The recent decision by Stuttafords International Fashion Company (Pty) Ltd to commence business rescue proceedings has highlighted the impact of business rescue and the risks associated with a debtor going into business rescue.

Once business rescue commences, the company enjoys a moratorium on legal proceedings in terms of section 133(3) of the Act which means that a creditor is precluded from claiming against the company, including in respect of debts which the company stood surety for, for the duration of business rescue. Should a creditor wish to retrieve a debt owed by the company in business rescue, the creditor would either need to do so in terms of the business rescue plan or enforce a suretyship against those who stood as surety/ies for the company’s debts, if such a suretyship exists.

A business rescue plan may stipulate what happens with suretyships for the duration of business rescue proceedings. When a business rescue plan fails to provide for suretyships, the common law must be looked to. The common law position is that the obligation of a surety is accessory in nature, thus the extinction of the principal obligation extinguishes the obligation of the surety. The two recent court judgments, Tuning Fork (Pty) Ltd t/a Balanced Audio v Greeff and Another 2014 (4) SA 521 (WCC) and New Port Finance Company (Pty) Ltd v Nedbank Ltd (30/2014) ZASCA 210 deal with the enforceability of a suretyship in these circumstances. The courts accepted that if the principal debt is discharged by an agreement between the principal debtor and the creditor or by the release of the principal debtor, the surety is released unless the deed of suretyship provides otherwise.

Section 155(9) of the Act casts further light on the matter, in that it states that a compromise does not affect the liability of any person who is a surety of the company, and thus the rights of a surety are preserved. Therefore, you may proceed against a surety for the debts of a company in business rescue during business rescue proceedings when the company is enjoying the protection of the moratorium, which protection the surety cannot invoke.

So what should you do? A creditor must ensure that when entering into a suretyship to recover the debts incurred by the company, that the surety relinquishes the benefit of excussion (the right to require the creditor to claim from the principal debtor before claiming against the surety) and agrees to pay the debt of the company should the company enter into business rescue regardless of what is stipulated in the business rescue plan. Furthermore, creditors of the company in debt must ensure that they attend the meeting of creditors when one is called by the business rescue practitioner. Creditors must furthermore ensure that at the meeting, the business rescue plan takes into account suretyships and the ability for creditors to enforce same regardless of the fact that the company in debt is in business rescue. Creditors should also ensure that their agreements contain the provision that should a company enter into business rescue, such act shall constitute an act of default and that the agreement would be deemed to have been cancelled immediately prior to the company entering into business rescue.

Please do not hesitate to contact our Commercial Department at Kevind@kisch-ip.com or Merciaf@kisch-ip.com or 011 324 3025/33 with any queries, or for further information on suretyships or business rescue, or if you require our assistance in drafting or amending your suretyship agreement.