Business rescue threat to creditors
Suretyships can exploit rescue plan loophole if principal debt provisions are changed by agreement
THE business rescue provisions in Chapter 6 of the new Companies Act have already spawned some interesting and sometimes conflicting decisions of the High Court. A recent judgment of the Western Cape High Court, ( Absa Bank v Du Toit and others on December 13 last year) made some important remarks concerning the enforceability of suretyships provided by third parties for the debts of a company where that company has subsequently adopted a business rescue plan.
The remarks and findings pose significant potential risks to creditors.
The Absa case dealt with the status of claims against third party sureties where agreements have been concluded with the principal debtor, and/or business rescue plans acceded to, incorporating the “full and final settlement” or extinguishment of a claim.
Three sureties had stood guarantee for the debts of The Waves at Wilderness Development, the distressed principal debtor. A business rescue plan was duly adopted.
Absa agreed to the business rescue plan but at the same time sought to reserve its rights against the sureties. It later instituted proceedings against the sureties which resulted in the case under consideration. At summary judgment stage the sureties raised the defence that because the business rescue plan provided for the settlement or extinguishment of Absa’s claim, and given that a fundamental characteristic of a suretyship is that it is accessory to the principal debt, Absa was not entitled to enforce the suretyships against them. Even though the plan recorded that it was the intention of the parties that claims against sureties would not be affected by the plan this did not help Absa at the end of the day.
The court held that the defendants had a bona fide defence on the face of it and refused the application. These important observations were made:
The well-established principle is that a claim against a surety “lives or dies” by the principal obligation.
It made no difference that the sureties had agreed to be co-principal debtors.
The fact that the business rescue plan in question sought to maintain claims against sureties did not assist the creditor as the sureties themselves were not party to the business rescue plan.
While previous decisions held that claims against third party sureties were unaffected by a business rescue process it is now apparent that once the principal debt is modified or its character altered, the accessory liability under the suretyship may also be regarded as having been modified or altered.
Creditors should be extremely cautious with the manner in which they deal with and treat claims. Solutions may include obtaining a “fresh” guarantee from the third party surety or ensuring that the surety becomes a party to the business rescue plan.
The wording of business rescue plans should also be carefully scrutinised so as to ensure that there is no inadvertent settlement or extinguishment of a claim against a surety or guarantor. The provisions of Section 154 of the Companies Act (which deals with the enforcement of claims that arose prior to business rescue) also needs to be referred to and dealt with as this normally prevents a creditor who assented to a business rescue plan from enforcing a claim other than in terms of that plan.
No doubt the case will enjoy much debate and consideration. It may also be relevant for the wording of standard suretyship agreements.
HEADING INTO STORMY WATERS The wording of business rescue plans should also be carefully scrutinised so as to ensure that there is no inadvertent settlement or extinguishment of a claim against a surety or guarantor