Has your right to demand repayment of your loan prescribed? A recent Constitutional Court (“CC”) judgement clarified the position vis-à-vis on demand loan agreements. This article shall briefly discuss the aforementioned case and the relevant legislation in order to highlight the impact which the case may have on a loan agreement. The courts have faced some degree of controversy surrounding the correct interpretation of “due” in order to determine the date upon which prescription starts its deadly journey.
In the recent Constitutional Court case of Trinity Asset Management (Pty) Limited v Grindstone Investments 132 (Pty) Limited  ZACC 32, the Court had to consider and determine the interaction between prescription and contractual freedom as envisaged in terms of Section 35 of the Constitution of the Republic of South Africa. More specifically the Court dealt with the date of demand and the right of the creditor to determine final repayment by means of lawful demand to the debtor.
Trinity Asset Management (Pty) Ltd (the “Applicant”) and Grindstone Investments 132 (Pty) Ltd (the “Respondent”) entered into a written loan agreement (“Loan Agreement”) on 1 September 2007, for the capital amount of R3 050 000 (three million and fifty thousand Rand) (“Loan Amount”) payable in three separate tranches. On 19 September 2013 the Applicant requested repayment of the Loan Amount by means of an email addressed to the duly authorised representative of the Respondent. The Respondent acknowledged receipt of the email and agreed to the repayment, however no payments were made and as a result thereof a letter of demand was served on the Respondent on 9 December 2013. The Applicant applied to the High Court of South Africa for the provisional liquidation of the Respondent and the Respondent in return denied its indebtedness to the Applicant and furthermore raised the defence of prescription.
The High Court ruled that the defence was indeed a valid defence and the application for provisional liquidation was dismissed. The Applicant appealed to the Supreme Court of Appeal (the “SCA”). The SCA came to different conclusions. The majority view of the SCA found that the claim had prescribed as the debt was “due” the moment it was advanced and enforceable. Consequently, prescription began to run from 1 September 2007. The minority view held that regard must be had to the true intention of the parties as it appears from the agreement and the relevant policy considerations in order to determine when a debt is due. The minority held that the debt did not extinguish as a result of prescription and that it was the intention of the parties that prescription would commence on the date on which the Applicant made a written demand.
Subsequent to the SCA judgement, the Applicant furthermore appealed the matter to the CC which held that the main issues that the CC had to decide was whether the Applicant’s claim had prescribed as well as the various circumstances that trigger the running of prescription. The Prescription Act No. 68 of 1969 (the “Prescription Act”) regulates the running of prescription. Section 12 of the Prescription Act stipulates that prescription shall commence to run as soon as the debt in question becomes due. In the Court’s quest to determine the correct meaning of the word “due”, the Court quoted Standard Bank of South Africa v Miracle Mile Investments 67 where the court reached the following conclusion:
“a debt must be immediately enforceable before a claim in respect of it can arise. In the normal course of events, a debt becomes due when it is claimable by the creditor and as a corollary thereof, is payable by the debtor.”
Therefore, a debt is regarded as due when the creditor acquires a complete and actual cause of action to approach a court to recover the debt and in such an instance prescription will only start running once the creditor is in the position to enforce its right in law and not necessarily when the right arises. Policy considerations provide that a creditor should not by its inaction cause a delay in the running of prescription and the courts have accepted the general rule that any and all debts “payable on demand” are immediately enforceable on the conclusion of the contract.
When a loan is “payable on demand” it entails that no specific demand for repayment is necessary and the debt becomes repayable as soon as it incurred and not only after demand has been given by the creditor. In contrast hereof where the parties have intended that a demand be made a condition precedent to the enforcement of any debt, the running of prescription is also deferred until the required notice has been given.
In the Trinity Asset Management case the CC carefully interpreted the wording of the Loan Agreement which read:
“The Loan Capital shall be due and payable to the Lender within 30 days from the date of delivery of the Lender’s written demand.”
The Court held in its findings that a contractual debt becomes due as per the terms of that specific contract. Where the agreement is silent of a due date, then the debt is regarded as due and payable immediately on conclusion of the contract. However, parties may agree that the creditor will be entitled to determine the time for performance and that the debt will only be “due and payable” once the demand for the performance has been made. When the agreement is clear on such an intention, demand will not only be a condition precedent for the creditor’s right to claim but also for prescription to start running. Ultimately courts have to interpret each agreement on its own in order to determine the true intention of the contracting parties.
Payable on demand has the effect that no specific demand is required and when suing for repayment the creditor does not have to allege a demand as demand is not part of the creditor’s cause of action. Debts in terms of such a loan will prescribe and/or be extinguished three years after the date on which the advance was made, unless the time period for prescription was interrupted by legal proceedings such as summons, etc. If the parties clearly intended demand to be a condition precedent to the creditor’s claim, then prescription will only start running once the demand was made to the debtor.
In casu the CC by a majority decision held that the parties did not intend to defer when the debt in terms of the Loan Agreement became due and hence there was no intention to delay prescription. The CC, in contrast to the SCA, did not view the 30 days’ notice as a condition for repayment. It is advisable for parties to a loan agreement to structure their agreements in such a manner in order to avoid the debt being extinguished by prescription. The parties therefore need to ensure that the terms of the agreement clearly stipulates the conditions for demand where debts are “payable on demand”.
13 July 2018