8 June 2021 by Dispute Resolution Alert

What’s good for the goose is not necessarily good for the gander: Prescription periods for the State vs Organs of State

Amongst other things, the Prescription Act 68 of 1969 (Prescription Act) sets out the time periods governing the prescription of debts and also includes a list of grounds upon which, if satisfied, may be deemed sufficient to interrupt the running of prescription. When considering whether a particular debt might have prescribed, a question which may arise is whether any special time periods apply to debts owed to the State as opposed to so-called organs of state

Section 239 of the Constitution of the Republic of South Africa, 1996 (the Constitution) defines an ‘organ of state’ to include any department of state or administration in the national provincial or local sphere of government; or any other functionary or institution exercising a power or function in terms of the Constitution or a provincial constitution, or exercising a public power or performing a public function in terms of any legislation but does not include a court or a judicial officer.

The judgment handed down by the Supreme Court of Appeal (SCA) in the matter of Madibeng Local Municipality v Public Investment Corporation Ltd (955/2019) [2020] ZASCA 157 (30 November 2020) (the Madibeng Case) discusses some considerations to be taken into account when dealing with prescription-related issues concerning the State and organs of state.

Background

During the 1980s to 1990s, the then-Brits Transitional Local Council (Brits) – the predecessor of the Madibeng Local Municipality (Madibeng) – borrowed large sums of money from various institutions and invested these monies in the hopes that the returns earned would outperform the costs of the loans, so that the surplus monies earned could be used to fund various capital projects.

Unfortunately, the markets did not perform as well as Brits had hoped, and Brits faced a looming fiscal crisis when the debts fell due for repayment. In an attempt to address this crisis, Brits re-scheduled number of short-term loans and borrowed money from the Public Investment Corporation SOC Limited (PIC) to repay its short-term debts. During the early part of 1994, Brits issued the PIC with several zero-coupon stock certificates – essentially promissory notes – and pledged numerous insurance policies to the PIC in order to repay the PIC’s loans.

One of the three stock certificates in question had a face value of R93 million and fell due for payment on 30 June 2003, whilst the other two stock certificates had face values of R37 million and R87 million respectively and fell due for payment on 30 November 2003.

In the meantime, Brits had become known as Madibeng. Although Madibeng failed to repay some of the debts owing to the PIC by the relevant due dates, Madibeng had however made a number of partial repayments to the PIC over time in respect of all three debts. It was only in 2010, however, that the PIC issued summons against Madibeng to recover the balance of the unpaid debts.

Madibeng raised a special plea of prescription in response to the PIC’s summons, alleging that the PIC’s claim had prescribed and that the PIC was not entitled to proceed with its claims. In defence of Madibeng’s special plea, the PIC alleged that –

1)    the applicable prescription period was fifteen years as opposed to three years, as the debt owed to the PIC was equal to a debt being owed to the State; and

2)    the running of prescription had in any event been interrupted on numerous occasions by several admissions of liability made by Madibeng.

The main issue for determination by the SCA was whether the PIC’s claims had prescribed in terms of section 11 of the Prescription Act (with section 11 informing the different time periods which apply to different types of debts) or whether the running of prescription was otherwise interrupted in terms of section 14 of the Prescription Act (with section 14 setting out the various grounds upon which the running of prescription may be deemed to be interrupted).

Prescription periods

Although the general rule is that a debt prescribes after a period of three years from the date of it falling due for payment, section 11(b) of the Prescription Act provides a prescription period of fifteen years in respect of debts owed to the State.

Moreover, in terms of section 14 of the Prescription Act, prescription is typically interrupted by service of legal processes on a debtor (such as the issuing of summons) or by a tacit or express acknowledgement of debt by the debtor.

The SCA had previously dealt with a similar issue regarding whether the applicable prescription period was three or fifteen years in the matter of Holeni v Land and Agricultural Development Bank of South Africa [2009] ZASCA 9; 2009 (4) SA 437 (SCA). Amongst other things, the SCA was required to determine whether the Land and Agricultural Development Bank of South Africa (the Bank) was the State or an ‘organ of state’ as envisioned in section 239 of the Constitution in order to determine which prescription period would apply.

Acting Judge Navsa observed that the term ‘the State’ does not have one settled meaning; that its precise meaning in any given case depends on the context; and that the Courts have consistently relied upon on practical considerations to determine its scope. The learned Judge rejected the argument that, for purposes of the Prescription Act, an organ of state was ‘the State’ and accordingly held that the Bank was not an ‘organ of state’, but instead was a state-owned entity that went about the business of the State by recovering moneys due to the treasury. The reference to ‘State’ in section 11(b) of the Prescription Act therefore means the State as government.

Applying this logic to the PIC, the SCA held that the PIC is a state-owned entity created by the Public Investment Corporation Act 23 of 2004 and although the PIC goes about the business of government, operating as a financial services provider in respect of government funds, it is distinct from the government in that its public function is not dictated by the Constitution. Accordingly, the usual three-year prescription period would apply to debts owed to the PIC and other similar organs of state.

Interruption in the running of prescription

The second issue that the SCA considered in the Madibeng Case was whether the running of prescription had been interrupted on numerous occasions owing to several admissions of liability made by Madibeng.

The general principle is that where prescription is interrupted by an acknowledgement of debt or an admission of liability by the debtor, the prescription period begins to run afresh from the date of such interruption. However, the SCA noted that an admission of liability alone (in other words, the debtor merely pronouncing in some form or another that it is indebted to the creditor) does not necessarily amount to a fresh undertaking to discharge the debt – instead, the SCA held that the admission must be accompanied by the conduct of the debtor, meaning that the debtor must truly convey its intention to repay the debt.

Significantly, Madibeng had on numerous occasions been vocal about the debt that it owed to the PIC. Not only did Madibeng make several partial repayments of the debt owed to the PIC over time, but Madibeng also regularly made balance enquiries and even requested the PIC for an extension of time to repay the loans. The SCA held that the effect of this was that the prescription period began to run afresh after the repayments were made by Madibeng. The SCA held that it was determinative of the prescription issue that a payment was made by Madibeng during 2008, shortly before summons was issued, meaning that the summons had been served timeously before the three-year prescription period took effect.

Conclusion

The SCA held that the PIC’s claim for repayment of the loans had not prescribed, particularly as a number of partial repayments had been made by Madibeng over time, amounting to tacit acknowledgements of liability deemed sufficient to interrupt the running of prescription.

Accordingly, the SCA ordered Madibeng to repay the PIC the sum of R162,639,962.00, together with interest running from the dates on which the respective debts had fallen due for repayment.

Given the fact that Madibeng had never disputed owing money to the PIC, the quantum of its indebtedness or the partial repayments that it had previously made to the PIC, the SCA was critical of Madibeng’s conduct in defending the summons and thereafter appealing to the SCA, in circumstances where Madibeng ought to have known that it had no prospect of successfully defending the PIC’s claims.

An important lesson from the Madibeng Case is that the relevant prescription periods will depend upon whether the creditor in question is the State or an organ of state. By contrast, an important lesson for debtors is that repeatedly requesting confirmation of the outstanding balance on a loan, making part-payments towards a debt, or otherwise conveying an intention to repay the outstanding debt may be construed as an acknowledgement of liability sufficient to interrupt the running of prescription.

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