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Suretyships are a danger to your financial health

It is difficult enough to pay one’s own debts. To assume liability for someone else’s debts – which is what a suretyship entails – is a very serious step to take.

Buying a house is major financial commitment, but at least your liability is limited to payment of the purchase price, plus interest. If you sign an unlimited suretyship (and many suretyships are expressed to be unlimited in amount), there is no ceiling to your liability. Consequently, you are putting everything you own, now and in the future, in jeopardy.
 
It is therefore surprising how easily and thoughtlessly many people sign suretyships. They are often mollified by the soothing words of the bank manager or other such person – “it’s just a standard document”.
 
If you are sensible you will strenuously resist standing surety for someone else’s debts.
Sometimes it is very difficult to resist, for example where your child is trying to establish him or herself financially and needs to borrow money, for example, to start up a business, and the bank requires a suretyship as security.
 
If you decide that you should or must stand surety, then it is essential that you insist that the suretyship is for a stipulated ceiling amount and is not an unlimited suretyship. If you can, you should also insist that the suretyship be for a specified period, after which it will lapse.
 
A suretyship, unlimited in duration and unlimited in amount, is a noose around your neck for the rest of time.
 
The sad story in GHPM Boerdery 100 Bpk v Standard Bank van Suid-Afrika Bpk, which came before the North Gauteng High Court earlier this year, illustrates the point. The facts presented to the court are outlined below:
 
Prinsloo Senior was a farmer.
 
His son, Prinsloo Junior, took over the farming business from his father and decided to branch out into farming potatoes, rather than farming with cattle as his father had done.
 
Prinsloo Junior approached the bank for a loan. After inspecting the farm’s financial statements, the bank agreed to lend him money, subject to his providing security by way of a suretyship from his father.

Prinsloo Senior and Junior went together to see the bank manager, Smit, and it was agreed that, to assist his son, Prinsloo Senior would consent to a mortgage for R500 000 being registered over the farm and that he would sign a suretyship in favour of the bank.

Prinsloo Senior’s attitude was that he was prepared to guarantee his son’s debts up to R500 000, but no more.

The bank made it clear to Prinsloo Junior that it required an unlimited suretyship from his father and prepared documents to this effect. But it seems that neither the bank, nor Prinsloo Junior, told Prinsloo Senior that an unlimited suretyship would be required of him.

Prinsloo Senior then went to the bank and signed the suretyship documents, not realising that the suretyship was not limited to R500 000 as he had thought, but was for an unlimited amount. It seems that he simply assumed, having made known (to his son at least) that he would only stand surety for R500 000, that the suretyship documents would reflect this.

Prinsloo Junior then ran up debts with the bank far in excess of R500 000 and the bank claimed payment from Prinsloo Senior in terms of his suretyship, for the full amount owing by his son, namely R1.5 million plus interest.

Prinsloo Senior sought a declaratory order that he was liable as surety only to the extent of R500 000, asserting that this was the amount agreed upon between him and the bank manager. However, he was faced with the difficulty that the suretyship, which bore his signature, was for an unlimited amount and he was not able to satisfy the court of the existence of the alleged agreement with the bank manager to limit the suretyship to R500 000.

The court ruled that Prinsloo Senior was bound by the document he had signed and was therefore liable for the full amount that his son owed the bank. The court ruled that Prinsloo Senior had not been able to prove that the bank manager, by words or silence, had misled him into thinking that the document he was signing was a suretyship limited to R500 000.

In addition to the court finding that pursuant to the surety Prinsloo Senior was liable to the bank for the full extent of his son’s debts, he was also ordered to pay the legal costs of the bank.

What is the moral to be drawn from this distressing tale?

• Do not make assumptions about what a document says when it is laid before you for your signature. Do not assume that what you have asked to be included in the document is indeed contained in it. Read it carefully – or better still, say that you want to take it away with you and read it in your own time before signing it.

• If a significant amount of money is at stake, ask your attorney to check the document before you sign it.

• If the document you are asked to sign is a suretyship, you should never sign before getting legal advice. Your attorney may be able to reach an arrangement which does not require you to be a surety at all; at the very least, your attorney will try to negotiate the terms of the suretyship so as to limit your liability as far as possible.

• Do not drop your guard or adopt an attitude of blind trust just because other members of your family are involved in the transaction, or have asked you to do them a favour.

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