On 29 September 2016, the Supreme Court of Appeal (SCA) issued a reality check to practitioners and businesspeople alike. Trinity Asset Management (Pty) Ltd v Grindstone Investments (Pty) Ltd (1040/15)  ZASCA 135 (29 September 2016) clarified misconceptions regarding the impact prescription plays on debts which are payable “on demand”.
The case in question concerned a loan agreement between Trinity and Grindstone in terms whereof Trinity advanced a loan to Grindstone during February 2008. The parties did not agree the date upon which the debt was to be repaid. Instead, the parties expressly agreed in writing that, “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.” (own emphasis)
On 9 December 2013, more than five and a half years after the loan was advanced, Trinity served a letter of demand on Grindstone (in accordance with s345 of the old Companies Act) claiming repayment of the loan capital plus interest. Grindstone denied its indebtedness and insisted that the debt had prescribed in February 2011, some two and a half years prior.
The only issue before the SCA was whether or not Grindstone’s debt owing to Trinity had prescribed or not.
The first lesson taken from this judgment relates to the format of the section 345 letter of demand. The time period stipulated in section 345 of the (old) Companies Act is three weeks, or 21 days. The time period agreed upon by the parties in their contract, however, was thirty days. The Court found that Trinity’s letter of demand did not comply with the parties’ agreement and was thus formally defective. A “schoolboy error”, some might say and one which is easy to avoid.
The second and more fundamental lesson relates to the date upon which prescription began to run. Surely, if the parties agreed that a debt would become “due and payable” upon demand, that would be the date from when prescription would run? Not quite…
The Prescription Act provides that prescription will be completed three years after the debt became “due”. The Court differentiated between when a debt is “due” and when it is “payable”. It is now established law that a debt that is “repayable on demand” becomes due the moment the money is lent or advanced by the creditor, as it is from that moment that the debt is “claimable”.
The Court found in this case that prescription ran from the date of the advance, even though the debtor may procedurally be entitled to a longer period of time within which to make its actual repayment. In support of its finding, the SCA reiterated that a creditor may not, by his/her own action or inaction, delay the running of prescription to his/her advantage and to the prejudice of the debtor.
The Court found in the circumstances that the issuing of a letter of demand satisfied a mere procedural requirement which triggered the payment obligation and it was not intended to be a condition precedent for the creation of the debt, which would have then triggered the running of prescription. It was Trinity’s advance of the loan which created Grindstone’s indebtedness, because from that date Trinity was entitled to demand repayment thereof.
The Court found that the wording “due and payable… within 30 days of… demand” was not sufficient to constitute a clear indication of the agreement between the parties that the debt was only to become due once demanded, thereby delaying the running of prescription. Although the Court confirmed that it was indeed possible for the parties to agree to postpone the running of prescription, no guidance was provided as to what wording would have been sufficient to achieve this outcome.
One can understand why the reasoning advanced by the SCA would apply to a loan simply “payable on demand”. It is however more difficult to understand why the express inclusion of the word “due” was insufficient to delay the running of prescription, as was the case here. The surrounding circumstances clearly pointed to a mutual understanding that the debt would remain alive until demanded.
The consequences of this judgment are clearly exposed when considering its application to shareholder loans (which are almost always “payable on demand”). Signed financial statements may constitute an acknowledgement of debt thereby interrupting prescription, but this would only be relevant to amounts owed by the company and not in respect of amounts owed to the company, by shareholders.
Unfortunately, insofar as a shareholder loan to a company has already prescribed (in accordance with this judgment), there is nothing which can be done to revive it after the fact. The loans can of course be “re-instated” but this will require cooperation and agreement from all parties concerned.
Trinity may very well have rewritten the general understanding of a debt “due and payable on demand”. It has now become vital that parties agree (and record) that the debt will only become due in clearly specified circumstances. In the absence of such an agreement, the timely filing of an acknowledgement of debt will be required, in order to interrupt prescription. A failure to do so may result in your claim for repayment being left dead in the water.