Can Interest Exceed The Capital Amount?

Before the decision of the Supreme Court of Appeal in Paulsen v Slip Knot Investments (434/13) [2014] ZASCA, there was uncertainty on whether the in duplum rule applied only to default interest, being interest accrued on a capital amount which has fallen due for payment but has not been paid, or whether it also applied to interest accrued on capital which has not yet become payable. The Supreme Court removed this uncertainty by finding that the in duplum rule applies in both cases.

Therefore interest ceases to accrue once the sum of the unpaid interest equals the amount of the outstanding capital, regardless of whether any capital and/or interest is payable at the time.

The in duplum rule was traditionally suspended once legal proceedings were instituted. Therefore even if the in duplum had been reached prior to litigation commencing (namely interest equaled the outstanding capital), interest would accumulate afresh on the outstanding capital from the date of service of summons or notice of motion.

The Constitutional Court in Paulsen and Another v Slip Knot Investments 777 (Pty) Limited [2015] ZACC 5, however found that the suspension of the in duplum rule during legal proceedings indiscriminately targets all debtors, in that some may genuinely believe that they have a valid defense, and those who do would be left with no option but to settle the debt or face potentially financial crippling interest in defending the claim. This would, the Court found, unfairly limit their right of access to courts.

The affect of the judgements of the Supreme Court of Appeal and the Constitutional Court is that a creditor may recover:

  • The unpaid capital sum;
  • Interest on the unpaid capital sum at the agreed rate up to an amount equal to the unpaid capital sum; and
  • Interest on the aggregate of the above amounts, at the contract rate from the date of judgment of the court to date of payment by the debtor

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