Business Rescue and Surety

ENS acted on behalf of Investec Bank Limited in an application for summary judgment against a defendant where the defendant had stood surety for the debts of certain companies. By the time of the summary judgment hearing, the defendant had already made application to place the companies under supervision in terms of the business rescue provisions of the Companies Act, no. 71 of 2008.

In defending the summary judgment application, the defendant as a surety raised various defences arising from the business rescue of the companies. In a judgment handed down on 14 November 2011, Acting Judge Owen Rogers of the Western Cape High Court, ruled on these defences as follows.

Section 133(2) of the Companies Act – the enforcement of a suretyship in business rescue

The section reads as follows: “During business rescue proceedings, a guarantee or surety by a company in favour of any other person may not be enforced by any person against the company except with the leave of the court and in accordance with any terms the court considers just and equitable in the circumstances.

The defendant contended that this section should be construed as providing that during business rescue proceedings the suretyship may not be enforced by the creditor without the court’s leave. Rogers AJ found in Investec’s favour that on the plain wording of the section, it deals only with sureties and guarantees by the company – it is not to be interpreted as releasing persons who stood surety for the company in business rescue.

Section 133(1) – the general moratorium provision

The defendant argued that as a surety he was entitled to raise as a defence the statutory moratorium in favour of the company in business rescue, that is, as the creditor was unable to proceed against the companies in business rescue so too should it be precluded from being able to proceed against the surety.

Rogers AJ found in favour of Investec agreeing with our argument that the statutory moratorium in favour of a company in business rescue is a defence in personam (as is the sequestration or liquidation of the principal debtor) not in rem – accordingly the business rescue moratorium does not avail the surety and the creditor may proceed against it.

Compromise of the principal debt

The surety raised the fact that a business rescue plan may in due course compromise the principal debt to a lesser amount than what he was presently being sued on as surety.

Rogers AJ held that even if the defendant could allege facts from which one might infer a reasonable possibility that the business rescue plan may result in a reduction of the plaintiff’s claim, this would still not disclose a defence on behalf of the surety. The surety would have recourse against the company in due course.

Where a business rescue plan compromises and reduces the principal debt, is the surety liable only for this lesser amount?

Rogers AJ acknowledged that where a business rescue plan is implemented in its terms and that plan provides for releasing the company in business rescue in whole or in part from its debts, a creditor may indeed lose or have reduced its claim against the company and may therefore lose its right to enforce its claim, in whole or in part. The judge then stated that he was prepared to assume for purposes of his judgment – without deciding – that should that occur the surety would not be liable to the creditor for more than so much of the claim that survives the implementation of the business rescue plan.

The judgment of Rogers AJ is therefore an important one for his ruling in favour of creditors on the defences outlined above: these are the defences we anticipated from sureties where business rescue proceedings have been brought against the principal debtor. Rogers AJ left open the question whether a creditor may enforce and obtain payment from a surety on the full pre-business rescue indebtedness where the principal debt was subsequently compromised in business rescue: this question will have to be decided by another court.

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