C&A Friedlander Attorneys

Business Rescue proceedings? Surely, I’m covered with a surety!

You have rendered efficient services to a company (“the company”) and now it’s time to send an invoice for your services. The invoice gets sent, but you hear nothing. You send follow-up e-mails and call the company to no end, all to no avail.  You even go as far as Googling the company to make sure that they are still trading.

Just when you have given up all hope in recovering your money, you get an e-mail with a covering letter informing you that the company is in business rescue.

In a panic, you get onto your computer and Google claims in respect of business rescue proceedings. Reading anything and everything, you start to see common phrases such as, “business rescue proceedings are proceedings aimed to facilitate the rehabilitation of a company that is financially distressed”. Further reading of the article will invariably mean that you come across the phrase, “a temporary moratorium (stay) on the rights of claimants against the company”.

Suddenly, the temperature in the room increases and you feel as though you are the last defender with Malcolm Marx heading straight for you, wondering how you got yourself into this position. You somehow manage to gather yourself just enough to flip through the file and see that there is a suretyship agreement which the director of the company signed making him jointly and severally liable as co-principal debtor for the debts incurred by the company (“the surety”). You instantly breathe a sigh of relief given your security.

You call your attorney and tell him not to worry, although the company is in business rescue you have a surety, so “it’s all good.” Your attorney asks you whether a business plan has been adopted and your reply is, “why is that important? I have a surety.”

This is why it is important.

The legal position of the company prior to and after the business rescue plan has been adopted is very different. A business rescue plan is aimed at rescuing the company by restructuring its business, property, debt, affairs, other liabilities and equity

The legal position prior to the business rescue plan being adopted is fairly straightforward in that the Courts have held that the liability of a surety for the debt of the company is not affected by the moratorium placed on legal proceedings against the company in business rescue. The surety remains liable for the debt of the company.

The legal position after the adoption of the business rescue plan, that which you, as a creditor, will be bound to, is more complicated. Should your suretyship agreement be silent on the enforceability of a surety in the event of business rescue proceedings, you, as the creditor, will have no recourse against a surety for the recovery of the balance of the outstanding debt of a company in business rescue where a business plan is adopted, if that business plan provides for a compromise of claims.

The rationale behind the above position is that the obligation of a surety is accessory in nature. What this means is that the surety cannot exist without there being a principal obligation of another, for which the surety has stood security for. Thus, should the principal obligation no longer exist, or should it have been compromised, the obligation of the surety, as an accessory to that of the principal obligation, will either fall away or be likewise compromised. In short, the suretyship agreement is conditional upon the existence of a principal debt.

What is interesting to note is that a guarantee, which is often overlooked in favour of a surety, is a better form of security in the case of business rescue proceedings, since a guarantee creates a primary independent obligation of the guarantor, not an accessory obligation, (as the case with a suretyship agreement). This means that if you have a guarantee, you, as the creditor, will have recourse against the guarantor for the recovery of the full outstanding balance due to you by the company, notwithstanding the adoption of a business rescue plan which provides for a compromise of claims.

So, in order to avoid the business rescue sweats, make sure that you are armed with a well-drafted suretyship agreement that provides for the surety’s continued liability, even in the case of a compromise of claims or a guarantee.

Clinton Hamman

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE).