By Sanette Viljoen
In the case of The Land and Agricultural Development Bank of South Africa v Rayton Estates (Pty) Ltd [460/12] (2013) ZASCA the appeal court gave a very clear exposition of interest and when it was payable, and a debtor’s obligation regarding unpaid interest. The bank appealed against a group of commercial farmers in a case heard by Judge Prinsloo in the North Gauteng Supreme Court.
The facts are not very important to this article, but the appeal court’s exposition regarding the circumstances in which compound interest may be charged is indeed.
The court pointed out that interest payable in terms of a contract could be either simple interest or compound interest.
An example of simple interest: You have to pay me 10% a year. You borrow another R1 000 over a period of two years. You will therefore pay R100 interest a year and over a period of two years you are going to pay R200 interest.
Compound interest: Compounded annually it will be R110 for the first year, whereafter the 10% will be calculated on R110. This is interest charged on interest.
If it is compound interest it is added to the capital from time to time (viz. monthly, weekly or annually) and this is interest payable on interest. If an agreement does not provide for compound interest or if the agreement is totally silent on the type of interest payable, it will always be simple interest.
The court also looks at moratory interest. Fundamentally moratory interest is totally different from simple or compound interest. Moratory interest is not payable in terms of a contract or an agreement, but it provides compensation for loss or damages due to breach of contract. If an amount of money had to be paid on a certain date and the contract is silent on interest should the money not be paid, the rate will be determined by law and be announced from time to time. In this case the judge of the appeal court said that in this case the parties were entitled to exclude moratory interest by explicit agreement.
The important point in this court case is the following: The court found that, in the absence of any agreement, there was no problem for a creditor to be compensated through an order for moratory interest on unpaid interest as part of loss or damages because the interest was not paid punctually. The court said that this was not against the public interest or any other form of fairness. On the contrary, said the court, it was actually in the public interest that creditors should be appropriately compensated when debtors fail to discharge their obligations on the due date.
Therefore, moratory interest may be charged on unpaid interest.