Traditionally, a “demand facility” is a loan with no fixed repayment date, and one where the lender will “demand” repayment at some future uncertain date – this could be 1 month, 1 year or 10 years from the date that the amount was advanced.
According to a recent Supreme Court of Appeal (“SCA”) majority judgment in Trinity Asset Management (Pty) Ltd v Grindstone Investments 132 (Pty) Ltd, loans granted on demand become “due” as soon as the loan capital has been advanced to the borrower – in other words the loan amount is due immediately after the funds have been advanced although it may only be repayable at a later date. This has obvious consequences regarding prescription and the lender’s ability to recover the loan amount.
The salient facts of this case are that Trinity Asset Management (“Appellant”) and Grindstone Investments (“Respondent”) concluded a written loan agreement in September 2007. The agreement provided that “the loan capital shall be due and payable by the Lender within 30 days from the date of delivery of the Lender’s written demand” (“Demand Clause”). The Appellant advanced the loan capital to the Respondent in three tranches during the course of February 2008.
In September 2013, the Appellant’s CEO emailed a director of the Respondent, requesting confirmation that the Respondent was willing to ‘settle the outstanding amount of the property fund’ and when such payment would be received. A director of the Respondent replied, confirming the outstanding amount and an approximate period in which repayment would occur. In December 2013, the Appellant (via the Sheriff) served a letter of demand on the Respondent in terms of the Companies Act, 1973 – commonly referred to as a “21-day letter of demand” – where, if the debtor failed to make payment, the creditor could proceed with an application to liquidate the debtor. The Respondent subsequently denied it’s liability to the Appellant.
The issue before the SCA was whether the debt had prescribed.
Once a debt is prescribed, a creditor is precluded from legally recovering the debt from the debtor. According to the Prescription Act, a debt shall prescribe after a period of three years unless the running of prescription was interrupted by an “acknowledgement of liability” or “judicial interruption”. The Appellant contended that the Demand Clause in the agreement required the making of a demand in accordance with its terms before the debt would become “due”, and therefore only once payment was demanded would prescription begin to run.
The SCA disagreed and stated that parties should not confuse the concept of when a debt is “due” with when a debt is “repayable”. The SCA, referring to the email exchange between the parties, emphasised that one cannot revive a debt that has prescribed by way of an acknowledgement of liability.
The SCA found that ‘the loan capital was immediately claimable from the respondent’ and accordingly held that the Appellant’s claim against the Respondent had prescribed.
This case illustrates that where a loan is advanced on demand:
• The lender must try to obtain an acknowledgment of liability by the borrower or interrupt the running of prescription by calling up the borrower on the facility – failing which, the debt will prescribe after a period of three years from the date on which the loan was advanced. It is important to note that any attempt of trying to obtain an acknowledgement of liability after the three-year period has run will be futile, as one cannot revive an extinguished debt.
• If the agreement contains a clause stipulating the manner in which repayment must be demanded, this must be strictly adhered to.