A notarial bond gives a lender rights over movable property, such as equipment or stock, that stays with the borrower. General and special bonds work very differently when the borrower is in trouble.
The general notarial bond
A general notarial bond does not give the holder a real right of security in the bonded assets, so the owner can still deal with them. The Supreme Court of Appeal said so in Contract Forwarding v Chesterfin [2002] ZASCA 143, which also noted that general bonds fall outside the Security by Means of Movable Property Act 57 of 1993. The holder’s rights matter mainly if the borrower becomes insolvent.
Perfecting a general bond
A general bond can be perfected. In that case the bondholder lawfully took possession of the bonded movables under a perfection clause before the insolvency process had fixed the creditors’ positions. The court held that the pledge was perfected and that the later liquidation did not undo it. Handing over the keys and exercising effective control was enough delivery on those facts.
How far the insolvency preference reaches
On insolvency, section 102 of the Insolvency Act 24 of 1936 gives the holder of a general notarial bond a preference. In FirstRand Bank v Land and Agricultural Development Bank of South Africa [2014] ZASCA 115, the Supreme Court of Appeal held that this preference reaches only as far as the value of the movable assets subject to the bond, and not the whole free residue of the estate.
The special notarial bond
A special notarial bond is registered over specifically described movable property. Under section 1 of the Security by Means of Movable Property Act 57 of 1993, a compliant special bond gives the creditor security equivalent to a pledge without delivery, so the creditor need not take possession first. See, for example, this summary of how notarial bonds are enforced.
What to check
- Whether the bond is general or special, and what you will rely on if the borrower fails.
- Whether the assets are described precisely enough.
- Whether the borrower still has the assets, and whether a general bond needs to be perfected.
Speak to a notary before you lend against movable property or take a bond.
This article is general information and is not legal advice. The law may have changed since it was published, and every matter turns on its own facts. Contact us about your own situation.
Sources
- Contract Forwarding (Pty) Ltd v Chesterfin (Pty) Ltd and Others [2002] ZASCA 143; 2003 (2) SA 253 (SCA), SAFLII
- Firstrand Bank Limited v The Land and Agricultural Development Bank of South Africa [2014] ZASCA 115; 2015 (1) SA 38 (SCA), SAFLII
- MJK Inc, Enforcing notarial bonds (summary of section 1 of Act 57 of 1993)