1. In our business rescue training workshops prior to the implementation of the Companies Act, No. 71 of 2008, clients were advised that where the debt of a debtor is compromised in terms of a business rescue plan, the debt of the surety and co-principal debtor may be extinguished because of the accessory nature of the suretyship debt to the principal debt. Clients were advised, where possible, to obtain guarantees from third parties in respect of the principal obligation (a guarantee being itself a principal obligation) rather than rely on suretyships as the only form of personal security.
  2. This issue was dealt with recently in a judgment handed down by Mr Justice Saldanha in the High Court, Western Cape Division, on Friday 13 December 2013 in the matter between Absa Bank Limited (Absa) and Theodor Gustav Du Toit and two others (the defendants).
  3. Absa applied for summary judgment in a total amount exceeding R27 million against the defendants in their capacities as sureties and co-principal debtors for the debts of The Wave at Wilderness Development (Pty) Ltd (the principal debtor and the company in business rescue).
  4. The business rescue plan of the company contained the following provisions:​
  • The amounts made available for payments to creditors… in terms of this B R Plan are paid in full and final settlement of any and all claims [of] creditors;
  • Such settlement is not intended to affect any rights that any creditor may have against any third party who bound itself as surety.
  1. Absa drew the attention of the Court to the fact that the plan thus provided that its implementation would not affect any rights that a creditor (such as Absa) may have against any surety for and on behalf of the principal debtor.
  2. The defendants submitted that the plan nevertheless extinguished the principal debt owed by the company to Absa through the use of the words “in full and final settlement of any and all claims” of creditors. In this regard, the defendants submitted that inasmuch as the liabilities of the sureties were accessory in nature – and notwithstanding that the defendants were co-principal debtors – the defendants’ liability under the suretyships was conditional upon the existence of the principal obligation. In the absence of a valid principal obligation (extinguished by the adoption and implementation of the plan), the defendants as sureties could no longer be bound to Absa.
  3. The defendants further submitted that insofar as the business rescue plan sought to retain Absa’s right of recourse against the defendants as sureties, it could not in fact do so as the defendants themselves were not a party to the plan.
  4. Sections 154(1) and (2) of the Companies Act provide that:​
  • A business rescue plan may provide that, if it is implemented in accordance with its terms and conditions, the creditor who has acceded to the discharge of the whole or part of the debt owing to that creditor will lose the right to enforce the relevant debt or part of it.
  • If a business rescue plan has been approved and implemented in accordance with this Chapter, a creditor is not entitled to enforce any debt owed by the company immediately before the beginning of the business rescue process, except to the extent provided for in the business rescue plan.
  1. The defendants submitted that insofar as Absa lost its right to enforce the principal debt against the company in accordance with section 154(1), it was precluded from enforcing the principal debt against the sureties. In accordance with section 154(2), the company had obtained by virtue of the business rescue plan “a full and final settlement of its indebtedness to [Absa]” and the plan had effectively extinguished the principal debt.
  2. Absa referred the Court to the judgment of Kathree-Setiloane J in African Banking Corporation of Botswana Limited v Kariba Furniture Manufacturers (Pty) Ltd [in business rescue] & others (case no. 20947/12 in the North Gauteng High Court delivered on 29 August 2013), wherein Judge Kathree-Setiloane remarked that: “There is no express provision contained in Chapter 6 of the Act which provides that the adoption of a business rescue plan will deprive creditors of the company in business rescue, of their rights as against sureties for the debts of the company in business rescue. The effect of such a provision, in my view, would be drastic as it would deprive a creditor of its rights as against a third party (surety) simply by virtue of the adoption of a business rescue plan for the debtor. If the legislature intended that the adoption of a business rescue plan would have such a far-reaching consequence, the legislature would have expressly provided for this consequence”.
  3. The defendants submitted to the Court that this decision did not deal with the provisions of section 154 of the Companies Act and was therefore distinguishable from the matter at hand.
  4. Judge Saldanha agreed with the arguments of the defendants.
  5. The Judge furthermore agreed with the defendants that, in any event, section 154 “does not extinguish a third party’s liability to a principal debtor as it could by separate agreement obtain a guarantee in the business rescue process for the continued liabilities of the principal debtor and by virtue of sections 154(1) and (2) … provision could be made in the business rescue plan that the principal debt not be extinguished … which by implication would mean the retention of the principal creditor’s right of recourse against a surety”.
  6. The Judge accordingly found in favour of the defendants, ruling that they had set out a bona fide defence to Absa’s claim and dismissed the application for summary judgment.
  7. While not making a ruling directly on the issue (the Judge only had to decide whether the defendants had a bona fide defence to the summary judgment application), this decision is a reminder that creditors would be well-advised to ensure that guarantees are obtained from third parties in the era of business rescue rather than relying on suretyships. Creditors must ensure, as far as they are able, that in terms of section 154 the business rescue plan of a debtor specifically provides that the principal debt is not extinguished.