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What happens to a surety obligation when the principal debtor is in business rescue?

  • South Africa
  • Corporate - International corporate knowledge briefing

26-08-2021

During the past two years, the courts and the Companies and Intellectual Property Commission have seen a significant increase in the number of business rescue applications. As a consequence of the on-going COVID-19 lockdown restrictions and impact this has had on the economy, many businesses are facing financial distress. As a result, businesses are exploring alternatives for the rehabilitation of their companies. The business rescue procedure as set out in chapter 6 of the Companies Act 72 of 2008 (“Act”) has been a viable option for businesses, however this process is not without consequences.

For a business rescue plan (“Plan”) to be approved and implemented, it is required that the creditors of the company accede to the Plan. This Plan, once approved, is binding on both the company and its creditors.

For many years, there has been uncertainty regarding the impact business rescue has on the liability of a surety for a debt of a company after a Plan has been implemented. Section 154 of the Act deals with the consequences of implementing the Plan, however the courts have not always agreed on the application of section 154 of the Act in relation to the liability of a surety.

On the 3rd of June 2021, the South African Supreme Court of Appeal (“SCA”) delivered a watershed judgement in the case of Van Zyl v Auto Commodities (Pty) Ltd. In this case, the SCA held that notwithstanding that the Act precludes creditors from bringing claims against the company after the implementation of a Plan, the Act does not affect nor extinguish the liability of the surety for the debt.

As a result of the SCA judgement, it can now be said with certainty that section 154 of the Act does no more than preclude creditors from pursuing claims against the company after the Plan has been implemented, but does NOT affect or extinguish the liability of a surety for the debt.

Contact us for more information on this ground breaking judgment and its effects.

Written by: Bryoni Govender, Candidate Attorney

Tanya Pollak, Partner

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