23 February 2021 by Dispute Resolution Alert

Enforcement of general notarial bonds

As debtors and creditors survey the waters during the ongoing pandemic, it goes without saying that the security held by the creditor will be paramount in any transaction. Mortgage bonds over the immovable property of the debtor in favour of the creditor are somewhat standard. Perhaps less common are notarial bonds, which are bonds hypothecating all or specified movable property (corporeal or incorporeal) of a debtor in a manner similar to mortgage bonds.

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.

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.

While much has been written about the impact of COVID-19 on the economy, there is no doubt that the pandemic will have far reaching consequences on the economy across the board. Creditors should therefore regularly perform an audit of the security package in place. As can be readily discernible from the above, debtors are likely to have easier access to movable property, as opposed to immovable property (which will likely be mortgaged) and are likely in a better position to provide security over movable assets. 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.

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