ABC (Pty) Limited (the creditor) wants to sell goods for a large amount to XYZ (Pty) Ltd (the debtor, also known as the principal debtor). The creditor needs some form of comfort that the debt will be paid. Typically, it could ask for a cession of the book debts of the debtor or a pledge of its shares or, usually, require one or all of the directors of the debtor to bind themselves as sureties on behalf of the debtor, or to provide guarantees, that if the debtor fails to pay, the creditor can look to the directors for payment.
So, what’s the difference between a suretyship and a guarantee? The main distinction is that a suretyship is based on ‘secondary’ liability whereas the guarantee is based on ‘primary’ liability.
- A suretyship is a contract between the creditor, the principal debtor and the person binding himself on behalf of the principal debtor, as the surety, usually as surety and co-principal debtor. In his personal capacity the surety undertakes to step into the shoes of the principal debtor and pay the creditor if the principal debtor can’t. This is the secondary nature of the contract.
- The surety and the principal debtor become jointly and severally liable to the creditor.
- There are legal exceptions (such as an obligation on the creditor to look to the principal debtor first, before proceeding against the surety) that are invariably waived in the suretyship agreement. This means that the creditor need not seek to recover the debt from the principal debtor first before enforcing the agreement against the surety.
- The General Law Amendment Act 50 of 1956 requires that a valid suretyship agreement must be in writing and signed by the surety.
- An independent guarantee is based on ‘primary’ liability and exists independently of any underlying obligation by the principal debtor to the creditor.
- So the guarantor irrevocably and unconditionally guarantees, as a primary obligation, in favour of the creditor, the due and punctual payment by the principal debtor of all amounts it owes to the creditor and undertakes to pay the creditor on written demand all sums which are now, or at any time or times in the future due by the principal debtor to the creditor.
- The guarantee is a continuing covering security and remains in force until the principal debtor pays everything it owes to the creditor.
- A guarantee does not have to be in writing, but it obviously should be.