Securities Revisited

The Protection of Suppliers

Winston E. Miller / 26 Jan 2010

What steps should a supplier of goods, take to protect his interests where there is a question mark as to the customer’s financial ability to pay for the goods?

In terms of good business practice, particularly where the transaction is of substantial value, the supplier should investigate forms of security which can be supplied by the customer and on the basis of the strength of the security the supplier will either contract or look elsewhere for business.

In practise the usual forms of security which a supplier will require are

• personal sureties or
• guarrantees from 3rd parties and/or
• a bond over immoveable property

Such exposure or limitation of property is often either not available or not acceptable to one of the parties .There is often a reluctance on the part of a potential debtor to expose personal assets such as a property to attachment. However the supplier is often likely prepared to contract if the business has assets which, in the unhappy event of a bankrupcy, could afford the supplier the status of a preferential creditor in an insolvency if such security is available. The assets in the estate will be sold for the benefit of the body of concurrent creditors in terms of the Insolvency Act 1936.

The most acceptable form of security is a mortgage bond hypothecating immoveable property. This will result in the supplier as mortgagee being entitled to repayment of amounts due to it in terms of the mortgage bond out of the proceeds of the sale of the immoveable property in preference to other creditors. In many cases the security afforded by the registration of a special notarial bond hypothocating specifically described moveable property is overlooked.

Whilst the customer may not possess assets such as property the customer may well have moveable assets in its business which can be notarially bonded and offer the same standard of preference. This security arises in terms of Section 1 of the Securities by means of Moveable Property Act, 1993. The security affords the additional advantage of the bonded property remains in the possession of the customer and as such does not interfere with the conduct of the business as long as the customer is not in default.

It can thus be seen that there is a realistic form of security available in the use of moveable property. The special notarial bond should be prepared by a qualified notarial attorney. The moveable property must be described in detail and registered in the appropriate Deeds Office within a specified period of the signature of the Bond.