Surely, surety is not a guarantee

2019-03-06 06:00
Anneri Moolman

Anneri Moolman

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Q uestion:

My wife and I are the shareholders of our family company.

We need to buy a delivery truck for the business and have talked to our bankers who will provide vehicle finance, provided my wife and I, in our personal capacities, bind ourselves as surety and also provide a guarantee for the payment of the debt.

What is the difference between a surety and gua­rantee or is it the same?

Answer:

Although both are forms of security for a principal obligation (the payment of your vehicle finance loan), there is definitely a difference.

A surety will exist where a person (you) enters into an agreement with a creditor (the bank) to stand surety (be bound) for the payment of an obligation by a principal debtor (your company).

Should the principal debtor fail to fulfil its obligations towards the creditor (i.e. the company does not pay the debt to the bank) then you (the surety) will be held liable to fulfil the obligation of the principal debtor towards the creditor (i.e. you will be required to make good the debt of your company to the bank).

A surety is accessory in nature – it cannot exist without a principal obligation, for example the obligation to pay the bank the finance debt for the vehicle purchased by the company.

A creditor can therefore only claim performance of the obligation from the surety (you) to the extent that the principal debtor (your company) fails to perform. The obligation to pay or fulfil the obligation under a surety is also only created when the surety is validly called upon by the creditor.

A surety is discharged when the principal obligation is extinguished either due to performance by the principal debtor or due to impossibility of performance or invalidity of the debt or when the surety agreement is terminated in accordance with its terms – irrespective of whether the principal obligation has been extinguished or not. A surety agreement must also be in writing to be valid.

A guarantee on the other hand is an undertaking by a guarantor (you) to pay or fulfil an obligation to a creditor (bank) upon the occurrence of a certain event.

In the case of an indepen­dent guarantee the obligation of the guarantor to pay is principal in nature and exists independent of an underlying obligation or the existence of any other debt.

Such a guarantee can be demanded once the agreed conditions of such guarantee have been met. Once it has been determined that the conditions of the guarantee have been met, the guarantor is obliged to perform in full as contracted. The liability of the guarantor under a guarantee is equal to the amount which is guaranteed, whether the guarantee is called upon.

A guarantee can only be discharged if there is performance of the principal obligation or payment on the part of the guarantor.

A guarantee does not have any formal requirements such as having to be embodied in a written document, although it is recommended to record the terms of a guarantee in a valid written agreement.

A guarantee is generally seen as a stronger form of security than a surety which is accessory in nature as it establishes independent liability for the principal obligation.

If you are unsure about the terms of your bank’s security arrangements, consider discussing it first with your attorney to ensure that you understand the personal security requirements.– Anneri Moolman, asso­ciate, Phatshoane Henney Attorneys

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