Breather for Creditors; Beware for Debtors


Commercial debtors and creditors (veteran and inexperienced) are generally aware of the Golden Rule when it comes to debt collection. It is a very old yet deadly rule; it would appear, however, that creditors and debtors alike appear to have limited understanding of this rule in the practical sphere.

The Golden Rule:
As a general rule, Section 11(d) of the Prescription Act, 68 of 1969 declares that if a debt is owed by person A (the debtor) to person B (the creditor), and unless person A is a State entity, person B is granted a period of three years from due date to claim the debt from person A in a Court of competent jurisdiction before the debt shall be deemed to have become legally extinguished.
It is essential that creditors and debtors alike are aware of this Rule. For the creditor, it indicates the time allowed to enforce its rights to claim the said amount from the debtor. For the Debtor, it indicates whether or not there is a valid defence against a debt which is otherwise due to the Creditor.

Rationale:
The reason why this rule was created in the first place was for legal certainty and for proficiency: creditors must act conscientiously in pursuit of their debts, and a debtor ought to have the right to know whether or not the debt is still due. It would seem unfair to punish a debtor for the lackadaisical actions of a creditor, which would bizarrely reverse the effect of actori incumbit onus probation (i.e. the burden of proof falls on the claimant).
In my view, the best explanation for the rationale behind the extinctive prescriptive rule was stated no better than Grosskopf J:

“Where a creditor lays claim to a debt which has been due for a long period, doubts may exist as to whether a valid debt ever arose, or if it did, whether it has been discharged… The alleged debtor may have come to assume that no claim would be made, witnesses may have died, memories would have faded, documents or receipts may have been lost, etc. These sources of uncertainty are reduced by imposing a time limit on the existence of a debt, and the relevant time limits reflect, to some extent, the degree of uncertainty to which a particular type of debt is ordinarily subject…”[1]

However, if you are person A and you have attempted in good faith through settlement negotiations to pursue the debt owed to you by person B but it all happened more than 3 years after the debt became due, does that mean your claim has automatically extinguished?

Limitations:
The aforementioned Prescription Act deals with the possibility of interrupting the running of prescription. This can be done through an act by the Debtor which has the effect of re-starting the prescription afresh so that the due date is renewed as at that date. For a creditor, it sings a song of celebration, but for a debtor, it shrieks the siren of sadness.

Section 11 of the Prescription Act defines non-judicial acts that may be deemed to have interrupted the running of prescription; one of those acts is through the “express or tacit acknowledgement of liability by the debtor.”

The acknowledgment of liability can take place “expressly or tacitly” and links directly to the public policy requirement of certainty. The question recently arose as to whether or not an admission of liability made by the Debtor through negotiation-correspondence could be held to interrupt prescription. In KLD Residential v Empire Earth Investments (1135/2016) [2017] ZASCA 98 (6 July 2017), the majority found that solely for the purposes of interrupting prescription, such an admission of liability may be considered as having the effect of interrupting prescription in terms of Section 14 of the Prescription Act.

The aforementioned decision is crucial in that it balanced the policy considerations for the need to protect that which is discussed in settlement negotiations up against the need for legal certainty. The SCA placed a great deal of emphasis on the assertion that a creditor ought not to be punished for delaying litigation in the face of an acknowledgment by the debtor of its indebtedness which otherwise alludes to certainty. However, this protection is not exhaustive and each case would be considered on its own merit.

Conclusion:
Veteran and Inexperienced businessmen alike ought to take the implications of this judgment under their belt for the following reasons:
  • 1.    As debtors, be careful what you say in written correspondence regardless of the nature of said correspondence; AND
  • 2.    As creditors, choosing to negotiate the settlement of your debt can be protected if the time arises to pursue more litigious methods.
  • It is absolutely essential that you consul with an attorney regarding the enforcement and protection of your rights as debtors and creditors.


27 September 2017


[1] Murray & Roberts Construction (Cape) (Pty) Ltd v Upington Municipality 1984 (1) SA 571 (A) at 578F-H

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