We were recently asked to explain the implications of waiving the benefit of excussion by a client wanting to stand Surety under a standard commercial suretyship agreement.
The benefit of excussion exists for the benefit of the Surety, whereby on default of payment by the principal Debtor, the Creditor is obliged to first proceed against the Debtor to settle the debt. Only if unsuccessful may he then proceed against the Surety for payment of the debt, or the balance thereof. The waiving of this benefit under a suretyship agreement is clearly to the advantage of the Creditor, as it allows for the Creditor to recover the debt directly from the Surety who would then in law have a right of recourse against the Principal Debtor. Unfortunately, all too often the principal Debtor is in no financial position to honour the debt.
Surely then, the simple solution when standing Surety would be to strike out the waiver of the benefit of excussion from the agreement? The stark reality is that the Bank or Financial Institution providing the finance would never agree to such a change to their standard terms and conditions, which would in all likelihood result in the Debtor’s application for finance being rejected.
If the circumstances are such that you have no alternative but reluctantly and begrudgingly to stand in as Surety, then it is extremely important that you prepare adequately, as follows:
Read the Suretyship agreement with a very keen eye from beginning to end, and if you do not understand your legal obligations, ensure that you seek legal counsel before signing the agreement. Get yourself into a position where you can make an informed decision, especially when it comes to honouring someone else’s debt;
Try and ensure that the Suretyship Agreement is limited to a specific time period and amount. It is not advisable to sign an agreement where you are unable to quantify your exposure or where your obligations under the agreement could endure indefinitely;
Keep an accurate record of all Suretyship Agreements you have or may conclude and even go so far as to record these potential liabilities in your Last Will and Testament. We see all too often in practice that Suretyship agreements are concluded in haste and shortly thereafter forgotten about, only to return when least expected with dire financial implications. The same position is true for those Sureties who have died where neither the appointed Executor nor family members have any knowledge of the suretyship agreement, only to find well into the administration of the estate, or even upon finalisation of the estate, that monies need to be paid to honour the deceased’s Surety obligations, resulting in lengthy delays and inheritances being depleted;
Ensure that while you are alive you have sufficient liquidity to honour your Suretyship obligations, either in the form of a liquid investment or a suitable life assurance policy (in the event of death), as you do not want to be selling off the family home or any other assets to settle this debt. In the event of death, the appointed Executor should try and negotiate for the estate to be released from its obligations under the Suretyship agreement with the financial institution concerned. Seek advice from your financial planner on how best to prepare for these contingent liabilities;
Seek estate planning advice on how best to protect your wealth from current and potential creditors – wealth preservation is one of the key elements of any effective estate planning strategy. This can easily be achieved through the drafting and setting up a Family Trust aimed at acquiring all low risk assets whilst alive and receiving inheritances and life cover proceeds upon death.