What legal obligations does a surety have in terms of liability?

There’s one word that strikes fear in the hearts of business owners: Suretyship. It’s guaranteed to send them fleeing for the hills. Many businessmen and women have suffered untold abuse at the hands of creditors who have manipulated them using suretyships and guarantees. On the other hand, there’s many a creditor berating themselves for failing to get a suretyship before granting credit to their now defaulting debtor. Let’s face it: the suretyship can be a useful business tool. If used correctly, fairly and with clarity on the parameters. A suretyship can grant companies access to the credit they so desperately need, while giving creditors the comfort to release goods before payment is made. But there needs to be a balance between the competing interests of debtor and creditor. All too often we hear of creditors upsetting this balance by trying to claim more than what the surety originally bargained for.

So what can a creditor claim in terms of a suretyship? How is a suretyship to be interpreted? Some insight can be obtained from the Supreme Court of Appeal, who gave us some clarity on how a suretyship is to be interpreted and applied.

In the 2015 case of Kilburn v Tuning Form (Pty) Ltd, the Supreme Court of Appeal was asked to confirm the extent of a surety’s liability under a suretyship. The surety had signed a suretyship in respect of Kilburn Auto Enterprises’ indebtedness to the creditor. In due course the creditor underwent an organisational restructure, resulting in the company being split into five trading divisions, albeit still under the same company, Tuning Form (Pty) Ltd. Kilburn had already paid its debt to the After Market Products division. However, it owed an amount of R800k to the Yamaha Distributors division, which it failed to pay. The creditor sued Kilburn and obtained a judgment against it, and thereafter claimed this amount from the surety under the suretyship. The surety’s defence against the claim was that the suretyship was limited to the debt that was payable to a different division. The High Court held that the surety was indeed liable for the amount due to Yamaha Distributors division on the basis of the unlimited suretyship that he had signed, and also observed that different divisions of a company are still part of one company. Company divisions do not have separate legal personalities. In other words, company divisions are created for operational purposes only but have no legal effect, as in law they are all regarded as one company. The surety was unhappy with this decision and took the matter on appeal.

The Supreme Court of Appeal noted that whether or not a surety is liable under a suretyship depends on:

• The wording of the suretyship: The suretyship stated that the surety was liable for: “the due fulfillment by the debtor of all its obligations to the creditor of whatsoever nature and howsoever arising, whether already incurred or which may from time to time hereafter be incurred as a continuing surety.” Read in isolation this may be interpreted to mean that the surety was indeed liable for the additional debt owed to a different division in the company of the creditor. However, this isn’t the only consideration when interpreting the suretyship.
• The heading of the suretyship: The suretyship signed by the surety was headed “Deed of Suretyship – Tuning Fork (Pty) Ltd t/a After Market Products.” The SCA observed that the heading is not meaningless, and needs to be read together with the wording of the suretyship.
• The original purpose of the suretyship and the circumstances giving rise to it: Kilburn originally needed to buy goods on credit from the After Market Products division. The creditor required security for this facility, which resulted in the surety signing the suretyship. As noted above, Kilburn subsequently paid this debt in full. The SCA observed that a suretyship can be limited to cover only certain debts due to the creditor, to the exclusion of any other debts that have been incurred or may arise in the future.

In this case, the Supreme Court of Appeal held that when looking at all three of the above elements (the wording, the heading and the purpose) the interpretation becomes very clear. The surety signed the suretyship for the sole purpose of securing the facility that Kilburn needed to purchase goods on credit from the After Market Products division. The creditor could not hold the surety liable for any other debt that Kilburn owed to it.

The SCA overturned the High Court’s decision and held in favour of the surety.

There’s a clear message to debtors and creditors alike. Make sure to engage in honest, ethical negotiations and ensure that the resultant Suretyship mirrors the true intentions and mutual agreement. If the suretyship is limited to a specific requirement, then this must be made clear. If the Suretyship is unlimited, intended to cover all amounts that the debtor may owe to the creditor whether existing or arising in the future, then this, too, should be clear.

Please note that this information is supplied for general information and does not constitute legal advice. It is advisable for you to contact a legal practitioner for guidance in respect of your unique requirements.