When lending money or extending credit to individuals, it’s crucial to protect your interests and ensure the repayment of debts owed to you. In South Africa, there are legal mechanisms available to secure debts owed by debtors, providing creditors with avenues for recourse in the event of default or breach of agreement. Here, we explore two common methods: acknowledgment of debt and notarial bonds.

Debt

Acknowledgment of Debt:

An acknowledgment of debt is a relatively informal yet effective way to secure debts owed to you. It involves the debtor formally recognizing the debt owed and may include terms for repayment. However, it’s essential to note that South African courts scrutinize informal lending practices, particularly if you’re not a registered credit provider. Without proper documentation, recovering both the principal amount and any accrued interest can be challenging. Additionally, in the event of the debtor’s passing or insolvency, you may only receive a limited return value as a concurrent creditor, depending on the state of the debtor’s estate and the number of creditors involved.

 

Notarial Bonds:

General Notarial Bond:

A general notarial bond is a legal instrument that hypothecates movable assets of a debtor which are situated on an immovable property which the general notarial bond is registered over, providing security for the satisfaction of a debt. To be effective, the bond must be registered in the Deeds Registry where the debtor resides or conducts business.

It is called a “general” notarial bond, because it is registered over all the general movable assets of the debtor which are situated on one or more immovable properties.

While a general notarial bond grants the creditor a personal right of security against the debtor, gaining a real right of security against third parties requires taking possession of the mortgaged assets. Without such possession, there is no preferent claim in favour of the bond holder in the event of the debtor’s insolvency.

In order to actually secure the assets, one would need to make application to Court for the bond to be “perfected”, which if such an Order is granted, you would take control of all of the movable assets on the property on which the bond is registered over.

One major advantage of a general notarial bond is that if your debtor runs a business, you can make provision in the general notarial bond that should you make application to perfect the bond, until your debts have been settled, you can take over and “run” their business and use the profits to settle the debt owing to you.

Special Notarial Bond:

A special notarial bond offers the most secure form of security by hypothecating specific movable assets. Unlike a general bond, a special notarial bond grants the holder secured creditor status over the specified movable property upon the debtor’s liquidation. By registering a special notarial bond over identifiable movable property, the creditor ensures priority in the event of default or insolvency.

Similarly, if one wants to take possession and control over a specifically bonded asset, the same process would be followed by making application to the Court to perfect the special notarial bond. The difference here is that specific assets would be taken into control, with vehicles being a common high value asset to specifically bond. With a general notarial bond, the debtor can still sell or dispose of the assets on the generally bonded property, but with specifically bonded assets, the debtor cannot dispose of such assets without the prior written consent of the bond holder, creating a much more secure form of security. 

Benefits and Considerations:

While an acknowledgment of debt is a simple and cost-effective solution, notarial bonds offer stronger legal protection. They provide creditors with a tangible claim over the debtor’s assets, reducing the risk of non-payment or loss in the event of default. However, notarial bonds require adherence to legal formalities, including registration in the Deeds Registry, which may involve additional costs and administrative burdens. 

Seeking Legal Advice:

In conclusion, securing debts owed to you requires careful consideration of legal mechanisms such as acknowledgment of debt and notarial bonds. While an acknowledgment of debt provides a straightforward solution, notarial bonds offer enhanced security and protection for creditors. It’s advisable to seek legal advice to determine the most appropriate method for securing debts based on individual circumstances and legal requirements. By understanding the available options and taking proactive steps to secure debts, creditors can mitigate risks and ensure the successful recovery of owed funds.

The content does not constitute legal advice, are not intended to be a substitute for legal advice and should not be relied upon as such. Kindly contact us on info@cklaw.co.za or 021 556 9864 to speak to one of our attorneys.

Author:
Neil Bensch

Neil Bensch

Neil primarily practices in commercial law, with a focus on insolvency law, collections, evictions, contracts and perfection of notarial bonds.

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