South Africa: How Is A Surety's Right Of Recourse Affected By The Business Rescue Of The Principal Debtor?

Business Rescue and Suretyships

With the introduction of business rescue in terms of Chapter 6 of the Companies Act No. 71 of 2008, one of the areas of contention has been its affect on the suretyships of the company in business rescue.

The legal consensus seems to have been reached that:

1. although a suretyship is an accessory obligation, the liability of sureties for a company in business rescue remain liable (for example see Investec Bank Ltd v Bruyns (19449/11) [2011] ZAWCHC 423; 2012 (5) SA 430 (WCC) (14 November 2011); unless
2. a business rescue plan has been adopted which re-arranges or compromises the liability to debtors and the suretyship does not deal with such an arrangement or compromise ( New Port Finance Co (Pty) Ltd and Another v Nedbank Ltd 2016 (5) SA 503 (SCA)).

It must be stressed that the suretyship should be properly drafted, to deal with the principal debtor going into business rescue and the continuing liability of the surety notwithstanding any arrangement, payment delay or compromise.

Surety's Recourse against a Principal Debtor in Business Rescue

So does a business rescue of the principal debtor affect the surety's right of recourse against the principal debtor, if the surety settles part or all of the debt to the creditor? This was the question that was addressed in the case of Zungu-Elgin Engineering (Pty) Ltd v Jeany Industrial Holdings (Pty) Ltd and Others (1138/2019) [2020] ZASCA 160 (3 December 2020).

Brief Facts of the Case

Without getting too bogged down in all the facts of the case, the important facts were that the Appellant, Zungu-Elgin Engineering ("the Principal Debtor"), was indebted to Hollard Insurance ("the Creditor") in terms of a R 34 Milion performance guarantee that the Creditor had put up. The Creditor had got the Respondents (two of which were directors of the Principal Debtor) to sign as sureties for this guarantee ("the Sureties"). The Principal Debtor failed to perform in terms of the main agreement in which the performance guarantee was put up. This, in turn, triggered the guarantee and in turn the recovery from the Sureties with the Principal Debtor having gone into Business Rescue.

The material dates in the timeline were:

Principal Debtor's Business Rescue Argument

Section 154(2) of the Companies Act  provides:

'If a business rescue plan has been approved and implemented in accordance with this Chapter, a creditor is not entitled to enforce any debt owed by the company immediately before the beginning of the business rescue process, except to the extent provided for in the business rescue plan.'

" The appellant's sole argument proceeded along the following lines. The debt owed by the appellant to the respondents under the surety's right of recourse arose on 20 February 2015, when Sunrise demanded payment from Hollard in terms of the guarantee. Therefore, so the argument went, the debt became owing prior to the commencement of the business rescue proceedings on 11 March 2015. As the approved and implemented business rescue plan did not provide for this debt, the respondents were not entitled to enforce it in the court a quo. " (at 10 of the judgment)

Court's Reasoning

The court then went on to reaffirm (at 13) that,

"In Proksch v Die Meester en Andere 1969 (4) SA 567 (A) this court considered the common law principles in respect of when the surety's right of recourse arises. With extensive reference to Roman and Roman-Dutch authorities, Rumpff JA said at 584H-585A:

'It appears clear that at common law, a surety could only be regarded as a creditor of the principal debtor, when he had paid the creditor.' (Translated) "

Further the court confirmed(at 14)  that:

"There is a presumption in our law that a statutory provision does not alter the common law unless it says so explicitly or by necessary implication. See Law Society of the Cape of Good Hope v C 1986 (1) SA 616 (A) at 639E and 25 Lawsa 2 ed Part 1 para 340. The appellant contended that to permit claims against a company that were not provided for in the approved and implemented business rescue plan, might jeopardise the business rescue. That may be so, but is irrelevant. The question is whether s 154(2) of the Act expressly or by necessary implication varied the common law principle that a debt based on the surety's right of recourse arises upon payment to the creditor. It did nothing of the sort. On the contrary, in terms of s 154(2) the question whether any debt was owed by the company at the specified point in time, is to be determined in terms of existing law, including the common law. "

Court's Conclusion

As a result, the court held (at 15) that :

" The only defence that the appellant had raised, was bad in law. It follows that the court a quo correctly granted summary judgment and that the appeal must fail. "

 The provisions of the Companies Act did not curb the normal operation of the common law relating to suretyships in this case.

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