Lending, Risk and Surety

Lenders try by all means necessary to protect their business interests, as indeed they are operating a business which needs to make profit and secure jobs for its employees. Consequently in the business transactions that they get involved in, careful thought and consideration is placed on how the business may protect its interests. In the event that there is no interest to be protected or achieved, profit making businesses will usually not enter into such transactions at all.

If done on a viable business model lending is brisk business, but a risky business as well. The NCR reported in 2019 that of the 25 million credit active South Africans, about 10 million had impaired credit records. What this means is that the lenders are the ones on the receiving end of this unfortunate state of things and therefore safeguards are necessary to curb this.

Despite putting in place safeguards such as higher interest rates and insisting on deposits, lenders still find themselves with a huge pile of debt in default, threatening the solvency and liquidity of the business as a whole. On its part, the National Credit Act places an obligation on credit providers to undertake extensive creditworthiness assessments of credit applicants before granting it, so as to reduce the incidence of bad credit.

Surety Agreements

One other way that Lenders use to reduce bad credit and also secure their business interests, is by insisting on credit facilities to be backed by surety agreements. A surety agreement is one whereby a third party signs and accepts liability for repayment of debt in the event that the debtor defaults in such repayment. As can be seen from this description, this is aimed at securing the repayment of the debt for the benefit of the lender.

In practice surety clauses are usually put in the same loan contract and space where the surety will sign to accept liability in the event the debtor defaults. Some however prefer that it be a separate addendum depending on the circumstances. Due to the fact that a surety agreement is one between the lender and the surety but subordinate to the principal loan agreement between the lender and the debtor, principles of the law of contract still apply nevertheless.

Consequently a surety wishing to be released from the surety agreement must prove on a balance of probabilities that the misrepresentation of another party led them to sign as surety even though they had no such intention. In some instances the Courts refuse to release the surety merely because of misrepresentation if the lender is innocent and unaware of the misrepresentation of the other party.

The Courts decide each case on its own merits.

Surety agreements are mainly enforced in either of two ways. Under the common law it is required that the lender pursue the debtor first before pursuing the surety. However prevailing surety agreements now require that the surety sign as co-debtor together with the principal debtor, meaning the lender may pursue the surety in much the same instance as the principal debtor.

The reason for this is that one who signs as surety is normally believed to have financial capacity that is improved enough to guarantee the fulfilling of obligations under the loan agreement of behalf of another person (debtor). Some surety agreements stipulate the extent to which the surety will be liable e.g whole amount in default or a certain portion.

In summary the following principles apply in Surety Agreements;

1. Liability commences only upon default by the principal debtor;
2. Liability may be wholesale or affixed to a specific portion;
3. Under common law the surety is pursued only after the debtor, whereas the practice in contractual surety the surety signs as co-debtor meaning the lender can pursue either of them in any instance;
4. A surety may only be released if they can prove that no intention existed when the agreement was concluded but that they acted upon the misrepresentation of the other party.  

Phoenix Bonds - Bond Originators South Africa

We strongly advise that parties seek expert assistance before signing off any type of contract, including suretyship agreements as significant consequences arise upon the contract becoming effective and enforceable.

We specialise in bond origination and bridge financing. We have assisted many clients who have fond memories of the professional services they received. At Phoenix Bonds, we commit our work to higher standards so that our clients walk away secure in the services we offer.

The information contained in this site is provided for informational purposes only, and should not be construed as legal and/or financial advice on any subject matter. One should not act or refrain from acting on the basis of any content included in this site without seeking professional advice. The contents of this site contain general information and may not reflect current developments or address one’s peculiar situation. We disclaim all liability for actions one may take or fail to take based on any content on this site.