What is prescription when it comes to lending someone money?
by Wendy Mvinjelwa, Attorney & Conveyancer at Spence Attorneys
Whether you loan money to a friend, a family member or to a company of which you are a shareholder of, you need to consider various aspects of law before you enter into an agreement. Many people aren't aware of the Prescription Act 69 of 1969 (the "Prescription Act"), and how prescription can potentially affect whether repayment of a loan can be enforced against the borrower- often these issues are picked up when it is too late, and in some cases the lender is left with little to no recourse against the borrower.
What is prescription in terms of the Prescription Act, pertaining to debts?
Section 10 of the Prescription Act provides that a debt shall be extinguished after the lapse of the applicable period and most debts prescribe ("fall away") after 3 years and prescription starts to run as soon as the debt is due, provided that prescription is not interrupted within the 3 year period. A debt is due when it is claimable by the creditor and immediately payable by the debtor.
What about the National Credit Act?
The running of prescription is interrupted (is “stopped”) when a legal process against the debtor commences for the recovery of the debt. A legal process can be a petition, a notice of motion, a rule nisi, a pleading in reconvention, a third party notice referred to in any rule of court, and any document whereby legal proceedings are commenced- however, most often the creditor will issue summons to start the legal process to interrupt prescription (after complying with the National Credit Act, where applicable). If an agreement is subject to the National Credit Act, then one would refer to Section 129 of the Act which requires the creditor to provide the debtor with a written notice informing them of the default. Following the notice, the debtor would then proceed with issuing the summons to begin the legal process.
Can parties agree to delay the commencement of prescription?
Parties to an agreement often attempt delaying the commencement of prescription in what is called “on demand” loans, and what usually becomes a dispute for these loans is when prescription starts to run. To clarify, when money is lent “on demand”, the parties usually intend that the debt only needs to be repaid when the creditor demands payment from the debtor. This is not always ideal as recent case law has shown us.
Repayable “on demand” loans are common between family members to small and large commercial businesses. There appears to be a common misconception that where no fixed date for repayment is set, then the “running of prescription is delayed” until such time repayment is called upon, but this is not correct, as the recent Constitutional Court case of Trinity Asset Management vs Grindstone Investments (2017) ZACC 32 (the "Trinity case") shows us- that unless you agree otherwise an amount is automatically due and payable on conclusion of the contract (where no date for repayment is made and such loan is a “repayable on demand loan”), and accordingly, no specific demand for repayment need be made for prescription to start running.
The Court in the Trinity case makes the distinction between a case of family members making loans to each other where it is clear that the loan is on a “never-never” basis and that the debt “won’t be due, in any sense, legal, technical or practical, until the creditor says, ‘Please won’t you pay back’, and a case most commercial loan agreements where prescription does start to run immediately once the money is paid over unless the parties specifically agree otherwise.
In the Trinity case, funds were loaned by Trinity to Grindstone on condition that it would be “due and repayable” to Trinity within 30 days from the date of delivery of the Trinity’s written demand”. Six years later Trinity demanded repayment a year after that it applied for Grindstone’s liquidation the grounds of Grindstone’s inability to repay the amount then owing, in the sum of R 4.6 million. The matter ended up in the Constitutional Court. Trinity was unsuccessful at the High Court, and on appeal at the Supreme Court of Appeal, with advancing its argument that prescription was delayed. It took the matter before the Constitutional Court, where it was decided on close majority and minority split in favour of the Grindstone (the debtor), that the debt had in fact prescribed. The Court considered the loan agreement in its entirety to determine whether the general principle that in loans “payable on demand” prescription begins to run as soon as the money is paid. Overall, the wording of the provisions in the contract contradicted the arguments put forward by Trinity was namely that prescription had been delayed, and further that the loan was intended to be long term as illustrated by the further requirement that Grindstone register a covering bond as a security in favour of Trinity.
For practical purposes in the case, prescription commenced running on the date upon which the debit is entered into the account. The Court stressed the loan was not “payable on demand” but rather repayable 30 days after demand, however the “30-day period” made no difference. The point of the jurisprudence is that the creditor had the unilateral power to demand performance from the debtor at any time from advance – not that, following demand, the debtor was obliged to immediately repay the loan (“on demand”) or 30 days later. In both instances, at any time there is nothing stopping the creditor from demanding performance. To hold that a “run-of-the-mill notice” clause delays prescription is to place enormous power in the hands of a creditor, and there are also policy considerations against creditors unilaterally being able to delay prescription.
People often try to phrase agreements in certain ways to try and avoid compliance with certain legislation or try and word agreements as widely as possible to avoid falling within the ambit of certain common law principles or certain regulatory requirements. It is essential to obtain legal advice when loaning funds- even to connected persons- as there are many considerations which need to be taken into account, such as the National Credit Act as well as the Prescription Act. Failure to comply or consider these prior to loaning funds can, in some cases, be detrimental to the actual agreements, or be considered unlawful. Spence Attorneys can assist with advice pertaining to loans, enforcing loan agreements as well as notarial bonds. Contact Wendy Mvinjelwa (firstname.lastname@example.org) to obtain advice.
DISCLAIMER: This article should not be regarded as financial or legal advice, and may contain errors and/or omissions. Spence Attorneys will not be held liable for any person acting and/or failing to act on any matter contained herein. Always seek legal advice from your own legal advisor before acting on any advice herein.