- If it wasn’t the bondholder who controlled the sale, but someone else.
Thus in one recent case, Mr. A as director of a company arranged a sale of its property for R3,3m, leaving the bondholder bank with a R2.5m shortfall for which it sued Mr. B as surety. B’s defence was that A had only been authorised to sell for no less than R3,85m, and that the sale at R3,3m was unlawful and well below market value – to B’s prejudice. Irrelevant, held the Court – even if the sale was at less than the minimum price authorised, that was a matter between A and B, it had no relevance to the bank’s claim. B had to pay under his suretyship.
In two other cases, the property-holding company had been liquidated, and the sales effected by the liquidators, not by the bondholders. In one case, a property allegedly worth R65m was sold for R30m, and the surety ended up having to pay the bank its R40m shortfall. In the other case, a property allegedly worth R15m was sold for R6.8m, leaving the surety liable for R7.2m. In both cases, the bondholder could not be held liable for the sale by the liquidator, the Court in the one matter specifically declining to find on the facts that the bank had “controlled and dictated the terms of the sale agreement.”
- If it wasn’t the bondholder who controlled the sale, but someone else.
- If the terms of your suretyship are such that you accepted the risk of a sale under value.
You are bound by the terms of what you sign. In one of the above cases the terms of the suretyship covered the bank regardless of “any negligence or breach of contract on the part of the Bank or the debtor, or the non¬-notification to the surety of any default, delay, omission or contractual breach on the part of the Debtor”. Whilst the Court confirmed that “fairness and good faith are considerations which are deeply embedded in our law of contract”, if the prejudice complained of results from the bank acting in accordance with the terms of the loan agreement and the suretyship, then that is prejudice which the surety “undertook to suffer”.
Take advice upfront
By all means invest in property through a company, but be aware of the risks associated with signing surety, and manage them at all times – in particular seek legal assistance before signing anything, and again at the first sign of trouble in your company or trust.
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