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A notarial bond over movables is a useful form of security

So called “limited liability companies” are the engine of first world economies. The term “limited liability company” is a misnomer. In a limited liability company, the company is fully liable for its legal obligations; it is the liability of its shareholders that is limited, in the sense that a shareholder is not liable for the company’s debts.

What this means, of course, is that if the company goes insolvent, it is the company’s creditors who suffer and bear the loss of their irrecoverable debts.

If you allow a company to become indebted to you – for example, by lending the company money or allowing it to buy goods from you on credit – you should, if at all possible, get security for the debt.

The best kind of security is one that gives you a real right over property. In law a real right (sometimes called by the Latin tag of a right in rem) is a technical term meaning a right in respect of particular property. For example, if a bank lends you money on the security of a mortgage over your property and you are unable to meet the instalments, the bank is not restricted to suing you personally for payment of what you owe. By virtue of its real right over the property in terms of the mortgage, the bank can arrange for the house to be sold and repay itself out of the proceeds of that sale. In short, the bank has rights over the property itself.

By contrast, a personal right merely gives you a right to sue someone personally; if they have nothing, you will not recover anything.

A notarial bond over movables

A useful form of security in the business world is a general covering notarial bond over movables. If a company owes you money, one kind of security that you could insist upon is that you are given a notarial bond over its movable property, such as the company’s stock-in-trade or equipment. The purpose of taking such security is to ensure that, if you are not paid what you are owed, you have a right over specific property which you can sell and repay yourself out of the proceeds.

The catch is that until you are actually in physical possession of the movable property, you have no real right in relation to that property, merely a personal right against the company. So, if the company gets behind with its payments to you, it is imperative that you act quickly and get a court order entitling you to take possession of the movables that are covered by the notarial bond. (Contract Forwarding (Pty) Ltd v Chesterfin (Pty) Ltd and Others 2003 (2) SA 253 (SCA)). Once you have taken possession in terms of the court order, you have a real right over the property. If the company thereafter goes into liquidation, you will not just be one of a host of unsecured creditors hoping for a paltry liquidation dividend; you will be entitled to sell the property and use the proceeds to recover what you are owed.

If you are slow off the mark and the company is placed in liquidation (or if some other creditor with a notarial bond over the same property gets in first, obtains a court order and takes possession of the property), you will have no security for your debt. The principle is pithily expressed in a Roman law maxim – vigilantibus non dormientibus iura subveniunt, which means, the law assists those who are vigilant and not those who sleep. The Supreme Court of Appeal has ruled, in the Contract Forwarding case, mentioned above, that there is nothing unjust or inequitable in this principle.

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