In terms of the Prescription Act of 1969, contractual debts are generally extinguished by prescription after a period of three years following the date that the “debt is due” (Section 12). In the recent Constitutional Court case of Trinity Asset Management (Pty) Ltd v Grindstone Investments 132 (Pty) Ltd (CCT 248/16), the court grappled with the following question: when does the debt fall due (and when does prescription commence) in the context of loans which are repayable on demand?
The relevant facts
During 2008 Trinity advanced an amount of R3 050 000 (the loan amount) to Grindstone in three tranches. The underlying loan agreement concluded between the parties during 2007 provided that the loan amount would be “due and repayable to [Trinity] within 30 days from the date of delivery of [Trinity’s] written demand.”. During September 2013, informal correspondence was exchanged between the parties, the gist of which was that Trinity made known its intentions to claim repayment of the loan amount plus interest accrued thereon. No repayment was forthcoming and, as a result, Trinity’s attorneys served a letter of demand for such repayment, but only during December 2013. Attorneys for Grindstone responded by raising the defence of prescription and denying Grindstone’s liability for repayment of the loan amount. During July of 2014 Trinity launched an application in the High Court of South Africa, Western Cape Division, Cape Town (High Court), for Grindstone’s provisional liquidation on the basis that Grindstone was unable to pay its debts as provided for in section 345 of the Companies Act. Grindstone raised as one of its defences that Trinity’s claim against it for repayment of the loan amount had prescribed during 2011 (3 years after the date of advance thereof). Grindstone contended, in support of this defence, that debts which are repayable on demand are in law repayable immediately upon advance of the sum lent, such that no formal demand is required in order to complete the cause of action (and in turn to commence prescription). It contended furthermore that no creditor could unilaterally delay the commencement of prescription merely by failing to take a procedural recovery step which is solely within its sphere of control. In reply to this prescription defence Trinity argued that the parties had never intended that the loan amount would become due and repayable immediately upon being advanced (but in fact only when and if demand were made by Trinity for such repayment). As such, Trinity contended, it was never the intention of the parties that prescription would commence on the dates of advance of the tranches comprised by the loan amount, but only on the date of demand for repayment. Trinity contended that as the loan amount would be due for repayment (and therefore ripe for the commencement of prescription) only when and if such demand for repayment was actually made. In the Supreme Court of Appeal, the Court upheld an earlier judgment handed down by the High Court and confirmed that the debt to repay the loan amount was indeed due the moment the loan amount was lent, and not only when and if it was demanded for repayment (with the result the prescription commenced on the date of advance of the loan amount). On appeal of this SCA judgment to the Constitutional Court, the key question considered by the court was whether the written loan agreement between the parties could be read to evince a clear intention to defer the date when the debt would become due to the date of demand for repayment (and in turn a clear intention to delay the commencement of prescription accordingly). In a 6 to 5 majority judgment the Constitutional Court found that the loan agreement could not be interpreted in support of any contention that the parties intended to delay when the debt would become due, or as a result when prescription would commence. The debt therefore became due, and prescription commenced, immediately upon the advance of the loan amounts during 2008, and based on this reasoning the underlying debt indeed prescribed in 2011. The appeal was dismissed on this basis.
Practical Implications
The real-world commercial implications of the Trinity judgment are potentially far-reaching. While the exact wording of the loan provisions in question would always be highly relevant in determining the intention of the debtor and creditor on a case-by-case basis, it seems clear that in most cases where loans are either advanced with no fixed repayment date, or expressly stated to be repayable on demand, prescription does indeed commence to run on advance of the loan. As such, and in the absence of a clear intention to the contrary, a host of historic loans of this nature which are governed by South African law may now be said to have prescribed, three years on from the date of advance thereof, unless prescription has been specifically delayed or interrupted for case specific reasons. Creditors all over the country would be well advised to review all loan documentation providing for the repayment of loans on demand, with a view to determining whether it would be appropriate to start panicking. The loan documentation subject to review includes not only loan or other credit agreements, but any documentation that provides for the creation of on demand loans. One critical such example is that of shareholders agreements, which typically provide that claims on shareholders loan account which are disproportionately high relative to other shareholders’ claims, are repayable on demand. In all of these cases where more than 3 years have lapsed since the underlying funds were first disproportionately advanced to the debtor company, the shareholder in question runs the very real risk of its (belated) demand for repayment being met with a definitive prescription defence, unless it can show that prescription was delayed by agreement or interrupted on one of the specific grounds enumerated in the Prescription Act. As for how creditors should contract so as to avoid the unintentional commencement of prescription on advance of the loan amount, the Constitutional Court in Trinity found that parties should take care to provide, expressly and in no uncertain terms, that the formal written demand for repayment of a loan amount shall constitute a condition precedent to the underlying debt falling due for repayment. As a result prescription will then, by agreement between the parties, commence only as and when such formal written demand for repayment has been made.
