Weighing up the Interests of debtors and creditors

Natasha Aysen
Natasha Aysen

THE IN DUPLUM RULE PROGRESSES TO EXTEND FURTHER PROTECTION TO CONSUMERS AND DEBTORS

The common law in duplum rule limits the amount of interest that may be charged on an outstanding debt and provides that such interest amount cannot exceed the capital amount.  Section 103(5) of the National Credit Act has extended and altered this rule by including not only default and contractual interest but also charges such as initiation fees, service fees, credit insurance costs, default administration charges and collection costs, which accrue during the time of a consumer’s default.

In a recent case the Constitutional Court handed down a judgment which has altered the position of our law for the last 17 years with regard to the operation of the in duplum rule by overturning the 1997 Supreme Court of Appeal decision of Standard Bank Limited v Oneate Investments.  That case decided that if the maximum interest had been reached prior to litigation commencing, interest would start accumulating afresh on the capital debt as and when legal proceedings commenced by the service of the summons on the debtor.

The majority of the Constitutional Court judges in the recent matter of Paulsen and another v Slip Knot Investments, decided that the Oneate decision did not take adequate account of debtors’ rights of access to courts, as it would hinder rather than promote this right of access.  The Court explained that suspending the in duplum rule during legal proceedings could have an undesirable effect because some debtors, despite having a valid defence to the creditor’s claim, might settle the claim rather than face the prospect of interest commencing to run again.  This could significantly deter a debtor from approaching the Court as it is constitutionally entitled to do.

The Paulsens, who had borrowed R12 million from Slip Knot Investments in this matter, were ordered to repay the R12 million principal debt together with R12 million interest.  Interest would, however, commence running on the full amount of the judgment debt (R24 million) once the judgment had been handed down.

In a strong dissenting opinion Judge Cameron argued that the Oneate decision of the Supreme Court of Appeal was correct and constitutionally compliant.

There are also strong public policy considerations against the operation of the in duplum rule during the course of litigation for both debtors and creditors and rather than focus only on the effect of the rule on creditors, the interests of both the creditors and debtors must be weighed equally.

This article has been written by Natasha Aysen, a Candidate Attorney in the Commercial Department at Garlicke & Bousfield Inc

For more information contact Natasha on telephone : +27 31 570 5319, email : natasha.aysen@gb.co.za

NOTE: This information should not be regarded as legal advice and is merely provided for information purposes only

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