Beware of “repayable on demand” loans – they may prescribe

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You might, at some point in your life, have lent money to a friend, family member or business associate. It is also quite common for a business to obtain or grant loans in the course of its trade.

In South Africa, in terms of the Prescription Act of 1969 (the “Act”), a debt prescribes (falls away) after a period of three years, unless prescription is interrupted (something happens to stop it temporarily).

The Constitutional Court recently considered the matter of Trinity Asset Management (Pty) Ltd v Grindstone Investments 132 (Pty) Ltd where a company lent funds to another company on the condition that the loan would be repayable on demand.

In terms of a loan agreement entered into in 2007, Trinity and Grindstone agreed that Trinity would lend just over R3 million to Grindstone (the “loan”). In terms of the loan agreement, the loan would be due and payable to Trinity within thirty days of Trinity’s written demand for payment. About six years after the loan was advanced to Grindstone, Trinity demanded repayment of about R4.6 million (the capital amount plus interest). Grindstone denied that they owed Trinity anything.

In 2014 Trinity approached the Western Cape High Court, seeking the provisional liquidation of Grindstone on the basis that Grindstone was not able to repay the loan. Grindstone opposed the application. One of Grindstone’s defences was that the loan in question had prescribed. They argued that, in the absence of the contract providing otherwise, a loan that is “repayable on demand” will become due and payable immediately when the loan is given, and not specifically when demanded by the creditor. Since more than three years had passed after the loan was originally given, and Trinity had failed to take steps to recover the loan within those three years, the loan prescribed.

Trinity, on the other hand, argued that it was not the intention of the parties that the loan would immediately become due and repayable upon the advance of the loan.

The High Court agreed with Grindstone’s argument that the claim (loan amount) had prescribed.

Trinity took the matter on appeal to the Supreme Court of Appeal (SCA) and the SCA agreed with the High Court’s view on the basis that, on the reading of the contract, it did not appear that the parties intended to postpone the repayment of the loan, and accordingly the loan became payable the moment it was advanced to Grindstone.

Trinity took the matter before the Constitutional Court, where the majority held that in considering the wording of the contract, it did not reasonably appear that the parties intended to delay the repayment of the debt nor did the contract specify when the running of prescription would commence.

Accordingly, Trinity’s appeal was dismissed on the basis that prescription had begun to run on the initial advance of the loan and, by the time formal demand was made for repayment, the loan had prescribed.

The Constitutional Court’s ruling is important since similar clauses dealing with the repayment of a loan “on demand” are often found in loan agreements. Your money could be at risk if provision is not specifically made in the loan agreement for when prescription is deemed to start running, or when, specifically, the loan will become due and payable.

It is therefore important to ensure that your loan agreements, or any commercial agreements, are prepared by legal professionals.

For more information regarding commercial agreements, please contact:

 

Henning PietersePartner

E: h.pieterse@bissets.com

Areas of Expertise: Corporate & Commercial Law

 

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)