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A debt, compromised and discharged in a business rescue plan, releases the surety

Author :   Claire Morgan Director | Insolvency

In our newsflash of November 2011, we reported to you on the seminal judgment of Acting Judge Rogers (as he then was) in Investec Bank Ltd v Bruyns 2012 (5) SA 430 (WCC). The Bruyns judgment confirmed that a creditor may sue a surety for the debts of a company in business rescue, notwithstanding the moratorium on claims against the company.

However, the judge left open the question whether a creditor may enforce and be paid by a surety on the full pre-business rescue debt, where that principal debt is compromised in terms of a business rescue plan.

This issue has now been dealt with in another judgment by Judge Rogers handed down on 28 May 2014 in the Cape Town High Court, Tuning Fork (Pty) Ltd trading as Balanced Audio v J M Jonker & Others.

On the facts, concurrent creditors received, in terms of an adopted and implemented business rescue plan, a dividend of 28.2 cents in the Rand “in full and final settlement ” of their claims.

The sureties, in a summary judgment application made against them for the debts of the company in business rescue, argued that the compromise with the principal debtor made in terms of the business rescue plan, released them (the sureties) from their liability, on the basis that where a principal debt is discharged, the surety is likewise released from its obligation which is accessory to, i.e. dependent on, the existence of the principal obligation.

Section 155 of the Companies Act, no. 71 of 2008, deals with a compromise procedure between a company and its creditors, akin to the section 311 scheme of arrangement provisions from the previous Companies Act, no. 61 of 1973. Both section 155 and the old section 311, contain provisions to the effect that although the company may be partially released from payment of its debts, such compromise does not affect the liability of a surety of the company.

By contrast, the business rescue provisions of the Act contain no such provision preserving a creditor’s rights against the surety, and the judge called the absence of such a provision “striking ”. However this absence did not mean “thatthere is an implied term in the [business rescue provisions] that sureties will be released” – there is simply a gap in the legislation, and common law authority will therefore determine the issue.

On the general principle that the obligation of a surety is accessory, the extinction of the principal obligation therefore extinguishes the obligation of the surety. The question whether the debt of the surety as accessory has been discharged thus depends on a common law interpretation of the terms of the adopted business rescue plan. The plan in question provided for the “full and final settlement ” of the claims of concurrent creditors. The plan contained no provisions preserving creditors’ rights against the sureties.

The judge therefore concluded that the sureties had been released from their obligations. In this regard, there is no distinction between the position of a creditor who voted for the business rescue plan and the creditor who voted against it.

Summary judgment against the sureties was therefore refused.

This judgment highlights how important it is for creditors to:

  • Obtain guarantees from third parties for principal obligations (a guarantee being itself a principal obligation) rather than rely on suretyships as the only form of personal security; or
  • Use suretyship agreements whose terms do not provide for the release of the surety where the principal debt has been compromised; or
  • Ensure that the business rescue plan preserves claims against sureties. Various technical issues arise in this regard and legal advice must be sought.

For more information on the above, please contact:

Claire Morgan
Director | Insolvency
+27 21 410 2742
+27 82 876 9600

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