Zungu-Elgin Engineering (Pty) Ltd v Jeany Industrial Holdings (Pty) Ltd and Others

Zungu-Elgin Engineering (the appellant) contracted to manufacture tanks for Sunrise Energy and obtained a performance guarantee from Hollard Insurance for R33 951 466. The first respondent (Jeany Industrial Holdings) and other companies signed a reciprocal indemnity and suretyship on 20 September 2013, binding themselves as sureties and co-principal debtors for the appellant's obligations to Hollard. The second and third respondents (Ian and Lee Donjeany), who were directors of the appellant, also signed a deed of suretyship. On 20 February 2015, Sunrise demanded payment under the guarantee. Hollard paid Sunrise R33 951 466 between 17-31 March 2015 and demanded reimbursement from the respondents on 5 March 2015. On 11 March 2015, the appellant was placed under business rescue. The respondents did not lodge claims with the business rescue practitioner. A business rescue plan was approved on 17 July 2015. Hollard obtained judgment against the respondents on 24 June 2016. The respondents settled with Hollard and paid R250 000 between 5 October 2017 and 10 April 2018. The respondents then sued the appellant for R250 000 based on the surety's right of recourse.

• When does a surety's right of recourse arise under common law?
• Does section 154(2) of the Companies Act 71 of 2008 alter the common law position regarding when a surety's right of recourse arises?
• Was the debt owed by the appellant to the respondents a debt 'owed by the company immediately before the beginning of the business rescue process' within the meaning of section 154(2) of the Companies Act?
• Can creditors enforce debts that arose after business rescue commenced but were not included in the approved business rescue plan?

The appeal was dismissed with costs.

At common law, a surety's right of recourse against the principal debtor arises only when the surety has made payment to the creditor, not when the creditor makes demand or when the principal debtor's liability to the creditor crystallizes. Section 154(2) of the Companies Act 71 of 2008 does not, expressly or by necessary implication, alter this common law principle. Therefore, a debt based on a surety's right of recourse that arises from payment made after the commencement and approval of a business rescue plan is not a debt 'owed by the company immediately before the beginning of the business rescue process' within the meaning of section 154(2), and creditors may enforce such debts notwithstanding that they are not provided for in the business rescue plan.

The court acknowledged the appellant's concern that permitting claims against a company that were not provided for in the approved and implemented business rescue plan might jeopardize the business rescue, but found this consideration irrelevant to the legal question of statutory interpretation. The court noted that there are exceptions to the common law principle regarding when a surety's right of recourse arises, but the appellant rightly conceded that none of these exceptions applied to the present case (the court referred to Caney at 165-166 for these exceptions but did not enumerate them).

This case clarifies the relationship between the common law principles of suretyship and the business rescue provisions of the Companies Act 71 of 2008. It confirms that section 154(2) does not alter the fundamental common law principle that a surety's right of recourse arises only upon payment to the creditor. The case is significant for business rescue practitioners and creditors as it demonstrates that debts arising from payments made after business rescue commenced are not subject to the restrictions in section 154(2) even if the underlying obligation pre-dated the business rescue process. The judgment reinforces the principle that statutory provisions are presumed not to alter common law unless they do so expressly or by necessary implication.