On 14 February 2025 a high court on appeal found that the defendant sureties had not established any basis for their release from their liabilities because of alleged prejudicial conduct by the principal creditor, a lending bank. The turnaround specialist who was appointed to assist the principal debtor was not the agent of the principal creditor. The sureties had not proved the required elements relating to the release of a surety due to prejudice caused to the surety by the creditor’s actions.
As a general proposition, prejudice caused to the surety can only release the surety (whether totally or partially) if the prejudice is the result of a breach of some or other legal duty or obligation. The prime source of a creditor’s rights, duties and obligations are the principal agreement and the deed of suretyship. If the alleged prejudice was caused by conduct permissible in the terms of the principal agreement or the deed of suretyship, the prejudice suffered is prejudice that the surety undertook to suffer.
When the borrower company got into financial distress, a turnaround specialist was called in to facilitate the turnaround and to monitor, observe and report on the business to the principal debtor, the now insolvent company. That included seeking outside funding. The turnaround specialist was not the bank’s agent, because he was appointed to assist in the financial management and profitability of the principal debtor’s business. In addition, the sureties were aware of and agreed to the conduct that allegedly led to their being prejudiced. The turnaround specialist did not have control over the company. The board remained in control. There was no objective evidence to demonstrate that the demise and winding-up of the principal debtor directly resulted from the turnaround specialist’s conduct acting on his own or as the principal creditor’s agent. The principal creditor as a bank had the sole discretion to base its lending decisions on reliable financial information and forecasts and had the legal entitlement to protect its interests. No breach of either the main contract or the suretyships has been demonstrated.
In passing, and not as part of the decision, the court examined a term in the suretyship that the sureties “irrevocably waive any right to rely on any defense based on… prejudice to them”. It was held that the purpose of the provision was to prevent the sureties from raising the defense of prejudice in litigation with the principal creditor.
The sureties were found jointly and severally liable for the sum of R142 319 311.58 with interest and costs, which would presumably explain why they pursued the defense of prejudice despite the facts set out in the judgment.