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Business Rescue – Are Sureties at risk?

busrescue“With surety stronger than Achilles’ arm” (Shakespeare) 

Creditors of a company in business rescue can, per a recent High Court decision, still sue the sureties.  Although the company itself is protected from legal action by its creditors, there is no similar protection for sureties.

The R16.6m claim, and the sureties’ defences fail

The facts of this particular case are perhaps typical of suretyship disputes –

  • A creditor (often, as here, a bank), finding itself unable to recover its money from the “principal debtor” (usually a company), sues the sureties (normally the company’s directors and/or related companies/trusts).
  • The sureties then – unsurprisingly – raise every possible defence they and their legal advisors can think of to the claim.
  • But only occasionally do they actually manage to wriggle off the hook because most suretyships are drawn in a tried and tested, tightly-worded format designed to survive any possible attack.
  • Usually, as in this case, the surety also signs as a “co-principal debtor” – important because that allows the creditor to sue the surety direct, without first proceeding against the principal debtor.

The end result in this case – all the sureties (a couple married in community of property and two companies) were held jointly and severally liable for the full principal debt of R16.6m, interest, and costs on an attorney and client scale.

Directors beware

Plan for this when considering business rescue.  Understand that it’s your company being rescued, not you personally!

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