Constitutional Court judgment on the in duplum rule – does it limit interest payable on a tax debt?

court image 1The recent Constitutional Court judgment of Paulsen and Another v Slip Knot Investments 777 (Pty) Limited 2015 centered on the common law in duplum rule.  The in duplum rule operates to protect debtors from becoming over-indebted to creditors  by only allowing arrear interest to accumulate up to the capital amount loaned to a debtor.  Interest ceases to run once the accumulated arrear interest equals the capital amount.

In this case, the Constitutional Court held that the operation of the in duplum rule is no longer suspended for the duration of litigation.

What is unclear from the outcome of this case, however, iswhether or not the in duplum rule can be applied in respect of interest imposed by the Commissioner of the South African Revenue Service (“SARS”) on tax debts.

Justice Madlanga, who handed down the main judgment in the Paulsen Case, used several lines of reasoning in coming to his conclusion in terms of the in duplum rule during litigation including:

  • the fear of potentially ruinous interest which could prevent a debtor from raising a defence which that debtor believed was valid; such fear would have the effect of infringing the debtor’s constitutional right of access to courts; and
  • South Africa’s economic disparity and the root causes thereof as justification for the application of the in duplum rule.  In this regard he reasoned that credit providers are, “large, established and well-resourced corporates” whereas when referring to the majority of credit consumers he stated, “it would be ignoring our country’s economic reality to suggest that there is any comparison between these corporates and most credit consumers.”  He then went on and stated that, “astronomical interest may mean the difference between economic survival and complete financial ruin“ for these credit consumers.

When applying his reasoning in the judgment, Justice Madlanga was speaking in terms of contracting parties and not in terms of statutorily imposed obligations such as the interest imposed by the Commissioner of SARS in terms of the Income Tax Act and the Tax Administration Act.

Considering the fact that the Paulsen case does not firmly answer the question of whether or not the in duplum rule applies to a tax debt, we have to review previous cases for answers.  In LTA Construction Bpk v Administrateur Transvaal 1992, the court found that the in duplum rule applies to all contracts under which a capital sum owed is subject to a particular interest rate.  This seems to limit the application of the rule to circumstances where a contract exists between parties.  In the case of CSARS v Woulidge 2002, the Supreme Court of Appeal found that the rule is applicable only to transactions between contracting parties and where it serves public policy (in protecting borrowers against exploitation by lenders).  The court stated that:

“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.”

It follows, from both the Paulsen and the Woulidge cases, that the in duplum rule does not limit interest payable to SARS on a tax debt since a tax debt arises by operation of statute and not by a contract between the taxpayer and SARS.  It has also been argued by the legal fraternity that thepublic policy argument would not necessarily apply to a taxpayer where SARS only caught the outstanding amount years after the relevant tax period and was thus unable to pursue the taxpayer sooner.  This is, therefore, the current status of the law and its interpretation until such time as the court makes a firm ruling on the use of the in duplum rule when it comes to interest payable on a tax debt. It is important to note, however, that in his Paulsen case judgment, Justice Madlanga cautioned the courts to defer issues containing complex policy considerations to the Legislature so as not to usurp a legislative function.