Do business rescue proceedings affect the liability of sureties of the company?
| Jurisdiction | South Africa |
| Published date | 27 November 2019 |
| Citation | (2019) 31 SA Merc LJ 129 |
| Pages | 129-144 |
| Author | None |
| Date | 27 November 2019 |
DO BUSINESS RESCUE PROCEEDINGS
AFFECT THE LIABILITY OF SURETIES
OF THE COMPANY?
SIMPHIWE P PHUNGULA*
Lecturer, School of Law, University of KwaZulu-Natal
Abstract
This article deals with the legal position of sureties of a company that
has commenced business rescue. It analyses how sections 133 and 154
of the Companies Act apply to debts incurred by the company and
whether these sections extend to sureties by examining how the courts
interpret sections 133 and 154 in relation to the liability of sureties for
the debts of the company. It starts by explaining the general legal
principles governing suretyship, and then addresses sections 133 and
154 and their impact on the sureties of a company undergoing business
rescue.
I INTRODUCTION
The concept of rescuing a financially ailing company and restoring it to
solvency was introduced in South Africa by the Companies Act, 1926, in
the form of ‘judicial management’. However, judicial management was
severely criticised from its inception.
1
Judicial management has now
been replaced in the Companies Act 71 of 2008 (‘the Act’) by a new
procedure termed business rescue. Chapter 6 of the Act introduced
business rescue as:
‘Proceedings to facilitate the rehabilitation of a company that is financially
distressed by providing for the temporary supervision of the company, and
of the management of its affairs, business and property; a temporary
moratorium on the rights of claimants against the company or in respect
of property in its possession; and the development and implementation, if
approved, of a plan to rescue the company by restructuring its affairs,
business, property, debt and other liabilities, and equity in a manner that
maximises the likelihood of the company continuing in existence on a
solvent basis or, if it is not possible for the company to so continue in
* LLB LLM (UKZN).
1
Le Roux Hotel Management (Pty) Ltd v E Rand (Pty) Ltd (FBC Fidelity Bank Ltd (Under
Curatorship), Intervening 2001 (2) SA 727 (C) 60.
129
(2019) 31 SA Merc LJ 129
© Juta and Company (Pty) Ltd
existence, results in a better return for the company’s creditors or
shareholders than would result from immediate liquidation of the com-
pany.’
2
The protection of a company by a general but temporary moratorium
is provided for in section 133(1) of the Act, which states that ‘during
business rescue proceedings, no legal proceeding, including enforce-
ment action, against the company, or in relation to any property
belonging to the company, or lawfully in its possession, may be
commenced or proceeded with in any forum’.
Of interest is whether this moratorium extends to enforcement action
against persons who have bound themselves as sureties, or as ‘surety and
co-principal debtors’ for the company’s debts. Section 133(1) is silent on
legal proceedings against sureties of the company. Conversely, section
133(2) protects a company undergoing business rescue which has bound
itself as surety, by providing that
‘during business rescue proceedings, a guarantee or surety by a company
in favour of any other person may not be enforced by any person against
the company except with leave of the court and in accordance with any
terms the court considers just and equitable in the circumstances.’
Section 154 touches indirectly on the position of sureties for a
company undergoing business rescue. However, this section does not
deal specifically with the protection of sureties, save for the creditor’s
discharge of a debt by a company to that creditor.
This article deals with the legal position of sureties for a company that
has commenced business rescue. It analyses how sections 133 and 154
apply to debts incurred by the company. It also considers whether these
sections extend to sureties by examining how the courts interpret
sections 133 and 154 in relation to the liability of sureties for the debts of
the company. It starts by explaining the general legal principles govern-
ing suretyship, and then discusses sections 133 and 154 and their impact
on the sureties of a company undergoing business rescue.
II SURETYSHIP
(a) Creation of suretyship
For a suretyship to be valid between a surety and a creditor, there must
be a valid principal obligation between a debtor and a creditor. In other
words, one party — a principal debtor — must be obliged to another —
2
Section 128(1)(b) of the Act.
(2019) 31 SA MERC LJ
130
© Juta and Company (Pty) Ltd
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