The Prescription Act and Judgment Debt – Good News for Creditors, Bad News for Sureties

Article by Christo Van Der Spuy of Denys Reitz

The Prescription Act provides that the basic period of prescription shall be 30 years in respect of ‘any judgment debt’ and 3 years for ‘any other debt’. The Act further provides that ‘prescription shall commence to run afresh on the day on which the judgment of the court becomes executable’.

In the recent case of KH Eley v Lynn & Main Inc [2007] SCA 142 (RSA), the question before the Court was whether a claim against Mrs Eley, bound as surety and co-principal debtor where the principal debt was confirmed and reinforced by judgment, prescribed after 3 or 30 years.

Mrs Eley bound herself as surety and co-principal debtor for the repayment of ‘all or any sums of money which the debtor may now or from time to time hereafter owe or be indebted to Nedcor Bank Limited (‘the bank’), its successors or assigns…’. Eley acted as director for the principal debtor, Help Seat It Southern Africa (Pty) Ltd (‘HSI’). Upon the bank’s request to provide security for an overdraft facility granted to HSI, she did so. A year after executing the deed of suretyship, she experienced marital problems, divorced her husband and left her chosen domicilium citandi(address appointed for service of process). HSI fell behind with payments and on 21 May 2001 the bank obtained default judgment against HSI for the principal debt plus interest. On 25 March 2003 the bank ceded all rights in and to the book debts (including HSI’s overdraft facility) to Lynn & Main Inc (‘LMI’) with effect from 2 January 2003, whereafter LMI instituted further action against Eley, serving a summons on her on 14 September 2005 and obtaining default judgment on 18 October 2005.

Eley denied that she was liable to the bank and contended that the claim against her had prescribed since judgment had been obtained against HSI on 21 May 2001, while summons was only served on her (as surety) more than three years later, on 14 September 2005.

The court examined the relevant sections of the Prescription Act to decide whether the debt of a principal debtor can be separated from the subsequent debt owed by the surety. The court referred to Sandbank Limited v De Jager 1982 (3) SA 418 (C), where it was found that in spite of judgment against a principal debtor the period of prescription applicable to the surety remained 3 years. Jans v Nedcor Bank Ltd 2003 (6) SA 646 (SCA) found that the De Jager case was wrongly decided, and that the common thread that runs through the cases is that the obligation of a principal debtor and surety relate to the same debt. If the principal debt is kept alive by judgment, the surety’s accessory obligation by common law also continues to exist.

The court in Eley specifically highlighted the observation in the Jans case that the very existence of the debt is dependent upon the existence of the suretyship, and the object and function of the suretyship is to ensure proper payment of the principal debt. Thus to allow a claim against the surety to prescribe before the claim against the principal debtor prescribes would be ‘almost subversive of the whole contract of suretyship’. The court in Eley agreed with this observation and held that the common law claim against a surety does not prescribe prior to the claim in respect of any judgment debt against the principal debtor.

This case should serve as a warning to people who bind themselves as sureties, since they may be held liable for the debts for an extended period of time arising from a judgment against the principal debtor of which they are not even aware.