Special Notarial Bonds and Insolvency: Protecting Lenders’ Interests | Barter McKellar
When a borrower faces insolvency, creditors are often concerned about recovering their debts. One of the most effective ways for creditors to secure their interests is through special notarial bonds. These bonds provide a real right over specific movable assets, giving lenders priority over other creditors if the borrower becomes insolvent.
At Barter McKellar, we assist clients with drafting, registering and enforcing special notarial bonds to ensure their financial interests are protected, even in complex insolvency proceedings. This article explains how special notarial bonds operate under the Security by Means of Movable Property Act and the protections they offer to creditors in the event of insolvency.
What is a Special Notarial Bond?
A special notarial bond is a legal security mechanism that allows borrowers to use identified movable assets (such as equipment, vehicles, or machinery) as collateral for loans, without transferring possession to the lender. The bond must be registered at the Deeds Office to be enforceable.
The Security by Means of Movable Property Act governs special notarial bonds, replacing the Notarial Bonds (Natal) Act. This act ensures that creditors holding properly registered special notarial bonds have a real right over the secured assets, giving them priority in case of the borrower’s default or insolvency.
How Do Special Notarial Bonds Protect Creditors During Insolvency?
When a borrower becomes insolvent, their assets are liquidated to repay creditors. Special notarial bonds provide the following key protections:
Preferential Claim Over Secured Assets
The creditor holding a registered special notarial bond enjoys priority over unsecured creditors when the secured movable assets are sold during liquidation.
Example: If a borrower defaults and goes into liquidation and their trucks are secured under a special notarial bond, the creditor can claim the trucks before any unsecured creditors have access to the assets.
Enforceability Without Physical Possession
Unlike other forms of security, creditors holding a special notarial bond do not need to take physical possession of the secured assets. The borrower retains possession and continues using the assets, but the lender’s real right remains enforceable if the borrower defaults or becomes insolvent.
Legal Protection under the Security by Means of Movable Property Act
The Security by Means of Movable Property Act strengthens the position of creditors by ensuring that registered special notarial bonds have priority over other claims in liquidation proceedings, provided the assets are identified accurately in the bond.
Failure to register the bond will result in the creditor losing this priority, reducing the claim to that of an unsecured creditor.
Priority During Liquidation Proceedings
If the borrower is declared insolvent, a liquidator is appointed to oversee the liquidation process. The liquidator will sell the secured assets and repay the creditor first, covering the loan amount, interest, and legal costs. Any remaining funds are distributed to other creditors.
How to Enforce a Special Notarial Bond During Insolvency
If a borrower with a special notarial bond becomes insolvent, creditors must follow specific legal procedures to enforce their rights.
Step 1: Submit a Claim to the Liquidator
The creditor must submit a claim to the appointed liquidator with a copy of the registered special notarial bond and supporting documentation showing the borrower’s default.
Step 2: Obtain Authorization to Seize Assets
The liquidator will confirm the validity of the bond and authorize the seizure of the secured assets. The bondholder can apply to the High Court if any disputes arise about the bond’s enforceability.
Step 3: Seizure and Sale of Secured Assets
The liquidator arranges for the sale of the pledged assets at auction. The creditor has priority over the sale proceeds and will be repaid from these funds before other creditors.
Step 4: Recovering the Debt
If the sale proceeds cover the outstanding loan, the bondholder will receive full repayment. If there is a shortfall, the creditor may submit a claim against the remaining insolvent estate as an unsecured creditor for the balance.
The Importance of Proper Registration
For a special notarial bond to offer full protection, it must be registered correctly at the Deeds Office. Failure to register the bond means the creditor loses priority in liquidation proceedings, making it harder to recover the debt.
Additionally, the bond must contain a clear description of the movable assets, ensuring there is no ambiguity about what is secured. Inaccurate or vague descriptions could lead to legal disputes, delaying the recovery process.
How Barter McKellar Can Assist with Special Notarial Bonds and Insolvency
At Barter McKellar, we provide expert legal services to ensure that lenders’ interests are fully protected when borrowers offer movable assets as collateral. Our experienced team can help with:
Drafting and Registration: We draft and register special notarial bonds that comply with the Security by Means of Movable Property Act.
Legal Advice on Insolvency: We provide guidance on how to enforce your bond if the borrower becomes insolvent, ensuring your claim receives priority.
Dispute Resolution: If disputes arise during liquidation, we represent your interests and work to secure the best possible outcome.
End-to-End Enforcement Support: From filing claims with liquidators to seizing and selling assets, we manage the entire enforcement process on your behalf.
Conclusion
Special notarial bonds are an essential tool for creditors seeking security over movable assets, providing crucial protection in cases of insolvency. Proper registration and compliance with the Security by Means of Movable Property Act ensure that creditors can recover their debts efficiently, even when a borrower faces liquidation.
At Barter McKellar, we understand the importance of protecting your financial interests. If you need assistance with registering or enforcing a special notarial bond, contact us today. Our team is ready to provide tailored legal solutions to safeguard your rights.
