You know that your business cannot survive without some debt. Your customers are often in debt to you. Your business may be in debt to the bank. You will most probably have signed a personal suretyship or guarantee to the bank that, if your business cannot repay the loan, your personal estate will.
When we talk of ‘contingent liability’, we mean a debt that is not your own personal debt, but a debt that can become your own responsibility – contingent on the happening of certain events beyond your control.
Your business may be enjoying a low rate of interest, but you do not know for how long interest rates will remain low. If your customers do not pay their debts, your cash flow suffers. If you do not pay the bank, and it calls up the loan, your business could be at risk.
While you are alive, you are in a position to negotiate the most favourable terms of repayment of a loan. However, should you die while the loan is still outstanding, this problem will be passed on to your executor tasked with winding up your deceased estate. Even if the loan was made to a company or CC, because you own the majority share, or have signed personal suretyship, the debt of the company or CC becomes a problem for the executor.
Remember that your executor does not have the same relationship with the bank manager as you did. Your executor is under pressure from the Master of the High Court to wind up the estate according to the timetable prescribed by the Administration of Deceased Estates Act. In addition, your executor has a duty to close down or sell a business, which, after proper investigation, he or she believes will quickly lose value, thus prejudicing the heirs of your deceased estate.
So, where does that leave your business and your employees? Unless there is certainty that the bank will refrain from lodging a claim for full repayment of the loan against your business and against your estate (in terms of your suretyship), you are placing both your employees and your heirs at risk. Remember that banks have no real loyalty to your employees or your family. A bank’s decision is driven solely by its assessment of its risk in allowing the loan to continue on its books on the same terms and conditions as before. The fact that someone else is prepared to step into your shoes and provide alternative security for the loan is no guarantee that the bank will be satisfied with his or her credit-worthiness.
There are few guarantees in life and even fewer in death. You need a proper assessment of the contingent liabilities of your business and your personal estate. If you are married in community of property, your spouse’s estate should be assessed as well. A consultation with a professional financial planner will set you on the path to peace of mind as he or she can put together a solution for you. You can sleep knowing that if you do not wake up, your employees and your family can continue with their lives without the threat of loss of jobs and inheritances.
Article originally written by Clive Hill in 2012, but edited and rewritten by David Thomson, Senior Legal Adviser, Sanlam Trust (Pty) Ltd in January 2019.