What you need to know about sure­ty­ship Many small busi­nesses start with a lack of tan­gi­ble se­cu­rity against which they can bor­row money from banks or ap­ply for credit from sup­pli­ers. One way in which cred­i­tors pro­tect them­selves against de­fault­ing cus­tome

Finweek English Edition - - ON THE MONEY SMALL BUSINESS - Ed­i­to­rial@fin­week.co.za There are a num­ber of pit­falls when act­ing as a surety, ac­cord­ing to ENSafrica’s Brian Jen­nings and Sanushka Chetty:

asure­ty­shipis, es­sen­tially, an un­der­tak­ing by a per­son – the surety – to pay a cred­i­tor should a debtor de­fault, ac­cord­ing to Brian Jen­nings and Sanushka Chetty, both se­nior as­so­ci­ates in ENSafrica’s cor­po­rate com­mer­cial depart­ment. As such, it is a form of se­cu­rity given by a third party to se­cure the debts of a debtor in favour of a cred­i­tor. There is usu­ally a re­la­tion­ship be­tween the debtor and surety, e.g. they might be a fam­ily mem­ber or there may be some other re­la­tion­ship of trust be­tween them, ac­cord­ing to Jen­nings and Chetty.

Po­ten­tial sureties should en­sure that they un­der­stand the im­pact that dif­fer­ent sure­ty­ship pro­vi­sions could have and read the sure­ty­ship doc­u­men­ta­tion care­fully in or­der to avoid nasty sur­prises in fu­ture should the debtor – whether an in­di­vid­ual or the small busi­ness – not be able to re­pay monies owed to cred­i­tors, ac­cord­ing to them.

“If one was act­ing for a surety, one would want to con­sider lim­it­ing the surety’s liability un­der the sure­ty­ship to a fixed amount,” they say. A po­ten­tial surety should also be vig­i­lant as to whether a cred­i­tor ex­cludes the com­mon-law ben­e­fit of ex­cus­sion in the sure­ty­ship, Jen­nings and Chetty say. Un­der a typ­i­cal sure­ty­ship, the cred­i­tor would be obliged to sue the debtor first to re­cover their loss, be­fore the cred­i­tor is en­ti­tled to sue the surety, and then only for the bal­ance of the cred­i­tor’s loss, they ex­plain. This is called ex­cus­sion.

“Be­cause this process is cum­ber­some and time-con­sum­ing, cred­i­tors of­ten ex­clude the ben­e­fit of ex­cus­sion in the sure­ty­ship,” they ex­plain. “By do­ing so, the cred­i­tor is en­ti­tled to sue the surety di­rectly for the en­tire amount of the cred­i­tor’s loss.”

It is then up to the surety to re­cover the amount he or she paid to the cred­i­tor from the debtor, they say.

WHAT ARE THE PIT­FALLS OF SURE­TY­SHIP?

The ma­jor pit­fall is that the small-busi­ness owner’s per­sonal as­sets, e.g. their home, would no longer be pro­tected by the sep­a­rate le­gal per­son­al­i­ties that ex­ist be­tween the owner and the small busi­ness. A cred­i­tor would be en­ti­tled to claim against the small-busi­ness owner’s per­sonal es­tate for the en­tire amount of the un­der­ly­ing debt.

If the debtor or the surety’s as­sets are not enough to cover the debt owed to the cred­i­tor, then the debtor and/or the surety would face in­sol­vency pro­ceed­ings.

There are other non-le­gal con­se­quences of be­ing re­quired to make pay­ment un­der a sure­ty­ship, in­clud­ing pos­si­ble ad­verse credit rat­ings and in­creased cost of do­ing busi­ness.

Po­ten­tial sureties should en­sure that they un­der­stand the im­pact that dif­fer­ent sure­ty­ships pro­vi­sions could have and read the sure­ty­ship doc­u­men­ta­tion care­fully in or­der to avoid nasty sur­prises in fu­ture.

Brian Jen­nings Se­nior as­so­ciate at

ENSafrica

Sanushka Chetty Se­nior as­so­ciate at

ENSafrica

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