Guarantees, Suretyships, Co-principal Debtorships and Indemnities given are all “dispositions” and are subject to section 26 of the South African Insolvency Act, 1936 which provides inter alia that “every disposition of property not made for value may be set aside by a court”.
A disposition, if not given for value or consideration less than the risk incurred, can be set aside by a Court under the Insolvency Act. What must be proved is that immediately after the disposition the insolvent’s assets exceeded its liabilities.
A common occurrence is where a company provides security through a guarantee, indemnity or suretyship for the obligations of another company in the same group of companies. If there is no benefit for the company providing the security and its liabilities exceed its assets immediately after the disposition, then the security agreement may be set aside by a liquidator on insolvency.
Our courts have held that where a subsidiary company provides security for its parent company, in circumstances where the subsidiary company places itself in a position where it is unlikely to be able to pay its debts, then if the risk incurred by the subsidiary company is greater than the advantage received and the disposition was not made for value, then the suretyship and mortgage bond (as was the case here) were set aside.
Creditors should therefore think carefully before accepting such security provided by a group company as they run the risk of the security agreement being set aside by liquidators on insolvency.