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By Zimri Attorneys

In terms of section 133(1) of the Companies Act 71 of 2008 (“the Act”), the implementation of a business rescue plan places a moratorium on legal proceedings against a financially distressed company. This means that a temporary hold is in place which precludes the enforcement of creditors’ rights against said company. This moratorium applies as soon as the business rescue proceedings commence, and such legal proceedings are only permitted if certain requirements as per the section are met. Furthermore, section 133(2) of the Act stipulates that no guarantee or surety by a financially distressed company in favour of any other person can be enforced against the company for the duration of the business rescue proceedings, unless it is with leave of the Court and according to terms which the Court deems just and equitable in the circumstances. Therefore, the question then arises as to the liability of both the company and the surety after termination of the business rescue proceedings. This article seeks to examine recent case law and the provisions of the Act regarding the legal position on this matter.

In the case of Van Zyl v Auto Commodities (Pty) Ltd [2021] 3 All SA 395 (SCA), the Appellant (“Mr Van Zyl”) was formerly the Chief Executive Officer for Blue Chipping Mining and Drilling (Pty) Ltd (“BCM”). Mr Van Zyl was required to bind himself as surety for the supply by the Respondent (“Auto Commodities”) of petroleum products on credit to BCM. Mr Van Zyl bound himself in July 2014. On 10 December 2014, BCM was placed under business rescue with a business rescue plan subsequently adopted on 2 June 2015. Auto Commodities received 2 dividends in the sum of 1.9 million rand in December 2015 and December 2016 respectively. The business rescue plan was terminated on 31 January 2017. On 21 July 2017, Auto Commodities issued summons against Mr Van Zyl for an amount in excess of 6 million rand which was the shortfall of BCM’s principal debt. The claim was based on the deed of suretyship entered into in July 2014. The High Court granted judgment in favour of the Auto Commodities in the amount prayed for.

On appeal, the Supreme Court of Appeal (“SCA”) had to consider whether Mr Van Zyl remained liable under the deed of suretyship to pay the amount claimed by Auto Commodities, which amount comprised the debts incurred by BCM.

Mr Van Zyl relied on the provisions of section 154 of the Act and argued that when BCM’s business rescue was terminated, BCM was released from its indebtedness to Auto Commodities. He therefore submitted that his liability under the suretyship was an accessory obligation which also terminated when BCM’s liability was extinguished. On the other hand, Auto Commodities argued that the terms of the deed of suretyship were wide enough to maintain Mr Van Zyl ’s liability irrespective of the effect of the aforementioned section.

The SCA was thus required to consider the interpretation of section 154 of the Act, which deals with discharge of debts and claims. Section 154(1) of the Act provides the following:

(1) A business rescue plan may provide that, if it is implemented in accordance with its terms and conditions, a creditor who has acceded to the discharge of the whole or part of a debt owing to that creditor will lose the right to enforce the relevant debt or part of it.

 (2) If a business rescue plan has been approved and implemented in accordance with this Chapter, a creditor is not entitled to enforce any debt owed by the company immediately before the beginning of the business rescue process, except to the extent provided for in the business rescue plan.”

The SCA submitted that the aim of section 154(1) is to extinguish the creditor’s right to enforce the debt, which would in turn extinguish the creditor’s right to enforce against the surety. However, regarding section 154(2), the SCA found that the wording of the section merely limits the enforceability of the creditor’s right against the debtor but does not extinguish the debt in its entirety. Moreover, the SCA was of the view that the ordinary creditor would not read section 154(2) to mean that the deed of suretyship in their favour is rendered worthless as a result of the adoption and implementation of a business rescue plan. It was thus held that the former section speaks of the discharge of the debt, while the latter merely limits the ambit of the enforcement of the debt. It was stated that under the one section the debt no longer exists, while under the other the debt exists but is enforceable only to a limited extent.

Furthermore, the SCA held that although the business rescue made provision to release BCM from the balance of some of its debts, the wording of the deed of suretyship was sufficient to hold Mr Van Zyl liable. In addition to customary terms whereby Mr Van Zyl assumed liability as a surety and co-principal debtor and further renounced the benefit of excussion, the deed of suretyship contained several such unobjectionable provisions which are fairly standard in commercial practice. The appeal was therefore dismissed with costs.

The legal position which is evident from the above is that although business rescue proceedings can be raised by the company as a defence against the enforcement of creditors’ rights even after termination of the business rescue plan, a surety for the company cannot rely on such business rescue proceedings as a defence against the creditors’ claim. It is therefore of great importance that any person who binds him/herself as surety for a company should be aware that although such company as principal debtor may be released from its obligations by virtue of a business rescue plan, it does not follow that the surety is also released from his/her obligations under the suretyship.