What should I know before signing surety?

Signing surety for an agreement can have far-reaching consequences. Apart from the financial repercussions, if the surety is called on to meet the financial obligations, personal or business relationships may be damaged.

To avoid misunderstandings, an agreement must be in writing and signed by the surety, in accordance with the General Law Amendment Act 50 of 1956.

A surety signed for a credit agreement under the National Credit Act (NCA) is also subject to the provisions of this act. If the agreement is exempt from the NCA, the suretyship is also exempt.

What are the legal implications of signing surety?

The surety is held liable for the debt if the debtor does not meet their obligations. The extent and time frame for this depends on the terms of the agreement.

If the debtor defaults, the creditor should first try to recoup the debt from the creditor. However, many suretyship agreements include a clause that allows the creditor to demand payment from the surety without pursuing the debtor first.

Who benefits from having a surety?

A surety reduces the risk of lending because the creditor has a second person to pursue if the debt is not paid. It also benefits the debtor as they gain access to credit that may not have been available without suretyship. However, they still have a legal and moral obligation to pay their debt.

Is there a difference between suretyship and providing a guarantee?

These two words are often used interchangeably, but there is a difference:

• Suretyship is an add-on to an agreement between a debtor and a creditor. If this agreement is invalid, the surety cannot be held financially accountable if the debtor defaults.
  
  
• A guarantee is a stand-alone contract between the guarantor and the creditor and not part of the debtor and creditor agreement. The guarantor is financially responsible if the debtor defaults, irrespective of the validity of the agreement between the debtor and creditor.

What are the various forms of suretyship?

Surety can be provided at a personal level for credit received by an individual. Commercial suretyship is prevalent in business transactions where the surety guarantees commercial commitments such as contracts and the supply of goods and services.

There are different forms of surety:

• Limited suretyship: the surety is responsible for a specific amount or time period.
  
  
• Unlimited suretyship: the surety is responsible for all the debtors’ current and future financial commitments, and there is no monetary limit.
  
  
• Co-suretyship: many sureties share the financial responsibility based on agreed-upon percentages.

When does a business owner need to sign surety?

A business owner may need to sign surety, putting personal assets at risk, for business activities. This could occur in situations such as the following:

• When a new business with limited or no financial history is seeking finance.
  
  
• When a business with a poor credit history, inconsistent cash flow, or limited assets applies for credit.
  
  
• When a business opens a new supplier account, suppliers may require a payment guarantee, particularly if it is a new client or there is a high volume of orders.
  
  
• When a business signs a commercial property lease to ensure landlords receive their rental income, regardless of the business’s success.
  
  
• When entering into large high-value commercial contracts and suppliers seek additional guarantees to reduce their risk.

Can it affect my credit score? 

Yes, signing surety can affect your credit score. Signing surety makes you a co-debtor, so the debtor’s actions have an impact on you. The amount of debt they have affects your credit utilisation, which affects your score, and if they make late payments or default on payment, it is reflected on your credit bureau profile.

What documents should I receive before signing surety? 

Request a copy of the credit agreement between the debtor and creditor which includes the debt amount, interest rates and repayment terms. Then obtain a copy of the deed of suretyship, which must contain the following:

The creditor’s name.

The debtor’s name.

The surety’s name and the capacity in which they’re signing as surety.

The nature and amount of the debt, including liability limits and time periods.

The terms under which the surety is responsible for the debt. This detail must be referenced back to the credit agreement.

Then obtain a copy of the debtor’s financial records, business registration documents, and spousal consent, if applicable.

Make sure you understand how your financial obligations are related to the credit agreement and the deed of suretyship.

How do I protect myself when signing surety?

If being a surety is unavoidable, minimise your risk:

Negotiate the terms, such as setting a financial or time limit, setting a review or expiry date, or including release triggers based on business performance milestones.

Consult a legal professional to review the documentation before signing.

Before signing, protect your assets by placing some of them in a trust or making other arrangements.

Monitor the debtor’s financial situation to identify potential problems.

Once the debt is repaid, cancel the agreement if the debt has not automatically been extinguished.

According to South Africa’s Code of Banking Practice, all banks must provide a surety with the duration, the nature and the amount of the debt, as well as the cancellation process once the debt has been repaid.

Furthermore, the surety has the right to request a statement of the debt and to settle it at any time as the co-principal debtor. However, if the primary debtor defaults or breaches the terms of the agreement, the bank will call in the surety.