BUSINESS RESCUE & SURETIES

Article by listed Attorney Anye Janses van Rensburg

The Companies Act (the “Act”) does not stipulate whether or not a creditor loses its claims against a surety when the business rescue plan, duly adopted and implemented, provided that the creditor’s claim against the principal debtor comprises as full and final settlement of such claims. The business rescue plan when accepted by the creditors of the company is an agreement between the company and the creditors. What happens to the sureties when the principal debtor has entered into business rescue?

In terms of a business rescue plan a compromise is reached between the creditors and company. The creditors will receive a portion of their debt and so the distressed company is released from its debt to the creditors. The company has then paid the creditor i.e. the debt is extinguished. What happens to the surety when the principal debt has been settled via this compromise? In the Tuning Fork v Greeff[1] case the creditors wanted to recover the remainder of the company’s debt from the sureties.

The Act contains no provision which safeguards the creditor’s rights against a surety in relation to a business rescue plan. The court in Tuning Fork v Greeff, held that the Act was indeed silent of this and it that the common law should apply.  The common law on suretyships must be applied in order to assess the liability of the surety when a business rescue plan has been adopted. This will be done by application of the common law to the precise terms of the plan.

In casu the section in the business rescue plan (which was adopted by the creditors) regarding the release from debt read: “Should the creditors approve the business rescue plan, the payment under the business rescue plan to them will be full and final settlement of their claims against the company”. The question before the court was whether the sureties were liable even though the company’s indebtedness had been extinguished by way of a full and final settlement. Due to the fact that the Act, the business rescue plan and suretyship agreements were silent on this the court applied the common law.

The general principle in terms of the common law regarding suretyship is that the accessory debt of a surety is discharged when the principle debt is discharged. Thus the court ruled that when the creditors accepted the business rescue plan and the proportional payment of the company’s debt in terms thereof, the company’s indebtedness to the creditors had been extinguished and therefore the sureties were also no longer liable.

Another aspect which was dealt with in the Tuning Fork case was the moratorium provided for in terms of the Act. The company is protected from legal proceeding by way of the moratorium. The Court held that there is a distinction between a defence in rem, which strikes the existence of the principle debt, and defence in personam which provides a personal defence to the principal debtor while leaving the debt in existence. In essence the surety cannot raise the moratorium as a defence.

The conclusion is that where the business rescue plan makes provision for the payment to be full and final settlement i.e. discharges the debt by agreement between the principal debtor and creditor and this plan is accepted, then the creditor can no longer proceed against the surety. However if the plan has no yet been accepted, but business rescue has commenced then the surety can be held liable as the company will be protected by the moratorium.

Conclusion

Creditors will have to ensure that their rights are protected when entering into suretyship agreements by ensuring that this aspect is dealt with in term of the suretyship agreement, alternatively when accepting a business rescue plan ensuring that it is dealt with in terms of the plan.

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