Commercial entities commonly require security in the form of inter alia a deed of suretyship in respect of commercial contracts concluded with other entities where payment is deferred, or any other form of credit is extended to the client. Whilst the persons providing the suretyship often have no objection to signing the document in order to reap the benefits of the underlying contract, they often attack the validity of the document in the event that the suretyship is enforced.
A weapon in the surety’s arsenal which is often employed in the attack on the validity of a suretyship is Section 15(2)(h) of the Matrimonial Property Act 88 of 1984 (“the Act”), which states that a spouse in a marriage in community of property may not without the written consent of the other spouse bind him/herself as surety.
Our firm recently represented a corporate client in the matter of Strydom v Engen Petroleum Limited (184/2012) ZASCA 187, in which the surety launched an appeal to the Supreme Court of Appeal, principally on the interpretation of Section 15(2)(h). The appeal was dismissed with costs and the judgment handed down by the Court expanded on a number of previous decisions in which sureties sought to escape liability under a deed of suretyship through section 15(2)(h).
The Court held that the statutory protection under Section 15(1) of the Act, against unilateral conduct by one spouse that may detrimentally affect the joint estate is not absolute, and should be read in context with the exceptions contained in inter alia Section 15(6) of the Act, which specifically nullifies the operation of Section 15(2)(h) where a spouse has acted in the ordinary course of his profession, trade or business. The pressing question to then be decided is what constitutes acting in the ordinary course of one’s profession, trade or business.
In answering that question, the Court stated that the determination of whether one acted in the ordinary course of one’s profession, trade or business is a question of fact that must be judged objectively with reference to what is to be expected of businesspeople.
Where a business is carried on through an incorporated vehicle such as a company or close corporation, or even an unincorporated vehicle, such as a partnership or trust, the question to be answered is whether the execution of the suretyship was in the ordinary course of the surety’s business, and not the business of the company, close corporation, partnership or trust. In other words, did the execution of the suretyship hold any potential benefit to the surety personally, or serve to benefit the surety’s personal interest.
Where a person who holds a number of non-executive directorships that are the principal source of their income, they may well be acting in the ordinary course of their business when executing a deed of suretyship for one of those companies. After all, the underlying reason for requesting that suretyships be provided by directors, members and the like is that they in general have a personal commercial interest in the business’s success or failure.
In the case of companies and close corporations in particular, the surety, in many instances, owes a fiduciary duty to the company/close corporation and is vested with powers of management in respect of its affairs. By, for example, investing capital into the business or being party to the conclusion of a loan agreement with a third party, the surety enables that investment to succeed by providing it the necessary funding and in so doing supports his own interest/trade/business/profession.
It must also be noted that the party seeking to rely on Section 15(2)(h) cannot merely state that they were married in community of property and that their spouse did not consent to the transaction in order to bring themselves within the ambit of the section. This is specifically because the section only operates in certain limited circumstances, and essentially as an exception to Section 15(1) of the Act, which seeks to abolish the marital power vested in the husband under the Roman Dutch Common Law, which allowed the husband to take all decisions in respect of the estate to the exclusion of his wife.
The surety therefore has an onus to bring themselves within the range of operation of Section 15(2)(h), specifically where matters are within his/her exclusive knowledge, such as the extent of their managerial commitment to the company/close corporation/partnership/trust, their reasons for providing capital, whether the profit generated forms a significant portion of the surety’s income and so on. If the surety remains silent on the details of his involvement in the dealings of the entity on behalf of whom he has provided security, it speaks volumes of the allegation made by the creditor that he has done so in the ordinary course of his profession, trade or business.
It must however be kept in mind that the Court was tasked with adjudicating a particular set of facts and circumstances, and by no means proposed a rigid test for determining whether one has acted in the ordinary course of their profession, trade or business. In the circumstances, the validity of a suretyship in the face of the Section 15(2)(h) is to be determined with reference to the facts peculiar to the person seeking to invoke the protection afforded by the section. It is however clear that the section operates within clearly defined parameters, and that a surety seeking protection under the section has an equal, if not higher burden to satisfy in proving whether a suretyship was executed in the ordinary course of business or otherwise.