The Commercial Advantages Of Using Special Notarial Bonds As A Form Of Security

The current Covid-19 Pandemic has definitely required a new approach to business by various institutions.  Life has seasons, and as a business owner, one must remain innovative and always think of possible financial options for one’s future.

Covid-19 has brought the world to the brink of the fourth industrial revolution. As a small business owner, one will have to adapt one’s offering, but the finance required to do so must come from somewhere.  

“What happens if one already has a mortgage bond over one’s immovable property (house, factory or unit in an office block for instance) that one conducts business from and an additional mortgage bond would not cover the loan amount required because the immovable property does not have enough value?” –The inquisitive business owner

“What happens if one cannot access any further funds in terms of one’s covering bond?” –The eager business owner

“What are one’s options if one does not own immovable property to register a mortgage bond over?” –The prudent business owner

1: Most businesses have movable property such as inventory, appliances or cars. Some individuals might argue that one could provide a company car or one’s machinery as security to one’s lender by giving them possession of the car or machinery. Therefore, you create a Pledge in favour of the lender. However, a Pledge may not be the best solution.   

2: According to the legal rules of creating a valid pledge, the borrower cannot be in possession of the object that is used as security to fortify his or her loan. This would mean that the borrower cannot operate fully as they cannot use the pledged items.

For example, a restaurant owner has kitchen appliances worth R 500 000 and he/she wants to obtain a loan from a wealthy friend or institution worth R 300 000 in order to adapt his/her business to the current times. The restaurant owner cannot remain in possession of the appliances if he/she wants to create a valid pledge over the appliances in favour of the lender. Further if he/she does give the lender possession it would mean that the business would operate at a lower productivity.  What options does the restaurant owner then have?

Special Notarial Bond

The Securities by Means of Movable Property Act 57 of 1993 provides that one can register a Special Notarial Bond over one’s movable property, provided that it is capable of being specified and described in a manner that is readily recognizable in the notarial bond.

• A Special Notarial Bond allows a borrower to hypothecate its movable assets as security for a debt while allowing the debtor to remain in possession of the asset and generate income to service the debt.

• A Special Notarial Bond is attested by a Notary Public. The bond hypothecates specific assets of the debtor. This bond is registered in the Deeds Office.  These assets are movable assets in contrast to those assets encumbered by a mortgage bond. It is a bond over assets such as vehicles, artwork and stock in trade.

• This is very advantageous to the creditor, because it creates a real security right over the property in the creditor’s favour. The lender/creditor will be regarded as a secured creditor upon the Insolvency of the borrower/debtor. The term, real security right or limited real right entails that an asset belonging to a debtor (the borrower) or someone acting on the debtor’s behalf is earmarked for the satisfaction of the creditor’s (lender’s) claim. For example, in terms of mortgage, a creditor obtains a limited interest in an asset which remains in the patrimony of the provider of the security.

• The debt will furthermore only prescribe within 30 years if it is secured by a special notarial bond. This is very advantageous for the lender/creditor as the debt will not prescribe within the normal three-year period.  

• A Special Notarial Bond, is advantageous to the borrower because he/she can carry on with their business in order to make a profit.

• The borrower can use all of the advantages of this form of security for the lender to negotiate favourable terms in the loan agreement such as a lower interest rate.

In conclusion, special notarial bonds are a useful tool or mechanism at your disposal to arrange financing for your business if you have movable assets to provide as security.  Please contact Ngcobo Sn Inc. if you have any questions regarding this mechanism.