Shareholder and Trust Beneficiary Loan Accounts : Prescription of Loans Repayable on Demand

In the recent matter of Trinity Asset Management (Pty) Ltd v Grindstone 132 Investments (Pty) Ltd 2016 ZASCA 135 (29 September 2016) the Supreme Court Appeal, in a divided decision, handed down a ground-breaking judgment dealing with the date upon which a debt becomes due when such debt is repayable on demand. Judges JA Willis, Theron and Swain JJA (with Judges D Dlodlo AJA dissenting with Bosielo JA) concluded that a debt which is repayable on demand becomes due the moment money is lent to the debtor – even before a demand is made.

In the particular case a loan was made expressed to be payable 30 days after receipt of demand made by the creditor. The loan was advance in 2008, and only in 2013, the creditor called for payment. Although the debtor implied that arrangements would be made for repayment of the debt, it failed to do so. Subsequently the creditor instituted action and was met by a Plea of prescription on the grounds that the debt was more than 3 years old. In the court a quo the plea was upheld. On appeal it was once again upheld.

Commercially speaking it could never have been within the contemplation of the parties, that if the loan was to remain unpaid for three years, that the debtor is released from his obligations. However, that is what happened.

The judgment is of great significance, particularly, as in the commercial world many long term loans by shareholders, either to companies or beneficiaries to trusts are repayable on demand by virtue of the loan being constituted as loan capital. Application of the judgment is that in the absence of an acknowledgment by the debtor made in respect of the claim before it has become prescribed, the loan creditors’ claims will become prescribed.

Although one would have expected that the clear interpretation of the agreement (in the absence of anything else being said) would be that the loan would not fall due for payment until 30 days after demand had been made, regrettably, the court held otherwise.

The judgment has the potential to prejudice creditors who make loans in good faith and of recovering payment of the loans if they are not demanded and action instituted within three years of the loan actually being advanced. Whilst balance sheets signed-off by the directors of a company, or the trustees of a trust, or the members of a close corporation, or other organisation are likely to amount to an acknowledgement of liability and thus extending the prescriptive period a further three years from the date of signature of the balance sheets, it will be wise for all companies, trusts, close corporations and other legal entities, excluding partnerships – which have different considerations, where loans were made by third parties, to make the loan accounts repayable by stipulated dates. The loans can then be renewed from time to time when those dates arrive, provided it is done before the actual date of prescription…”

Article by Andries Geyser

Andries Geyser
– Executive Consultant