In September 2024 the High Court underscored the fundamental differences between guarantees and suretyships and the implications of business rescue proceedings on these financial instruments.

The principal debtor was indebted to the bank and had been placed under business rescue. These debts were guaranteed by the respondent as an independent, principal obligation. The respondents renounced various legal benefits and agreed that a certificate from any manager or authorised signatory of the bank would serve as sufficient proof of the principal debtors’ debts.   

The bank demanded payment from the respondents. The application was opposed and one of the defences was based on Section 133 of the Companies Act, 2008 which imposes a general moratorium on legal proceedings against a company under business rescue without the consent of the business rescue practitioner. The respondents argued that this moratorium should absolve them from their obligations under the guarantee because as the principal debtor was in business rescue.

The court clarified that, unlike a suretyship, the respondents guarantee entails an independent obligation to indemnify the bank. The moratorium on legal proceedings against a company in business rescue does not negate the debt of the principal debtor; it merely prevents legal action from being initiated against the principal debtor during the business rescue period. The respondents’ obligation under the guarantee remained enforceable, independent of the principal debtor’s business rescue status. Judgment was granted in favour of the bank.

This case serves as a key reminder of the promissory nature of guarantee agreements, especially in the context of business rescue proceedings. The judgment reinforces the principle that a guarantor’s obligation is independent and not contingent upon the principal debtor’s ability to pay.

Standard Bank of South Africa Ltd v Vally and Another