During our years in the debt counselling industry, we got used to bad behaviour from our major banks. Lack of co-operation, a disregard for consumers rights, unreasonable demands and many other problems were the norm.
An “acceleration clause” in a loan agreement (where the loan is repayable in instalments) provides that if the borrower fails to pay any one instalment, the full amount of the loan becomes due and is immediately recoverable in full by the creditor. Inserting such a provision into a loan agreement is a sensible precaution for a lender to take – without it he could only sue for any overdue instalments, not for the full amount of the loan.
Borrowers: your danger
Failure to pay just one instalment exposes you to court action for recovery of the full amount owing.
Lenders: your limits
But, as a recent High Court judgment illustrates, lenders also have to act cautiously here. A lender had invoked an acceleration clause to sue the debtor for the full amount outstanding (over R7,6m) after the debtor missed one instalment of R42,133-15. The debtor had, after receiving an email from the lender, paid the instalment – but he hadn’t paid the default interest (a measly R86-57).
In other words, the borrower’s failure to pay R86-57 led to the entire debt of R7,6m being called up in full.
The Court refused to enforce the acceleration clause on two grounds –
1. The lender’s email to the debtor advising of the overdue instalment was not “a proper demand” – it didn’t inform the debtor of the full amount he had to pay (the default interest wasn’t mentioned), nor was it unambiguously a demand to pay,
2. It would, held the Court, be “startlingly draconian and unfair”, and therefore a breach of “public policy” to allow the acceleration clause to be invoked without “some form of communication to pay a measly sum of R86.57 immediately following payment of the large principal sum”.