The Constitutional Court has restored the law on the running of interest on outstanding debts – reversing the SCA’s 1997 decision that the institution of legal proceedings suspends the operation of the in duplum rule. The revised legal position applies to all debtors, except those whose court cases have been finalised with no possibility of appeal. This is likely to have a serious impact on the value of creditors’ claims – especially those which have been in litigation for a lengthy period.
The in duplum rule halts the running of interest on an unpaid amount once the interest payable equals the outstanding capital amount. Since 1997 the law has been that initiating legal proceedings suspended the operation of the in duplum rule – interest would run uncapped and could therefore exceed the value of the capital sum claimed. Once judgment was given, the in duplum rule was revived and interest would once again be limited, to the value of the judgment given.
The Constitutional Court overturned the 18 year old decision, holding that it impermissibly infringes a debtor’s constitutional right of access to justice. The court held in Paulsen v Slip Knot Investments 777 (Pty) Limited that suspending the in duplum rule has a “chilling effect” on debtors who, despite having a valid defence, would rather settle a claim than face potentially ruinous interest charges. The effect of the Constitutional Court’s decision is to shift the chilling effect from debtors to creditors. The court held that this was appropriate given the economic disparity between commercial lenders and credit consumers.
The decision is likely to have widespread effects. Creditors will need to scrutinise their existing debts to determine whether any will be hit by the “new” law. It will now make financial sense for creditors to institute claims earlier and prosecute them more aggressively. Importantly, it also means that, in an already constrained economy, lenders will be even more cautious about who they lend money to.