South Africa: Guarantees Are Preferable Under Business Rescue Provisions

Last Updated: 6 September 2011
Article by Nastascha Van Vuuren

Section 133 of the Companies Act, No. 71 of 2008 as amended (the Act) places a general moratorium on legal proceedings against a company in business rescue.

According to section 154(1) of the Act, a business rescue plan may provide that a creditor who has acceded (voted in favour) to the discharge of the whole or part of the debt owing to that creditor, will be prohibited from enforcing the relevant debt or part of it against the company.

Section 154(1) therefore envisages a compromise of the debt (alternatively, an extension of time to repay the debt) between the company and its creditors who consent to the business rescue plan and the discharge of the debt owing to those creditors in terms thereof ("consenting creditors"). However, the position of those creditors who do not consent to the business rescue plan ("dissenting creditors") is unclear.

Creditors often secure the obligations of a company by requiring a third party to bind itself as surety for the obligations of the company. However, assuming that the legislature in drafting Chapter 6 of the Act intended to distinguish between consenting creditors and dissenting creditors, the distinction between a suretyship and an independent guarantee becomes of significance.

Distinction between a surety and guarantor

In common law, a surety is discharged if the principal obligation is extinguished due to the accessory nature of the suretyship. An independent guarantee, on the other hand, due to the fact that it is a principal obligation, can only be discharged if there is performance of the principal obligation or payment on the part of the guarantor.

List v Jungers 1979 (3) SA 106 (A) is the precedent in respect of the distinction between a suretyship and a guarantee. In this case, the Appellate Division held that:

  • the meaning of the words "guarantee" and "warrant" must be obtained from the particular context in which they are used;
  • the document under consideration was no more than an original and unqualified undertaking by the appellant to pay money to the creditor by a certain date;
  • there was no suggestion that the document was an accessory contract or that it was an undertaking that the principal debtor would perform his obligations; and
  • the appellant bound himself as a principal debtor and not as a surety.

There are therefore times when the wording of a guarantee will be such that it is an independent and unconditional undertaking to bind the guarantor as co-principal debtor. If the wording is such, then the guarantee will be principal in nature, it will not qualify as a suretyship, and the creditor will therefore not be required to first proceed against the company for performance.

The creditor will be entitled to demand payment or performance directly from the guarantor.

The effect of business rescue on claims against sureties and guarantors

If a company is in business rescue, creditors are prohibited from proceeding against it for recovery of their debts as a result of the moratorium put in place by section 133. As a result, creditors will have to wait for the moratorium period to terminate before proceeding with their claims.

Moreover, section 154(2), as read with section 133, provides that where a business rescue plan has been approved and implemented, a creditor will not be entitled (during the course of the business rescue process) to enforce any debt owed by the company other than to the extent provided for in the business rescue plan. Therefore, there is a moratorium on all enforcement actions other than for the enforcement of the provisions of the business rescue plan.

The effect of this on claims against sureties and guarantors of the company must be examined. To do so one must distinguish between personal defences and defences in rem (against or about a thing). The court in Standard Bank v SA Fire Equipment 1984 (2) SA 693 (C) explained that a personal defence arises from a personal immunity of the debtor from liability for an otherwise valid and existing claim or obligation. With a defence in rem, the law does not recognise the obligation or debt, for example, because the obligation has ceased due to it having been discharged or otherwise extinguished by means of payment, compromise, novation or judgment.

Accordingly, the court referred with approval to the case of Worthington v Wilson 1918 TPD 104, which held that a statutory moratorium (being a purely personal defence) would not be an impediment to the creditor proceeding against a surety. This case was also referred to with approval in the cases of Ideal Finance Corporation v Coetzer 1970 (3) SA 1 (A) and Cape Produce Company (PE) (Pty) Ltd v Dal Maso and Another NNO 2002 (3) SA 752 (SCA).

A creditor will therefore be entitled to proceed against a surety once business rescue proceedings have commenced, even though the moratorium put in place by section 133 would prohibit that creditor from proceeding against the company for recovery of the debt.

Where an independent guarantee has been provided, on the other hand, the creditor will be entitled to proceed against the guarantor, simply because the guarantee establishes a separate principal obligation.

Once the debt has been legally discharged by way of compromise in terms of section 154(1) of the Act, a consenting creditor will not be entitled to proceed against the surety. The creditor will, however, still be entitled to proceed against the guarantor, because the guarantor is bound, despite the terms of the compromise, to fulfil the obligations that were guaranteed.

It must be noted that section 154(1) does not refer to the general body of creditors and the compromise envisaged therein is not peremptory. It merely provides that a business rescue plan "may" provide that a creditor who has "acceded" to the discharge of the whole or part of the debt owing to that creditor will lose the right to enforce the relevant debt or part of it. The word "accede" is not defined in the Act. However, Black's Legal Dictionary (7th Eddition, 1999) defines it as meaning to consent or agree.

The question therefore arises whether or not the legislature intended to distinguish between a creditor who has consented or agreed to the discharge of the relevant debt or part of it, from a creditor who did not. If such a distinction is relevant, then, in circumstances where the business rescue plan includes a compromise as envisaged in section 154(1), an argument may be made that the debt owed by the company to dissenting creditors does not fall within the ambit of such provision, therefore such debt is not discharged by way of a compromise, and the dissenting creditor may accordingly be entitled to proceed against a surety despite the implementation of the business rescue plan.

A further question needs be answered, that is, would a vote against the business rescue plan be sufficient for a creditor to be considered a dissenting creditor or would something more be required, such as an actual refusal to accept the discharge contemplated in the business rescue plan?


It remains to be seen whether any creditor would vote for a business rescue plan and subsequently accept the discharge of the relevant debt or part of it in terms of the business rescue plan, if as a result thereof, such creditor would be excluded from proceeding against the sureties. Only time will tell!

Authored by Nastascha van Vuuren

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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