When considering whether to place your company under business rescue, the question often arises as to whether parties who have bound themselves as sureties in respect of the company’s debt, are safe from action by the creditors.

Our courts recently dealt with this in Tuning Fork (Pty) Ltd t/a Balanced Audio v Greef and another [2014]. In this matter a financially distressed company was placed under business rescue and a business rescue plan was adopted. The plan specifically stated that the creditor would receive a dividend in full and final settlement of its claims. The creditor however still sought to obtain summary judgment against the sureties.

Section 155 of the Companies Act, 71 of 2008 states that a compromise procedure with creditors does not affect the liability of sureties. The Act however does not provide for the same in respect of business rescue. The judge in this matter argued that there is no basis for implying such a term and therefore the common law relating to suretyships should be applied.

In terms of our common law the liability of a surety is accessory in nature in that the elimination of the principal debt also eliminates the liability of the surety. The court applied the general principle that if the principal debt is discharged by agreement with the creditor, the surety is also discharged, unless the suretyship agreement specifically states otherwise.

The business rescue plan specifically provided for full and final settlement and therefore the court held that the principal debt was discharged by the dividend which was paid. The sureties were therefore also discharged.

In deciding whether to place a company under business rescue, we would suggest that any suretyship agreements, which are in place, are reviewed to determine whether they provide for survival of the liability of the surety after business rescue. If not, then the business rescue plan should specifically state that the compromise with a creditor releases the surety or that the debt is discharged in full.