The right of recourse by surety
It is common practice that credit providers often request security before advancing credit. Security is usually classified as either real or personal security.
In this article, we will only discuss personal security. A creditor who holds personal security is entitled to look to a third person, known as the surety, to carry out the obligations of the principal debtor. This right is created by a suretyship agreement entered into between the creditor and the surety. A surety may be any person, or a director of the principal debtor if it is a company, a trust or any other legal entity.
Over the years, our courts have clarified the position of a surety of a company in business rescue proceedings. It has been stated that a surety is not an affected person and is not a party to business rescue proceedings.
In Nedbank v Zevoli 208 (Pty) Ltd, it was held that business rescue proceedings and the moratorium therein do not have the effect of discharging the obligations of a surety. The court went further to state that the moratorium is only intended to benefit the company in business rescue, and that surities cannot claim such benefit since they are sued based on the suretyship agreement.
Therefore, a surety’s liability remains intact up to and until the adoption of the business rescue plan. After the adoption of the plan, a surety’s liability is dependent on whether the terms of the suretyship agreement read with the terms of the business rescue plan extinguish the liability of the surety or not as held in Hitach Construction v Botes 2019.
In the event the surety pays off the debt of the company, such surety will have the right of recourse against the company. This means that the surety becomes the company’s creditor. Alternatively, the surety may enter into a cession agreement with the old creditor, which will then entitle the surety to additional rights.
Disclaimer: The contents and information provided above are generalised and must not be acted upon as legal advice.
Contact information
Visit Business Rescue at 7 Alcrest Building, C/o Mc Adam and Rothery Street Nelspruit.
