Notarial bonds over specified movable property

When you extend finance facilities to a debtor, you should obtain additional security, inter alia, in the form of Deeds of Suretyship from the members of the customer and, where appropriate, additional security in the form of a pledge or mortgage of movable assets.

Notarial bonds over specified movable property (Security By Means Of Movable Property Act no. 57 of 1993 - the Act)

When you extend finance facilities to a debtor, you should obtain additional security, inter alia, in the form of Deeds of Suretyship from the members of the customer.

  1. The security of the Deeds of Suretyship may not always be adequate. An additional form of security could take the form of a pledge or mortgage of movable assets. If the customer possesses property, you could call upon it to put the whole or any part of such property at your disposal up to the amount of the sum due, should the customer fail to pay. In that event, you could have the mortgaged or pledged property sold and receive payment of the debt out of the proceeds in preference to all other creditors - a right which is obviously of the highest importance in the event of the debtor’s insolvency.

  2. The Act commenced on 7th May 1993. Prior to that date, the subject matter of the pledge had to be delivered to the creditor to constitute a pledge that would be valid against the other creditors of the customer. Generally, the delivery of a customer’s movable assets would be impractical as more likely than not, such assets would be required to operate the business of the customer. However, since the promulgation of the Act, if a Notarial Bond hypothecating notarial movable property is specified and described in the bond in a manner that renders it readily recognisable, such property is deemed to be pledged to the creditor as effectually as if it had expressly been pledged and delivered to it.

  3. In other words, if your customer causes a Notarial Bond to be passed in your favour and if the assets of the customer are specifically detailed (e.g., by reference to serial numbers and the like) in the bond, then actual physical delivery of such goods to you is not required.

  4. Of course, in order to confer a preference on you, the special Notarial Bond ought to have been registered 6 months before the insolvency of the customer (Section 88 of the Insolvency Act).

  5. The Act also has the effect of excluding the operation of the landlord’s tacit hypothec in respect of immovable property specially mortgaged.

  6. What the Act addresses in particular is that the holder of a General Notarial Bond (conveniently referred to by bankers as a GNB) does not enjoy a real right of security in the assets, subject to the bond. Thus there is nothing to prevent the owner from dealing with or disposing of such assets, which results in the assets becoming free of the bond. You can, by Court Order, attach the customer’s movables to “perfect” your security. You must do so, however, before the property hypothecated by another creditor perfects its rights under its GNB and before the customer is declared insolvent.

  7. On the other hand, in the case of a special Notarial Bond, you will enjoy preference if the mortgaged property is sold in execution. You will also enjoy the security conferred by Section 95 of the Insolvency Act i.e., the proceeds of the movable property specially hypothecated (less costs) is, on the insolvency of the customer, applied in satisfying the claim secured by the property. Of course, there is no need for you to perfect your security before the customer is declared insolvent.

  8. The difficult decision will always be whether to register a GNB hypothecating all the customer’s movables or a special Notarial Bond hypothecating specified movable. There will be many cases in which the registration of a special Notarial Bond will be impractical or impossible. In such cases, you will have to be satisfied with a GNB and thus with an inferior preferent ranking afforded by Section 102 of the Insolvency Act. On the other hand, if it is possible to describe movable property in the bond in a manner which renders it readily recognisable (such as would, for example, be the case in the hypothecation of a truck), it would be foolish not to opt for a special Notarial Bond.

  9. On a practical level, even though pledged goods are deemed to have been delivered to you, you should, of course, take care to monitor the position from time to time, to ensure that the pledged goods subject to a special Notarial Bond remain in the possession of the customer and to ensure (to the extent that it is possible) that such goods are not sold to a third party or refinanced. You may follow up the pledged property in the hands of third parties in certain circumstances. In this short synopsis, I do not propose traversing your rights in this regard.

  10. As far as stock-in-trade is concerned, it will be a difficult decision for you to determine whether to classify stock-in-trade as "special" or "general", assuming specification and description as required by the Act, can be met.  Bear in mind that when the customer is declared insolvent, his stock-in-trade of, say, motor vehicles, may be entirely different from that which was originally hypothecated, as new vehicles would have been acquired in substitution or replenishment of vehicles sold. Can it then be said that the new stock is still deemed to be pledged to you?  Although the law is not entirely clear in that regard, it seems that with the exception of stock-in-trade (which it must be contemplated will be sold in the course of trade), movables subsequently acquired in substitution or replacement of movables specially described and enumerated, cannot be the subject of a special Notarial Bond.

  11. It is also possible to register in one and the same bond, a Notarial special hypothecation of specified movables and a general Notarial Bond of the entire mortgagor’s remaining movables.