Unpacking the crucial considerations when agreeing to suretyship

When applying for a loan, whether a student loan or a business loan, financial institutions often require additional security to protect themselves if the borrower defaults. One common form of security is a suretyship agreement.

A suretyship means that a third party (the surety) undertakes to repay the loan if the debtor fails to do so. This legal arrangement provides the creditor, usually a bank or financial institution, with an additional safeguard against loss.

What Is a Suretyship Agreement?

In a suretyship agreement, the debtor’s obligations under the loan become binding on all parties. However, the surety is only liable once the debtor has defaulted.

By signing a suretyship agreement, the surety legally commits to settle the debt if the borrower cannot. This means the surety is effectively guaranteeing repayment on behalf of the debtor.

Types of Suretyship

A suretyship may take one of two forms:

1. Unlimited liability – where the surety is responsible for the entire debt.

2. Limited liability – where the surety’s liability is restricted to a specific amount, clearly stated in the agreement.

If liability is not limited, the consequences can be severe. A surety may remain bound to a debtor’s obligations indefinitely, even after the relationship between them has ended.

Case Law on Suretyship

The importance of clear terms was highlighted in the case of Van Zyl v Auto Commodities (Pty) Ltd (279/2020) [2021] ZASCA 67; [2021] 3 All SA 395 (SCA); 2021 (5) SA 171 (SCA)

The Supreme Court of Appeal ruled that although the  Companies Act 71 of 2008 may prevent creditors from pursuing claims against a company once a business rescue plan is in place, it does not release a surety from liability. The surety remains legally responsible for the debt.

Rights of a Surety

If a surety repays a debt on behalf of a debtor, they have the right to recover the amount paid. This includes any related expenses or interest. A surety can also approach the court for relief if the debtor refuses to reimburse them.

Key Considerations Before Signing

Before agreeing to a suretyship:

• Ensure the agreement clearly reflects your intentions.

• Avoid signing anything you do not fully understand.

• Seek professional legal advice to assess the risks and long-term implications.

A poorly drafted suretyship agreement can lead to unwanted and costly consequences.

Need Legal Guidance on Suretyship Agreements?

At Derik Jaftha Attorneys, our experienced legal team can help you understand, negotiate, and draft suretyship agreements that protect your interests. Contact us today for expert assistance.