087 237 9752
083 629 6860

Business Rescue and sureties

May 7, 2020

It is trite in the business world that directors, or any other person normally conclude a suretyship agreement with a creditor on behalf of a company. A question then arises as to what is the position of a surety for a company in business rescue (BR)? Does the surety enjoy the moratorium and any other benefits enjoyed by the principal debtor, being the company in BR?
Chapter 6 of the Companies Act dealing with BR is silent in this regard. However, this legal issue has been addressed in various cases, the most recent being Haitachi Construction v Botes 2019. In this case, the creditors, after having received their dividends in terms of the Business Rescue Plan (BR plan), claimed the balance of the debts from the sureties.
In the above case, the court stated that, as a general rule, the moratorium on legal proceedings in respect of a principal debtor in BR does not extend to sureties. The court further noted that the Act deals only with the ability to sue the principal debtor and not with the existence of the debt, thus, the liability of sureties is unaffected by BR unless the BR plan provides otherwise. Therefore, to determine the liability of a surety for a debt of a company in BR, one must look at the BR plan and the suretyship agreement.
The court held that if the BR plan provides for a discharge of the principal debt in the form of compromise and the claim against the surety is not preserved, then the surety is also discharged. However, sureties will not escape liability if the suretyship agreement contains a clause that affords creditors the right to pursue the surety, even if the principal debt has been compromised.
It is therefore important for creditors and sureties to make sure what the exact terms of the BR plan is, as well as the terms and conditions of the suretyship because it may affect the liability of the surety.

Disclaimer: The contents and information provided above are generalised and must not be acted upon as legal advice