Ever since the Companies Act, 2008 came into force, the courts have been inundated with cases pertaining to the interplay between the moratorium established by business rescue, the creditors’ claims and the effect of the business rescue plan. In New Port Finance Co (Pty) Ltd and Another v Nedbank Ltd 2016 (5) SA 503 (SCA), the Supreme Court of Appeal (SCA) had to decide whether or not the terms of a business rescue plan, which altered the obligations of the principal debtors had the effect of, as a matter of law, altering the obligations of sureties which were jointly and severally liable for the same obligations.

Overview of Facts

In New Port Finance Co (Pty) Ltd and Another v Nedbank Ltd 2016 (5) SA 503 (SCA), Wedgewood Village Golf and Country Estate (Pty) Ltd and Danger Point Ecological Development Company (Pty) Ltd (the Principal Debtors), respectively, borrowed approximately R55 million and R10 million from Nedbank Limited (Nedbank). Both loans were secured by deeds of suretyship executed by the appellants (the Sureties). When the Principal Debtors defaulted on their loan obligations, Nedbank obtained judgment against the Principal Debtors and the Sureties, jointly and severally liable, for the loan sum. The Principal Debtors subsequently went into business rescue. When Nedbank called on the Sureties to pay the amount owed, the Sureties were unable to settle the debt which led to Nedbank applying for the liquidation and sequestration of Sureties.

In response, the Sureties brought an application to interdict Nedbank from pursuing the sequestration and liquidation applications. They argued that the business rescue plan, which altered the obligations of the company in respect of the judgment debt, had the effect in law of altering the sureties' obligations as well, and that on discharge of the company's obligations on completion of the rescue, so the sureties' obligations would be discharged.

The court a quo dismissed the application, which judgment was confirmed by the SCA on appeal for the reasons outlined below.

Reasons for judgment

  1. The terms of the deeds of suretyship in this case entitled the bank to pursue the Sureties notwithstanding their dealings with the Principal Debtor (including any extension of time or any compromise in relation to the scope and extent of the principal debtors' indebtedness).
  2. The SCA stated further that, notwithstanding the terms of the agreement, the court was not referred to, nor were they aware of, any authority that supports the argument that a compromise in respect of the principal debtor's liability for a judgment debt, whether as a result of business rescue or otherwise, would accrue to the advantage of the surety after judgment had been taken against it. The SCA emphasised that there could be no question of the sureties' rights or interests being prejudiced in such circumstances because the extent of the sureties' liability for the debts had been fixed by the judgment granted against them prior to the commencement of business rescue proceedings. How the creditor set about executing the judgment against the debtors thereafter did not affect either the nature or the extent of the sureties' liability.
  3. The SCA further found that section 154 of the Companies Act, 2008, which regulates enforcement of debts against companies in business rescue, does not appear to affect the liability of sureties.

The moratorium kaleidoscope is an area of our law that will no doubt be subject to further development. Decisions like this serve as a useful caution to creditors to pay particular attention to wording in security documents. The case goes a step further in interpreting the business rescue provisions of the Companies Act as well as it draws attention to the effect of obtaining a court order, thereby creating a judgment debt rather than a contractual claim.

Explore More Insight
View All