Tick Tock for Demand Loans

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0020 - CaveatLegal_26_08_2015_webLoans in terms of which the obligation for repayment of the outstanding amount only arises on receipt of a demand for repayment from the lender (“Demand Loans”) are frequently being used in South Africa as part of trust/company structures or business operations in general.

A word of warning – Demand Loans may have become ticking timebombs for lenders unaware of the judgement in the recent Constitutional Court case of Trinity Asset Management Pty Ltd v Grindstone Investments 132 Pty Ltd 2018 (1) SA 94 (CC).

The Constitutional Court judges hearing the Trinity Asset Management case had to grapple with the question whether prescription of the loan debt under a Demand Loan starts running from the date of advance or only from the date of demand for repayment.

Currently, under the Prescription Act (68 of 1969), a debt will be extinguished by prescription (in other words, will no longer be due by the borrower to the lender and hence the lender will no longer be able to claim repayment of such debt) after the lapse of 3 years from the date upon which such debt becomes due.

The due date for a contractual debt may be specifically agreed in a loan agreement. Should the parties decide not to agree a specific due date, then the debt will generally be due immediately upon conclusion of the loan. The parties may, however, also agree to allow the lender to determine when the debt becomes due at a future date by delivering a written demand to the borrower, in which case the debt will only become due upon such demand being received by the borrower.

The loan agreement under scrutiny in the Trinity Asset Management case included simple and general wording stating that the loan amount advanced would be due and repayable within 30 days from the date of delivery of the lender’s written demand; the same language that is probably used in the majority of Demand Loans in South Africa.

The Constitutional Court held that simply including the 30 day time period linked to a written demand being received from the creditor did not make any difference to when the debt became due for prescription purposes. The lender was entitled to demand payment at any time, which had the effect that the debt was immediately claimable and enforceable. The majority judgment emphasised that, in the loan in question, “there (was) no conditionality attached to the making of the demand and the claimability of the debt”. Put simply, because demand could be made at any time, and was not required for the debt to become claimable, it did not delay the running of prescription. In their view, the so-called debt on demand became due from the date upon which the loan was advanced and as such, prescription began to run immediately from then.

In order for Lenders to avoid their Demand Loans detonating prematurely due to prescription, leaving them with no legal recourse after three years from advance, they should ensure that their Demand Loans clearly specify the intention of the parties that  demand be a condition precedent for the debt to become due.

Nadia Smith

Nadia has a BCom and LLB and was admitted as an attorney in 2006 after having completed her articles at Jan S De Villiers Attorneys (now Werksmans). Nadia then joined Freshfields Bruckhaus Deringer LLP in Amsterdam as an associate for 4 years before returning to ENS as a senior associate in the banking and finance department. Nadia joined Caveat in 2015.