Suretyships and Business Rescue are important aspects of commercial law in South Africa. Suretyships are agreements in which a person agrees to pay the debt of another person or entity if they are unable to do so themselves. This is a common practice in the business world, particularly when securing loans from financial institutions.
However, in cases where a business is experiencing financial distress and may be facing liquidation, suretyships can become a complex issue. Business Rescue is a legal process aimed at helping financially distressed companies recover and avoid liquidation. It is a relatively new concept in South Africa, having been introduced in 2011 with the Companies Act.
No creditor likes having to deal with a defaulting debtor. Matters become even more interesting when the said debtor goes into business rescue. In such instances, the creditor’s avenues of recourse become rather limited by the Companies Act – because a creditor is unable to sue its debtor while their debtor is in business rescue. What’s a hapless creditor to do? Particularly in the uncertain economy in which we currently live, where suppliers are increasingly at risk. One good option is to make use of suretyships. Before releasing goods or rendering services, request your debtor to provide some solid guarantors, eg. ask the shareholders, directors, trustees, members, holding company etc to sign a suretyship guaranteeing the debtor’s obligations.
But is a creditor able to sue the surety if the debtor goes into business rescue?
Consider the 2017 case of Nedbank v Zevoli that came before the Kwa Zulu Natal High Court. Nedbank made a loan to a company called Zevoli, which was secured by three suretyships. The sureties bound themselves jointly and severally for the performance of all Zevoli’s obligations, ie. It was an unlimited suretyship. In due course, Zevoli defaulted, then voluntarily resolved to start business rescue proceedings. So Nedbank proceeded to sue the sureties for the not-to-be-sniffed-at amount of R14.8 million, being the total amount of the outstanding loan. Naturally, the sureties were not altogether keen on digging so deep into their own pockets!
The sureties raised a number of defenses to try and escape liability. One of their arguments was that the sureties couldn’t be sued while Zevoli couldn’t be sued. And Zevoli couldn’t be sued because they were under business rescue.
The court disagreed. When a debtor goes into business rescue, the debtor can raise their business rescue as a defense against a creditor who attempts to sue. But this defense does not extend to the sureties.
In this case, Nedbank couldn’t sue Zevoli. But they could still sue their sureties.
At Agreements Online, we have a team of experienced attorneys who specialize in commercial law and can provide expert advice on Suretyships and Business Rescue in South Africa. Contact us today for assistance in navigating the complexities of these legal issues.
In Summary: A suretyship can be a good way for a creditor to protect itself in the event that its debtor defaults and goes into business rescue.
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.