The release of liability of a surety during business rescue proceedings.

Abstract

Chapter 6 of the companies Act has attempted to resolve problems created by the ineffectiveness of judicial management which has failed to provide suitable alternative to the liquidation. The process of business rescue proceedings has made some impact on the liability of sureties in so far as it relates to creditors. Moratorium has been imposed once the business rescue proceedings commences and therefore the principal debtors are protected against any legal action unless the court or business rescue practitioner has consented thereto. The question is what is the impact of the business rescue proceedings on the rights of creditors against the sureties of the company under business rescue proceedings and what is the judicial position in so far as it relates to liabilities of sureties during business rescue proceedings, finally what is the position of comparative law in respect of other foreign Jurisprudence terms of business rescue proceedings and the liability of sureties. The South African Companies Act does not regulate the situation of creditor’s rights against sureties of a financially distressed Company. In terms of American law, the situation is different. Creditor’s rights against non-debtors (including sureties) is regulated by Bankruptcy Codes. In terms of bankruptcy codes, the discharge of a debtor does not affect the liability of the nondebtors or other entities. There are divergent views in terms of South African Court decisions in respect of liability of sureties. Some Judges believe that the commencement of business rescue proceedings does not affect the liability of sureties and others are of the view that the beginning of business rescue proceedings releases sureties from their obligations towards creditors unless business rescue plan or deed of suretyship provides otherwise. It is therefore recommended that our legislature introduces some new sections into the companies act. One Section should be similar to section 524(e) of the bankruptcy codes which expressly states that a discharge granted to the principal debtor does not affect the liability of sureties towards creditors. Another section should be similar to section 105(a), which provide courts with powers to make any order to realize the objectives of the companies act. This to avoid conflicting courts decisions on this issue.