"KZN pilot held in Dubai on debt claim" ...This was the headline of a local newspaper recently. 1 In summary the pilot signed surety for his son's debt and found himself in a jail cell as a result.
All too often people needing to raise finance are presented with a suretyship document to sign. A suretyship is an agreement to take on the responsibility of another's debt or obligation.
DO YOU REALLY WANT TO PAY SOMEONE ELSE'S DEBT?
It is common practice in any financing transaction, that lenders attempt to protect their financial interests by taking some form of security from a borrower. Where the borrower's financial position is not sufficient to provide this security, the lender will invariably require a third party to sign surety. In the case of a small close corporation or company, the lender will require the directors, shareholders or members to sign this surety.
While you may not be in a position to avoid signing as surety, here are some suggestions to imit your exposure:
- Sign as a limited surety -if you are a 50% shareholder or partner, take responsibility for 50% of the debt.
- Don't sign as co-principal debtor (or waive the benefit of excussion) - this enables the lender to pursue you without first trying to collect the money from the lender.
- Limit the amount of the surety - if the debt is for R10,000, limit the surety to this amount only. Lenders prefer unlimited surety for obvious reasons.
- Define the time span you are willing to sign as surety. For exampe, if the facility is a 6 month facility, limit your surety to 6 months.
For more details on the terms used in surety documents and an explanation or these, see the article Suretyships, some things you should know
1. Natal Mercury front page 9 December 2009
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