Business Rescue and Suretyships: Creditors at Risk

Rescue_NoBoarderConsider this scenario.  It’s unfortunately one all too likely to face creditors in these hard times –   

  • One of your corporate customers runs up a substantial debt, finds itself in financial distress, and applies for business rescue,
  • You suspect that somewhere down the line you will have to write off at least part of your claim,
  • Sure enough, a business rescue plan is proposed that will in effect compromise your claim,
  • Nevertheless you are relaxed, because you hold personal suretyships from the directors and they have assets.  They are good for the shortfall if necessary.

But before you relax too much …..

The outcome of a series of recent court decisions is that your suretyships could well become worthless if your main claim is compromised in an adopted business rescue plan (it normally is).  

In the most recent case, the High Court held that –

  • Before adoption of a business rescue plan you can still sue the sureties – the moratorium against suing a company, which kicks in as soon as business protection proceedings commence, gives no protection to sureties.
  • However, if a business rescue plan providing for compromise in full and final settlement of your main claim is adopted by a meeting of stakeholders, your claim against the sureties also falls away unless –
    • Your suretyship document is correctly worded to preserve the suretyship claim, or
    • The business rescue plan validly provides for the suretyships to survive.
  • It doesn’t matter if or how you vote at the meeting to consider the business rescue plan – you are bound by the meeting’s decision.

Preserving your suretyship claims – a checklist

1.   Before you grant credit in the first place –

a.  Have your lawyer check your standard suretyship forms – are they correctly worded?
b.  Take advice on replacing them with full guarantees from directors (as some commentators are suggesting).
c.  Look also for security other than just the suretyships – cessions of debtors, bonds over properties etc.

2.   Then if a debtor goes into business rescue, immediately –

a.  Take advice on how best to enforce/preserve your rights against the surety/ies.
b.  Secure your position well before you are called on to consider any business rescue plan.

The cost of getting this wrong could be high – the creditor in this case is down R370k.

Ashersons Attorneys

Ashersons Attorneys

Industry news and noteworthy articles from a boutique corporate law firm in Cape Town, South Africa

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