It is a common commercial practice to secure the settlement of a debtor’s indebtedness to his creditor; assets belonging to the debtor are mortgaged as security.
There are two types of mortgage available in our law :
- Mortgages of immovable property, i.e. land
- Mortgages of movable property, i.e. physical assets, incorporeals, intangible assets. In short, anything other than land
The latter mortgages are known as notarial bonds, which is the subject of this discussion.
Notarial bonds fall into two categories :
- General notarial bond
- Special notarial bond
Both are executed before a notary public and registered in the appropriate deeds registry.
REGISTRATION
Registration of a notarial bond must take place within 90 days of the date of its execution. If not, an application will have to be made to the court for an order condoning late registration.
The bond must be registered within the jurisdiction of the Deeds Registry in which the debtor resides and carries on business. In practice, this may mean registering in more than one Deeds office if the debtor’s place of business and residence are not the same.
If the debtor is a company, registration must take place within the jurisdiction of the Deeds Office in which its registered office is situated.
GENERAL NOTARIAL BOND (GNB)
A GNB is registered over all the debtor’s property, wherever it is situated, other than land
It is worth noting that section 53 of the Deeds Registries Act, 1937, specifically prohibits the registration of a mortgage bond that purports to bond all the debtor property, i.e., movable and immovable. A notarial bond may furthermore not bond immovable property
A GNB is a minimal form of security in that it is only on the debtor’s insolvency that the bondholder enjoys any preference concerning other creditors. In terms of section 102 of the Insolvency Act, 1936, the holder of a GNB is entitled to participate in the free residue in the insolvent estate ahead of the concurrent creditors.
The holder of a GNB’s status as the creditor would change if he were to perfect his security.
A GNB typically has a clause entitling the mortgagee to claim control of the assets in question in certain circumstances. The mortgagee would perfect his security by invoking the provisions of this clause.
Subject to the actual terms of the bond, this could entail the debtor voluntarily parting with control of the assets or the creditor applying to the court for an order granting the mortgagee a pledge of the assets as security. The emphasis is on legal control, not physical control or possession. He becomes a secured creditor instead of being unsecured before his security is perfected.
If it is sought to register a GNB but to exclude certain specified assets from it, the bond loses its status as a GNB and becomes a special notarial bond
SPECIAL NOTARIAL BOND (SNB)
An SNB is a mortgage of all assets belonging to the debtor that does not consist of land.
In the normal course, a mortgagee under an SNB would have to perfect his security, as mentioned above, to become a secured creditor.
However, the Security By Means of Movable Property Act, 1993 provides that if the assets are “ specified and described in the bond in a manner which renders it readily recognisable ”(Section 1(1)), on registration of the bond these assets are automatically deemed to have been pledged to the creditor. This prevents the need for formal delivery or an application to court to perfect his security. He, therefore, automatically becomes a secured creditor.
This deeming provision only applies to corporeal movables, i.e. physical, tangible assets e.g. motor vehicles, furniture and the like. Excluded are incorporeals such as inheritance or a usufruct.
THE CREDITOR AS PLEDGEE
As a holder of the pledge, the creditor is
- Obliged to look after and maintain the assets that are the subject of the pledge until they have served their purpose.
- Entitled to participate in the proceeds of a sale should the assets be sold at the instance of a third party.
- Entitled to exercise his rights as specified in the bond if the debtor defaults in complying with his obligations in terms thereof. These could include the right to sell the assets in question subject to the debtor’s right to contest that sale on the grounds of prejudice to him. He could furthermore also agree with the debtor that he retains those assets in settlement of the debt subject to a fair value being agreed.
CONCLUSION
It is, therefore, preferable that if a notarial bond is tendered as security for a debt, the bond be drawn to comply with the provisions of the Security using Movable Property Act.