Notarial bonds- Important considerations

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Topics Contract Law | Dispute Resolution | Property Law

29 Jun 2020

In these trying times, the security that a creditor will hold will be of importance. Generally, Debtors have already encumbered their immovable property with mortgage bonds and ceded as security various rights in favour of creditors.

A form of security that is often overlooked is notarial bonds. There are several benefits to registering a notarial bond –

Debtors generally have easier access to movable property, as opposed to immovable property, and are likely in a better position to provide security over their movable assets
The Debtor remains in possession of the movable property (notwithstanding that the asset has been bonded)
With a special notarial bond, the Creditor gets a limited real right in respect of the moveable property specified and described in the bond (see s. 95 of the Insolvency Act, 1936)
The prescription period under a special notarial bond is 30 years
Notarial bonds may also include the fruits of the moveable property

1. TYPE OF NOTARIAL BONDS

Ordinary notarial bond (secures existing obligations)
Notarial covering bond (provision for the covering of future debt is made)
Collateral notarial bond (a bond in addition to a principal bond as additional security for the principal debt over different movable property)
Notarial surety bond (registered by a third party (the surety) over movable property, on behalf of the principal Debtor, in favour of the Creditor.)
Notarial indemnity bond (similar to a surety bond. The obligations under the notarial indemnity bond are however primary)

2. 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 2002 (5) 425 (SCA)).

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 1994 (4) SA 514 (O)).

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.

3. A NOTARIAL BOND HYPOTHECATING MOVABLES SPECIALLY OR GENERALLY

In Reeskens v Registrar of Deeds 1964 (4) SA 369 (N), the Court held that the extending meaning “and/or” is to be given to “or” in the definition of “notarial bond” in section 102 of the Deed Registries Act, 1937, and that therefore special movables plus movables generally (excluding the special movables) may serve as security in one notarial bond.

If in the notarial bond assets are generally bonded, and provision has been made therefor, the Creditor may attach the mortgagor’s movable goods in order to perfect his/her security. If the bond does not make provision for such an attachment, the Court will not grant an order in favour of the Creditor (Boland Bank Ltd v Vermeulen 1993 (2) SA 241 (E)).

4. 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 and even future increase of progeny of animals, e.g. calves and lambs, 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 a merchant’s 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. Similarly, accessions to original articles will be hypothecated, e.g. a radio set fitted into a car.

HYPOTHECATION OF LEASES AND SUB-LEASES BY NOTARIAL BONDS

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, These are briefly:

If a lease or sub-lease is not immovable property, it can only be hypothecated by means of a notarial bond (section 81(b) of the Act).
If one compares the definition of “immovable property” in section 102 of the Act, it appears that the following leases or sub-leases are “movable property”:
- - Unregistered leases (Smith v Farrely’s Trustee 1904 TS 949).
  - Registered short term leases of land, i.e. registered leases of land which are not “immovable property” according to section 102 of the Act.

Where hypothecation of a registered lease or sub-lease is effected by means of a notarial bond, the deed of lease or sub-lease must be produced to the registrar of deeds, and must be endorsed as to the bond and after that, the lease cannot be further dealt with unless the bond is disposed of as provided in section 56(1) of the Deeds Registries Act, 1937 (this applies only where a registered lease or sub-lease is hypothecated (section 82 of the Act)).

NOTARIAL BONDS AND 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.

It is thus the responsibility of the notary to ensure that a ship, as defined in the ship registration act, is not included in the movable property forming part of the security in a notarial bond (RCR 2.20/1999).

NOTARIAL BONDS AND THE CONVENTION ON THE INTERNATIONAL RECOGNITION OF RIGHTS IN AIRCRAFT ACT 59 OF 1993

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, 59 of 1993 (hereinafter referred to as the “Rights in Aircraft Act”) be mortgaged by bond registered in a deeds registry, and no bond so registered shall confer upon the mortgagee any preference over other creditors (section 3(1) of the Rights in Aircraft Act).

It is the responsibility of the notary to ensure that an aircraft, as defined in the Rights in Aircraft Act, is not included in the movable property forming part of the security in a notarial bond (RCR 2.20/1999).

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

Hang glider
Para glider
Captive balloon
Kite
Model Aircraft
Foreign registered aircraft
Parachute
Powered para glider
Hot-air balloon
Unmanned radio-controlled aircraft.

Section 3(2) of the Rights in Aircraft Act provides that a bond registered in a deeds registry, after the coming into operation of this Act, by which an aircraft or a share in an aircraft is hypothecated, shall be recorded by the Director General: Transport in the register kept by him/her for that purpose, if a copy of the duplicate original of the bond, certified by the registrar of deeds is produced to him/her.

LIQUOR LICENSES AND HYPOTHECATION

A liquor license may be hypothecated by means of a notarial bond (Solomon v Registrar of Deeds, 1944 CPD 319).

Where the mortgagor is also the licensee, no difficulty is experienced because the mortgagor is not specially described as the licensee. Where the mortgagor is e.g. a company or close corporation and the licensee is an employee or nominee of the company or close corporation, it is the company or close corporation which mortgages the license and not the licensee. In the latter case it is preferable to describe the property mortgaged as the interest of the company or close corporation in the liquor license.

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 be necessary to disclose in the bond specifically:

what the property is;
type and sort of each;
the sum of each.

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.

5. THE NCA

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.

Although there are many characteristics of a notarial bond that is similar to that of a mortgage bond, 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, and you firstly need to determine whether or not the transaction that will be concluded does not fall under the NCA.

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) and a further investigation into the asset value or annual turnover, together with the combined asset value or annual turnover of all related juristic persons of the consumer will not be required.

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.

For further information about the structuring of a credit agreement to fall outside the ambit of the NCA have a look at the following article – Drafting Loan Agreements and the NCA: Important considerations.

6. PARATE EXECUTIE CLAUSE

With a general notarial bond, the Creditor will firstly have to perfect the general notarial bond. Things are however different with a special notarial bond, and a parate executie clause can be included in the special notarial bond (the parate executie clause must however be drafted carefully to not be contra bones mores).

When acting for the Creditor, one would want to ensure maximum protection for your client. If the special notarial bond does not contain an express parate executie clause it is doubtful whether the Creditor may alienate the movable property under the special notarial bond in the absence of an appropriate court order, even after the debt may have become due.

It is therefore advisable to include a comprehensive parate executie clause (when sanctioned by the obligationary agreement this is a form of parate executie which is valid for movables and invalid for immovables (Bock v Duburoro Investments (Pty) Ltd supra; SA Bank of Athens Ltd v Van Zyl 2006 1 All SA 118 (SCA); 2005 5 SA 93 (SCA)).

7. REGISTRATION REQUIREMENTS

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

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

Where registration is effected in terms of section 62(4) of the Act, compliance with the provisions of section 61(3)(b) of the Act is not essential, except where the bond is registered in a deeds registry serving an area outside that in which the registered registry of the company is situated, in which case it will be necessary to disclose that the company also carries on business in areas served by other deeds registries (RCR 25 of 1961 and RCR 26 of 1964). A general reference will be sufficient, e.g. carrying on business in the province of the Free State. Nothing, however, prohibits the bond from being registered in any of the other Deeds Registries within the prescribed period of time (see RCR 38 of 2006).

It was held in Kuhne & Nagel (Pty) Ltd v Elias and Another 1979 (1) SA 131 (T), that the provisions of section 61(3)(b) of the Act are not peremptory but merely directory. Deeds registries must, however, ensure that notarial bonds comply with the requirements of this section (RCR 11 of 1980).

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 –

Registration must be effected in the deeds registry for the area in which the Debtor resides and carries on business, but where he or she resides and carries on business in areas served by different deeds registries, registration must be effected in the registry serving his or her place of residence and every registry serving any area within which he or she carries on business (registration in this manner is effective as registration for the whole of the country)
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.

8. CONCLUSION

Now, more than ever, structuring of transactions need to be done in a sensible way that makes sense for both the Lender and the Debtor. Making use of notarial bonds as security can enable a Debtor to unlock the full value of its assets and provide a lender with the necessary comfort.