At last: Some joy for creditors!

Creditors face daily uphill battles when trying to collect money from debtors. Not only has the National Credit Act, No 34 of 2005 made it more onerous on creditors to recover debts due to them, but creditors must constantly be aware of the threat of a claim prescribing.

The Prescription Act, No 68 of 1969 (Act) provides that a debt is extinguished by prescription after the period set out in the Act.

A claim for monies owing generally prescribes within a period of three years from the debt becoming due. Our courts have long debated the question of when a debt becomes ‘due’. What is, however, certain is that once the prescribed period of prescription runs out, the debt is extinguished and cannot be claimed.

The Supreme Court of Appeal recently overturned a judgment of the High Court which dealt with the question of when prescription commences in the event of an agreement having, what is commonly called, an acceleration clause.

The matter Standard Bank of South Africa Ltd v Miracle Mile Investments 67 (Pty) Ltd and Another 2017 (1) SA 185 (SCA) concerned an agreement containing an acceleration clause that entitled the creditor bank to claim the whole outstanding amount payable, upon the occurrence of a breach by the principal debtor. The crux of the dispute in the matter related to the question of when the debt becomes ‘due’ in terms of s12(1) of the Act. In other words: is the debt due when the principal debtor (this case involved sureties) breaches the obligation to pay the monthly instalment, or is it due when the creditor elects to enforce the acceleration clause, in order to render the whole amount payable?

The background facts can be summarised as follows: In August 2005 Standard Bank and the principal debtor entered into a facility agreement where the principal debtor was granted a line of credit styled a ‘Liberator facility’ (the facility) for a maximum amount of R13,984,600, which was repayable over a period of 240 months. As security, the respondents executed deeds of suretyship in favour of Standard Bank in terms of which they bound themselves as sureties and co-principal debtors with the principal debtor. Standard Bank registered mortgage bonds over the properties of the respondents as further security.

One of the terms of the facility was that Standard Bank could, in the event of non-payment, convert the facility to one repayable on demand, in which event Standard Bank would be entitled to terminate the facility and claim immediate payment of the outstanding balance by giving a further written notice.

The principal debtor, after the respondents executed the suretyships, defaulted on his monthly instalment repayments. As a result, and on 12 August 2008, Standard Bank addressed a letter to the principal debtor advising him that he had not met his obligations in respect of the facility and that, in order to bring his account up to date, he had to pay the total arrears of R671,072,88 which was due immediately. In this notice Standard Bank did not elect to accelerate the debt to claim the full amount owing.

The principal debtor was thereafter sequestrated.

On 27 August 2013, more than five years after the first notice was sent to the principal debtor, Standard Bank instituted action against the respondents to recover the debt due and declare the properties mortgaged executable. The respondents proceeded to launch an application during June 2013, in which they sought an order directing Standard Bank to consent in writing to the cancellation of the bonds, notwithstanding that the debt they secured remained unpaid. The basis of the application was that Standard Bank’s claim had prescribed on 22 October 2011 as a result of the principal debtor’s failure to pay any instalments after the last payment on 21 October 2008. They contended that as there was no longer any principal debt for the bonds to secure, they were no longer liable as sureties.

The sureties contend that prescription commenced to run and that the debt became ‘due’ when the principal debtor breached his obligation to pay the monthly instalment.

Standard Bank opposed the application, contending that its claim against the principal debtor had not prescribed. It argued that its notice dated 12 August 2008, had merely called upon the principal debtor to bring the arrear instalments up to date and accordingly the full indebtedness under the facility was not due, owing or payable and as such prescription had not commenced running.

The High Court recognised that, whether or not the debt incurred by the principal debtor in terms of the facility had prescribed, depended on when the debt had become ‘due’, within the meaning of that word in s12(1) of the Act. If the debt became due from the date of the principal debtor’s default, namely on 21 October 2008, prescription would have commenced running from that date and the bank’s claim would have prescribed on 22 October 2011, prior to Standard Bank’s institution of the action for the recovery of the debt against the sureties. The High Court went on to find that if Standard Bank was entitled to accelerate the debt and claim the full amount but failed to do so, this did not prevent prescription from running and that prescription ran from the date that Standard Bank acquired the right to enforce payment of the full amount even though it elected not to do so. We had previously analysed the High Court decision, which analysis can be found at the following link: High Court Decision.

The SCA carefully considered the relevant provisions of the Act and confirmed that s12(1) of the Act provides that prescription begins to run when the debt becomes ‘due’ and not when it first accrued. Thus, so the SCA found, where an acceleration clause affords the creditor the right of election to enforce the clause upon default by the debtor, the debt in terms of the acceleration clause only becomes due when the creditor has elected to enforce the clause. Before an election by the creditor, prescription does not begin to run.

The SCA did consider the policy consideration that a creditor should not be able to determine of his own accord when prescription will begin to run against him, by deferring his election to enforce an acceleration clause but found that this consideration cannot override the clear provisions of the Act.

This does not mean that a creditor can completely escape the consequences of the Act, as the SCA went on to find that while the creditor holds in abeyance his decision whether or not to enforce an acceleration clause, prescription will continue to run in respect of the individual arrear instalments, payable by the debtor.

The SCA ruled that the High Court erred and that in terms of the current Act, a debt must be immediately enforceable before a claim in respect of it can arise. In the normal course of events, a debt is due when it is claimable by the creditor, and as the corollary thereof, is payable by the debtor. It found that in the present case the acceleration clause in the agreement has its own procedural requisites to be satisfied before Standard Bank can claim the full balance owing.

The SCA reversed the decision by the High Court by finding that the balance owing on the facility, excluding the outstanding arrear payments, was not due as Standard Bank did not elect to terminate the facility and claim repayment of the outstanding balance. It therefore follows that prescription did not commence to run on the so-called ‘critical date’ or ‘decisive date’ of 21 October 2008.

This judgment is a reminder to creditors to always be vigilant when it comes to recovery of debts due and to make sure they understand the terms of the agreements they enter into with debtors.