Sureties are bad. They contain clauses designed to strip innocent businesspeople of their rights to defend themselves and are written in a language not used by laypersons for hundreds of years.If a layperson really understood what they were getting into, the personal surety would never be signed.
But when it comes to sureties, the businessperson is usually in a tight corner, financially speaking, and has little option but to sign. I’ve written about this topic in the past, but the damage caused by signing sureties, especially to innocent parties – and the fact that sureties are “live” – mean regular reminders are needed.
A friend recently had his weekend ruined when the attorney of a supplier of his firm (which he had sold) called, cheerfully demanding a large amount of cash to settle the firm’s debt. A surety bound my friend to his ex-firm, but had been forgotten about in the sale. The firm has since been liquidated.What defence can be raised against a surety? The debt might have prescribed before any action was taken. Alternatively, the goods that were said to have been delivered and not paid for might have been either not delivered (or the supplier is unable to prove they were delivered) or they might indeed have been paid for.
What about the fact that the financial woes of the firm were caused by the other partners or purchasers of the firm? Or what if the other partners have plenty of money and are capable of being sued?Both factors are totally irrelevant. The surety guarantees the debts. End of story. The creditor has every right to sue for their funds.
If a judgment is taken against the debtor before the prescription of the debt, then that judgment will be effective against the surety and won’t prescribe until 30 years have passed. This is in terms of the Prescription Act, reinforced by the Supreme Court of Appeal Judgment Eley v Lynn and Main 2008 (1) 315 SCA.
In that case, the person had moved away from the domicile where the surety was signed and was no longer involved in the business when the judgment was granted against the company.When a business is sold, the shareholders and guarantors of the company’s debts have to make sure the debts are settled and a new financial institution is found to replace the one used during their term as shareholders.
A smart course of action would be to have a company register in which copies of all surety documents and guarantees are held. When negotiating loans or other financial assistance, shareholders can also insist on a clause releasing them as sureties upon the sale of the business.