Supreme Court verdict could have significant effect for creditors

It is now legally understood that borrowers are entitled to levy ‘mora interest’ on unpaid interest. It is now legally understood that borrowers are entitled to levy ‘mora interest’ on unpaid interest.

The Supreme Court of Appeal (SCA) on Friday handed down a judgment in favour of the Land and Agricultural Development Bank of South Africa, which found that a party or individual that defaults on payment does not only owe the interest on that capital, but also the interest that accrues on top of the owed interest.

The case against Ryton Estates was brought in front of the courts to determine whether or not the Bank is liable to repay interest on overdue interest, which it charged its clients.

According to legal representative Theo Buchler, director at ENSafrica in litigation and dispute resolution, the judgment on this case is significant, as it is now legally understood that borrowers are entitled to levy ‘mora interest’ on unpaid interest. He says that it applies automatically, unless the parties agree to exclude it, or make a different arrangement such as automatic compounding of unpaid interest.   

“This was a test case, meaning that its judgement would set a precedent for future cases involving interest rates. It is now settled law that a creditor may charge interest on due and unpaid interest, where the agreement is silent. Modern commercial agreements often make provision for compounding of interest, but in the absence of agreement a creditor is entitled to charge simple interest on arrear interest. Currently the applicable rate is set by the Prescribed Rate of Interest Act, at 15.5%,” says Buchler.

Buchler explains that the case will have ramifications for creditors and their clients in South Africa, as should a client not repay the loan amount on a set due date, he will be liable to pay interest on top of the interest owed on the capital amount. 

“Clients who sign loan agreements with creditors must be aware that in terms of the law, should they default on payment, they will now be liable not only for the interest on the capital amount owed, but also mora interest. As the loan agreement does not have to state this to be legally sound, clients of creditors should exercise caution when proceeding with credit and loan applications, and endeavor not to default.” concludes Buchler. 

Buchler explains that in the case against Ryton Estates, the bank loaned money to various commercial farmers, including Ryton Estates. However, Ryton Estates did not subsequently pay installments on time and therefore the bank then charged Ryton Estates mora interest, which is interest charged on top of the interest due on defaulted payment.

“The group argued that the bank could only charge simple interest owed on the capital amount, however the bank argued that it was entitled to mora interest on the arrear interest, as there was no agreement in place to the contrary,” he says.

The Supreme Court of Appeal found that ‘in the absence of agreement to the contrary, mora interest at the prescribed rate is payable on unpaid interest, which is due and payable’.

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