“I have heard that in war, haste can be folly, but have never seen delay that was wise.” (Sun Tzu, The Art of War)
Collecting debt from a recalcitrant debtor can feel very much like going to war, particularly if you have to slog through the trenches of a series of increasingly costly court battles.
Which is where Sun Tzu’s warning against delay comes into play, because not starting collection in time could defeat your claim entirely. The reason of course is that debts – with only a few exceptions – prescribe (become unenforceable) after three years. Although that sounds like a long time, it can race by all too quickly!
Indeed, our law reports are full of cases where creditors have lost large amounts of money through procrastination, so it’s essential to start the process as soon as you think you may have a claim against someone.
It’s important to note however that the “prescription” defence has its limits, as a recent Supreme Court of Appeal (SCA) decision illustrates.
Another bent bookkeeper?
A Trust sued the sole member of a close corporation (CC) on the basis of allegations (hotly denied by her) that she, her CC, and her bookkeeper husband (since deceased, apparently by suicide) had defrauded a company in a sophisticated six-year scheme. Her husband, as the bookkeeper/accountant of both the Trust and the company, had allegedly made fraudulent payments totalling R21.8m to her CC through a series of fictitious transactions.
One forensic investigation and an insolvency inquiry later…
The Trust came into the picture when it took over the company in question. It identified suspicious transactions and commissioned auditors and forensic investigators to investigate. Critically, however, it was only during the inquiry held subsequently in her deceased husband’s insolvent estate that the member admitted receiving monies from the CC, and produced the bank statements which came to underpin the claims.
After some R12m was repaid, the Trust sued the member for the balance of R9.8m on two grounds:
- Personal liability under the Close Corporations Act for being party to the reckless or fraudulent conduct of the CC’s business.
- Liability for damages as a co-wrongdoer alongside her husband and the CC.
Before defending the claims directly, she raised the prescription defence, saying the claims were more than three years old and thus unenforceable. The High Court agreed with her, but the Trust appealed and the SCA held that the claims had not prescribed and that the trial could continue.
Let’s see why, and what lessons we can extract from that outcome.
Why didn’t the Close Corporations Act claim prescribe?
This statutory claim for recklessness or fraud, held the Court, isn’t a “debt” for the purposes of prescription, which only begins to run when a court actually declares a member personally liable. That hasn’t happened, so prescription hasn’t yet started running.
Why didn’t the damages claim prescribe?
Turning to the damages claim, the Court confirmed that “a debt is not considered due until the creditor knows the identity of the debtor and the relevant facts behind the debt. A creditor is assumed to have such knowledge if he could have exercised reasonable care to obtain it” – only then does the three years start running.
In this case, the Court held that although the forensic report had raised suspicion against the member, the Trust only acquired enough knowledge of the facts to actually sue her after the insolvency inquiry. The Trust then avoided prescription by issuing Summons within three years of that inquiry.
The Trust can now breathe a sigh of relief and return to the main trial in the High Court to prove its claims.
The bottom line: Delay can be fatal!
If you are unfortunate enough to fall victim to a sophisticated fraud, it may not be easy to identify the culprit and establish your claim immediately. But the sooner you call in the forensic investigators and ask us to advise on your best course of action, the less likely you are to have to fight your way through the courts (as this Trust has had to do just to retain its right to continue with its claim).
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact us for specific and detailed advice.
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