What is a Suretyship Agreement
A suretyship agreement is a contract where a third person (the Surety) offers to pay an outstanding debt on behalf of a principal debtor, if the principal debtor is in default to pay that debt to the creditor of the principal debtor.
...Accordingly, the credit provider will only be able to claim from the surety if the principal debtor is in default of the re-arrangement agreement...
When is a Suretyship Agreement Subject to the National Credit Act
In terms of Section 8(5) of the National Credit Act 34 of 2005 (the “Act”) and FNB v Carl Beck Estates (Pty) Ltd and Another 2009 (3) SA 384 (T) it is common place in our law that a Suretyship Agreement is a credit guarantee and that the credit guarantee (suretyship) will be subject to the provisions of the Act if the original underlying Credit Agreement, in terms of which the surety was granted, is a credit agreement/transaction governed by the Act.
What implications does a Debt Review order have on a Suretyship Agreement
In terms of Section 88(3) of the Act a credit provider who received a notice of a debt review court application, may not exercise or enforce any right or security under the credit agreement until the consumer is in default of the credit agreement and in default of an obligation in terms of a re-arrangement plan agreed upon by the consumer and credit provider, or order by a court.
Business Rescue and Surety Claims: Key Court Ruling
A similar situation to the above was dealt with by the court in Tuning Fork (Pty) Ltd t/a Balanced Audio v JM Jonker and Others 2014 (4) SA 521 (WCC) where court stated “in terms of a business rescue plan, if a compromise is reached between a company and its creditors in full and final settlement of their claims, the compromise of the claim would apply equally to any claim which a creditor may have against a surety for the debt of the company.”
In essence the legislation and case law both point to a view that once there is a compromise reached in full and final settlement of a debt then the credit provider is bound by the re-arrangement agreement and cannot enforce its claim against the surety.
Accordingly, the credit provider will only be able to claim from the surety if the principal debtor is in default of the re-arrangement agreement.
Conclusion
It is our view that a suretyship agreement, which is subject to the Act, cannot be enforced if there is a pending debt review application or an order granted by a court or the Tribunal which re-arranges the consumer/principal debtor’s original debt obligation towards their creditor.
Furthermore, the suretyship agreement can only be enforced, against the surety, if the consumer/principal debtor is in default of the new re-arranged debt obligation.
This means that obtaining a debt review order protects both the principal debtor and the surety.
WHO ARE WE AT VHT
VHT Attorneys is a boutique law firm with a large vision. We provide innovative legal solutions with a renowned standard of integrity and confidentiality.
We help our clients:
- Remove Debt Review Status
- Commercial & Corporate Law
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