Act, 1937, lay down, inter alia, certain rules for and in connection with the hypothecation of leases and sub-leases by notarial bonds.

In terms of Items 9 to 11 of Schedule 1 to the Ship Registration Act 58 of 1998, a ship or a share of a ship may be mortgaged as security for the discharge of an obligation, however not in terms of a notarial bond registered in a deeds registry.

An aircraft or a share in an aircraft shall not after the coming into operation of the Convention on the International Recognition of Rights in Aircraft Act (hereinafter referred to as the “Rights in Aircraft Act”) be mortgaged by bond registered in a deeds registry.

However, the said Act is not applicable to the following: