1.1
A suretyship agreement creates a type of security known as secondary or accessory security. It comes into being when the surety (Lloyd) agrees to provide a guarantee to the creditor (Money-Bags Bank) that they will fulfill the obligations of the principal debtor (ZED Ltd) if the debtor fails to do so. The suretyship agreement is a contract between the surety and the creditor, and it is typically entered into separately from the main contract between the debtor and the creditor.
In order for the suretyship agreement to be valid, it needs to meet the following requirements:
- Consensual: Both parties must agree to enter into the suretyship agreement voluntarily.
- Formality: Generally, a suretyship agreement needs to be in writing in order to be enforceable, although there are some exceptions to this rule.
- Valid consideration: The surety must receive some form of benefit or advantage from the debtor in return for providing the guarantee.
1.2
Three benefits available to a surety in a suretyship agreement are:
1) Limited liability: The surety can negotiate the limits of their liability in the agreement. This means that they can specify a maximum amount for which they are responsible, and beyond that amount, they will not be liable for any further amounts owed by the debtor. This provides the surety with protection against unlimited liability.
2) Independent defenses: The surety is entitled to raise defenses that are specific to them, which are independent of the debtor's defenses. For example, if the debtor claims that the contract is void due to misrepresentation, the surety can still be held liable under the suretyship agreement unless they can prove that they were also misled or deceived.
3) Right of subrogation: If the surety has to fulfill the obligations of the debtor, they have the right to step into the shoes of the creditor and take over the rights and remedies against the debtor. This means that the surety can recover any amounts paid from the debtor or their assets, allowing them to minimize their loss and potentially seek reimbursement.
These benefits provide the surety with a level of protection and assurance when entering into a suretyship agreement, as they have certain rights and limitations that can mitigate their risk in guaranteeing the obligations of the debtor.
Question 1 Lloyd is a director of ZED Ltd. On 20 September, ZED Ltd applied to Money-Bags Bank for a loan of R2 000 000,00. The bank indicated that it is prepared to enter into a credit agreement on the condition that Lloyd, as director of ZED Ltd, signs a suretyship agreement in favour of Money-Bags Bank. Lloyd doesn’t understand what a suretyship agreement is. He approached you for advice. Answer the following questions: 1.1 What type of security does a suretyship agreement create and how does it come into being? Explain in detail. 1.2 Name and explain any three benefits available to a surety
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