The Legal Side of Debts

The Legal Side of Debts

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The concept of prescription – where a debt – ‘an amount legally owing’ expires or ceases to exist can be a valuable legal defence for a debtor to raise and an equally valuable motivation for creditors / plaintiffs to timeously collect their outstanding debts alternatively to know the risks involved and their legal rights. This is specifically relevant in respect of cash flow and related issues in a business.

The abovementioned concept is regulated by the Prescription Act 68 of 1969, which provides (in section 10(1)) that a debt (and in this context a debt has a very wide meaning in that it essentially means a claim in law – see below), expires or ceases to exist by way of prescription within a set  amount of time.

These provisions simply exist in order to create legal certainty. It is in the interest of justice and fairness that a legal claim does not exist for an indefinite period of time. This is especially when for example documents relating to the matter may have gone missing and witnesses who would have testified may have died or become untraceable

Accordingly, aside from some special prescriptive periods for debts secured by mortgages, judgments, and tax debts, the general prescriptive period is three years from the date that the debt became legally due. This needs to be observed by all business owners when considering whether to enforce any legal claim as collecting amounts legally owing is vital to the cash flow of any business.

The definition of ‘debt’ for prescription

Bester NNO and others NNO v Schmidt Bou Ontwikkelings CC (696/11) [2012] ZASCA 125. The question raised in this case was whether the rectification of a deed of transfer qualifies as a debt for the purposes of prescription.

The facts of the case are briefly as follows:

 

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The seller was the owner of a large Erf in Sedgefield. In 2003 the Erf was subdivided and a portion sold. The parties intended that the purchaser would become the owner of a portion sold only and that the seller would retain ownership of the remainder.

However, the remainder was erroneously transferred along with the portion sold. Years later the seller applied for rectification of the deed of transfer to reflect it as the owner of the remainder. The purchaser contended that the seller’s claim had become extinguished by prescription because the applicable three year prescription period has expired.

The court held that since the deed of transfer did not reflect the correct state of affairs, rectification of the deed would not constitute re-delivery of the property, symbolic or otherwise. Rectification does not have the effect of changing the rights and duties of the parties, but merely constituted a formality / administrative measure to correct the true state of affairs on paper.

Accordingly this case illustrates that to the contrary of the transfer in question only a legally enforceable right will dictate the application of the Prescription Act. It is important to understand these concepts accurately in order to avoid incurring unnecessary costs or wasting time, either of which could easily cripple any business.

General principles

The Act also provides (in section 15(1)) that prescription may be interrupted. The act is very clear in this regard it is only interrupted when legal process is issued, this however does not entail only the issuance of a letter of demand, but in fact a summons should be issued and served or another appropriate Court process if applicable.

The question often arises when a creditor does issue for example a summons but once it has been served fails to take further steps, how does this affect prescription?
This was one of the issues facing the Supreme Court of Appeal in Cadac (Pty) Ltd v Weber-Stephen Products Co 2011 (3) SA 570 (SCA).

“… the interruption of prescription [by service of a summons] shall lapse, and the running of prescription shall not be deemed to have been interrupted, if the creditor does not successfully prosecute his claim under the process in question to final judgment … “

Arguably according to some colleagues this provision could have been interpreted to mean that where a summons lapses prescription continues to run as if no summons was served. However, the court ruled to the contrary that the service of a summons interrupts the running of prescription, and prescription does not resume running if the creditor takes no further action.

However, in terms of the rules of court a summons lapses and accordingly a debtor may compel a creditor to adhere to these rules even where prescription does not run as set out above.

Conclusion

It is important to accurately understand the concept of prescription and to consider these when bringing a legal claim. Creditors need to observe this before instituting a claim against a debtor and debtors need to observe this when they are facing claims with a long history. Effective planning and monitoring outstanding claims is vital to healthy cash flow in any business.

Nicolene Schoeman-Louw
Nicolene Schoeman – Louw is an admitted attorney of the High Court of South Africa, as well as being a Conveyancer, Notary Public and Mediator. She is the Managing Director of Schoemanlaw Inc Attorneys, Conveyancers and Notaries Public (Schoemanlaw Inc Attorneys) in Cape Town. Visit www.schoemanlaw.co.za for more information or email enquiries@schoemanlaw.co.za