There are extremely broad powers that a lender has over assets when one signs Personal Surety. These documents are legal documents full of terms that can be confusing. Caution is essential when signing these documents and understanding the full consequences should be considered.
Often, it is unavoidable to sign personal surety when you are in business. When businesses borrow money, a way a lender lessens the risk of lending money, is by insisting that the business or its individuals provide surety for the loan. The more viable it is to recover the money, the less risk there is to the lender.
Someone “stands surety” for the loan
When someone agrees to stand surety for a loan, they become a third party who promises to pay the loan back even if the business or individual goes into bankruptcy – it is a guarantee. Furthermore, the legally binding document is not null and void after a period, nor after moving on from the business involved.
The cancellation of a surety is only possible in writing with the permission of the relevant lender. This does not happen often, and most lenders will only do so if the debt is paid in full or if there is a replacement for surety.
Types of surety
There are different ways a lender secures and exercises their extremely broad powers in a loan.
- Signing personal surety: an individual becomes fully responsible for repayment on the loan and interest.
- Joint and several liability: all business owners are “jointly and severally liable” in their personal capacity.
- Excussion: the lender must first try to get their money back from the principal debtor before turning to you and other signees.
- Unlimited: In South Africa, personal surety contracts are genuinely unlimited in relation to time.
Signing surety with your business partners
When a business has multiple partners, it may seem plausible to consider joint and several liability instead of personal surety. Yet, this could be misleading as the real snag is that each partner signs surety for the FULL amount of the loan (including interest and administrative costs). Therefore, the lender has the right to decide to collect on the loan from all partners or an individual partner, irrespective of their shareholding in the company.
How to limit your risk against the broad powers of personal surety
- Make sure the document clearly states the limits of the loan amount
- The document must contain a clause ensuring the surety is only valid for the agreed loan period.
- Always keep records of the documents you sign.
- Get legal advise when considering signing for surety.
- Once the loan has been paid, written confirmation is needed confirming the surety is cancelled.
Despite the complex legal implications, signing surety for another person (often a family member, business partner or friend) can appear to be a simple formality to concluding a significant transaction. For the many reasons you may be considering an agreement like this, make sure you know what you are in for by standing surety for someone else’s debt.
A clear understanding of the terms of the agreement and one’s obligations cannot be overstated.
We are committed to partnering with people on their journeys through life. Let us know how we can help you today.
Call or email us at 086 111 4803 | clientservices@evolution.za.com
