MUNHUMUTAPA SCHOOL OF

COMMERCE
DEPARTMENT OF BANKING
AND FINANCE
NAME. :TAVONGA ENERST MASWERA Reg
number :M210820

Lecture : Halimani D
Module : Banking Law and Practice
Level : 2.1
Assignment : One
Using various sources and authorities critically
discuss the in duplume rule and it's application
in Zimbabwe law and evaluate if the rule is still
relevant and tenable in light of modern business
demands (25)

This rule applies to loans, overdrafts and any other contracts where a capital sum can be
identified, and where interest is chargeable on it at an ascertainable rate. This rule thus covers
such transactions as hire purchase schemes, credit sales and microlending transactions and
the like.In practice, because repayments are appropriated to interest and to capital as they are
made, forensic calculations are necessary to establish exactly how and when the in duplum
position would have been reached.

In the last few years, the country has experienced a hyperinflationary situation. This was
worsened by a promiscuous monetary policy pursued by the authorities prior to the monetary
review made by the Reserve Bank of Zimbabwe in December 2003.The effect of that policy
was to restrict money supply. In turn, interest rates skyrocketed to unprecedented levels. At the
time of this rude disturbance however, institutions and individuals had committed themselves,
either as lenders or borrowers. The ballooning interest rates were enough to wrong foot the
most well laid out cash flow projections.
The monetary policy of December 2003 did not mean the immediate decline in inflation. In fact,
it initially continued on its upward path. Although it later slowed down somewhat the fact is
amounts initially loaned at earlier periods now purchased far less than they could at the time of
the making of the loan.

However, because interest rates remained high over the period, the amounts that would have
been reflected as due on loans and overdrafts now bore little relation to the amounts initially
extended. In extreme cases, amounts almost five or six times the amounts initially extended
would on the face of it appear as due.The effect of the application of the rule in inflationary
times therefore is to accentuate a redistribution of income from lenders to borrowers. Thus, an
amount of one million dollars which was a fortune way back in 1999, is of very little value now,
even if its double of another one million dollars were to be repaid now.

It would therefore follow that debtors who by hook or crook managed not to pay any amounts
due on loans or overdrafts over a lengthy period of time, can now boldly approach their
creditors, pay the double of amounts borrowed in the past, and lo and behold, they are free of
the debt!To avoid such situations, the creditor should insist on punctilious payments of all
amounts due in terms of the credit facility, as and when they are due. This may be well and
good if the loan agreement anticipates the adjustments necessary to make in the future to cater
for inflation. If, however, a fixed form of regular payment is agreed upon, then the creditor
remains at a disadvantage.

In spite of the surge in interest rates, he may be unable to insist on accelerated repayment
schedules if he has tied himself to an agreement. This same argument goes for credit stores
where goods are purchased on credit and monthly instalments are expectedto extinguish the
value of the credit extended.To cover themselves, credit stores often stipulate that they are at
liberty to determine the extent of the instalments payable by the customers. Whilst this might
appear as adequate cover, it may become negated if borrowers contest this condition.

In seeking to mitigate the effects of the operation of this rule, however, a creditor cannot simply
agree with the debtor that the in duplum rule shall not apply to their transaction. Such an
agreement would be contrary to the public policy of Zimbabwe, and would be
unenforceable.However, the remedy might lie in inducing the debtor to agree to abandon his
rights under the earlier agreement, and enter yet another agreement, whose effect would be to
consider all amounts up to the date of the new agreement, due.

Once the debtor has been thus hoodwinked, such an agreement can thereafter be enforced if
the debtor defaults. If he can, the debtor can neutralise this manoeuvre by declining the
creditor’s enticements.
The in duplum rule can have far reaching effects in relations between creditors and lenders,
particularly if the hyperinflationary situation prevalent now persists. However, this can only
occur if borrowers utilise the advantages it confers upon them, or conversely, if lenders, aware
of the negative results that may attend in delay, seek to minimise its operations by calling in
loans in arrears, timeously.This common law rule provides that interest on a debt will cease to
run where the total amount of arrear interest has accrued to an amount equal to the
outstanding principal indebtedness.

It was developed in response to considerations of public interest and sought to protect

borrowers from exploitation by lenders who permit interest to accumulate unchecked. It also
has the effect of encouraging lenders to exercise their rights to be repaid, promptly and without
delay.

Section 103(5) of the National Credit Act (NCA) 34 of 2005 as amended, incorporates a
statutory version of the in duplum rule. This section provides that: “Despite any provision of the
common law or a credit agreement to the contrary, the amounts contemplated in section 101
(1) (b) to (g) that accrue during the time that a consumer is in default under the credit
agreement may not, in aggregate, exceed the unpaid balance of the principal debt under that
credit agreement as at the time that the default occurs.”Accordingly, the amounts referred to in
section 101(1)(b) to (g) include initiation fees, service fees, interest, the cost of any credit
insurance, default administration charges and collection costs.Paulsen and Another v Slip Knot
InvestmentsIn Paulsen and Another v Slip Knot Investments 777 (Pty) Ltd 2015 (3) SA 479
(CC), several related issues were considered:

” The scope of the Constitutional Court’s jurisdiction under s 167(3)(b)(ii) of the Constitution;
whether an agreement which is exempted from the National Credit Act 34 of 2005 (the ” NCA”)
is nevertheless invalidated by a party’s failure to register as credit provider; and whether the in
duplum rule — which stops the running of interest when the unpaid interest equals the
outstanding capital — continues to operate once ligation to recover the debt commences. “
In brief, the facts of the matter were as follows:

In 2006 Winskor, a property developer concluded a loan agreement with Slip Knot, a finance
company. Under the agreement, Slip Knot loaned Winskor R12 million for 12 months at an
interest rate of 3% per month. The Paulsens bound themselves as sureties for Winskor’s
liabilities to Slip Knot. I By July 2007 Winskor had defaulted. Slip Knot sued the Paulsens for
the R12 million capital plus interest accrued, which by this time far exceeded the capital sum.
No relief was sought against Winskor, which was in the process of being liquidated. In their
defence, the Paulsens argued that the loan agreement was invalid because Slip Knot was not
registered as a credit provider under the NCA; that even if the contract were valid the in
duplum.

The Court found that it is settled law that the in duplum rule permits interest to run anew from
the date that the judgment debt is due and payable.Also, the Court found that there are three
further closely related questions with similar practical implications. First, does post-judgment
interest run on the whole of the judgment debt or only on the original capital amount of the
loan? Second, does the in duplum rule cap the running of such additional interest at double the
sum of the whole of the judgment debt or double the sum of the original capital amount of the
loan? Third, does this interest run at the contractual rate or the statutorily prescribed rate of
interest.The Court upheld this position.The Supreme Court of Appeal also held that the post-
judgment interest runs at the rate agreed upon contractually, in this matter the applicants have
provided no persuasive arguments justifying a departure from the accepted practice of
applying the contract rate to post-judgment interest. The Court, therefore, upheld the Supreme
Court of Appeal’s position.

The in duplum rule applies to various agreements, not only credit agreements. In the case of a
judgement debt, interest runs afresh as awarded from the date on which it becomes due and
payable. Litigants should, therefore, take note of this position and ensure that they deal with it
where needed to safeguard their best interests. Contact an expert at SchoemanLaw for all your
dispute resolution needs.The in duplum rule is a common law rule that provides that
arrear interest ceases to accrue once the sum of the unpaid (accrued) interest equals
the amount of capital outstanding at the time (and not the amount of capital originally
advanced). “In duplum” directly translates to “double the amount”.

Some have understood the in duplum rule to mean that it applies to arrear or default
interest – in other words, interest accruing on amounts that are due and payable but
not paid on due date. In Paulsen v Slip Knot Investments (434/13)[2014] ZASCA 16,
the Supreme Court of Appeal made it clear that the in duplum restriction merely
refers to accumulated interest on the (capital) amount in arrears. It is clear that the
effect of the in duplum rule is therefore that interest ceases to accrue once the sum of
the unpaid (accrued) interest equals the amount of the outstanding capital, whether or
not any capital and/or interest is payable at the time.Previously the in duplum rule
was qualified in that it was suspended pendente lite (during the pendency of
litigation), in other words, even if the duplum had been reached prior to litigation
commencing, interest would accumulate afresh on the outstanding capital from the
date of service of the summons or application papers. However, the constitutional
court in Paulsen and Another v Slip Knot Investments 777 (Pty) Limited [2015]
ZACC 5, has now overruled previous authority and held that the suspension of the in
duplum rule pendente lite indiscriminately targets all debtors and that debtors may be
entirely drained by the accumulation of interest during the pendency of litigation. The
constitutional court held that there are strong public policy considerations in favour of
maintaining the operation of the in duplum rule even if litigation has been
commenced.

Therefore, the law currently is that the in duplum rule permits interest to run anew
only from the date the court issues judgment in favour of the creditor and the
judgment debt is due and payable, and not from commencement of litigation
proceedings.In summary, the in duplum rule provides that a creditor is entitled to the
following repayment of the unpaid capital sum;
interest on the unpaid capital sum at the contract rate up to an amount equal to the
unpaid capital sum (in duplum); and interest on the aggregate of the above amounts
(unpaid capital and accrued interest up to an amount equal to the unpaid capital sum),
at the contract rate from the date of judgment of the court to date of payment by the
debtor.Mezzanine lenders in particular should be mindful of the application of the in
duplum rule. Mezzanine lenders typically provide loans to borrowers who are not
able to obtain funding from banks, and such loans typically carry higher risk and high
interest rates. Often the funding transactions are structured such that the loans (capital
and interest) will only become repayable after some time, during which period
interest accrues on a compounded basis. During the tenure of such loans, it sometimes
happens that the aggregate accrued and unpaid interest reaches the amount of the
unpaid capital. At this point interest ceases to accrue until, for instance, an interest
payment is made and the aggregate accrued (and unpaid) interest is again less than the
unpaid capital. essay is concerned about discussing the law as it relates to the
duplum rule. The in duplum rule is a rule of law which provides that when
interest on a debt equates to the capital of the debt, interest ceases to
continue accruing. For example, if an amount of $200 is borrowed, assuming
everything is equal, the amount payable on it in both interest and capital
should be no more than $400.This rules applies to loans, overdrafts and any
other contracts where a capital sum can be identified, and where interest is
chargeable on it at an ascertainable rate. Thus, this rule covers such
transactions as hire purchase scheme credit sales and micro lending
transactions. The in duplum rule serves to aid debtors in financial difficulties
by holding that it is unlawful to recover interest equal to or more than the
capital sum upon which interest had accrued. The rule. Serves an important
social function by protecting debtors and providing that any clause in a
contract that seeks to deprive a person of the protection afforded to them by
the law is unenforceable by reason of its illegality or on the basis that it
offends public policy. Furthermore, the application of the in duplum rule
cannot be waived and circumvention of the rule cannot be tolerated by
courts.When calculating interest claimable under the in duplum rule, interest
that has been "capitalized “must be regarded as interest and not as capital.
Unpaid interest never ceases to retain its character as interest, even if it has
been added to the capital indebtedness and has carried interest in turn. In
computing the interest claimable under the in duplum rule, interest that has
been "capitalized" in the books of the bank together with any interest that may
have been charged, on the “capitalized interest “must be added to any
interest claimed by the plaintiff and any amount of interest above the
equivalent of the capital owing and claimed would not be owing and
payable.Court case: Paulsen and Another v Slip Knot Investments 777 (Pvt)
Ltd 2015 (3) SA 479 (CC)The facts of the matter were as follows: In 2006
Winskor, a property developer concluded a loan agreement with Slip Knot, a
finance company. Under the agreement, Slip Knot loaned Winskor R12
million for 12 months at an interest rate of 3% per month. The Paulsens
bound themselves as sureties for Winskor’s liabilities to Slip Knot. I by July
2007 Winskor had defaulted. Slip Knot sued the Paulsens for the R12 million
capital plus interest accrued, which by this time far exceeded the capital sum.
No relief was sought against Winskor, which was in the process of being
liquidated. In their defence, the Paulsens argued that the loan agreement was
invalid because Slip Knot was not registered as a credit provider under the
NCA; that even if the contract were valid the in duplum. The court found that it
is settled law that the in duplum rule permits interest to run anew from the
date that the judgment debt is due and payable. Thus interest runs on and is
limited to an amount equal to the whole of the judgment debt.

REFERENCES
Bills of exchange Act - Reserve Bank of Zimbabwe, Section 72 Chapter 14.02
"Customer Mandate”. The Law Dictionary. Retrieved 17 April 2017
Sheldon & Fidler Practice and Law of Banking, 11th ed, English Language
Book Society, 1982
The Banking and Financial Institution Act 1989 part XIII: Information and
Secrecy. Section 97(1)
J.W.Gilbert. The Impact of Monetary Policy on the Performance of Banks (1990-
2002)