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The art of law - a company's sureties get no benefit from business rescue once the creditor has taken judgment against them

Where a company enters business rescue, does this release its sureties or reduce their liability?

One of the most eagerly awaited reforms in the new Companies Act 71 of 2008 was the introduction of a modern business rescue regime.

Despite the considerable length of Chapter 6 of the Act which contains the business rescue provisions, the Act is silent on several important issues.

One of these is the question of the impact on the company's sureties where the company is placed in business rescue. Naturally, an unpaid creditor will usually not be willing to await the uncertain outcome of the attempt at business rescue and will want to enforce the debt against the sureties immediately the company defaults on its obligations.

Does a reduction of a company's debt as a result of a business rescue plan reduce its surety's obligations?

Does the change in the company's legal obligations in terms of an accepted business rescue plan - which in the New Port Finance judgment, discussed below, reduced the amount of the company's debts and gave the company additional time to pay - have the effect of reducing the sureties' liability to no more than the company is obliged to pay the relevant creditor under the business rescue plan?

This was the argument put forward by sureties in the Supreme Court of Appeal in New Port Finance Company (Pty) Ltd v Nedbank Ltd [2014] ZASCA 210, in which judgment was given on 1 December 2014.

In this case, sureties for the company had applied for an interdict to prevent the creditor, Nedbank, from taking steps against them to recover the amounts owed to Nedbank by the company undergoing business rescue.

In the event, the business rescue attempt failed and was terminated, rendering this argument academic. However, the court, recognizing (see para [8]) the importance of the legal issue, went ahead and spelled out what its judgment would have been had business rescue gone ahead.

A judgment against a surety (if it is not appealable) fixes a surety's liability

The court pointed out (at para [9] of the judgment) that, in this case, the creditor, Nedbank, had at the outset of the dispute taken judgment against the principal debtors and against the sureties, jointly and severally. It was held that these judgments served to fix the liability of the sureties; that there were no grounds for rescinding those judgments and that the judgments were final with no avenue for an appeal.

There was no authority for the proposition, said the court, that a compromise of the principal debtor's liability, whether in terms of business rescue or otherwise, would accrue to the benefit of a surety after judgment had been taken against that surety.

Moreover, (see para [10] of the judgment) the deeds of suretyship in this case had been drafted widely enough as not to bar the creditor from taking action against the sureties if the principal debtor entered the business rescue regime, and the deeds of suretyship explicitly allowed the creditor to enforce the suretyships in such circumstances.

The court said (at para [13]) that counsel for the sureties were correct in not even attempting to argue that the sureties were entitled to the benefit of the automatic statutory moratorium accorded to the two companies when they entered business rescue.

The court consequently rejected the sureties' application for an interdict to bar Nedbank from enforcing their liability under the deeds of suretyship.

What is the position where the deed of suretyship is silent in relation to business rescue?

The more difficult issue, that did not arise for decision in New Port Finance and is still unresolved, is the impact on sureties' obligations where a debtor company enters the statutory business rescue regime and the deed of suretyship is silent as to the effect of business rescue on the sureties.

In Tuning Fork (Pty) Ltd t/a Balanced Audio v Greeff 2014 (4) SA 521 (WCC) Rogers J was of the view that, even in the context of business rescue proceedings, the general common law principle applies, that a surety is released if the principal debt is discharged by reason of a compromise with or a release of the debtor. Since the business rescue provisions of the Companies Act are silent in this regard, Rogers J was of the view that this common law rule will apply.

In the New Port Finance decision, Wallis J, said of Rogers J's view in this regard that, "I simply record that it is by no means clear to me that it is correct."

Deeds of suretyship should be drafted to provide for business rescue

With the law in its present state of uncertainty as to the impact of business rescue on the company's sureties where the deed of suretyship is silent regarding business rescue, it is important for both creditors and sureties, that deeds of suretyship explicitly deal with the possibility that the principal debtor, if it is a company, may enter into business rescue and that the company's debts may be expunged or reduced by the business rescue plan.

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