Surety is a difficult concept to grasp and often misunderstood. If a party is not informed, this often leads to serious consequences. It is therefore important that a person signing as surety understands what he or she will be committing to and what he or she will be held responsible for, if the debtor fails to satisfy its debts.
A suretyship agreement should be drafted with the following considerations in mind
In order to understand a suretyship, it is essential to understand that the surety agrees to bind itself to the contract terms. In the event the debtor fails to honor the contract, the surety will take responsibility for it and be responsible for payment.
A suretyship may take one of two forms – unlimited liability or limited liability. In the event that the suretyship is limited to a certain amount, the suretyship contract must specify the amount.
Unless the suretyship is specific, failure by the debtor to pay the debt can be detrimental. A creditor can also bind a surety in perpetuity for the principal debtor’s obligations and secure the surety for debts. The surety will still be liable or have to pay even when the surety no longer has any involvement with the debtor.
In Van Zyl v Auto Commodities (Pty) Ltd (279/2020) [2021] ZASCA 67; [2021] 3 All SA 395 (SCA); 2021 (5) SA 171 (SCA) (3 June 2021) the South African Supreme Court of Appeal ruled. Even though the Companies Act 71 of 2008 prevents creditors from bringing claims against the company after implementation of a plan, it does not affect, nor do its provisions extinguish, the surety’s liability for the debt.
Following the Supreme Court of Appeal decision, a surety’s liability for the debt is not affected or extinguished by section 154 of the Code. In terms of business rescue, it merely deals with the consequences of executing a plan, and it has no bearing on the liability of a surety.
A surety’s relationship with the principal debtor
Upon paying the principal debt, the surety has the right to recover from the debtor the amount paid and any alternative interest or fees incurred during the process. In the event that a debtor refuses to pay back an expunged debt, someone signing as surety can apply to a court for relief.
It is essential that parties ensure that their intentions are accurately reflected in a suretyship agreement and that they are not signing anything that they do not fully understand and are not willing to commit to.
Unwanted consequences of a suretyship agreement may result from misunderstanding its implications.
(This article is provided for informational purposes only and not to provide legal advice. For more information on the topic, please contact our offices.)
