When business is good you never think there is a reason why the business should not be able to pay its Creditors. So, it’s natural for Directors and Shareholders to sign surety on behalf of the business however you need to be aware of the personal risk you are taking.
Since the start of Covid 19 many businesses have found themselves struggling and unable to pay their liabilities. And even worse the share value has declined drastically.
A company has a separate legal personality separate from its Directors and Shareholders, making it liable for its own debts, however this is overridden when there is a Surety Agreement in place.
A Suretyship Agreement is defined as an agreement in terms of which a third party, namely the Surety (Director/Shareholder), undertakes liability towards a Creditor for the proper performance of a portion of, or the entire, obligation of a Debtor (company) .
Some aspects to consider:
Where two or more persons have bound themselves as Sureties in favour of the same Principal Debtor and in respect of the same Principal Debt. Each is liable for the whole debt and not only a portion as most assume.
It is important that Co–Sureties bind themselves only for a specific share of the debt.
2. Matrimonial regimes and their impact on suretyships
Section 15 of the Matrimonial Property Act,1984, provides that a spouse married in community of property may not bind themselves as Surety without the written consent of their spouse.
If a person married in community of property signs a surety without the necessary permission from their spouse, the Suretyship will, in most instances, be invalid and unenforceable.
3. Renunciation of benefits
A Creditor should first claim payment from the Principal Debtor before turning to the Surety. However, when the Surety renounces this benefit the Creditor can demand payment from the
Surety without excusing the Principal Debtor from performance.
4. Debts exceed value of your shareholding
It is important to remember when you sign a Surety in your personal capacity, and not as a Shareholder, the fact that the debt is higher than your stake in the business is irrelevant. You cannot escape the liability even if you sell your shares or resign as a Director, the debt stands.
Before you unwittingly bind yourself in a Surety Agreement, for the principal debt, or any part thereof, ensure you have considered all possible outcomes taking special note of the points above, and do not hesitate to contact our offices to give the agreement a “once over”.
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