“BINDS HIMSELF AS CO-PRICIPAL DEBTOR” – NO LONGER HAS THE EFFECT OF BINDING SURETIES AS CO-DEBTORS WHEN CLAIMING THE DEBT AMOUNT

Allen West

Sean Janse van Rensburg

A suretyship can be defined as a contract whereby a person, namely the surety, undertakes to the creditor of another person, namely the principal debtor, that as accessory to the principal debtor’s liability, the surety will be liable for the debt. What is evident from the aforementioned definition of a contract of suretyship, is that a suretyship is an accessory obligation. A valid principal obligation must, therefore, exist between the creditor and principal debtor.

A suretyship document often dictates that the surety binds himself as “surety and co-principal debtor in solidum” with the principal debtor. The ramifications of being bound as “co-principal debtor” was recently dealt with by the Supreme Court of Appeal (hereinafter “the SCA”) in the matter of Liberty Group Ltd v Illman, which judgment was handed down electronically on the 16th of April 2020.

The SCA was, inter alia, posed with two questions; firstly whether a surety becomes co-debtor to the principal debt. Secondly, that just as summons on one co-debtor interrupts prescription in respect of all co-debtors, then surely summons on the surety as “co-debtor” would interrupt the running of prescription in respect of sureties as well? The SCA confirmed that a surety, who binds himself as co-principal debtor, does not become a co-debtor with the principal debtor. The Court also found that service of the Summons on a surety as “co-debtor” would not interrupt the running of prescription in respect of the other sureties as well. The rational of the Court is laid out below.   

In March 2003 Charter Life Insurance Company Ltd (which later changed its name to Liberty Active Ltd (“Liberty”) concluded a written broking agreement with ECE Financial Holdings (“ECE”). In terms thereof, ECE was to act as an independent intermediary for Liberty’s financial products. As compensation, ECE would be paid commission on premiums received by Liberty during the currency of the agreement on contracts issued pursuant to proposals submitted by ECE.

In the period during March 2003 and February 2005, eight individuals, including Mr Illman (the Respondent herein), each signed separate but identical deeds of suretyship in terms of which they bound themselves as sureties and co-principal debtors in solidum with ECE for the payment to Liberty of all monies which ECE could in future owe to Liberty, ‘from whatsoever cause arising’.

During March 2003 and March 2011, and before receiving any premiums in respect of contracts issued by Liberty on proposals submitted to it by ECE, Liberty advanced commissions to ECE. However, during the same period, and up to August 2011, the contracts in respect of which commissions were advanced to ECE either lapsed, were cancelled, or terminated because of non-payment of premiums to Liberty. As a result, the commissions which Liberty had paid in advance, became repayable to it by ECE in terms of the agreement and by the sureties in terms of the deeds of suretyship. The total amount of the commissions was R1,029,963.50. Liberty later ceded all its rights to claims arising from the claw-back commissions in respect of the broking agreement to Liberty Group Ltd (LG).

On 14 March 2011, the agreement with ECE was terminated and on 22 September 2011, LG, as cessionary, issued summons against all the sureties and co-principal debtors for re-payment of the commission. On 29 September 2011, the summons was served on one of the sureties, Mr September. He failed to deliver a notice of intention to defend. As a result, LG obtained default judgment against him in January 2012.

The Summons was only served on Mr Illman (the Respondent) on 31 March 2016, approximately five years after it was issued. Mr Illman raised a special plea of prescription to LG’s claim and asserted that to the extent that LG’s claim against him was based on the alleged termination of the agreement on 14 March 2011, such claim became prescribed after three years of that date, in terms of the Prescription Act 68 of 1969.

LG responded and argued that as Messrs September, Illman and the other trustees had bound themselves as sureties and co-principal debtors in solidum with ECE, they became ‘co-debtors.’ As the claim against ECE and the sureties became due on 14 March 2011, service of the summons on Mr September within the prescription period interrupted the running of prescription in favour of ECE and all co-debtors, including Illman. Accordingly, it was pleaded, the claim against Illman had not prescribed.

The High Court in Pretoria found in favour of Mr Illman and the sureties which lead LG to launch an appeal in the SCA.

The SCA considered three cases in the aforementioned appeal, namely Kilroe-Daley v Barclays National Bank, Neon and Cold Cathode Illuminations (Pty) v Ephro and Jans v Nedcor Bank Ltd.

In the Janse case, the Court had to evaluate whether the interruption in the running of prescription in favour of the principal debtor interrupted the running of prescription, in favour of a surety. The Court concluded that there were significant differences between the relationship existing between the principal debtor and surety on the one hand, and that between co-debtors, in solidum on the other. The Court accordingly concluded that an interruption or delay in the running of prescription in favour of the principal debtor, interrupted or delayed the running of prescription in favour of the surety. As between co-debtors, the common law allowed the judicial interruption of prescription of a co-debtor by service on another co-debtor.

In this regard, it was significant that LG referred to Ilman and the other sureties as ‘co-debtors’. LG submitted that the addition of the words ‘co-principal debtor in solidum’ signaled an intention that the liability shall be of the same scope and nature as that of the principal debtor. This made the principal debtor and the surety, co-debtors. Thus, service of summons on any of them, Mr September in this case, interrupted prescription running in favour of the rest.

LG was cognisant that this submission was contrary to the jurisprudence of this court in the decisions of Kilroe-Daley and Neon. In Kilroe-Daley, the accessorial nature of a suretyship agreement to the main contract was emphasised, despite it being a separate contract from that of the principal debtor and his creditor. The addition of the words ‘co-principal debtor’ did not transform the contract into any contract other than one of suretyship. Consequently, it was held that if the principal debt became prescribed the surety’s debt also became prescribed and ceased to exist.

In Neon it was held that the sole consequence (albeit an important one) of a surety binding himself as a co-principal debtor is that, as regards to the creditor, he renounces the benefits such as excussion and division available to him and he becomes liable with the principal debtor jointly and severally. It did not make him a co-debtor.

LG argued that Kilroe-Daley and Neon, to the extent that they limited the effect of the phrase ‘and co-principal debtor’ to only a tacit renunciation of the legal exceptions, had been wrongly decided. The flaw in the criticism of the decisions of the previous judgments lie in the conflation of two distinct concepts: co-debtors and co-principal debtors. The undertaking of the surety is accessory to the main contract. It is an undertaking that the obligation of the principal debtor will be discharged, and if not, that the creditor will be indemnified.

Although the surety binds himself as co-principal debtor, that does not render him liable to the creditor in any capacity other than that of a surety who has renounced the benefits ordinarily available to a surety against the creditor. He does not become a party to the contract between the creditor and the principal debtor.

A surety and co-principal debtor does not undertake a separate independent liability as a principal debtor; the addition of the words ‘co-principal debtor’ does not transform his contract into any contract other than one of suretyship. The surety does not become a co-debtor with the principal debtor, nor does he become a co-debtor with any of the co-sureties and co-principal debtors, unless they have agreed to that effect (our emphasis).

 

There was another string to LG’s bow, based on the rule that if a creditor, through the service of a process, claimed payment from one co-debtor who bound himself jointly and severally with others, the remaining co-debtors could not rely upon extinction of the debt by prescription. The principle was received into Roman Dutch law.

LG urged the Court to apply this principle to the converse situation. In other words, that the interruption of prescription in respect of a surety serves to interrupt prescription in respect of a principal debtor. Once so decided, it was said, the further logical extension of the principle would be that interruption of prescription in favour of a surety would also interrupt prescription in favour of a co-surety. The result would, therefore, be that service on Mr September interrupted prescription in favour of Illman.

The argument could not succeed. Neither in the Roman law nor in the Roman Dutch law had it ever been suggested that the converse should apply – in other words that interruption of prescription against the surety should constitute interruption of prescription against the principal debtor. The Roman Dutch writers, who wrote extensively on the topic and debated the pros and cons thereof, were ad idem that the converse should not apply. It is consequently simply not part of our common law.

LG’s appeal was, thus, dismissed. The SCA did, however, state that should a creditor wish to hold a surety liable as a co-debtor with the principal debtor as well as a co-debtor with any of the other co-sureties and co-debtors, then it is imperative that it is worded as such in your suretyship agreement. The use of the words “the surety binds himself as surety and co-principal debtor in solidum with the principal debtor” will not suffice. It needs to be expressly stated in the suretyship agreement that the surety will be liable as a co-debtor with the principal debtor as well as a co-debtor with any of the other co-sureties and co-debtors.