A recent decision of the Supreme Court of Appeal (SCA) has prompted analysis from legal practitioners on how South African law treats capitalised interest under the in duplum rule.
The judgment in SACTWU Investments Group (Pty) Ltd v Sekunjalo Independent Media (Pty) Ltd and Another addressed, among other issues, whether interest that accrues and is capitalised under a loan agreement remains subject to the rule.
The dispute arose from a R150-million loan advanced in 2013. Interest accrued quarterly and, where the borrower lacked funds to pay on an interest date, was capitalised. No interest was paid over the seven-year term, and by maturity the accumulated and capitalised interest exceeded the original capital.
Although the appeal ultimately turned on the enforceability of a subordination agreement, the SCA also dealt with the operation of the in duplum rule in this context.
Accrual, non-payment and arrears
A central contention advanced by the lender was that interest which had been contractually deferred and capitalised was not “arrear interest” and therefore fell outside the in duplum rule.
The SCA rejected that framing by focusing first on how interest accrued under the agreement. Interest was calculated daily and compounded periodically. Against that backdrop, the Court addressed the argument that such interest was not yet payable and therefore could not be in arrears.
The Court held that the absence of immediate payability does not determine whether interest is arrear. As it explained: “The fact that it is not payable does not detract from the fact that it is calculated daily and on the number of days elapsed.”
It went on to state that where interest is not paid on the agreed interest date, the debtor “failed to meet its obligations by not paying on the interest date” and is therefore “in arrears with payment of interest”.
This aspect of the judgment addresses the distinction between accrued and arrear interest and confirms that non-payment – rather than strict contractual “due and payable” status – is determinative.
Capitalisation and the character of interest
Having established that the unpaid interest in question was arrear interest, the SCA turned to whether capitalisation altered its character.
Relying on established authority, the Court held that capitalisation does not change the character of the debt. Quoting Standard Bank of South Africa Ltd v Oneanate Investments (Pty) Ltd (in liquidation), it reiterated: “Interest remains interest and no methods of accounting can change that.”
The Court further confirmed, with reference to Paulsen and Another v Slip Knot Investments 777 (Pty) Ltd, that “arrear interest” refers to accumulated interest that has accrued but remains unpaid.
Taken together, these findings rejected the proposition that capitalised interest became part of the capital in a way that would remove it from the operation of the in duplum rule.
Public policy underpinning the rule
The SCA grounded its approach in the policy considerations underlying the in duplum rule. It cautioned that allowing interest to accumulate unchecked through capitalisation and deferred-payment mechanisms would permit interest to “easily escalate exponentially above the capital amount” and result in “boundless interest”.
The Court emphasised that the rule serves to limit the accumulation of unpaid interest and to protect borrowers from excessive financial exposure. As reflected in the SCA’s media summary of the judgment, its purpose is to prevent “the ongoing accumulation of excessive interest” where payment is not enforced.
Litigation and the operation of the rule
The SCA also referred to the established principle that the in duplum rule is suspended during litigation. Citing Margo and Another v Gardner, Gardner and Another v Margo and Another, it noted that a creditor is not prevented from recovering more than double the capital in interest over time, provided that unpaid arrear interest does not exceed the capital at any point prior to litigation.
This aspect of the judgment formed part of the broader explanation of how the rule operates, rather than a determination specific to the facts of this case.
Bowmans: a ‘notable shift’ in the treatment of capitalised interest
In its commentary, Bowmans characterised the decision as representing “a notable shift from the established common law position”.
Its analysis focused on how the judgment engages with the traditional distinction between accrued interest and arrear interest. According to Bowmans, the established position was that the in duplum rule applied to interest “that had fallen due and was payable and remained unpaid by a defaulting debtor”, whereas contractually deferred or capitalised interest was generally treated as falling outside the rule’s scope.
Against that backdrop, Bowmans highlighted the SCA’s conclusion that interest which is calculated, compounded, and not paid on the interest date “constitutes arrear interest regardless of its capitalisation”.
The firm drew out the implications for structured lending. It noted that arrangements involving capitalisation – such as payment-in-kind (PIK) interest – may now fall within the reach of the in duplum rule, even where payment has been contractually deferred.
It advised lenders to “audit their existing loan portfolios”, review interest provisions in standard-form agreements, and reassess structures that rely on capitalised interest.
Bowmans also emphasised that the Court’s reasoning was grounded in broad public policy considerations, which may extend beyond the specific facts of the case.
Webber Wentzel: caution and potential extension
Webber Wentzel similarly concluded that the SCA treated capitalised interest as arrear interest in substance. It noted that interest capitalised because the debtor could not pay on the interest date was regarded as “functionally arrear interest regardless of how the agreement characterises the non-payment”.
Like Bowmans, it highlighted the Court’s concern that allowing creditors to structure around the rule through capitalisation and deferral would result in “boundless interest”, contrary to public policy.
However, Webber Wentzel placed greater emphasis on the potential reach of the judgment. It noted that although the case involved capitalisation triggered by the debtor’s inability to pay, the Court’s reasoning was “notably broad” and “may have wider implications” for agreements where capitalisation arises from a commercial election rather than financial distress.
It observed that “any accrued interest can potentially be considered arrear interest for in duplum purposes” and concluded that “caution is warranted” when structuring loan agreements involving capitalised or deferred interest.
It also suggested the judgment may require reconsideration at Constitutional Court level.
A clarified but closely watched position
The SCA’s judgment provides a detailed explanation of how the in duplum rule applies to interest that accrues, remains unpaid, and is subsequently capitalised.
Legal commentary suggests the decision will be closely examined in the context of structured lending, particularly where capitalisation and payment deferral mechanisms are used.
Whether the judgment represents a shift in the law or a clarification of existing principles is likely to remain a subject of debate. What is clear from the judgment itself is that interest which accrues and is not paid does not escape the operation of the in duplum rule merely because it is capitalised.
