By Nico Claassen

Standard Bank of South Africa Ltd v Miracle Investments 67 (Pty) Ltd and Another (SCA) (unreported case no 187/2015, 1-6-2016) (Mbha JA (Leach, Saldulker and Swain JJA and Baartman AJA concurring))

The Prescription Act 68 of 1969 (the Act) stipulates in s 12(1) that prescription commences to run as soon as a ‘debt is due’. In a recent judgment handed down by the Supreme Court of Appeal (SCA), the SCA was required to consider the meaning of that provision of the Act. This required the consideration of an instalment agreement containing an acceleration clause that entitled a creditor to claim the full outstanding amount payable in terms thereof on the occurrence of a breach and the giving of written notices.

Background facts

The facts in the case were, in short, as follows:

• The creditor lent and advanced money to a principal debtor pursuant to a facility.
• The amounts lent and advanced were repayable in 240 monthly instalments.
• As security for the obligations of the principal debtor certain entities executed suretyships in favour of the creditor, which suretyships were in turn secured by mortgage bonds registered over certain immovable properties owned by sureties (the bonds).
• The principal debtor failed to pay the monthly instalments in terms of the facility and the last payment was made by principal debtor on 21 October 2008 (the critical date).
• The sureties contended that the debt of the principal debtor prescribed on 22 October 2011 (ie, three years after the last payment was made by the principal debtor) and as there was no principal debt to secure, they sought an order directing the creditor to consent in writing to the cancellation of the bonds without receiving any payment.

The terms of the facility stipulated that the creditor could terminate the facility and claim immediate repayment of the outstanding balance by giving written notice to the principal debtor. The written notice as aforesaid could, however, only be given by the creditor if the principal debtor previously failed to pay any instalment due in terms of the facility and not remedy the default within seven days of written notice having been given to him.

In this case, although a written notice was given claiming the arrear instalments, no written notice was given whereby the election was communicated to terminate the facility and thereby accelerate the full amount payable in terms of the facility. This only took place when an action was instituted by the creditor for repayment of the amounts owing to it pursuant to the facility. This action was instituted long after the three year prescriptive period would have lapsed, on the assumption that the prescriptive period commenced on the critical date (ie, on 21 October 2008) as contended by the sureties.

Meaning of when a ‘debt is due’

The phrase ‘debt is due’ is not defined in the Act. The meaning thereof was accordingly considered by the court a quo with reference to jurisprudence. The court a quo found that the ‘debt is due’ on the day the creditor acquired the right to enforce payment of the full amount even though it elected not to do so. This conclusion was reached based on the policy consideration that a creditor should not be able to determine, of its own accord, when prescription will commence to run, by delaying its election to enforce an acceleration clause.

The SCA considered the jurisprudence and case law relied on by the court a quo with reference to the following –

• contrary views expressed by various academics;
• the difference in wording in the Act and the previous Prescription Act 18 of 1943 (the old Act) (which contrary to the Act, stipulated that prescription would commence when a creditor’s right of action first accrued); and
• the express terms of the agreement, which required certain written notices to be given.

The SCA identified that:

• Certain of the cases relied on by the court a quo were decided under the old Act and with reference to the policy consideration referred to above.
• The cases that were decided under the Act found, contrary to the views of the academics, that prescription commenced to run on the (first) default by the debtor and not when the creditor elected to claim the balance outstanding.
• The cases in bullet two above were in any event distinguishable, in that in none of them were the giving of written notice a condition precedent to the creditor’s right to claim.

The SCA aligned itself with the academics and found that the claim of the creditor against the principal debtor had not prescribed. It found that the written notice of termination was a condition precedent of the creditor’s right to claim the full balance owing under the facility. Only when that written notice was given would the creditor have a complete cause of action to pursue its claim against the principal debtor. If such written notice is not given, the creditor cannot be said to be delaying prescription in respect of an existing claim, as the claim for the full amount owing can only arise once the written notice is given. Prescription will, however, commence to run in respect of each monthly instalment, each of which are in themselves separate causes of action. It was, therefore, not a case where the creditor was delaying the commencement of prescription by its own inaction.

The decision of the court a quo was accordingly set aside and the sureties’ application was dismissed.

Conclusion

The meaning of when a ‘debt is due’, in the case of an instalment agreement, must be determined with reference to the terms of the agreement. If a written notice is required prior to the full balance owing under the instalment agreement becoming due and payable, it may be that the obligation to pay the full balance will only arise once such written notice is given. This will be the case if a written notice is a condition precedent for a creditor’s cause of action to claim the full balance. However, care must be taken as this does not mean that prescription will not commence in respect of each individual instalment as and when they become due and payable.

The findings made by the SCA are not only relevant for litigating practitioners, but may also need to be considered by commercial practitioners when drafting instalment agreements. The benefit of an automatic acceleration clause (where the creditor elected in advance that the full debt will become due immediately upon the first default) must be weighed against the benefit of protecting a creditor’s right to elect (after the fact) when to claim the full balance by giving a written notice to the debtor and thereby communicating its election to do so.

• Ramsey Webber were the instructing attorneys for the appellant.
• See law reports ‘Prescription’ 2016 (May) DR 38.

Nico Claassen BCom LLM (Stell) is an attorney at Ramsay Webber Inc in Johannesburg.

This article was first published in De Rebus in 2016 (Aug) DR 43.