The in duplum rule explained

The in duplum rule was an time-honored and accepted principle of our law for many years, well that was until the Western High Court matter of Paulsen & Another vs Slip Knot Investments 777 (Pty) Ltd 2014 (4) SA 253 (SCA) (“The Paulsen matter”) radically changed our idea of what the maximum permissible interest could be.

The in duplum rule

From Roman law, which our common law is mostly based upon, comes the in duplum rule and has been accepted into our common law as long ago as 1860. The rule deals with the permissible amount of interest which may be charged on any outstanding capital amount. In accordance with this rule, the interest charged on any outstanding debt may never exceed the initial capital debt amount.

Background to the Paulsen-matter

In 2006, Winskor 139 (Pty) Ltd (“Winskor”), was a Company who was involved in purchasing portfolios of properties, in the greater Brooklyn area in Pretoria, and reselling them at a substantial profit. The shares of Winskor were held by the Paulsen Family Trust. On a particular property portfolio purchased, they were able to raise capital, save for a shortfall of R12 000 000.00. The loan then was funded by a Company known as Slip Knot who were in the business of supplying “bridging” or “mezzanine finance” to large property developers. The basis of the agreement was that Slip Knot would advance Winskor the amount of R12 000 000.00 on 10 July 2006. This R12 000 000.00 was then repayable within 12 months. Winskor were only liable for interest, at 3% per month on the outstanding capital from the 7th month after the commencement of the date of payment (10 July 2006). The interest was to be capitalized monthly. The economic downturn, especially in the property market, that occurred from 2007 severely affected Winskor and they were placed in Liquidation as they were unable to repay their loan to Slip Knot amongst other debts they could not service.

Slip Knot’s legal proceedings in the Western Cape High Court

Slip Knot instituted legal action and claimed the following:

  1. the capital sum of R12 000 000.00;
  2. interest on the capital sum which, as at date of commencement of litigation, had accumulated to R12 000 000.00 and had been limited to that amount by the in duplum rule;
  3. further interest on the capital at the rate of 3% per month, from the date of instituting proceedings to date of judgment; and
  4. interest on the sum of the amount set out in 1 and 3, at the rate of 3% per month from the date of judgment to date of payment, subject to the interest being limited by the in duplum rule to an amount equal to that sum.

Western Cape High Court Judgment

Judgment was given in this matter in the amount of R72 000 000.00. This amount was made up of an amount of R12 000 000.00 and the remainder was accrued interest. Such interest was 5 times the capital amount, being a substantial deviation from the in duplum rule.

Appeals

Not surprisingly, this matter was then taken on appeal to the Supreme Court of Appeals, but what was extremely shocking, was that the Supreme Court of Appeal upheld the judgment of the Western High Court.

This matter was then taken on Appeal to the Constitutional Court. The amendment by the Constitutional 7th Amendment Act 72 of 2012 allows the Constitutional court to hear constitutional matters and

“Any other matter, if the Constitutional Court grants leave to appeal on the grounds that the matter raises an arguable point of law of general public importance which ought to be considered by the Court.”

Constitutional Court judgment

The Constitutional Court set aside the Western Cape High Court decision and only the portion of the Supreme Court of Appeal’s judgment, which was concurrent with the Constitutional judgment was to stand. The Constitutional Court ruled that the interest could not exceed the capital and ordered as follows:

  1. payment of the capital sum of R12 000 000.00;
  2. payment of interest on the above amount at the rate of 3% per month, calculated from 21 July 2007 to 10 January 2010, up to a total of R12 000 000.00;
  3. payment of interest on the above sum of R24 000 000.00, being the total of the amounts of (1) and (2) above, at the rate of 3% per month, from date of judgment on 24 March 2015 to date of finale payment, limited to R24 000 000.00.

Reasons for this judgment

In the majority judgment, Madlanga J, looked at both the rights of the debtors and creditors and balanced same in this matter.

Madlanga J also dealt with the question whether the in duplum rule should operate pendente late, meaning from date of service of the process instituting the legal action until date of judgment and the drastic consequences, if same is not.

Madlanga J said by suspending the application of the in duplum rule pendente late, will have the effect of indiscriminatingly targeting all debtors, whether they are defending the claim in good faith or not. It also allows for interest to sky rocket the original debt amount and be far in excess of such, which the in duplum rule specifically prohibits.

Thankfully Constitutional Court restored this valuable corner stone of our law known as the in duplum rule.

By Natalie Bailey