Every suretyship securing a company’s debts should specifically preserve the creditor’s rights to recover from the surety despite discharge of the principal debt in a business rescue plan. And every business rescue plan should, if possible, contain a provision preserving rights against sureties.
If a debtor company is in business rescue, its creditors may call on a suretyship given to the creditor. Although the company enjoys the protection of a moratorium, the surety does not have similar protection.
Lost rights against surety
But after the adoption of a business rescue plan, a creditor may lose its ability to claim against the surety. This depends on the terms of the business rescue plan and of the suretyship. If the debt is discharged and the plan does not make any provision preserving the creditor’s rights against the surety, to the extent possible, the creditor may be precluded from recovering from the surety.
This is based on common law principles regarding suretyships and specifically their accessory nature. When the underlying debt is discharged, whether by way of a release or a compromise and whether done voluntarily or through a statutory process, the claims against the surety likewise terminate.
Claim against sureties before a business rescue plan is adopted, and make sure that rights of recourse are provided for in the business rescue plan and the suretyship.
Rights not preserved by Companies Act
In Tuning Fork vs Jacobus Marthinus Jonker Greeff and Delano Shanon Kasner the court had to decide whether a creditor of a company in business rescue could claim against the company’s sureties after a business rescue plan had been adopted. The business rescue plan gave creditors a dividend in full and final settlement of their claims. It was argued for the creditor that the rights against sureties should not be affected by the adoption of a business rescue plan, even though this was not expressly provided for in Parts A to D of chapter 6 of the Companies Act, 2008. Part E of chapter 6 deals with compromises between a debtor and its creditors and s 155(9) specifically says that a compromise does not affect the liability of a surety for the debts.
There is no similar provision in the business rescue provisions. Therefore a retention of rights against the surety akin to that contained in section 155(9) cannot be read into the business rescue provisions.
What should you do?
As a result our courts will apply common law principles related to suretyships when determining whether or not claims under them may be enforced when the debtor is in business rescue and a plan is adopted. Much depends on what is contained in the suretyship and in the business rescue plan. Encouragingly the court said that the business rescue plan could contain provisions relating to the rights of recourse against sureties.
Creditors should therefore claim against sureties before a business rescue plan is adopted, and make sure that rights of recourse are provided for in the business rescue plan and the suretyship.