1. Business & Commercial Law
Security
Business & Commercial Law

2. 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

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

5. 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.

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

7. 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

8. 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

9. 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

10. 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

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

12. 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

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

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

15. 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

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

17. 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

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

19. 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

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

21. 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

22. 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

23. 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