Can you rely on your suretyship in business rescue

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7 October 2015

So you think it’s safe to offer credit to a company or close corporation just because you have a suretyship in place? The Companies Act 71 of 2008 (“the Act”) and recent case law may change your thinking.

Once business rescue commences, the company enjoys a personal moratorium in terms of section 133(3) of the Act which precludes a creditor from claiming against a company, including in respect of suretyships which the company stood surety for, as this action is suspended for the duration of business rescue. Should a creditor wish to retrieve the company debt, the creditor would need to enforce a suretyship against those who stood as surety/ies for the company debt.

It is important to note that while a creditor’s claim against the company is suspended, so is the legal time limit to institute legal proceedings there for, however, prescription is applicable when enforcing the suretyship and therefore it is imperative that a creditor knows when the outstanding debt became due and payable in order to avoid the prescription of the creditor’s debt.

When a business rescue plan fails to provide for suretyships, the common law position becomes applicable. The common law position is that the obligation of a surety is accessory in nature, thus the extinction of the principal obligation extinguishes the obligation of the company. It is this position that questions the enforceability of a suretyship against the sureties of a debtor company. The two recent court judgments, Turning Fork (Pty) Ltd t/a Balanced Audio v Greed and Another 2014 (4) SA 521 (WCC) and New Port Finance Company (Pty) Ltd v Nedbank Ltd (30/2014) ZASCA 210 are vital to understanding the enforceability of a suretyship.

From the above it is generally accepted that the principal debt is discharged by an agreement between the principal debtor and the creditor or by the release of the principal debtor, the surety is released unless the deed of suretyship provides otherwise.

Some light can be found in section 155(9), in that a compromise does not affect the liability of any person who is a surety of the company and thus the rights of a surety are preserved. Therefore, you may proceed against a surety for the debts of a company in business rescue at the commencement of the business rescue proceedings when the company is enjoying the protection of the personal moratorium, which protection the surety cannot invoke. However, when the business rescue plan is silent on the creditor’s right against such surety, you may not proceed against the surety for the debts of the company which is in business rescue after such plan is adopted and which provides for the discharge of the debt by agreement between the principal debtor and the creditor or release of such company’s obligations to the creditor.

So what should you do? A creditor must ensure that when entering into a suretyship to recover the debts incurred by the company, that the surety relinquishes the benefit of excussion (the right to require the creditor to claim from the principal debtor before claiming against the surety) and agrees to pay the debt of the company should the company enter into business rescue regardless of what is stipulated in the business rescue plan. Furthermore, creditors of the company in debt must ensure that they attend the meeting of creditors when called by the business rescue practitioner. Creditors must furthermore ensure that at the meeting, the business rescue plan takes into account suretyships and the ability for creditors to enforce same regardless of the fact that the company in debt is in business rescue.

Please do not hesitate to contact our Commercial Department at Kevind@dmkisch.com or Merciaf@dmkisch.com or 011 324 3025/33 with any queries, or for further information on suretyships or business rescue, or if you require our assistance in drafting or amending your suretyship agreement.

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Can you enforce your suretyship against members of a company in business rescue? Since a suretyship is ancillary to the principal agreement with the company and the company enjoys a moratorium at the time of being placed in business rescue, your suretyship may be unenforceable if you do not follow certain guidelines when drafting it. Ensure that the suretyship caters for the company being placed under business rescue and attend the meetings of creditors to guarantee that the business rescue plan provides for the enforceability of suretyships against sureties/ co-principal debtors regardless of the moratorium. Should a creditor be placed under business rescue, try to institute legal action against the sureties before the business rescue plan is adopted. The above are mere guidelines to assist in successfully instituting legal proceedings, failure may result in your debt repayment falling prey to the business rescue plan.