COVID times, the security that a creditor will hold will be of EXTREME
Debtors may encumber their immovable property
with mortgage bonds or cede various rights in favour of creditors as security
(e.g. pledges, cessions, etc.).There is
also Credit Insurance or Factoring that may be used to "secure" the
debt. However, a form of security that is often overlooked is notarial bonds.
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
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
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:
·A valid causa for the registration of a
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.
·A power of attorney and draft notarial bond
as an annexure
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
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
The application of section 61(3)(b) of the
Act creates no problem where natural persons are concerned.
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).
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,
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
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
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).
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
5. WHAT CAN SERVE AS SECURITY?
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
· Leases And Sub-Leases
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.
·The Ship Registration Act
58 Of 1998
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.
·Convention on the
International Recognition Of Rights in Aircraft Act
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
However, the said Act is not applicable to
ØForeign registered aircraft
ØPowered para glider
ØUnmanned radio-controlled aircraft.
A liquor license may be hypothecated by means
of a notarial bond (Solomon v Registrar of Deeds).
Stock-in-trade is normally intended for sale,
therefore it is impractical for it to be used as an object in a notarial bond.
It is in practice permitted to determine to what extent stock-in-trade is
identifiable and as an object for utilisation in a notarial bond. It will look more or less like a stock list.
Existing as well as future crops which have
not yet been harvested are regarded as immovable property and cannot be
mortgaged under a notarial bond.
·Plant and Equipment
Manufacturing entities frequently have plant and equipment of significant value that is capable of being used as security under a notarial bond.
6. THE NATIONAL CREDIT ACT
The treatment of a notarial bond and a
mortgage bond is different under the NCA.
Under the NCA a “mortgage agreement” is
regarded as a “large agreement”. Accordingly, a mortgage agreement that is
concluded with a consumer that is a juristic person will not be subject to the
NCA, irrespective of the consumer’s asset value or turnover and irrespective of
the principal debt under the transaction.
A notarial bond is
not regarded as a mortgage agreement and is therefore not a large agreement
under section 9 (4) (a) of the NCA. The structuring of the transaction is
Generally, where the principal debt exceeds
the threshold value (currently R250,000.00) and the consumer is regarded as a
juristic person in terms of the NCA, the NCA regards the transaction as a large
agreement in terms of section 9 (4) (b). If the principal debt does not exceed the
threshold value, you will need to determine the asset value or annual turnover,
together with the combined asset value or annual turnover of all related
juristic persons, of the consumer.
7. PARATE EXECUTIE CLAUSE
In some cases the secured creditor can simply agree with the borrower that the secured assets are sold without the need for judicial execution. This is known as parate executie (the right of a creditor to realise a borrower’s property without first obtaining a court order).
An agreement of parate executie concerning movables pledged and delivered to the secured creditor is valid provided there is no prejudice to the security provider. However, an agreement of this nature is invalid in relation to security over:
Secured assets not in the possession of the secured creditor at the time it wishes to enforce its rights.
8. RANKING OF CLAIMS
·General notarial bonds (GNB)
Perfection of a GNB
bond is crucial in creating a limited real right over the bonded property.
Perfection entails a further step of taking possession of the movable property
pursuant to a court order.
·Ranking of claims
A borrower is entitled to burden its moveable property with numerous
GNBs. Where a borrower has granted more than one GNB over its moveable
property, the date of perfection rather than the date of registration
determines the ranking of the bondholder’s claims.
·Insolvency of the Borrower
Where a bondholder of a GNB perfects its claim prior to
sequestration/liquidation of the borrower, the bondholder will enjoy a secured
claim against the insolvent estate.
If the GNB is unperfected at the time of liquidation/sequestration, then
despite the GNB having been successfully registered, the bondholder does not
have a limited real right and therefore no secured claim against the insolvent
Special Notarial Bonds (SNB)
SNBs may be registered
in respect of specific items of moveable property that must be described in the
bond in such a manner that the property is readily recognisable.
encumbered by a SNB must be readily recognisable to a third party on the basis
of the description in the bond alone, without recourse to extrinsic evidence.
If this requirement is not met, registration of the SNB will not confer a
preference in favour of the bondholder.
Unlike GNBs, the
bondholder is granted a limited real right simultaneously with the registration
of a SNB.
·Ranking of claims
Where more than one SNB is registered over a particular moveable, the
competing claims of the bondholders will be ranked according to when the
respective SNB was registered.
Furthermore, bondholders with prior-registered SNBs will be required to
consent to further SNBs being registered over the bonded property, providing
increased protection to the bondholder whose bond was registered first in time.
·Landlord’s tacit hypothec
A registered SNB ranks superior to a landlord’s tacit hypothec if that
hypothec is unperfected at the time of registration of the SNB.
·Secured claim against insolvent estate
The implication of the limited real right afforded to the bondholder of a SNB at the time of registration is that should the borrower’s estate be liquidated/sequestrated, the bondholder will have a secured claim against the insolvent estate in respect of the encumbered movable property.
In this Post, I have highlighted the numerous benefits (to Creditor and Debtor) of registering Notarial Bonds in order to secure debt. I have had the pleasure of having dealt with a number of (large and medium) companies that have used Notarial Bonds with tremendous success.
So, can Notarial Bonds save your business? They most certainly can!