Does the in duplum rule limit interest payable on a tax debt?
20 June 2014
Posted by: Author: Michael Honiball
Author: Michael Honiball and Leani Nortjé (Webber Wentzel)
The in duplum rule is a South African common law rule which originated in Roman law and provides that interest on a loan or debt will cease to run when the amount of outstanding interest reaches the amount of the outstanding capital. The in duplum rule is based on public policy and protects debtors who are in financial difficulty and are unable to service their debts from an ever-increasing accumulation of interest1.
It has been established in various South African court cases that the common law in duplum rule forms part of South African law.2 It has also been established that where the common law in duplum is applicable, and a debtor pays a portion of the outstanding interest, interest will again run until such time as the total amount of outstanding interest equals the amount of outstanding capital3.
There is also a statutory in duplum rule which is set out in Section 103(5) of the National Credit Act, 2005 ("NCA"), and applies only to those credit agreements that fall within the ambit of the NCA. It is generally accepted that the statutory in duplum rule offers better protection for consumers than the common law in duplum rule4.
Due to the fact that a tax debt does not fall within the ambit of the NCA, the question arises whether the common law in duplum rule can apply to limit interest payable to SARS on a tax debt. A tax debt is an amount of tax liability due in terms of any of the South African tax acts or under the Tax Administration Act, 2011 ("TAA") to the South African Revenue Service ("SARS"). In order to determine whether the common law in duplum rule applies to a tax debt, we consider the relevant South African case law below.
As a starting point, in LTA Construction Bpk v Administrateur Transvaal 1992 (1) SA 473 (A), the court concluded that in principle, the in duplum rule applies to all contracts under which a capital sum owed is subject to a particular interest rate. This approach seems to limit the application of the in duplum rule to circumstances where a contract exists between parties.5
In the case of CSARS v Woulidge 63 SATC 483 ("Woulidge"), the Supreme Court of Appeal ("SCA") held that, to the extent that either a lender or a borrower is absent, the result is a gratuitous disposition and that it is difficult to see how a gratuity can trigger the working of the in duplum rule. It was further held that the in duplum rule does not apply to hypothetical or notional interest, in other words, where an amount is deemed to have been received. More importantly, the court concluded the following with regard to the application of the in duplum rule: "It is clear that the in duplum rule can only be applied in the real world of commerce and economic activity where it serves considerations of public policy in the protection of borrowers against exploitation by lenders." Accordingly, although a deeming provision was under consideration in the case of Woulidge, as opposed to a provision providing the Commissioner with tax-collecting powers, the court clearly stated that the rule is applicable only to transactions between contracting parties6, and where it serves public policy in protecting borrowers against exploitation by lenders.
In Ethekwini Municipality v Verulam Medicentre (Pty) Ltd (2006) 3 All SA 325 (SCA) ("Ethekwini Municipality"), the SCA refused to apply the in duplum rule where interest arose only upon the cancellation of a contract and held that the rule can only be applied in respect of arrear interest. It is worth noting that the court a quo formulated both a strict and a lenient test in order to determine whether the in duplum rule applied in the particular circumstances.7 According to the court a quo, the strict test is whether the interest at issue serves a purpose other than the ordinary function that interest fulfils. Where it serves such other purpose, the in duplum rule will not apply. In terms of the more lenient test, the question is whether the borrower is the kind of person or concern that requires the protection of the in duplum rule. This test considers whether public policy requires the debtor to be protected against exploitation by the creditor.8
In the SCA judgement of Ethekwini Municipality, Maya AJA held that the ultimate conclusion of the court a quo was correct and he did not find it necessary to determine the correctness or otherwise of the findings relating to the two tests. However, he pointed out that the court a quo's interpretation of the Woulidge case, regarding the extent of the in duplum rule's application, appears to be based on an error as theWoulidge judgment is reported both in the South African Law Reports and the All South African Law Reports. The Judge contended that the court a quo relied on the case cited in the first report omitting the word "only" and that the latter report cites the case correctly, by including the word "only". In this regard Maya AJA stated the following:
"It is readily apparent, on a comparison of the two quotations, that the word "only" is misplaced in the first version, thus giving the sentence a meaning that is completely different to what Froneman AJA obviously intended to convey, which also does not tally with the dicta expressed in the decided cases on which he relied in that regard. The court a quo’s conclusion about the so-called "lenient" test, namely, that the enquiry is merely". . . whether in the particular case public policy requires the debtor to be protected against exploitation by the creditor", which invariably necessitates an enquiry into the identity of the debtor instead of the nature of the debt, is thus based on an incorrect premise."
The judge further notes that:
"…whilst it may be so that the in duplum rule is founded on public policy considerations, it now forms part of positive law. Consequently, public policy is not the criterion in deciding whether or not the rule applies. As was correctly submitted on the appellant’s behalf, the rule is not qualified so that it applies only where a debtor cannot cope with the burden of interest exceeding the capital sum. The Woulidge case (supra) should accordingly not be understood to mean that the identity of the debtor (ie whether the debtor requires protection from exploitation) determines whether or not the in duplum rule is to be applied".
Accordingly, based on the various case law, we note that the in duplum rule is not restricted to interest on money-lending transactions and applies to all types of contracts in terms of which a capital sum is due by the debtor to the creditor.9 It is, however, confined to arrear interest in the sense of a penalty for not paying what was owed when it was due and does not extend to, for example, accumulated interest or capital growth.10 When applying the in duplum rule, it is necessary to take into consideration whether public policy requires the debtor to be protected against exploitation of a creditor. However, this is not a prerequisite for the in duplum rule to apply. More important than the identity of the debtor, is whether there is some commercial contract between the debtor and creditor which indicates that an amount is due and/or imposes a penalty for overdue payments.
It follows that it could be argued that the in duplum rule does not apply to interest on moneys owed to SARS, since a tax debt arises by operation of statute and not by a contract between the taxpayer and SARS. Furthermore, public policy may also not require the taxpayer to be protected, for example, where the interest only arises years after the relevant tax period where SARS was unaware of the amounts outstanding and therefore, was unable to pursue the debtor until it had conducted an audit.
Sinclair submits that the in duplum rule does not apply to a statutory debt such as unpaid income tax.11 This submission is based on the provisions of Section 89(2) of the Income Tax Act, 1962, which provide that, unless the Commissioner otherwise directs, the payment of interest on outstanding tax is peremptory. He further submits that it is unlikely that our courts will hold that the in duplum rule overrides the clear obligatory terms of a statute. In our view, since the enactment of the TAA it is likely that SARS will not apply the in duplum rule to interest owing to it. This view is based on Section 188 of the TAA which provides for the period over which interest accrues, and states that unless otherwise provided for in the TAA, interest payable under Section 187 of the TAA will be imposed for the period starting from the so-called "effective date" of the tax to the date that the tax is paid. Accordingly, this wording suggests that interest payable by the taxpayer may exceed the outstanding tax due to SARS. It appears that the only discretion afforded to SARS in this regard is contained in Section 187 of the TAA, which determines that if a SARS official is satisfied that interest payable by a taxpayer under Section 187 is payable as a result of the circumstances beyond the taxpayer's control, the official may, if not prohibited under the TAA, direct that so much of the interest as is attributable to the circumstances is not payable by the taxpayer. The "circumstances" are limited to natural or human-made disasters, civil disturbance or disruption of services, or a serious illness or accident. Therefore, the Commissioner's discretion is very limited as regards remission of interest payable by the taxpayer under Section 187 of the TAA.
In conclusion, while it is doubtful that the in duplum rule currently applies to interest on tax debts, the courts may, in future, extend the in duplum rule more clearly and definitely to apply to interest on tax debts. It must be noted that a court is not obliged to raise or to consider the in duplum rule unless the debtor has raised it in his pleadings, or unless it is clearly applicable from the evidence before the court.12 Therefore, until there is clear case law on whether the common law in duplum rule applies to interest on tax debts, it is recommended that taxpayers raise the common law in duplum rule as a defence against excessive interest in proceedings against SARS. It will then be up to the courts to extend or to restrict the rule.
1 See Kelly-Louw, M: The common law versus the statutory in duplum rule (2006) 14 Juta's Business Law (141).
2 See for example LTA Construction Bpk v Administrateur Transvaal 1992 (1) SA 473 (A) and Standard Bank of SA Ltd v Oneanate Investments (Pty) Ltd (in liquidation) 1998 (1) SA 811 (SCA).
3 Van Coppenhagen v Van Coppenhagen 1947 (1) SA 576 (T).
4 Supra note 1.
5 See Milner, E: The in duplum rule and SARS, Tax Shock, Horror Newsletter, The Practice Manager, April 2013.
7 Verulam Medicentre v Ethekwini Municipality 2005 (2) SA 451 (D).
8 See Schulze, H: Are there exceptions to the in duplum rule? (2006) 14 Juta's Business Law (20).
10 Sharrock, R: Business Transactions Law, Eighth Edition, 2011.
11 Sinclair, D: Folly to assume the in duplum rule always applies (2005) 5 Without Prejudice (24).
12 Supra note 10 and see F & I Advisors (Edms) Bpk en 'n Ander v Eerste Nasionale Bank van Suiderlike Afrika Bpk 1999 (1) SA 515 (SCA).
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This article first appeared on webberwentzel.com.