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

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

• Commercial convenience

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.

• Possession

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

• Real Right

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

• Prescription

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).

• Registration costs

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).

• Fruits

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 notarial bond

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.

·         Necessary resolutions

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

·         Registration

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

• ·         Ordinary notarial bond
• ·         Notarial covering bond 
• ·         Collateral notarial bond 
• ·         Notarial surety bond 
• ·         Notarial indemnity bond

 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 as security.

·          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 registry.

 

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

 

Ø  Hang glider

Ø  Para glider

Ø  Captive balloon

Ø  Kite

Ø  Model Aircraft

Ø  Foreign registered aircraft

Ø  Parachute

Ø  Powered para glider

Ø  Hot-air balloon

Ø  Unmanned radio-controlled aircraft.

 

Liquor Licenses

A liquor license may be hypothecated by means of a notarial bond (Solomon v Registrar of Deeds).

·         Stock-In-Trade

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.

·         Crops

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 therefore important..

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:

• Immovable property.

• 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 estate.

• 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.

Moveable property 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.

9. CONCLUSION

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!