When a company is placed under business rescue, the question
arises as to the enforceability of a suretyship given for the debts
of or by the company.
As far as the company itself is concerned, the question is easily
answered. Section 133(2) of the Companies Act 71 of 2008 (the Act)
"During business rescue proceedings, a guarantee or surety by
a company in favour of any other person may not be enforced by any
person against the company except with leave of the court and in
accordance with any terms the court considers just and equitable in
One would therefore hope that if a creditor seeks to enforce a deed
of suretyship, the appointed business rescue practitioner will take
the necessary steps to ensure that the best interests of the
company as a whole are protected, even if this means opposing the
enforcement proceedings. Without being prescriptive, in most
instances it will not be in the best interests of the company as a
whole to be forced to pay out under a guarantee or suretyship while
business rescue proceedings are pending.
The position is not quite as clear when one considers the rights
and interests of a person who has given a suretyship for the debts
of the company under business rescue. The plain wording of section
133(2) of the Act clearly restricts the application of that
subsection to the company itself, and does not protect third
parties. Furthermore, it can be stated as a general principle that
the status of the principal debtor (for example a company under
business rescue or winding up) does not offer a defence to the
surety, because the underlying debt is not affected by a change in
status of the principal debtor. In theory this means that the
creditor can enforce any suretyship for the debts of a company
under business rescue against the surety/ies. It is already
becoming commonplace in commercial practice for deeds of suretyship
to contain a standard clause providing that if the principal debtor
is placed under business rescue, this constitutes an event of
default which justifies the creditor in enforcing the
The position of a surety has to be considered carefully by the
appointed business rescue practitioner. This is because if a surety
pays under the suretyship such payment does not constitute a
"free pass" to the company. Since the surety has a right
of recourse against the principal debtor for any amounts which he,
she or it has to pay out on the company's behalf, the payment
by a surety of the underlying debt to the creditor will merely
result in an exchange, from the company's perspective, of one
creditor (the original creditor) for another (the surety). The
overall financial position of the company will not improve.
For this reason a practitioner will be well advised to make
specific provision for suretyships in the business rescue plan. It
will be appreciated that the business rescue plan may include (and
in most cases will include) a compromise of the company's debts
– see section 154 of the Act. If for example the business
rescue plan provides that the principal debt may be paid off by the
company in monthly instalments or even if the principal debt is
reduced, this would constitute a compromise of the underlying debt
which would benefit not only the company under business rescue, but
also the surety.
In summary therefore, the best interests of the surety would be
served by avoiding payment for as long as possible in the hope that
the business rescue plan will provide for a compromise of the
underlying debt. By contrast, the best interests of the creditor
would be served by attempting to enforce the claim against the
surety as quickly as possible, before the underlying debt can
potentially be compromised by a business rescue plan. Finally, the
best interests of the company would generally be served by
compromising the principal debt, in such a manner that is neutral
as between the interests of the principal debtor and the
surety/ies, but serves the best interests of the company as a
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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Globalisation and the rapid expansion of international trade has highlighted the need for uniform and consistent insolvency legislation across international markets. South Africa will take a further step towards such international best practice with the passing of the Judicial Matters Second Amendment Bill making provision for certain technical changes to Section 35B of the Insolvency Act.
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