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Christo Smith Law Blog

Business rescue – creditors be warned!

Creditors loose their right to claim from sureties of companies and CC’s under business rescue.

Creditors who have suretyships from directors and sharholders have had a measure of peace of mind when companies or close corporations go into business rescue proceedings (BRP – a procedure established in terms of chapter 6 of the Companies Act 71 of 2008 the purpose of which is to give a company or CC that is in so-called financial distress an opportunity or breathing space, to recover). A business rescue plan is adopted (if the company or CC is not eventually liquidated). In Investec Bank Ltd v Bruyns 2012 (5) SA 430 (WCC) it was held that business rescue proceedings do not affect suretyships – creditors were free to sue the sureties despite the institution of BRP.

However, in the matter of Tuning Fork (Pty) Ltd t/a Balanced Audio v Jonker 2014 (4) SA 521 (WCC) the court held that a creditor loses his claim against a surety when a business rescue plan is adopted, which provides that the claim of the creditor against the company is compromised in full and final settlement of such claim.

The court’s decision was based on the reasoning that the Act is silent on the right of a creditor to hold a surety of the principal debtor liable after the creditor’s claim has been fully and finally settled in the adoption and implementation of a business rescue plan and accordingly, the common law applied. The court held, on the application of the common law relating to suretyship, that since the principal debt was compromised in the business rescue plan, and since the creditor’s rights against the sureties were not preserved in the deed of suretyship or in the adopted business rescue plan, the sureties were released from liability. The surety’s obligation to perform is accessory in nature : if the principal debtor is discharged from his or her obligation, be it by way of payment in full, settlement, prescription or by operation of law, then the surety is absolved from performing in terms of the suretyship.

A proviso in a business rescue plan to protect the rights of creditors to enforce suretyships will also not suffice : sections 154(1) and (2) provide if a business rescue plan has been approved a creditor is not entitled to enforce any debt owed by the company.

Therefore, note :

  • 1             Directors will use BRP to escape the consequences of suretyships.
  • 2             Creditors should revert to guarantees rather than suretyships.
  • 3             Creditors should vote against BRPs unless directors sign new guarantees.
  • 4             Creditors with suretyships should rather opt for liquidation as liquidation does not affect suretyships.
  • 5             Creditors : don’t sell your claims to third parties unless they pay all creditors in full.

Many creditors are under the misguided belief (and are so convinced into accepting proposals for a business rescue plan) that the plan will render a better dividend than would be the case if the entity were liquidated (although this is debatable, because many see business rescue as nothing more than a lucrative tool in the hands of opportunistic private financiers who team up with business rescue practitioners). The truth is, if the entity is liquidated those creditors with suretyships from directors, could stand to gain much more than they would if a BRP was implemented.

See also Lombard M & Swart WJC Business Rescue: The uncertainty about sureties THRHR vol 3 August 2015 521.

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Business rescue – creditors be warned!