Article by Shakira Ahmed
In this article we discuss mortgage bonds and notarial bonds as forms of security.
A common example of the granting of security is a mortgage bond, which is registered over immovable property in favour of a creditor.
A notarial bond is a lesser-known form of security, which is registered over movable property and functions in a similar way to a mortgage bond.
Mortgage bonds as a form of security:
A mortgage bond is utilised where one party (the debtor) agrees to pass a bond over their specific immovable property in favour of another party (the bondholder) as security for the advance of credit or repayment of a loan.
The debtor may agree to have a bond passed in respect of their own indebtedness to the bondholder or in respect of the debt of another party for whom they have agreed to provide a suretyship. Mortgage bonds are prepared by conveyancers and the security afforded by a mortgage bond would only be conferred once the bond has been registered in the Deeds Office.
In terms of the credit or loan agreement, the debtor must repay the bondholder on the terms as set out in the agreement. While a mortgage bond is registered over the immovable property, the debtor would still be entitled to full use and enjoyment of the mortgaged property but would not be able to sell and pass transfer to a third party unless the indebtedness to the bondholder is settled and the bondholder has agreed to the cancellation of the mortgage bond.
Once a mortgage bond is registered over immovable property it would cover the land and all improvements thereon (including any improvements which may have been made after registration of the bond), and in the event of the debtor being declared insolvent, or another creditor attempting to sell the property in execution, the bondholder would have a preferential claim to the proceeds of the sale. The bondholder will also not be limited to the three-year prescription period ordinarily applicable to debt, as the right to claim from the debtor in terms of the bond would persist for a period of 30 years.
Further the fact that all the debtor’s obligations to the bondholder may have been fulfilled does not automatically cancel the mortgage bond. A mortgage bond can only be cancelled by registration of the cancellation in the Deeds Office, and usually occurs after the fulfilment of all the debtor’s obligations to the bondholder.
Notarial bonds as a form of security:
A notarial bond is used to secure all the movable assets of a party (the debtor) or a specific movable asset as security in favour of the bondholder and may be used in business transactions to secure indebtedness in terms of a credit agreement or loan. Notarial bonds are attested to by a notary public and are registered in the Deeds Office.
The movable property which forms the subject matter of the notarial bond must be either corporeal or tangible (e.g. plant and machinery, vehicles, goods and equipment of a business, livestock) or incorporeal or intangible (e.g. shares, book debt, certain leases of immovable property) movable property.
As the debtor you have the option of granting the bondholder either a special notarial bond over specified immovable property or a general notarial bond over all movable property.
Where a general notarial bond is registered over all the movable property of the debtor, the bondholder would need to perfect his security, in the event of a default by the debtor. In perfecting the security, the bondholder would need to:
- Approach the High Court for an order directing that the movable property be attached; and
- The sheriff proceeds to attach the movable property of the debtor.
In contrast, where a special notarial bond is registered, the bondholder acquires a real right to security over the movable property on registration of the bond in the Deeds Office.
Like the mortgage bond once the right to security has been obtained, the bondholder will have preferential claim to the proceeds of the sale of the movable assets on the insolvency of the debtor, and in the case of a special notarial bond, prescription persists for a period of 15 years in respect of the bond and not the normal three-year period which applies to ordinary debts.
Notarial bonds are also not extinguished by the fact that the debtor’s obligations to the bondholder have been fulfilled and it would be necessary to obtain the consent of the bondholder and apply to the Deeds Office for the cancellation of bond once the debtor’s obligations have been fulfilled.
In the ordinary course, and more so in the current economic climate, it is prudent for businesses extending credit (whether it be for the provision of goods or service or otherwise) to secure their exposure through obtaining security from their debtors.
Mortgage bonds and notarial bonds are a practical ways to secure the obligations of debtors and should be considered by business as a method of limiting their exposure.
For any further information on this topic or for any assistance in respect of securing indebtedness please contact us on 041 396 9254.