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Have you ever signed surety?

If there is one thing no one should take likely, it is signing personal suretyship.
A simple definition is: “a person who accepts legal responsibility for another person’s debt or behaviour,” or, “a promise that someone will do something that they have promised to do, such as pay a debt.”

With most surety agreements, the surety binds themselves as surety and co-principal debtor. This makes the surety jointly and severally liable. This means that if the principal debtor (company) is unable to service the debt, then the creditor can claim the amount outstanding from anyone of the individuals that provided suretyship in full.

Example:
Company A took a facility of R5 million with X-Bank. The Shareholders Edwin*, Thabo* and Sarah* have signed personal surety on behalf of Company A. The surety agreement states that Edwin*, Thabo* and Sarah* are jointly and severally liable as co-principal debtors. Therefore, if Company A defaults and is unable to service the debt, then X-Bank can claim the outstanding amount in full, from either, Edwin*, Thabo* or Sarah*. If the agreement excludes the benefit of excussion, then X-Bank can claim the debt amount from the sureties first before claiming from the principal debtor.

If the surety dies and the principal debtor is unable to replace the deceased as surety, then the creditor can claim the debt from the deceased estate if the creditor is no longer willing to accept the credit risk attached to the debtor without that surety. So, the heirs of the Estate can end up paying the debt of the company.

Where parties have signed personal surety, especially for an entity like a close corporation, a company or trust, the surety should consider protecting the financial risk of the suretyship. This is generally achieved by implementing contingent liability protection, where sureties have life cover on their lives with the specific purpose to settle the debt of the company.

Jaquces Hodsdon, director at Affluence Group, suggests that if you are uncertain, to rather ask your financial advisor for assistance and guidance before signing surety or anything related to contingent liability or suretyship.

Jacques Hodsdon – MCom Tax | CA(SA) | CFP ® is a Director of Affluence Group and specialises in Investments, Personal and Business planning
For enquiries contact, jacques@afgroup.co.za or 0823011332

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