Director's liability ito business debt and sureties

[cyclesmith]

I have been asked regarding the following scenario:

Residential property of director of pty is registered in his and his wife's name jointly. The director has signed sureties to bind himself as co-principal debtor for his pty's debts. His shares in the same business is held in a family trust. When can the creditors have his house sold to cover the outstanding debts? The business is in financial difficulty and receives many visits from the sheriff.

 

[HavocXphere]

Director goes down with the business thanks to the surety.

 

[TheMightyQuinn]

I have been asked regarding the following scenario:

Residential property of director of pty is registered in his and his wife's name jointly. The director has signed sureties to bind himself as co-principal debtor for his pty's debts. His shares in the same business is held in a family trust. When can the creditors have his house sold to cover the outstanding debts? The business is in financial difficulty and receives many visits from the sheriff.

The days of directors "stealing" this way and getting away with it, went down with the new company laws that came in effect a few years ago.
If the company is bankrupt, the director becomes liable and regardless of "hiding" stuff in family trusts etc, his assets WILL be attached.

 

[Greig Whitton]

Director goes down with the business thanks to the surety.

Not necessarily. The suretyship may not even be valid if the director is married in community of property per the Matrimonial Property Act.

If the company is bankrupt, the director becomes liable and regardless of "hiding" stuff in family trusts etc, his assets WILL be attached.

Rubbish. As a general rule, personal liability only applies where a director has acted recklessly or fraudulently. Bankruptcy does not automatically imply that reckless or fraudulent conduct has occurred, and there is already legal precedent to this effect (e.g. Heneways Freight Services (Pty) Ltd v Grogor).

@cyclesmith - if the business is experiencing financial difficulty, why not apply for business rescue?

 

[cyclesmith]

Hi Greig Whitton,

We have spoken with a couple of people who have advised us against this and in a way I can see where they come from. The main problem is that the business is operating in the construction industry and constantly has to battle with main contractors for payment, not to mention the battle it takes to collect retention fees. Often times a particular main contractor would indicate that X amount would be received by a given date, and then nothing happens. The company has actively engaged with all affected persons and signed restructured payment agreements with creditors, but since the problem with the main contractors persist, it is increasingly difficult to make payments and re-arrangements. The company has taken various steps in ensuring that all costs are as low as possible and have started to cede retention payments to SARS and other creditors as a way of forcing contractors to pay retention fees. Perhaps I am overlooking the benefit that a business rescue practitioner could serve to the company at this stage?

 

[Greg C]

Hi Greig Whitton,

We have spoken with a couple of people who have advised us against this and in a way I can see where they come from. The main problem is that the business is operating in the construction industry and constantly has to battle with main contractors for payment, not to mention the battle it takes to collect retention fees. Often times a particular main contractor would indicate that X amount would be received by a given date, and then nothing happens. The company has actively engaged with all affected persons and signed restructured payment agreements with creditors, but since the problem with the main contractors persist, it is increasingly difficult to make payments and re-arrangements. The company has taken various steps in ensuring that all costs are as low as possible and have started to cede retention payments to SARS and other creditors as a way of forcing contractors to pay retention fees. Perhaps I am overlooking the benefit that a business rescue practitioner could serve to the company at this stage?

The business rescue practitioner will assist in ring fencing the business and its debts and facilitating placing the business back into a "Going concern"once again. Definitely something that should be looked at if it is the intention to continue business.

Suretyship gives the holder the ability to attach assets at default of any specific debt. It allows personal assets to be attached. A previous post refered to in COP for a signed surety. If there was no consent by the other partner the surety becomes null and void as they are seen as one estate essentially. In very simple terms as long as the NCA is followed as per procedure regarding collections and affording a creditor the time to make payment, as well as to adopt potential payment plans. If this fails, the suretyship can be called, assets attached in a personal nature and the sheriff of the court will have a legal enforceable duty. This is a long process and most creditor if not all prefer to avoid this as it comes with bad debt losses, costs legal fees and time. Rather negotiate payment terms if possible. But that suretyship is essentially their security for the unsecured credit

 

[Greg C]

The days of directors "stealing" this way and getting away with it, went down with the new company laws that came in effect a few years ago.
If the company is bankrupt, the director becomes liable and regardless of "hiding" stuff in family trusts etc, his assets WILL be attached.

If he signed personal surety, (ignore COP consent) then they can go after his personal assets. Noting - there is case law regarding placing personal assets into a trust with the intention of preventing creditors. "piercing the corporate veil". The real way to prove what you related is if there is no independent trustees, if he/she is still receiving the fruits of the asset as if it were their own etc.

Either way costly through court but yes essentially can attach trust assets.