NBS Bank Limited (predecessor of BOE Bank Limited, the appellant) extended credit to Zandills Shoe Manufacturers Limited (the Company) pursuant to two action bond agreements secured by two mortgage bonds over immovable property owned by the Company. On 3 July 1996, the respondent bound himself in writing as surety and co-principal debtor for the Company's debts, renouncing the benefits of excussion and division. The Company was finally wound up on 12 May 2000. On 26 October 2000, the appellant proved a claim against the Company of R1,972,721.06 plus interest and stated in its affidavit in terms of s 89(2) of the Insolvency Act that it relied solely on the realization of its security (valued at R800,000). Liquidators were authorized to abandon the secured assets to the appellant, and on 14 November 2000, they concluded a Deed of Abandonment with the appellant for R800,000. The appellant then sued the respondent as surety for the shortfall of R623,891.13 and R385,897.40 plus interest. The High Court dismissed the claim, finding that the appellant's election to rely solely on its security extinguished the balance of the claim and released the surety.
The appeal was upheld with costs, including costs of two counsel. The judgment of the court a quo was set aside. The court declared that the respondent was liable to the appellant as surety in terms of the deed of suretyship executed on 3 July 1996. The respondent was ordered to pay the appellant R550,000.00 together with interest at 0.5% per annum above the appellant's prime rate from 12 May 2000 to date of final payment. The respondent was directed to pay the appellant's costs of suit including the costs occasioned by the postponement on 26 May 2003, such costs to include the costs of two counsel where employed.
The binding legal principle is that a secured creditor's election to rely solely on its security when proving a claim in terms of s 89(2) of the Insolvency Act 24 of 1936 does not release a surety from liability for the shortfall between the proceeds of the security and the full amount of the debt. Section 89(2) merely limits the creditor's participation in the insolvent estate to the value of the secured asset and exempts the creditor from liability for sequestration costs; it does not extinguish the debt or effect a waiver of the creditor's rights against a surety. The operation of s 89(2) creates a pactum de non petendo against the insolvent company only, rendering the balance of the claim unenforceable against the company but not against the surety. An unenforceable debt (provided it does not arise from a prohibited transaction) is a natural obligation capable of supporting a suretyship. The liquidation of a company does not extinguish a surety's liability for the company's debts.
Zulman JA made observations about the nature of suretyships in modern commercial practice, noting that the typical surety binds himself as co-principal debtor for a company or close corporation with little share capital or assets but dependent on credit to conduct business, often being the owner of the business conducted through such entity. The court observed it would not make commercial sense if a creditor who elects to rely on security thereby waives rights against the surety. The court also noted that if the surety pays the shortfall, he would be entitled to prove a concurrent claim in the insolvent estate, and the liquidators could not raise against the surety the fact that the appellant had limited its claim to the proceeds of the security. Navsa JA observed that insolvency is exactly the kind of eventuality against which a creditor would wish to protect itself by procuring a suretyship, echoing the reasoning in Norex Industrial Properties (Pty) Ltd v Monarch SA Insurance Co Ltd.
This case is significant for clarifying the relationship between insolvency law and suretyship law in South Africa. It establishes that a secured creditor's election under s 89(2) of the Insolvency Act to rely solely on its security does not extinguish the creditor's rights against a surety for any shortfall. The judgment protects the commercial function of suretyships and confirms that the liquidation process relates only to claims against the insolvent estate, not to accessory obligations such as suretyships. It provides important guidance on the interpretation of s 89(2) of the Insolvency Act and confirms that statutory provisions protecting sureties (such as s 129(3)(d) of the Insolvency Act and s 311(3) of the Companies Act) should be read purposively. The case is also significant for its discussion of the typical surety in modern commercial practice and the policy reasons for preserving creditors' rights against sureties notwithstanding insolvency proceedings.