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Business rescue proceedings and liability for sureties

When the news breaks that a potential debtor, which is being pursued via litigation, files for business rescue the first question a client ask is if recourse is still available against a surety relating to such debt that forms the basis of that claim.

In terms of Chapter 6 of the Companies Act 71 of 2008 (as amended) (“the Act”) and specifically Section 154 thereof the following are applicable relating liability:

  1. A business rescue plan may provide that, if it is implemented in accordance with its terms and conditions, a creditor who has acceded to the discharge of the whole or part of a debt owing to that creditor will lose the right to enforce the relevant debt or part of it;
  2. 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 fundamental question now arises how to interpret the aforementioned sections in the Companies Act and how the interpretation influences liability of sureties when a business rescue plan is adopted.

In the matter of TUNING FORK (PTY) LTD T/A BALANCE AUDIO VS J.M.J. GREEF & OTHER (18136/13) [2014] ZAWCHC 78 (28 MAY 2014) the learned Judge Rogers referred to a lacuna in the current legislation and reverts to the common law as it applies to sureties. The Court came to the conclusion that the current common law principles dictates that if a principle debt is extinguished the effect of the aforementioned is that the liability of the surety follows suit and accordingly the liability of the surety is extinguished likewise unless the business rescue plan makes specific provision for liability to be preserved.

The “Tuning Fork” matter was in the back drop of a previous Judgment in the matter of AFRICAN BANKING CORPORATION OF BOTSWANA LIMITED VS KARIBA FURNITURE MANUFACTURES (PTY) LTD & OTHERS (2013) (6) SA 471 (GNP) to which the Court came to conclusion that the sureties will still be liable if the principal debt has been extinguished through the adoption of business rescue plan and even if the business rescue plan makes provisions for the limitation of creditors’ claims, but not specifically sureties.

In the most recent matter of NEW PORT FINANCE COMPANY (PTY) LTD AND ANOTHER V NEDBANK LIMITED (30/2014) [2014] ZASCA 210 (1 DECEMBER 2014) the learned Judge Wallis interpreted the abovementioned Section of the Companies Act in a narrow sense as to only effect and arrange the liability of the principle debtor and not the sureties, with the important conclusion that such provision needs to be adopted in terms of the business rescue plan itself and in the absence thereof the surety would not escape liability.

In conclusion it is very clear that our Courts have shown diverse interpretations relating to the liability of sureties pertaining to business rescue proceedings and the final word has not been spoken yet.

Proper due diligence is required in scrutinising the business rescue plan if specific provision has been made relating to liability over and above the principle debtor as a lack thereof would most certainly leave the door open for a surety to challenge liability as interpreted in the “Tuning Fork” matter.

Although surety agreements do not fall under the current subject matter, special mention needs to be made that in the absence of not specifically contracting out of liability in the event of business rescue proceedings, which is the norm, the business rescue plan itself would be the primary source as to define liability for any surety.

In a recent matter our firm dealt with the abovementioned question arose whilst the business rescue plan’s adoption was discussed, between all voting creditors, with the unanimous decision that before adoption a specific clause would need to be inserted as to protect creditors and provide clarity that sureties ancillary to the principle debt would still be liable as to provide clarity to all parties involved, in effect providing recourse over and above the ambit of the business rescue proceedings.

SA Branch Phone: +27 (0)21 914 0513
Namibia Branch Phone: +264 (0)81 143 6980
SA Branch: Ben Groot Attorneys Inc (2012/051739/21)
Namibia Branch: Michelle Saaiman Inc (2017/1088)