Can one proceed with legal action against a surety where the principal debtor is under business rescue?  A recent judgment considered this question.

Briefly, the facts were that the Plaintiff issued summons against the Defendant based on a suretyship which the Defendant executed, binding himself for the debt of two entities - both of which were in liquidation.

Thereafter the Plaintiff launched an Application for Summary Judgment. The Defendant defended the action and also opposed the summary judgment application.  This was based on the fact that an application had been made to place both entities under supervision to commence business rescue proceedings (“BRP”) in terms of Section 131 (1) of the Companies Act, Act 71 of 2008 (“the Act”).

The Defendant based its defence on Section 133 (2) of the Act, which:   

  1. prohibits claims against parties who have executed suretyships in favour of a company undergoing Business Rescue;
  2. the Defendant as surety can claim the benefit of moratorium afforded to the principal debtor; and
  3. that the amount of the principal debt is rendered uncertain by the fact that it may be compromised in terms of an approved business rescue plan.

In dealing with the defence raised by the Defendant, the court once again referred to Section 133 (2) above, and found that it contained a special provision dealing specifically with the enforcement of claims against the company based on guarantees and suretyships, and that these claims could only be enforced with the leave of the court. 

The question whether the Defendant, as a surety, could raise as a defence, the statutory moratorium (in favour of the two entities) depended on the distinction between defences in rem and defences in personam.

A defence in personam, is a defence which is purely personal to the principal debtor and may not be raised by the surety.  A defence in rem is a defence which attaches to the claim itself and, which shows that the claim against the principal debtor is invalid, or has been extinguished or discharged.

The court found that the statutory moratorium in favour of a company that is undergoing BRP is a defence in personam, as it is a personal privilege or benefit in favour of a company only, and does not apply to the Defendant, and therefore did not constitute a proper defence.

The Defendant then alleged that enforcement of claims against sureties would disturb the BRP in respect of the principal debtor.  The court found that this was not so and stated that if a creditor took judgment against the surety and the principal debt was later reduced or discharged against the surety, the latter could claim the benefit thereof.

The court thus held that the enforcement of claims against the surety would not disturb BRP, as the company undergoing BRP would face either the original creditor or the surety as its creditor.

The court found in favour of the Plaintiff and granted Summary Judgment, with costs, against the Defendant.

Adams & Adams is currently in the process of issuing summons against three sureties, who bound themselves jointly and severally liable, in solidium, in respect of the debt of the principal debtor, who has now been placed under BRP.  We will keep you advised of all further developments in our matter.

Ends.