A creditor may receive only part of its claim under a business rescue plan. Can it recover the unpaid balance from a surety? The answer depends on what happened to the principal debt, the wording of section 154 of the Companies Act 71 of 2008 and the terms of the deed of suretyship.
How suretyship works
A surety undertakes to pay a debt if the principal debtor fails to do so. The surety’s liability is described as accessory to the principal debt. This means that the liability of the surety ordinarily depends on the continued existence of the debt owed by the principal debtor.
If the principal debt is extinguished, the surety may be released. If the debt continues to exist but cannot be enforced against the company, the creditor may retain its claim against the surety.
The Van Zyl case
In Van Zyl v Auto Commodities (Pty) Ltd [2021] ZASCA 67, Blue Chip Mining and Drilling (Pty) Ltd entered business rescue. A business rescue plan was adopted and implemented. Auto Commodities received part of its claim under the plan. It sued Mr Van Zyl, who had signed as surety, for the unpaid balance.
Van Zyl argued that section 154(2) prevented Auto Commodities from enforcing the debt against Blue Chip. Because his liability as surety was accessory to Blue Chip’s debt, he contended that his liability had also fallen away.
The deed of suretyship
The Supreme Court of Appeal held that the deed of suretyship preserved Auto Commodities’ rights against Van Zyl despite any compromise, arrangement or dividend affecting Blue Chip’s debt. Those provisions were enough to decide the appeal. The Court nevertheless considered section 154 because earlier judgments had taken different approaches to its effect.
How section 154 operates
Section 154(1) applies where a creditor has agreed to discharge all or part of a debt under a business rescue plan. The creditor may no longer enforce the debt, or the relevant part of it. Section 154(2) deals with a pre-business-rescue debt after substantial implementation of the plan. Unless the plan provides otherwise, the creditor may not enforce that debt against the company.
The Supreme Court of Appeal held that section 154(2) does not extinguish the debt. It prevents the creditor from enforcing the debt against the company. Because the principal debt continues to exist, the creditor may still have a claim against the surety.
The Court also held that rights under a deed of suretyship are property for purposes of section 25 of the Constitution. An interpretation that extinguished those rights could deprive the creditor of property.
What the judgment means
Van Zyl does not establish that every surety remains liable after the implementation of a business rescue plan. The principal debt must still exist. The business rescue plan and the deed of suretyship must also be considered. In Van Zyl, the wording of the suretyship expressly preserved the creditor’s rights despite a compromise or dividend affecting the principal debtor.
Creditors should ensure that their deeds of suretyship address the effect of a compromise, extension, arrangement or dividend involving the principal debtor. A business rescue plan should also state how it treats claims against sureties and other providers of third-party security.
A compromise of the company’s liability does not, without more, release a surety. The outcome depends on the effect of the plan on the principal debt and the terms of the relevant documents.
