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  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  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  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  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; R  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  May be fixed amount or limited to certain amount, eg; R  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  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  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  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  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  Available to a surety who has paid  Can claim cession of action from the creditor

Recovery from Debtor  If surety has 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  If surety has 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

Liens  Liens  A lien is a right to retain the possession of property (a right of retention).  There are three types of lien:  Liens for the storage or salvage of property (salvage liens)  Liens for the improvement of property (improvement liens)  Liens for contractual debt (debtor and creditor liens)  Liens  A lien is a right to retain the possession of property (a right of retention).  There are three types of lien:  Liens for the storage or salvage of property (salvage liens)  Liens for the improvement of property (improvement liens)  Liens for contractual debt (debtor and creditor liens)