When a creditor makes a loan to a debtor, the creditor does so with the hope and expectation that the debtor will repay the loan, usually with interest. In order to incentivise the debtor to repay the loan on time and in full, a creditor might want to insist on the debtor providing it with some sort of security for the repayment of the loan.
A notarial bond in present-day South African law is a bond, attested by a notary public, which hypothecates movable property, either generally or specifically, and which has been registered in the Deeds Registry. It provides a means by which a debtor may hypothecate the movable property that serves as security without having to deliver the property to the creditor. The debtor may continue to use the property. Examples of movable corporeal property include: equipment and machinery; furniture; vehicles; stock-in trade (including replacement stock); animals (including any future offspring) etc. whereas examples of movable incorporeal property include: shares; licences and permits; book debt; unregistered leases or subleases and registered leases of immovable property etc. Any movable property whatsoever can be bonded provided that it is movable and tangible (i.e. it has physical existence and occupies time and space).
Because this type of security is registered at the Deeds Office, our law regards all others as having notice of the existence of this credit arrangement. This means that the creditor who registers the notarial bond first in time, will “rank” first. Any creditors who register notarial bonds afterwards (i.e. second or subsequent bonds) or any creditors who have other (non-registered) security rights in that property, will rank after the creditor that registered the notarial bond first (with one exception – a prior pledge).
These assets can be secured by means of either a general notarial bond (GNB) or a special notarial bond (SNB). An SNB burdens specifically described movable property belonging to a debtor. A GNB is registered over all the movable property of a debtor and does not entitle the creditor to a real right of security in the property. Nothing prevents the debtor from dealing and disposing of the property subject to the GNB. The creditor cannot prevent an alienation or pledge of the property subject to the GNB, cannot follow up the property in the hands of the acquirer and cannot prevent a judicial attachment. The rights of the creditor are of importance mainly upon insolvency. In that instance, a creditor is not secured and is only entitled to a preference over the concurrent creditors with respect to the proceeds of property subject to the GNB.
A creditor will only obtain a real right of security (and therefore become a secured creditor in the event of insolvency) upon perfecting its GNB. 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. The aforesaid clause amounts to an agreement to constitute a pledge and can be enforced at the instance of the creditor. Perfection of a GNB entails two things:
∞ First, a successful application to the High Court for an order that such property be attached; and
∞ Second, actual possession of the property is obtained via attachment by the sheriff of the High Court.
A GNB is therefore only perfected once a creditor takes physical possession of the property. GNBs remains one of the mechanisms which debtors can utilise to unlock the full value of its assets by putting them up as collateral while providing a creditor with the necessary comfort. This is more so for debtors who do not own immovable property or whose immovable property is mortgaged.
Additional benefits of notarial bonds
The rights of a creditor to claim from a debtor in terms of a special notarial bond only prescribe after 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 a tariff, which is itself 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 (because the value of the security will now include any fruits of the movable property), and it is not necessary for a creditor to register further notarial bonds over the fruits as and when they come into existence.