A nasty surprise for lenders

A nasty surprise for lenders

By Jerome Veldsman

Trinity Asset Management (Pty) Limited v Grindstone Investments 132 (Pty) Limited, a decision of the Constitutional Court (CC) on 5 September 2017 in an appeal from the Supreme Court of Appeal (SCA), dealt with extinctive prescription of a debt under a loan agreement.

The relevant part of the Prescription Act reads: “prescription shall commence to run as soon as the debt is due.”  And, absent specific circumstances, the debt under a loan agreement will be extinguished by extinctive prescription three years after prescription commenced running.

The relevant part of the loan agreement read: “The Loan Capital [principal and interest] shall be due and repayable to the Lender within 30 days from the date of delivery of the Lender’s written demand.”

The primary question was: Did prescription commence to run (1) when the principal was advanced, (2) or when the lender delivered written demand for payment to the borrower?  If (1) was the correct answer, the lender would win; and if (2) was the correct answer, the borrower would win.

The Judges had different answers to the question in, respectively, the Supreme Court of Appeal and in the Constitutional Court:

Court Answer (1) Answer (2)
Written demand was a condition precedent for the debt to become payable, and prescription commenced to run when the lender delivered written demand for payment to the borrower. Written demand was only a procedural term, and prescription commenced to run when the principal was advanced.
SCA (five Judges): Two Judges (the minority) Three Judges (the majority)
   
CC (eleven Judges): Five Judges (the minority) Six Judges (the majority)

The borrower won in both Courts, but it was a close call.

In the SCA, the majority regarded it as unnecessary to decide whether, or not, in law, it is possible, by agreement, to make demand a condition precedent before prescription could begin to run.  In the CC, the majority (seemingly) held that, in law, it is possible, by agreement, to make demand a condition precedent before prescription could begin to run.

This case is a serious prompt to review all loan agreements, including inter-company loan agreements, and especially standardised documents.

Also in this issue:

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