One of the concepts introduced by the Companies Act 2008 (the “Act”) is Business Rescue. These proceedings provide for financially distressed companies a prospective outcome to remain commercially viable.

From the latest case in point, Tuning Fork (Pty) Ltd T/A Balanced Audio v Greef and Another, some portion of a creditor’s claim may be reduced or compromised by an approved Business Rescue Plan. The question is, how does this impact any personal suretyships from Directors or Members, should the above situation arise?

The Court dealt with such a situation, particularly the lacuna where the Act fails to address whether or not a creditor loses its claim as surety when it has been reduced or compromised in the Business Rescue Plan.

In the Tuning Fork (Pty) Ltd T/A Balanced Audio v Greef and Another the facts briefly of this case are as follows:

The financially distressed company in this case purchased audio and visual equipment from Greef and Another was placed in Business Rescue. A Business Rescue plan was adopted by a meeting of the relevant stakeholders. In terms of this plan, amongst others, the creditor would receive a dividend in full and final settlement of its claim.

After the plan was adopted, but prior to its implementation, Greef and Another applied for Summary Judgment against the sureties who had signed unlimited continuing suretyship for the company’s debt, present or future and bound themselves as sureties and co-principal debtors in favour of Greef and Another. The sureties in opposition of the Application argued that the compromise with the company released them from liability. The Judge agreed with the sureties and Summary Judgment against the sureties was refused.

The Court decided as follows, that:

1. The Act is silent and therefore it cannot be implied by the provisions of the Companies Act that creditor’s rights are or are not affected by the adoption of a Business Rescue Plan.
2. For the above reason, the common law principles of suretyship must be applied to determine what effect the provisions of any Business Rescue Plan may have on the sureties.
3. One of these common law principles entails that once a principal obligation is discharged whether by a compromise or release, then the surety is released unless the deed of suretyship provides otherwise.
4. Therefore if a Business Rescue Plan provides for the discharge of a principal debt and the surety is not specifically preserved in the plan, then the surety will be discharged. The terms contained in the Tuning Fork Business Rescue Plan provided did not preserve the surety and further, neither did the surety agreement.

Thus, according to Lynne Louis, in order to preserve your suretyship claim, a creditor must take the necessary precautionary measures when providing credit to companies and once faced with business rescue proceedings. In addition they must with the aid of their legal counsel, carefully examine the business rescue plan to determine whether the principal debt may have been extinguished in terms of the said plan.

Written by Nicolene Schoeman-Louw, MD, SchoemanLaw