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Surety’s Rights in Business Rescue

March 25, 2024

It is customary for credit providers to require security before extending credit, with security typically categorized as either real or personal. This article focuses solely on personal security. A creditor holding personal security is entitled to seek recourse from a third party, referred to as the surety, to fulfil the obligations of the principal debtor. This entitlement is established through a suretyship agreement between the creditor and the surety. A surety can be any individual, a director of the principal debtor in the case of a company, or a trustee of a trust, among other legal entities.

Over time, our courts have clarified the position of sureties in business rescue proceedings involving companies. It has been established that a surety is not considered an affected party nor a participant in business rescue proceedings.

In landmark cases such as Investec Bank v Andre Bruyns (2012) and African Bank Corporation of Botswana Ltd v Karlba Furniture Manufacturers (Pty) Ltd (2013), it was determined that prior to the adoption of a Business Rescue Plan, the moratorium on legal proceedings concerning a company in business rescue does not discharge the obligations of a surety. The court emphasized that the moratorium is designed to benefit the company undergoing business rescue, and therefore, sureties cannot claim such protection since their liability arises from the suretyship agreement. Consequently, a surety’s liability remains unaffected until the adoption of the business rescue plan.

Following the adoption of the plan, the liability of a surety hinges on whether the terms of the suretyship agreement, in conjunction with the business rescue plan, absolve the surety’s liability. This was highlighted in the case of Hitach Construction v Botes (2019). Hence, it is imperative from a creditor’s standpoint that the deed of suretyship comprehensively addresses the rights of the creditor.

In the event that a surety settles the company’s debt, the surety retains the right of recourse against the company, effectively becoming a creditor of the company. Alternatively, the surety may opt for a cession agreement with the original creditor, thereby acquiring additional rights.


Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.