Default on the maturities of a loan contract: When does a creditor’s claim become time-barred?
Acceleration clauses are commonly found in loan agreements that require debtors to make installment payments. A standard acceleration clause provides that if a debtor fails to pay a due date, the creditor may choose to terminate the loan agreement and demand payment of the full amount due under the agreement.
The question of prescription in the context of acceleration clauses recently arose before the Court of Cassation (“SCA“) in the case of Standard Bank of South Africa Ltd v Miracle Mile Investments 67 (Pty) Ltd and another  3 All SA 487 (SCA). The SCA was confronted with this question in particular: does the prescription on all the sums advanced begin to run when the creditor chooses to enforce the forfeiture clause or when the debtor is in default of payment of a deposit?
In this case, in 2005, the creditor, the Standard Bank of South Africa (“the bank”), advanced a line of credit to an individual debtor with a maximum value of approximately R14 million. The respondents, two companies, guaranteed the principal debt and allowed the registration of certain hypothecary sureties on their buildings, as security for the principal debt. The loan agreement included an acceleration clause which gave the bank the choice to terminate the agreement and accelerate the debt in the event of default by the debtor.
The debtor took advantage of the facility and defaulted. The debtor was then placed in provisional receivership. In 2013, the bank sued the respondents to collect the debt and declare the mortgaged property specially enforceable. The respondents then sought an order requiring the bank to consent to the cancellation of the mortgage bonds on the grounds that the claim against the debtor, and therefore against the respondents, had become statute-barred in October 2011, three years from the date on which the debtor has not paid the installments. The bank denied that the statute of limitations had started to run.
The parties conceded that a letter from the bank to the debtor, delivered in August 2008 under section 129 of the National Credit Act 2005, constituted a request to the debtor to update the delinquent account. However, importantly, the bank did not choose in this letter to terminate the agreement and accelerate the debt.
The SCA noted that whether or not the debt was statute-barred depended on when it became “due”. Section 12(1) of the current Limitation Act 1969 provides: “Subject to the provisions of subsections (2), (3) and (4), limitation begins to run as soon as the debt is due(emphasis added).
The SCA found that in cases involving standard acceleration clauses in loan agreements, and contrary to case law under the old Limitations Act of 1943, the debt becomes “due” when the creditor chooses to terminate the loan agreement and accelerate the debt. Indeed, the election is a necessary precondition to the cause of action for claiming the full amount owed. The SCA found that the policy considerations referred to in the old statute of limitations case law, which argued against allowing a creditor to delay limitation by delaying its election, did not outweigh the clear wording of current statute of limitations.
While the creditor decides whether or not to opt for debt acceleration, the statute of limitations begins to run on individual arrears maturities. If the election to accelerate the debt is not exercised, the creditor can wait until all payments are due before suing the debtor. However, prior installments may have been barred as of the date the action is brought, as each installment is a separate cause of action arising as it becomes due.
The SCA therefore considered that if the bank wished to accelerate the debt, it should put the debtor on notice to remedy the non-payment and, in default of payment by the debtor, the bank should choose to terminate the facility and claim reimbursement of the total amount due under the loan agreement. The first notice was given when the letter was delivered under Section 129, but the last notice was not given.
The election and the communication of the election were prerequisites to the cause of action, and in this case they did not occur. The SCA therefore found that since the bank did not choose to terminate the facility and claim reimbursement of the outstanding balance, the prescription did not start to run on the claim for the full amount in October 2008. The prescription does not would only begin on the date the bank gave notice of the election and claimed the full amount. The appeal was therefore allowed with costs.
What lenders can learn from this judgment
Lenders should carefully consider whether the acceleration clauses of their loan agreements include a choice whether or not to accelerate the debt. If there is an intention to choose to accelerate the debt, the choice must be clearly stated in the loan agreement.
Where the debtor is in default, then the election must be exercised by following the procedural prerequisites, such as the debtor’s written demand to pay or the creditor’s written notice of the exercise of the election. Only then will the cause of action be complete (making the full amount claimable) and the statute of limitations begin to run.
While the creditor decides whether or not to exercise the choice, prescription runs on the various installments that have not been paid. It is important to make the choice in time and not to prescribe claims on individual installments.
If no choice is provided for in the acceleration clause and the debt is automatically accelerated in the event of default by the debtor, the limitation period will begin to run in default. The recovery action must then be brought within three years from the date of default.