When is surety required? Most of us have heard of surety and if you are in business, you may even have signed surety at some stage in time. This article seeks to explore when and why, as a creditor, it is important to require a surety from a new client, and how it works when attempting collection and a surety is available.
What is surety?
Surety is an undertaking or guarantee that is made by a third party in favour of the creditor. Surety serves to guarantee that, should the original debtor for any reason whatsoever, fail to pay its debts towards such creditor, that the surety may be held liable for such payment together with the debtor. A surety is usually a natural person who is in some way affiliated or involved in the dealings of the original debtor. For instance, a director of a company may be required to sign surety.
Why is it necessary to secure surety?
From a creditor’s perspective, it is important in certain circumstances to ensure that when an agreement is signed with a new client, that surety is secured. Obtaining surety is especially important when you are doing business with a juristic entity – ie a company or close corporation. This is due to the sometimes-limited lifespan of a company and the volatility of the market which influences its sustainability. It is advisable to always insist upon surety when dealing with a juristic entity, to safeguard the interests of the creditor.
How does a surety improve chances of recovery of debt?
What the surety ensures is that, should the debtor fail to make payment in terms of the agreement and it become necessary for the creditor to enforce the agreement by way of legal action, a second entity may be joined in the action for payment of the outstanding money. This in effect gives the creditor twice the odds of a successful collection of outstanding money as it would have had having pursued just the debtor.
Since the surety is usually a natural person, the chances of such surety not being in existence any longer is also far less than would it have been with a juristic entity, which may easily be wound-up or deregistered.
Having secured surety therefore doubles the creditor’s chance of success should it need to pursue legal action.
Can a creditor force a surety?
It is not possible to force any person to sign an agreement. This is because it is a foundational principle of the South African Law of Contracts that persons must enter into agreements willingly. If a party is forced or coerced into signature of an agreement, such agreement would be void for such fact.
It is, however, possible for a creditor to ensure that a surety is secured at conclusion of the agreement. The manner in which this may be done is to make signature of a surety a requirement of the creditor in order to accept the agreement, and that if no surety is secured that no agreement would be entered into.
This may easily be done by inserting a term to the agreement that states that the acceptance of the agreement by the creditor is provisioned upon a surety being provided. The creditor may then walk away from such agreement if the debtor refuses to provide surety as required.
How does an entity require payment from the surety?
Should the debtor default on a payment in the normal course, the creditor must enforce its agreement by approaching a Court for the collection of the debt. In issuing the summons, the debtor together with the surety, will be added as defendants to the action, thereby ensuring that both the debtor and surety shall have to prove to Court that the amounts claimed are now owed to the creditor by them.
If the Court however gives judgment in favour of the creditor, it will be granted against both the debtor and the surety. Judgment is given on the grounds that the defendants are both liable for the payment jointly and severally, the one to pay, the other to be absolved. Therefore, should the company settle the debt, the surety would have been absolved of his or her duty to pay; and vice versa.
It is critical to ensure that your rights as a person or company are protected at the time of conclusion of agreements, when it is easier to agree on certain aspects. Should you require an agreement which provides for a surety, please contact our offices for assistance in this regard.