“Our company is owed money by one of our contractor companies who we helped with finance and provided us with personal sureties by the shareholders as security for the transaction. They have been making promises that they will pay for some time and we left it, but now we are getting worried about prescription. We are also unsure whether if we act against the sureties, prescription will be halted for the contractor or may continue and we lose our claim against the company itself. Can you advise?”
To answer your question, we must explain some of the terminology.
“Prescription” is a legal principle in terms of which a debtor’s liability to pay an outstanding debt is extinguished after the passing of a prescribed time period. The Prescription Act 68 of 1969 establishes different time periods for different types of debt, with the most common debt, namely a debt arising from a delict (eg. damage caused to someone’s property) or contract (eg. breaching provisions of a contract that results in damage), prescribing three years after becoming due. This means that the debtor will not be liable to pay the debt if three years have passed since the debt became due.
However, the running of prescription can be interrupted by:
- An acknowledgement of debt by the debtor; or
- A summons issued and served by the creditor on the debtor in order to claim payment of the debt due.
A “surety” on the other hand is one who takes upon himself the obligation of the principal debtor to pay the debt where the principal debtor fails to settle the debt. By providing surety, persons like the shareholders in your situation, undertake to stand in for the principal debt should the principal debtor default on payment.
Our courts have recently had to consider whether the interruption in the running of prescription against one surety by service of summons, interrupted or delayed the running of prescription against the principal debtor or other sureties.
In respect of co-debtors, it was confirmed that our common law allowed the judicial interruption of prescription of a co-debtor by the issuing of summon on another co-debtor. However, in respect of sureties, the court found that a surety does not become a co-debtor with the principal debtor, nor does he become a co-debtor with any of the co-sureties and co-principal debtors, unless they have specifically agreed to that effect.
This means that the institution of action against a surety and the interruption of prescription against that surety would therefore not result in the interruption of prescription against the principal debtor or even against the other sureties. This further means that you should be careful of prescription and not assume it will be halted if your act against a surety. If you are concerned about prescription ensure you consult with your attorney immediately and take the necessary steps timeously to recover the outstanding debt.