Case
Study: What is a Surety?
Almost all small business owners face signing a surety at some
point in their careers. Almost all of us sign. We should not. This article details what the small print
means, and how much you give away when you sign it. There are ways to borrow money without signing sureties.
We discuss these in depth in the CrashProof material.
This is a long page. Sadly, that’s because a surety
contract is very complex if you want to understand the small print. Here is a quick executive summary:
Do not sign a surety because you give away all your rights, including rights
that the law would normally give you.
A surety is also called a personal guarantee or, in Afrikaans,
persoonlike waarborg.
Before we get to the document itself I must briefly talk about
readability, because is the root of the problem.
 I think we can agree that some
articles are much easier to read than others? That readability depends on a few things. If the words are
short, and the sentences are short, most of us will find an item much easier to read. Some folk have even
devised some tests to measure quite how readable something is.
There are two basic readability measures that I work with. The first is
the Flesch Reading Ease Score. All you need to know is that a higher score is better. Dr Seuss
books score above 90. Most of the items on this website score above 80. The Readers
Digest averages about 60.
 The Harvard Law Review is about
35. (The Harvard Law Review can only be read
comfortably by another
lawyer.) A surety is about 38. It’s not written for real people to read.
The other measure is an Automated Readability Index. This shows
how many years of education you need to comfortably read an item, Most of the pages on this site can be easily read
by anyone with 7 years of education.
A surety requires more than 18 years of education before you
can comfortably read through
it.
And finally, before we start, can I ask you to get shizophrenic
for a moment? You and your business are two separate legal entities. You are a real live human being with a family,
parents, and children. You are not your business, which is a legal contract with the government that allows you to
do business without exposing your entire personal wealth to the risks of commerce.
When you sign a surety your firm is borrowing the money. You
are not. This is a crucial distinction. You will not be paid for putting your home on the line. Your family won’t
be paid. Your staff won’t recognise your heroism. Nor will your partner. (The one who doesn’t have a home.) When
things go wrong, you will not find a damp eye anywhere in the house. You will be on your own.
In other words, just so that we’re clear about this: You are
putting your home on the line for a business that you happen to own a piece of. That business has a very uncertain
future. (You have seen the stats that show that 96% of firms do not survive 10 years?) How honourable is it to put
your family’s home on the table?
Now that I have really upset you, lets look at this piece of
paper that you’re about to sign.
If you read the copy below, you will see that I have
highlighted a few of the worst aspects of this beast – and these are the ones that we’ll discuss today. While the
document is in legalspeak, lets try and throw some common English at it.
DEED OF SURETYSHIP INCORPORATING CESSION OF
CLAIMS
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The words in the surety
document
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What the words mean
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I/We, the undersigned (you put your name
here])hereby bind myself/ourselves jointly and
severally to – [the bank/landlord/etc puts his name
here] ("the creditor"), and their successors-in-title, as surety/ies for and co-principal debtor/s
in solidum with – [your put your companys name here] ("the debtor") for the due and punctual
payment and performance by the debtor of all debts and obligations of whatsoever nature and
howsoever arising which the debtor may now or in the future owe to the creditor from any cause of
indebtedness howsoever arising, including, without limiting the generality thereof any claims which
the creditor may have acquired or may in future acquire against the debtor from any company,
person, partnership, association or other legal persona whomsoever or whatsoever by way of cession
or otherwise, legal costs on the attorney and own client scale, collection commission, interest and
any other charges of whatever nature ("the obligations").
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This means that you can be asked pay any
money owing for any reason at any time in the future – even if you are no longer
involved with the firm – even if you don’t know that the amount is owing in the first place.
Even if it’s 10 years later. There’s actually a lot more in here – but we need to keep it
brief.
But if your firm owes me money, and I owe the bank
money – I can give them my claim against your firm and then they can chase you personally as
well!
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I/we hereby expressly
renounce the defence of prescription and the benefits of the legal exceptions of "order",
"excussion", "cession of action", "no value received", "non causa debiti" and all or any
exceptions which could or might be pleaded to any claim by the creditor against me/us or any
one of us, with the meaning force and effect of all of which exception I/we declare ourselves
to be fully acquainted.
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This means that you have given away any defence that
common law and common sense would give you, and you have confirmed that you completely
understand what you have given away. |
| The rights of the creditor under this
suretyship shall not be affected or diminished if the creditor at any time obtains additional
suretyships, guarantees, securities or indemnities in connection with the obligations.
Notwithstanding that this suretyship may for any reason whatsoever be held to be or become not
binding in whole or in part upon any one or more of us and notwithstanding that it may not be
signed by all of us, it shall be and remain of full force and effect and binding upon the others of
us |
This means that if the bank gets another five
people to sign sureties, they can still sue you for the full
amount.
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I/We shall be bound by all admissions or
acknowledgements of indebtedness made or given by the debtor to the creditor from time to
time.
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If your company signs anything or makes any commitment
to the bank, no matter what the reason, you agree that you will pay it if asked. This applies
even if you no longer own the business. |
| Should the debtor fail to discharge
any of the obligations on due date, the creditor shall be entitled notwithstanding any contrary
arrangement with the debtor, to demand from me/us immediate performance of all the obligations then
owing by the debtor to the creditor, whether the due date for the performance of the obligations
shall have arrived or not. |
The bank can sue you for all the outstanding money,
even though they might be negotiating with the firm about delaying those payments. This would
apply if the firm had new owners, or if the firm was in the hands of
liquidators. |
| This suretyship is a
continuing suretyship and shall remain of full force and effect notwithstanding
any fluctuation in, or temporary extinction of the debtor’s indebtedness too the creditor. It may
not be withdrawn, revoked or cancelled by me/us without the creditor’s prior written consent. Any
consensual cancellation or withdrawal of this suretyship by me/us and the creditor shall only be
valid and effective if reduced to writing and signed by both parties thereto. |
At the time you were asked
to sign the surety, you probably were applying for a loan or overdraft. If you pay that loan up, or
you reduce that overdraft to zero, the surety does not automatically die. You will still be
responsible for any future bill.
The only way to
get this surety cancelled is to get it in writing and signed by an authorised bank
official. This means that old sureties that ‘have been filed in our obsolete section’ are still
valid.
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| The creditor shall be entitled,
whether before or after the due date for payment or performance of the obligations, without
reference or notification to me/us, without affecting its rights hereunder and without
releasing any surety hereunder, to release other sureties and securities; to grant the debtor
extensions of time for payment and other indulgences; to compound or to make any other arrangements
with the debtor for the discharge of the debtor’s indebtedness; to accept any dividend in a
liquidation or judicial arrangement on account and in reduction of the debtor’s indebtedness; to
alter or vary any present or future agreement between the debtor and the
creditor. |
The bank and the company can do what they want,
when they want, without telling you – but you must still pay for any arrangements they
make.
This makes sense when you own the company. But
what if you have sold it, and all this discussion and correspondence is with the new
owners?
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| A certificate under the hand of any
director or manager of the creditor (whose appointment need not be proved) as to the existence and
the amount of the debtor’s indebtedness and the surety’s indebtedness to the creditor at any time,
as to the fact that such amount is due and payable, the amount of interest accrued thereon and as
to any other fact, matter or thing relating to the debtor’s indebtedness to the creditor and the
surety’s indebtedness to the creditor, shall be sufficient and satisfactory proof of the contents
and the correctness thereof for the purpose of provisional sentence, summary judgment or any other
proceedings of whatsoever nature against the debtor and/or the surety in any competent court and
shall be valid as a liquid document for such purpose. |
The short version says that the bank never makes any
mistakes. Any document signed by them that says you owe them money can be used to get a
judgment against you. |
| In terms of section 45 of the
Magistrate’s Court Act, I/we hereby consent to the jurisdiction of the Magistrate’s Court having
jurisdiction in terms of section 28 of the said Act in respect of any action to be instituted on
this suretyship. This consent is without prejudice to the creditors rights to proceed in any other
court having jurisdiction. |
Since it’s cheaper and easier for the bank to attack
you in a lower court, you have just said they can do it that way. |
| I/We hereby choose domicilium
citandi et executandi at the address/es set out below at which address/es all notices and
communications may be addressed to me/us and all notices addressed to me/us at the said address/es
and despatched by prepaid registered post shall be deemed to have reached me/us three days after
the date of posting . |
You have asked them to summons you at this
address. This is usually the address of your firm. The point at which they’re most likely to
sue you is when the business has stopped trading (or you have retired or sold the firm). This
means that the summons will never reach you.
This means they can take a judgement against you
without you even knowing about it. (It’s much easier and cheaper if you don’t appear in court
to fight their claims.)
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| As security for the fulfillment of
all obligations hereby undertaken I/we do hereby pledge, cede, assign, transfer and make over unto
and in favour of the creditor all right, title and interest in and to any amounts and claims from
whatsoever source arising and which are now, or which may hereafter become, owing to me/us from any
source and from any cause of indebtedness howsoever arising. In the event of any prior ranking
cession existing at the date hereof the aforegoing cession in favour of the creditor shall operate
as a cession to the creditor of any right of action which I/we may now or at any future time have
against the prior cessionary. |
Since you owe them so much money you have just
transferred all your future rights to them – including the right to your future
salary. |
| I/we hereby indemnify and hold the
creditor harmless against any damage or loss of whatever nature which the creditor may sustain
arising out of or in connection with the enforcement, cancellation or invalidity for any reason
whatsoever of any agreement between the creditor and the debtor. I/we warrant and undertake that
the debtor will perform all of its obligations of whatever nature which are at any time owed by it
to the creditor. |
If the bank incurs any costs at all – you’ve just
offered to pay them. |
| Should the creditor cede its claim
against the debtor to any third party, then this suretyship shall be deemed to have been given by
me/us to such cessionaries, who shall be entitled to exercise all rights in terms of this
suretyship as if such cessionaries were the creditor hereunder. |
If the wonderful person that you owe money to sells
out to the Mafia (or another bank) the Mafia get all the good things you’ve promised in this
document. |
If you feel that I have been unduly
harsh – then please remember that I have met business owners who have been hammered on all of these issues – so I
speak from experience. And it isn’t pretty.
You will notice that the agreement is drafted so that
the bank has all the rights, and you have none. It’s also drafted in such a way as to be unreadable for
most of us. And when it’s presented, it is almost always as a fait accompli. (In the sense that ‘everyone signs
it’, or it’s our ‘standard document’.) This places huge pressure on us small folk.
Often the bank has delayed their decision so that we’re under
huge pressure when we finally get to the table.
There are practical ways to borrow money without signing
sureties. We discuss these in the Crashproof seminar and book.
Although the text of the surety featured in this article was
drawn from a First National Bank (FNB) document, the other major banks (Standard Bank, ABSA, and Nedbank) have
contracts which say much the same thing.
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