WHAT MAKES A SURETYSHIP VALID?

On 29 May 2015, in the case of Dormell Properties 282 CC v Bamberger[1], the Supreme Court of Appeal (SCA) set out the importance of, firstly, expressly pleading a suretyship clause in a plaintiff’s particulars of claim and, secondly, ensuring that the contract to which a deed of suretyship is annexed is duly signed by all parties thereto.

The case

There were two agreements of importance. The first agreement was a written offer to lease agreement concluded between Dormell and Edulyn, duly represented by Bamberger in his capacity as sole director, in terms of which Bamberger undertook to bind himself as surety for Edulyn’s obligations under a second agreement, being the agreement of lease.[2]

The first agreement

The first agreement was properly signed by the parties; however, the agreement of lease was only signed by Bamberger. Annexed to the agreement of lease was a deed of suretyship which Bamberger signed. The deed of suretyship and agreement of lease were annexed to Dormell’s particulars of claim as if this suretyship was the instrument that bound Bamberger as surety and co-principal debtor for the fulfilment of the obligations of Edulyn.[3]

In the court a quo, Savage AJ found that ‘a contract of suretyship requires a valid principal obligation with someone other than the surety as debtor and the liability of the surety does not arise until this principal obligation has been contracted (Caney [C F Forsyth and J T Pretorius Caney’s The Law of Suretyship in South Africa 6 ed (2010)] at 47)’.[4] In the SCA the appellant conceded that no express reference to the first suretyship clause was made in the particulars of claim, but argued, inter alia, that the omission caused no prejudice to Bamberger.[5]

The suretyship clause

Dormell’s cause of action was based on the deed of suretyship attached to the agreement of lease and not on the suretyship clause in the first agreement. To seek to change this now would amount to an amendment of the particulars of claim and the advancing of a case which was not initially pleaded. Bamberger therefore contended that he was not given the opportunity to raise any defence which he could have raised to the suretyship clause.[6]

The SCA set out that ‘the purpose of pleadings is to define the issues for the parties and the court. Pleadings must set out the cause of action in clear and unequivocal terms to enable the opponent to know exactly what case to meet. Once a party has pinned its colours to the mast, it is impermissible at a later stage to change those colours.’[7] Furthermore the court found that Dormell should have expressly alleged a valid contract of suretyship (i.e. that the terms of the deed of suretyship were embodied in a written document signed by or on behalf of the surety which identified the creditor, the surety and the principal debtor). Dormell had to allege the cause of the debt in respect of which the defendant undertook liability as well as the actual indebtedness of the principal debtor.[8]

In the Dormell case the deed of suretyship was invalid and enforceable because it was annexed to an agreement of lease which wasn’t signed by Dormell, and therefore the suretyship was in respect of a non-existent obligation. Dormell conceded that the suretyship pleaded was invalid, but argued that Bamberger would not suffer any prejudice if Dormell was allowed to rely on the suretyship in the first agreement instead. The court found that although it does have discretion regarding keeping parties strictly to their pleadings, it does not agree that this discretion reaches as far as to place a party in the disadvantageous position of not being permitted to raise any legal defence.[9]

In deciding the above, the court looked at whether Bamberger would have conducted his case materially differently, had Dormell’s case been pleaded properly. The court found that he would have, in that he would have been in the position to raise the defence of non-excussion (i.e. that Dormell should have first claimed the outstanding amounts owed from Edulyn and only if they could not pay this amount, should Dormell have claimed from Bamberger).[10] He had not raised this defence in his plea or at the trial because the deed of suretyship annexed to the agreement of lease in terms of which he had waived the defence of non-excussion (which was not signed by Dormell) was relied upon.[11]

Conclusion

The SCA therefore found that Bamberger would suffer prejudice if it were to allow Dormell to rely on the suretyship clause in the first agreement which was not relied upon in the particulars of claim.[12] It is therefore crucial to, firstly, expressly plead the details of a valid suretyship clause in a plaintiff’s particulars of claim and, secondly, to ensure that the contract to which a deed of suretyship is annexed is duly signed by all parties thereto. If you do not do you may find yourself in a situation where the courts will not allow you to enforce a valid suretyship.

[1] (20191/14) [2015] ZASCA 89 (29 May 2015)

[2] ibid para 1-3

[3] ibid para 5

[4] Dormell Properties 282 CC v Bamberger (20191/14) [2015] ZASCA 89 (29 May 2015) para 8

[5] ibid para 8

[6] ibid para 10

[7] ibid para 11

[8] ibid para 12

[9] Dormell Properties 282 CC v Bamberger (20191/14) [2015] ZASCA 89 (29 May 2015) para 15

[10] ibid para 19

[11] ibid para 20

[12] ibid para 21

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

HOW TO RESCUE YOUR BUSINESS

Is your company experiencing financial strain? Are creditors breathing down your neck? Business Rescue proceedings may be a solution to your problems.

Business Rescue is an approach that is governed by the Companies Act 71 of 2008 (“the new Companies Act”) with the aim of assisting companies which are experiencing financial strain and are unable to pay their creditors in the ordinary course of business.

What is business rescue?

Section 128(1) (b) of the Companies Act defines Business Rescue proceedings as proceedings to facilitate the rehabilitation of a company that is financially distressed by providing, inter alia, temporary supervision of a company under a Business Rescue practitioner.

The role of the Business Rescue practitioner (who must be appointed within 5 days after the company has been placed under Business Rescue) is to ensure that the company complies fully with the steps to be taken once Business Rescue proceedings have commenced. They must also ensure that everything reasonably possible is being done (including the drafting of a Business Rescue plan) to assist the company in getting out of its current state of financial strain and into a position where it will be able to pay its creditors in the ordinary course of business.

The new Companies Act stipulates that, in order to place a company under Business Rescue, a resolution must be taken by the Board of Directors and an application thereto must be made to the CIPC (Companies and Intellectual Property Commission). The Commissioner must then consider the application and approve or reject it. Alternatively, any interested or affected party may apply to the Court for a court order placing the company under Business Rescue.

A company that is under Business Rescue is protected from creditors in that no legal action or proceedings may be taken against a company that has commenced with Business Rescue proceedings.

It is imperative to note that a lack of full compliance with the requirements in respect of Business Rescue proceedings may render the Business Rescue proceedings null and void. This position was reiterated in the High Court case of Advanced Technologies & Engineering Company (Pty) Ltd v Aeronautique et Technologies Embarquees SAS (unreported CASE NO 72522/20110), and the Court further held that the new Companies Act does not provide for condonation of non-compliance with the requirements.

References:

Companies Act 71 of 2008

D Davis, W Geach, T Mongalo, D Butler, A Loubser, L Coetzee, D Burdette, 3rd Edition (2013) Commercial law: Companies and other Business Structures in South Africa.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

BUSINESS RESCUE SUCCESS

By Lebogang Mpakati

Independent Advisory (Pty) Limited

The aim of this document is to establish if Business Rescue can be described as successful or not in South Africa since promulgation.

What constitute success in terms of chapter 6 of Companies Act?

S128 (1b)(i)  define business rescue as proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for – S128 (1b)(iii)The development and implementation, if approved of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities and equity in the manner that maximizes the likelihood of the company continuing in existence on a solvent basis or if it is not possible for the company to so continue in existence, results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company.

The first requirement of a successful restructuring is for the business to, in fact, emerge from the process as a going concern.  A further test is to assess the post-business rescue results of the entity as to its operating performance whether it continues to operate on a sustainable basis without being liquidated further down the line. This will constitute a successful restructuring of the business that emerges from business rescue.

Defining success in chapter 11 cases can be somewhat difficult. Success in chapter 11 is really a function of your perspective. A “successful” chapter 11 may be a success to a secured creditor and a disappointment to an unsecured creditor and a dismal failure to equity holders. (Thomas J. Salerno, Jordan A. Knoop and Craig D. Hansen)

With regards to the American Bankruptcy Institute publication, a critical difference between the 17% of successful non- “mega case” reorganisations and the 83% “might have beens” is the formulation of a well-defined exit strategy, i.e. what exactly does the company wants from the reorganization, and how, from a business perspective, does the company plan to achieve it? All and too often the company has only one desire from a bankruptcy filing: stop a pending foreclosure or other action by a creditor or group of creditors. This myopic analysis results in a reactive reorganization.

The most important determinant of a company’s likelihood of emerging successfully from these legislation, was the company’s size (measured by assets at the time of the bankruptcy petition – – see Hotchkiss (1993) and more recently by its ability to secure debtor-in possession financing (DIP) or post commencement finance (PCF) (Dahiya et al (2003).  Size and access to PCF are, not surprisingly, highly correlated.

In terms of S128 (1b)(iii) of Chapter 6, If it is not possible for the company to so continue in existence, the reorganization must result in a better return for the company’s creditors or shareholders than it would result from the immediate liquidation of the company. This option can be pursued as an alternative success outcome. However, this statement is not acceptable by many role players within the SA regime of business rescue as per the Business Enterprises at University of Pretoria (Pty) Ltd report prepared in March 2015 for CIPC.

In accordance with Business Enterprises at University of Pretoria (Pty) Ltd report prepared in March 2015 for CIPC it mentioned that from the substantial implementations filed (COR 125.3) the available figures refers to terminations only and appears to be 132/1398 = 9.4%. The statistics kept by the CIPC do not distinguish between the different options that are regarded as “success in business rescue” as it does not provide for recording the specifics for reorganization vs better return than in Liquidation (BRIL).

The Act further makes provision for another alternative if reorganization is not possible i.e. Section 155 – Compromise between the company and its creditors, Section 155. This alternative is not unique to Chapter 6 in South African context and can be found in similar legislation for Canada, UK and Australia.

Other options although not specified in the Act itself, it appears that the “spirit” of the Act provides for actions that are associated with the “benefit of the common” that includes business in general, economic growth and employment protection (section 7). Thus, alternatives such as business sales through mergers or acquisitions can be contemplated as successful outcomes as per the Business Enterprises at University of Pretoria (Pty) Ltd report prepared in March 2015 for CIPC.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)