Suretyships are accessory in nature and are normally provided to creditors as additional security for their claims against their debtors. If the principal obligation is discharged, released, compromised or invalid, there is a corresponding effect on the accessory obligation. Whilst creditors' claims enjoy specific statutory protection in some parts of the Companies Act, No 71 of 2008 (Companies Act), the business rescue chapter is silent on the aspect.

If a creditor consents or votes in favour of a business rescue plan (where its debtor is the entity under business rescue), the creditor may compromise or jeopardise its claim against a surety to such principal debtor.

The Companies Act does not contain specific provisions whereby creditors' rights as against sureties are safeguarded from any compromise of the principal debt in a business rescue situation. Creditors are cautioned to peruse and consider business rescue plans carefully and to build in safeguards to protect their claims against sureties where appropriate.

Effect of business rescue on sureties

In the decision of Investec Bank Limited v A Bruyns 2012 (5) SA (WCC)(Bruyns), Rogers AJ (as he then was) held in passing that:

"a business rescue plan may provide for the company to be released in whole or in part from its debts [and that]… a surety for the company would not be liable to the creditor for more than so much of the claim as survives the implementation of the business rescue plan."

At the time judgment was handed down in that case no business rescue plan had been adopted or implemented. The court therefore left open the question of whether lenders could lose their rights against sureties in circumstances where there was a compromise of the principal debt in terms of a business rescue plan.

Subsequently, and in the case of Absa Bank Limited v Du Toit and Others (7311/13) [2013] ZAWCHC 194 (13 December 2013) the court was faced with a situation where a defendant surety was defending summary judgment proceedings and argued that the principal debt had been, or would be, discharged as envisaged in the business rescue plan adopted in respect of the principal debtor. Consequently his argument was that this discharge should afford him a sustainable defence in his capacity as surety. The matter did to some extent turn on the wording of the business rescue plan which provided for 'the full and final settlement' of the creditor's claims against the principal debtor. Mindful that the court was dealing with summary judgment proceedings where only prima facie evidence of a defence needs to be established, the court found that the surety might be able to rely on such defence and summary judgment was refused.

In the most recent decision of Tuning Fork (Pty) Ltd T/A Balanced Audio v Greeff and Another (18136/13) [2014] ZAWCHC 78 (28 May 2014) (Tuning Fork), Rogers J had to decide inter alia whether the adoption and implementation of a business rescue plan resulted in the discharge of a surety's obligation to a creditor, arising from the compromise of the principal debt owed by the company under business rescue to the said creditor.

Rogers J found briefly the following:

  1. One cannot imply a term, in the business rescue provisions of the Companies Act, to the effect that creditors' rights against sureties are or are not unaffected by the adoption of business rescue plans. The Companies Act is silent on the matter.
  2. The general common-law principles of our law of suretyship must therefore be applied to determine what effect the provisions contained in any business rescue plan may have on sureties (if any).
  3. One of the general principles that applies is that once the principal debt is discharged by a compromise with or release of the principal debtor, then the surety is similarly released, unless the deed of suretyship provides otherwise.
  4. Furthermore, if a business rescue plan provides for the discharge of the principal debt by way of a release of the principal debtor, and the claim against the surety is not specifically preserved by such stipulations in the plan (as may legally be permissible or unless any other arrangement is made with the surety), the surety will be discharged.

The terms of the business rescue plan in the Tuning Fork case provided for the discharge of a principal debt and it was consequently held that because the business rescue plan did not specifically address the position of sureties, and absent the evidence of any other agreement, the defendant sureties were also deemed to be discharged from their accessory obligations. This case is obviously distinguishable from the Bruyns case, where no business rescue plan had yet been adopted or implemented and absent any compromise or settlement, the creditor was entitled to proceed against the surety.

As a result, the likelihood (depending on the terms of the suretyship) exists that creditors' rights as against sureties can be extinguished in circumstances where the principal debt is compromised and/or altered in a business rescue plan.

Precautionary measures

The above-mentioned decisions warrant a creditor approaching business rescue creditors meetings and the consideration of proposed business rescue plans with a substantial measure of caution. Creditors should, as a minimum, consider the following:

  1. safeguarding themselves against the effect that the terms of a business rescue plan may have on their securities in the form of relevant suretyships by negotiating or insisting on appropriate terminology in the plan which reserves their rights against the sureties;
  2. where possible, ensuring that sureties are party to the business rescue plan or agree to the creditors' rights against them being retained; and/or
  3. obtaining suitable alternative security to replace the suretyship and mitigate against the risk of such security being lost or diminished.

Guarantee – an alternative to suretyships

From a commercial perspective, as an alternative to seeking security in the form of suretyships containing traditional undertakings and contractual obligations, a creditor or lender could consider using guarantees. The obligations of a guarantor who provides a guarantee to a creditor are principal in nature and a guarantee can only be discharged by the fulfilment of the obligations that are so guaranteed unless otherwise agreed. In a business rescue scenario a creditor would therefore be entitled to proceed against a guarantor notwithstanding any discharge or compromise of a debt with that entity under business rescue.

Conclusion

Business rescue proceedings have, given their fairly new status and ongoing developments, created some uncertainly for creditors and lenders. Consequently creditors and lenders are encouraged to:

  1. approach business rescue proceedings with suitable insight and caution; and
  2. consider whether the terminology and obligations incorporated in their standard suretyship documents are sufficient to protect them in a scenario where the principal debtor has been placed under the umbrella protection of business rescue in terms of the Companies Act.