The consequences of signing surety for a debt can be devastating

Signing surety for a debt means that one person stands in for the debt of another. The classic case of suretyship is when a member of a Close Corporation or director of a Company signs surety for the debt of the entity.  Should the business fail to pay the debt, the director/member who signed the surety will be personally liable for the debt of the business in terms of the surety. (If there is no surety, there is no personal liability).

Husband and wife

Another classic example where persons will be signing surety is when a husband and wife or two persons purchase a property together. Both parties bind themselves as surety and principal debtors and no bank will give a bond if this will not be the case.

Cancellation of a surety

A surety can only be cancelled in writing with the permission of the creditor.  If a bank is willing to cancel a surety, it will only do so if the debt is paid in full or if one surety can be replaced with another or if the remaining surety is financially in a good enough position to satisfy the bank’s requirements.  In my experience creditors are seldom willing to release a surety from a debt, because it won’t make sense that a creditor will let go of the security it has for its debt.

Signing surety for a debt of Company or Close Corporation

If there is a liquidation of a Close Corporation or Company, the creditors of the business will call up the sureties after date of liquidation. Don’t forget therefore to deal with the sureties as soon as possible after date of liquidation. If the amounts that you signed surety for are manageable, make payment arrangements as soon as is possible. If the amounts are too high to manage, rather sequestrate as soon as possible, Sometimes it is better to just sequestrate and not liquidate if your exposure to a debt is too high.

Signing surety for a debt of a husband or wife, and a divorce follows

It often happens that during a marriage the bank insisted on both parties signing surety for a debt and the parties then get divorce. There is a settlement agreement in terms of which, for example, the wife gets the house and the husband must pay for it.  Do not forget to release the other party from the suretyship at the bank as well. It is not enough for the parties to agree that one will assume all the debt and the other will be released from it. You must also make arrangements with the bank that the person can be released from the suretyship.  For these purposes you will take the Deed of Settlement to the bank and the court order and the bank must then let you sign the appropriate forms to be released as a surety.

Suretyship agreement not signed

It also sometimes happens that one signs a contract with a creditor and there are no suretyship clauses contained in the contract, but in an addendum.  I have had cases where the main agreement was signed, but not the addendum (the suretyship).  Does this render the suretyship invalid?  In terms of Section 6 of the General Law Amendment Act 50 of 1956 (“the GLA Act”), no suretyship shall be valid (if the suretyship was signed after this Act came into effect) unless the suretyship is in writing.  The suretyship must be in writing. What if it is not signed, but there is a main agreement which is the principal debt?  The Supreme Court previously held that the doctrine of incorporation applies to suretyships.  This means that if there is a main agreement of which the suretyship is an addendum or annexure and the suretyship is not signed but the main agreement is signed, the suretyship will still be valid.

Copies of agreements when signing surety for a debt

It is advisable to obtain copies of agreements as soon as possible after you signed them. Double check if there is a surety clause. I often to people with businesses who do not know whether they signed surety for certain debts or not. Also, check the documents that you sign to make application with suppliers – nowadays these application forms also contain suretyship clauses.

Who pays if there is more than one surety

The consequences of signing surety for a debt are that the surety can be addressed to pay the debt if the principal debtor does not.  If there is more than one surety, the creditor is not obliged to act against all of them. The creditor can choose to act against only one of the sureties (usually against the one that pays) and not collect anything from the other sureties. If this happens and one surety pays all the debt, the person who paid can claim the pro rata share from the debt from the other sureties.

When a Company or Close Corporation or Trust signs surety

Companies, Close Corporations and Trusts can also sign surety for the debt of other businesses or Trusts or persons, in which case, if the principal debtor fails to pay the debt, the Company or Close Corporation or Trust can be liquidated to pay the debt of the principal debtor.

Signing surety for a debt:  know who you signed surety for

The single biggest problem I encounter in my dealings with clients is the fact that they either don’t know for which debt they signed surety (usually for a business), or they don’t know the total of the debt that they exposed to as surety, or they forget to deal with the sureties in the case of liquidations or divorce. Remember also if a member of a Close Corporation or the director of a Company resigns, to arrange with the relevant creditor that that member is relieved as a surety, otherwise the member/director will remain liable as a surety even if he/she has resigned.

Signing surety for a debt must not be taken lightly and taken seriously and dealt with the respect it deserves.