General vs Special Notarial Bonds
A notarial bond hypothecates movable assets of a debtor and is registered in the Deeds Registry to attempt to secure the position of a creditor for the satisfaction of a debt. Should the debtor default on its obligations to the creditor, the bond enables the creditor to have the hypothecated assets attached and sold to satisfy its claim against the debtor. A notarial bond may refer to a specific movable asset/s of a debtor (known as a Special Notarial Bond) or it could refer to all the movable assets of a debtor (known as a General Notarial Bond). A notarial bond can also cover certain special movables plus movables generally to afford the creditor added protection.
In order for a notarial bond to be effective, it must be registered in the Deeds Registry for the area in which the debtor resides and/or carries on business, or in each area where such business is carried on. For a notarial bond executed by an incorporated entity (company) to be effective throughout the Republic, it must be registered in the Deeds Registry for the area in which the registered office of the company is situated at the date of registration of such bond.
General Notarial Bonds
A general notarial bond applies to all property in the possession of the debtor at the time the bond is passed and may include assets acquired after the passing of the bond.
According to South African common law, the creditor in a notarial bond only has a personal right of security against the debtor. In order to gain a real right of security, exercisable against any third party, the creditor needs to take possession of the mortgaged asset. In many circumstances it is not practical for the creditor to take possession of the asset which may be vital to the operation of the debtor’s business.
As a result, there is no preferent claim in favour of the holder of a general notarial bond against the insolvent estate of a debtor. In order for the holder of the general notarial bond to enjoy the status of a secured creditor there must be an attachment by the Sheriff of the Court of the assets bonded, alternatively the bond holder must be in possession of the movable property.
Special Notarial Bonds
This is a bond which hypothecates a specific movable asset/s.
A special notarial bond registered over the debtor’s movable property, differs to a general notarial bond in that, on liquidation of the debtor, the holder of the special notarial bond ranks as a secured creditor in respect of the specific movable property over which it is registered.
The Security by Means of Movable Property Act 1993 (“the Act”) sets out the statutory position in respect of special notarial bonds. If the movable property is specified and described in the special notarial bond in a manner which renders it readily recognisable, that movable property is deemed to have been pledged to the mortgagee.
This deemed pledge of the movable property replaces the need for the creditor to take physical delivery of the asset in order for a valid pledge to take place. This provides the creditor with better security in the sense that in the event of the debtor being declared insolvent, the creditor is assured of a “secured creditor” status.
The decision whether to register a general or a special notarial bond can be affected by the type of asset/s to be bonded. If the asset cannot be distinctly described in the bond (extrinsic evidence should not be allowed to identify the assets as described in the bond) or if the assets are ever changing (such as stock in trade) then a special notarial bond may not be practical in those circumstances.
If the circumstances do provide for high value assets which can be distinctly described, such as a fleet of motor vehicles with distinct engine/VIN numbers or plant & machinery with individual serial numbers, then a special notarial bond would afford the creditor greater security in the event of the insolvency of the debtor.