Article by listed Attorney: Nanika Prinsloo
Most business owners are forced to sign surety for the debt of the business at some stage by either a bank or a supplier. So when does the surety have an effect on your personal position as director of your Company or member of your Close Corporation? When must you worry about the suretyship and when not. This article will in brief set out when suretyship is relevant and when not.
Of course, it is always relevant, but what is meant is when is it payable by you as the director or the member and when not. I will refer to a Company or a Close Corporation as the “entity” throughout, and when I refer to director of a Company, I also mean to include a member of a Close Corporation in this article.
What does it mean to have surety? It means that, if the person or entity you sign surety for, does not pay his/her/its debt, you will make sure that the debt gets repaid by paying it yourself.
What is the real effect of that piece of paper that you have signed? It means that if the person/entity that you signed surety for does not pay his/her debt, the bank/supplier/creditor is allowed to look at you for payment. They will look at you for payment by either phoning you, sending you a letter or issuing a summons.
This article’s purpose is not to give a legal discussion of the law surrounding suretyships – the legalities etc of it, but instead is aimed at giving a practical perspective as to when the suretyship really matters.
The majority of people that I speak to on a daily basis, think that once you signed surety, you owe the money. You do not. As long as the person/entity that you signed surety for repays the debt, there is nothing for you to do. There is completely no liability on you in fact, to do anything, but to hope that the principal debtor continues to pay the debt.
Only when the principal debtor (the entity/person that you signed surety for) stops to repay the debt, then only the bank/supplier/creditor will look at you for payment of that debt. So legally up to the point where they look at you as the surety, that debt is none of your concern. Once you have received a summons that calls up the suretyship, then your liability towards payment (to do something) of the principal debt becomes alive.
Otherwise put: until the moment that you receive summons, a suretyship is just a piece of paper that means nothing and only comes alive when it is called up and it is called up with a summons. If the principal debtor repays all the debt, the suretyship falls away completely. (Although – one must be very careful to check that you have not signed and open-ended surety. This would mean that if you sign open-ended surety for a principal debtor which will bind you as surety for any debt that the principal debtor incurs with a bank for example, you will remain liable as surety if the entity for example takes out a R200 000 loan and repays it; and then takes out another R200 000 after that. Unless your suretyship is limited, you can remain liable).
Let’s use a practical example:
Your business owes the bank R100 000 for a loan. You signed surety for your business for R100 000. You have NOT received summons as surety yet, as the business is comfortably repaying its loan.
In your personal capacity you have an overdraft, a credit card and a clothing account, totally R150 000.
Today, the debt of the business is R100 000 and your personal debt is R150 000.
Your business owes the bank R100 000 for a loan. You signed surety for your business for R100 000.
The business has not repaid the loan, and the bank has issued summons against you as surety.
Your personal debt is R150 000 for an overdraft, a credit card, and a clothing account, total R150 000.
Because you have received the summons that calls up the suretyship, your personal debt today is R250 000.
The above becomes important not only in your financial planning, but also in your calculations when you intend to sequestrate.
When you sell your business or when it has closed down, or if there is a director/shareholder or membership change, remember to arrange with the creditor to release any persons from the suretyship who are no longer involved in the business. It happens too often that in these scenario’s the suretyships are forgotton, and the person who signs surety finds out with a nasty surprise that they forgot to cancel their suretyship.