Prescription: a perfect present for miracle mile?

Prescription has long been regulated in South Africa by means of the Prescription Act, No 68 of 1969 (Act). In terms of s10(1), a debt is extinguished by prescription after the effluxion of the prescription period laid down in the Act.

It is crucial for a creditor to be aware of the point at which prescription started running so as to avoid a situation where such a creditor loses the right to compel payment.

In the case of Miracle Mile Investments 67 (Pty) Limited & Present Perfect Investments 116 (Pty) Ltd v The Standard Bank of South Africa Limited (2013/22057) [2014] ZAGPJHC 423 (11 December 2014), the Gauteng Local Division of the High Court dealt with, among other things, the commencement of prescription in respect of a credit facility secured by suretyships.

N.C. Papachrysostomou (Nicolas) was granted a 'liberator facility' by the bank in terms of which an account was opened and a line of credit was extended to Nicolas in excess of

R13 million. The bank also undertook to advance sums of money on Nicolas' behalf in respect of which the account would be debited. Nicolas agreed to pay the principal debt with interest over a period of 240 months by way of monthly instalments.

Miracle Mile and Present Perfect (Sureties) executed suretyship agreements in favour of the bank in terms of which they bound themselves as sureties and co-principal debtors in solidumwith Nicolas for payment of any sum owing by Nicolas to the bank. They also registered 12 bonds as security pursuant to the suretyships.

Nicolas overdrew the account and was indebted to the bank in the amount of R7.4 million as at 21 October 2008. No further withdrawals or payments were made in respect of the account after this date.

Relying on s11 of the Act, the Sureties argued that the debt owed by Nicolas to the bank had been extinguished by prescription due to the bank's failure to take action for a period in excess of three years, and that the debt had therefore prescribed on 22 October 2011.

The bank raised several arguments to counter this. It attempted to distinguish between the liberator facility and a normal overdraft on the basis that repayments were not due on the date of any particular advance but rather in monthly instalments over the duration of the agreement.

The failure to pay a monthly instalment did not automatically accelerate the balance of the debt. In terms of the facility, the bank was entitled to convert it to one repayable by demand if Nicolas did not remedy his failure to pay within seven days of written notice from the bank. In such circumstances, the bank would also be entitled to terminate the facility and claim immediate payment of the outstanding balance. As no such notice was given, the bank contended that prescription could not have commenced.

The question for the court was whether the debt became 'due' within the meaning of s12(1) of the Act.

The court considered various articles written by academics but also had regard to a number of judgments which were critical of those academics.

The academics took the view that particular regard had to be had to the contract and the acceleration clause and that a normal acceleration clause does not itself make the balance of the debt payable, but rather gives the creditor an option to demand it, so prescription runs from this demand, not from the date of the debtor's failure to pay the instalment.

While admitting that such views may have merit, the case law considered found favour with the court. It was held that if the bank was entitled to accelerate payments and claim the full amount but failed to do so, this did not prevent prescription from running. Prescription would commence running from the date that the bank had the right to enforce payment of the full amount due, even if it chose not to give such notice.

The court also confirmed that the Sureties did not undertake a separate independent liability, but rather one which was accessory in nature. Therefore if the principal debt prescribed, so too did the Sureties' debts, regardless of the mortgage bonds registered as security for their liability.