07 Jun 2021

The Right to Enforce a Claim against Surety after Business Rescue Proceedings: Authoritative Respite Welcomed

by Nerisha Besesar, Partner, Durban, Andrew Donnelly, Partner, Durban,
Practice Area(s): Litigation |

Practice Area(s): Banking & Finance Law Insolvency, Business Re-structuring & Business Rescue
It has always been common commercial practice for a creditor to call for a personal suretyship when extending credit to a juristic debtor. In law, the contact of suretyship is accessory contract to the main contact of loan. The question that has troubled our Courts is what happens when the principal debtor is placed in business rescue and there is a compromise of the principal claim. Is the claim against the surety equally compromised or does the claim survive the compromise?  Section 154 of the Companies Act provides that if any business plan is sanctioned, a creditor will lose the right to enforce its claim.

This uncertainty caused a number of financial institutions to move away from using personal suretyships and to use a form of guarantee in which it is recorded the guarantor assumes a separate and distinct obligation to the creditor; this avoids the argument that as the main claim has been compromised so has the accessory claim against the surety.

This issue has now been settled by the Supreme Court of Appeal in terms of a judgment handed down on the 3 June 2021 in the matter of Van Zyl v Auto Commodities (Pty) Ltd (279/2020) [2021] SCA 67 (3 June 2021). Mr van Zyl, was the CEO of Blue Chip Mining and Drilling (Pty) Ltd which went into business rescue. A business rescue plan was proposed and sanctioned by the  creditors and various dividends were paid to creditors. After substantial implementation of the business rescue plan, the business rescue proceedings were terminated and the company was returned to its shareholders. Auto Commodities then instituted action against van Zyl, as surety, for over R6 million, which was the shortfall of its debt. Van Zyl resisted the claim, relying on Section 154, and argued when the claim against Blue Chip Mining was compromised so were any claims against him as surety.

In coming to its decision, the SCA first considered the business rescue plan and the consequences of its implementation. The court found that the plan indeed provided for the compromise and discharge of the principal debtor. However, what needed to be considered were clauses in the deed of suretyship which made it clear that any compromise of the principal debt would not result in the release of the surety.  On the strength of these clauses, the Court held that it would dismiss the appeal and hold the surety liable. However, because of the reliance by Van Zyl on Section 154, the SCA decided that it was necessary for reasons of legal certainty to decide this point as well.

The Court when looking at Section 154, found that there was a contrast in the language used by the legislature between its subsections. Section 154(1) contemplates a discharge of debt where the creditor has “acceded” to the discharge of the whole or part of the debt. Section 154(2) however contemplates the situation where a creditor, regardless of whether it voted for or against the plan, is prohibited against enforcing its claim against the company.

The Court ultimately held that section 154(2) only seeks to prevent creditors from pursuing claims for the balance of the debt against principal debtors and does not extinguish claims against  sureties. Van Zyl’s appeal against Auto Commodities was therefore dismissed.

This judgment therefore reaffirms the rights of creditors to enforce suretyships notwithstanding the business rescue of the principal debtor. However, that in itself creates a further problem.  A company rescued by business rescue still needs its directors and shareholders to be able to focus on the new business. If the directors and shareholders continue to be sued under personal suretyships with the risk of being declared insolvent, there remains little incentive for them to get the business back on track. Therefore, business rescue practitioners would need to bear this in mind in their negotiations with creditors and the formulation of a business rescue plan.