Law amended so that interest plus costs may not be more than principal debt
By Sanette Viljoen
All creditors and debtors are hereby reminded of the in duplum rule. It is a rule of law to the effect that a creditor may not recover more money from a debtor than the original capital amount.
This rule has been changed as follows:
Original rule: You owe R100. The debtor may then only recover interest to a maximum of R100. The debt amount plus interest may not exceed R200 (costs excluded).
New rule: You owe R100. The creditor will in total not be able to recover more than the original debt. The interest plus all costs may not be more than the original debt. The creditor will therefore be able to recover only R200.
Section 103(5) of the National Credit Act (Act 34 of 2005) has changed this rule fairly radically with regard to credit agreements. The Credit Act provides that when a debtor is in default all costs incurred from the date on which the debtor neglects to pay may never be more than the balance of the claim.
In other words, all costs that may be recovered may never be more than the amount owed. These costs include all service fees, credit insurance, administration costs, etc. Keep in mind that collection costs also includes legal costs.
There are many disputes about this, but by far the majority’s interpretation of this is that it also includes interest from the date on which the debtor neglects to pay.
The new rule, therefore, is that not only may the interest not be more than the principal debt, but all the costs plus the interest may not be more than the principal debt.
In practice this means that the common law in duplum rule has been made much stricter with regard to credit agreements. However, it would be unwise to allow too much interest time to pass from the date of default as the interest could later exceed the in duplum rule with the creditor then being unable to recover that interest. Apart from this, care should be taken that unnecessary administration cost, legal fees, etc., are incurred. The recovery process must therefore start as soon as possible.
It is important to note that this rule only applies to transactions mentioned in the Credit Act.