Business & Commercial Law Security Business & Commercial Law

Suretyship Suretyship is an agreement by means of which one person (the surety) renders him/herself liable towards a creditor for the debts of another person (the principal debtor) if that person does not pay

Why? Banks and financial institutions require security when lending money to mitigate their risk of not being repaid

The liability of a surety The consequence of a contract of surety is, naturally, that the surety is liable to the creditor for payment of his or her debt by the principal debtor, or for a lesser amount if the surety has only bound himself or herself in respect of such lesser amount.

Suretyship Suretyship is an accessory contract – principal debtor remains bound to creditor but surety agrees to be jointly and severally liable with the debtor

Requirements of a contract or surety General Laws Amendment Act prescribes certain formalities: Must be in writing Must be signed by (or on behalf of ) both surety & creditor Must disclose identity of creditor, principal debtor & surety Must disclose nature of principal debt Must disclose amount of principal debt

Parties to the contract The original debtor – principal debtor Person to whom debt is owed – creditor Person who agrees to undertake obligation of suretyship – surety Original amount owing – principal debt

Rights of the surety The right of recourse against the principal debtor The right of contribution from co-sureties Any defence that the principal debtor could raise against the creditor may also be raised by the surety

Defences Generally any defence available to principal debtor is available to surety Exception – personal defences Eg: if principal debtor alleges duress – not open to surety to allege duress

Principal debt Need not exist at time of suretyship – can be future debt

Amount of suretyship May be fixed amount or limited to certain amount, eg; R70 000 May be limited by time, eg: for one year May be unlimited – can then be cancelled on reasonable notice Can be continuing covering security - ongoing

The special defences of the surety (benefits) Excussion Division Cession of Action

The benefit of excussion The creditor should first proceed against the principal debtor before proceeding against the surety

Exceptions Surety has renounced the benefit Principal debtors estate already sequestrated Principal debtor clearly unable to pay Principal debtor outside SA without local assets Principal debtor has a personal defence Principal debtor hinders creditor in excussion

The benefit of division Applies if two or more sureties Allows surety to claim only liable for pro rata portion of the principal debt

Exceptions Where benefit renounced Co-surety fails to claim benefit when sued for whole amount Co-surety outside SA and cannot be found Co-surety is insolvent

The benefit of cession of action Available to a surety who has paid Can claim cession of action from the creditor

Recovery by Surety without having paid If judgment obtained against surety (even if he has not yet paid) Where debtor has agreed to pay when demand against surety or at certain time Where principal debtor wasting assets Where surety negotiates debtors release

Cession The process by which one party (cedent) transfers a personal right to another party (cessionary)

Requirements for cession Cedent must hold the right being ceded Right must be capable of being transferred Parties must intend for the right to be transferred Object of the cession must be properly described Cession must be lawful

Consequences of cession Rights form part of cessionary’s estate Only cessionary may collect the debt Once ceded cannot be further ceded by cedent but only by (original) cessionary Debtor must render performance to cessionary Claim is transferred to cessionary in its entirety with all benefits, privileges and disadvantages attached

Termination of suretyship Upon termination of the principal debt (payment in full) If surety pays or if bound for limited period upon expiry of that period Where creditors conduct prejudicial to the surety By operation of law – set-off, merger or prescription of the principal debt