Lenders beware! – Gather your debts while you may

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  • Here is a tricky matter – and for the creditor a harsh lesson.
  • The case of Trinity Asset Management Ltd (Trinity) / Grindstone Investments 132 (Pty) Ltd[1] (Grindstone) is a warning for lenders and attorneys alike. At stake was R3 050 000.00 (excluding interest) which Trinity had loaned to Grindstone in terms of an agreement concluded on 1 September 2007. According to the loan agreement the loan capital would be “due and payable” upon delivery by Trinity of a letter of demand to Grindstone. When Grindstone failed to pay back the loan, Trinity accordingly served Grindstone with a letter of demand claiming the repayment of the loan capital plus interest.
  • So far so good, right? Wrong! Trinity assumed (as many would) that the debt would only become due for payment upon delivery of the letter of demand (as and when it chose) but Grindstone denied liability for the loan amount and claimed that the debt had prescribed.
  • The demand was made more than 6 years after the contract had been signed and, in terms of Section 11(d) of the Prescription Act,[2] a debt prescribes 3 (three) years after it has become due unless prescription is interrupted by, for example, the commencement of legal proceedings by the creditor (in this case by the delivery a letter of demand). (Note; the first question to be asked in all matters involving prescription is the date the debt became due – which in some instances is clear but in many instances (too numerous to mention) it is not).
  • The letter of demand that Grindstone received from Trinity was, however, delivered on 9 December 2013 – more than 3 (three) years after the loan agreement had been concluded (emphasis provided). Grindstone therefore argued that the debt had prescribed long before legal proceedings commenced. Trinity counter-argued that, in this instance, prescription had not begun to run when the loan agreement was concluded, but rather when demand was made on 9 December 2013.
  • In the course of its judgment the court reasoned that a loan that is repayable on demand becomes due the moment the loan agreement is concluded and the debt is incurred. Thus, the debt owed to Trinity became due at the moment the loan agreement was concluded on 1 September 2007. The debt was therefore “claimable” as of that date, which meant that prescription began to run on 1 September 2007. In contrast, the obligation of the debtor to pay (not to be confused with due and owing) arose only once the debtor had received written demand and the notice period stipulated in that demand had expired.
  • It all came down to the distinction between “claimability” and “payability”. One must not confuse the date on which a debt becomes due (claimable) with the date upon which it becomes payable. In this case, because the demand was made only after the period during which the debt was “claimable”, the debt had prescribed and Trinity’s claim for a whopping R3 050 000.00 plus interest had been extinguished.
  • This is a further example of the complexities and nuances – and from Trinity’s perspective, unintended consequences – that can arise when the meaning / interpretation of a clause in an agreement is simply taken at face value. BKI has conducted a number of workshops for the auditing profession and other clients on the topic “when does an agreement not mean what it seems to mean” and this falls squarely under that subject.

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. Please feel free to contact Brian Kahn for further information or specific and detailed advice. Errors and omissions excepted (E&OE)

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