Notarial bonds and credit security | Legal Articles

 

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Notarial bonds and credit security

What is a notarial bond?

Definition: A notarial bond is registered in the Deeds Office to provide credit security over movable property which a debtor has put up as a security obligation to a creditor in terms of a creditor loan.

Notarial Bond Debt Security

To understand what notarial bonds are we need to first look at the term “credit security”. 

Put simply this is a generic term that is used to describe the arrangement wherein creditors are given security for the repayment of amounts that are owed to them. 

These arrangements usually allow for the creditor to obtain a court order to claim possession of property owned by the debtor and thus sell it and use the proceeds to repay the loaned amount. 

Examples of this include mortgage bonds, notarial bonds, pledges, cession agreements, suretyships, guarantees, indemnities etc. 

While there are quite a number of different forms of credit security, we will focus on notarial bonds in this article.  

How do notarial bonds function as credit security?

Notarial bonds are registered with the Deeds Office for movable property which the debtor has given as security for the repayment of a loan to a creditor. 

The movable property which is usually used in notarial bonds includes, although not limited to, vehicles, stock in trade, jewelry, valuable artworks and Kruger Rands, and so long as it is tangible and movable it can be used for credit security. 

The creditor who registered the notarial bond first will usually be the first to avail of the proceeds from the property that is sold. 

Afterwhich any creditor who registered a notarial bond thereafter will have a claim on the proceeds from the sold property in the order in which they registered the notarial bond. 

This applies also to non-registered creditors however they will only be able to obtain amounts owed to them once the creditor who registered the notarial bond has taken their loaned amounts. 

The Notary Public is competent to draft a notarial bond, and once signed by the relevant parties the notarial bond will be registered with the deeds office for the movable property. 

Registering a notarial bond will afford the creditor protection in the form of being able to obtain a court order to take possession of the bonded property and then sell it. 

After this the proceeds can be used to satisfy the loan agreement. The notarial bond also allows for the creditor to be paid first from the proceeds before any other creditors of the debtor. 

In South Africa, notarial bonds are very useful for credit security as many debtors have movable property which can be used as security. 

This will usually give a lender a wider target market and allow for them to attract business from more individuals.

Another reason for notarial bonds being a useful credit security is the fact that the debtors will keep the property safe throughout the duration of them repaying the loan amounts. 

This is enticing to debtors who will be more eager to bond their movables knowing that they will retain possession of the movable property. The opposite is the case with pledges where instead the debtor will have to hand the possession over to the creditor. 

They will still be able to use the property which was used as security for the loan. 

Such as, when they use their vehicle for this purpose, they can still use to to travel to work so that they can earn the money which will be used to make the monthly loan repayments.

Even though notarial bonds are very strong forms of credit security in South Africa, notarial bonds are still not often used in South Africa. 

Additional benefits to notarial bonds

There are a few other benefits that both creditors and debtors can experience with notarial bonds. 

For example, the terms of special notarial bonds are valid for 30 years instead of 3 years as is the case of most normal loan agreements that aren’t secured. 

Also the cost to register a notarial bond is based on the value of the movable property which means that the debtor will be able to afford the costs of registration. 

Also, movable property may also include the fruits produced by it. Say for instance the movable property is a herd of cows. If they produce young calves, then these will also be part of the movable property that has a notarial bond over it. 

This means that the creditor will be given security for a great amount than the value of the movable property by itself as this value will include the young calves as well. 

These benefits all help to incentivise notarial bonds and make them a more appealing option for creditors who will be able to entice debtors who don’t own immovable property to mortgage as security for loans.

Van Deventers & Van Deventers Incorporated - Notary Sandton

Van Deventers & Van Deventers Incorporated are able to assist you to register notarial bonds over movable assets as security for a credit loan, contact us.

Read more about General Notarial Bonds here.

 

Comments are closed for this post, but if you have spotted an error or have additional info that you think should be in this post, feel free to contact us.


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