Beware Of Suretyship

by | Apr 15, 2003 | Agreements, Legal Tips

As a businessperson, you will invariably be required to sign a Deed of Suretyship while conducting business. A Deed of Suretyship is where you undertake, in writing, in favour of a creditor to pay the debts of another party (the debtor).

Should you require a loan or an overdraft facility with a bank, and you apply on behalf of a legal entity (that is a Company, Close Corporation or Trust) then the bank, before advancing the loan or the giving of such overdraft facility, will insist that you, as a shareholder/member/trustee (as the case may be) sign a Deed of Suretyship.

This means that should the legal entity not be able or willing to pay its debt to the bank, such bank will look to you, as surety, for payment of that debt.

In the event that there is more than one shareholder/member/trustee, then the bank will require that all the shareholders/members/ trustees sign a Deed of Suretyship, jointly and severally. For example, if two people sign a Deed of Suretyship, being X and Y, and should the debtor not be able to pay its debts, the bank can call on either X or Y, or X and Y to pay for the indebtedness of the debtor. The bank is not obliged to sue X and Y each for 50% of the debt. The bank shall be entitled to sue only X, or only Y for the full debt. Should a surety be called upon to pay 100% of the debt, then s/he can, after s/he has paid the debt, look to Y to repay his/her 50% of the amount that s/he has paid.

Generally, a bank will require you to sign an unlimited Suretyship. I suggest that you negotiate with the bank and limit the Suretyship to, possibly the overdraft amount that you are applying for.

One important aspect of a Suretyship, which business people generally forget, is the termination of the Suretyship. Once the indebtedness has been extinguished, for example the loan has been repaid, or you wish to cancel the overdraft facility with the bank (being the example given above), it is important that the bank cancels the Deed of Suretyship. It is not sufficient for the creditor to verbally inform you that the Deed of Suretyship has been cancelled. It is imperative that you receive a letter from such creditor confirming that your Deed of Suretyship has been cancelled.

I have often consulted with clients where a Deed of Suretyship was signed in favour of a bank as a result of an overdraft facility and the bank manager has verbally informed my clients that their Deed of Suretyship has been cancelled, but such cancellation has not been reduced to writing. The bank manager may be transferred to another branch or may resign, and as there is no record of the cancellation of the Suretyship, you will still be liable on the Suretyship, regardless of the verbal agreement reached with the bank manager.

My advice to you is only sign a Deed of Suretyship when absolutely necessary, and ensure that you read and understand the contents of the Deed of Suretyship before you sign it.



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