A recent Supreme Court of Appeal decision sheds light on a tricky legal question: When does the clock start ticking on a claim when the underlying wrongdoing, in this case, fraud, is hidden but the law says you should have noticed?
A debt starts to prescribe as soon as it is due.[1] However, a debt is not deemed to be due until the creditor has knowledge of the identity of the debtor and the facts from which the debt arises[2] – otherwise, a debt could theoretically become due and in time prescribe without the creditor ever having been aware of it. Even if the creditor does not have knowledge of the identity of the debtor and the facts from which the debt arises, he will be deemed to have it if he could have acquired it by exercising reasonable care.[3] A creditor cannot be allowed to “by supine inaction, arbitrarily and at will postpone the commencement of prescription”[4].
Inevitably, much case law has been generated around the question of what it means for a creditor to exercise “reasonable care” – a vague term with far-reaching ramifications since prescription is a potential “kill shot”. The recent judgment of the Supreme Court of Appeal (SCA) in Mason N O v Mason and Another[5] illustrates the application of these principles to a particular scenario and considers whether a defrauded party ought to have done more to become aware of the concealed fraud – and hence whether his claim had prescribed.
The deceased and his surviving brother (Mr Mason) had been partners in an electrical business through a close corporation (CC) – the deceased held 60% of the members’ interest and Mr Mason 40%. The brothers had different responsibilities in the business: the deceased oversaw the management and finances, while Mr Mason looked after its operational and technical side. When the deceased passed, the executrix (his widow) tried to enforce an agreement between the brothers that in the event of one of them dying, the survivor would purchase the deceased’s members’ interest using the proceeds of life insurance taken out specifically for that purpose, less anything owed by the deceased to the business.
Mr Mason resisted this on the grounds that over a period of fifteen years, the deceased had misappropriated money exceeding the proceeds of the policy. This theft had funded the acquisition of properties, namely a wine and olive farm in the Calitzdorp area of the Western Cape in South Africa, which included the building of a winery. Mr Mason instituted separate proceedings on behalf of the CC against the deceased estate for a statement and debatement of account arising from the long-running theft, and the two actions were consolidated for trial.
The executrix pleaded prescription to the CC’s claim[6]: Mr Mason, she said, owed the CC a fiduciary duty since he was a 40% member. By virtue of this, he ought to have known of the deceased’s unlawful conduct. His deemed knowledge must be imputed to the CC, and the CC’s claim had accordingly prescribed in respect of any misappropriations that occurred more than three years before the summons was served. Only one witness gave evidence at trial, a forensic auditor who had done an investigation and confirmed the theft. The High Court dismissed the executrix’s claim and granted judgment in favour of the CC against the deceased estate for the total misappropriated amount, less the amount paid to Mr Mason under the policy, which Mr Mason was to pay to the CC.
The executrix appealed, the issues being firstly whether Mr Mason had had actual or constructive knowledge of the misappropriation, and if so, then whether that knowledge could be attributed to the CC. The executrix’s case rested on two legs:
- Through the exercise of his legal obligations, including fiduciary duties, and entitlements as a member of the CC, Mr Mason could reasonably have acquired knowledge of the deceased’s misappropriation of funds.
- Mr Mason’s affidavit resisting summary judgment stated that he and the deceased drew only modest drawings from the CC; that over 15 years the deceased had acquired ‘significant assets’; that Mr Mason did not understand how he had acquired them; that when the deceased died it had ‘immediately become apparent’ to Mr Mason that the deceased had made large-scale withdrawals from the CC; and that Mr Mason’s ‘preliminary investigation’ had revealed the diversion of substantial sums, amounting to millions of rands, to fund assets for the deceased. These were red flags which the reasonable member in Mr Mason’s position would have used his statutory powers to investigate and thus uncover the truth.
Neither of these arguments found favour with the SCA. Mr Mason’s fiduciary relationship to the CC was not enough by itself to close the circle and show that by the exercise of reasonable care, he could have known of the deceased’s theft. If it was, then every member of a CC would always have constructive knowledge of all wrongdoings in its management for purposes of prescription – an absurd conclusion. The executrix thought she had a “gotcha” with the summary judgment affidavit, but she was wrong. The statements relied on were one-liners, devoid of any explanatory context, and filed before the executrix had first raised prescription – and therefore of little value. And, the executrix’s reliance on the fact that Mr Mason had approached the bookkeeper several times to find out why only his loan account was always in the red while the deceased’s was in credit, and failed to receive satisfactory answers, was misplaced.
The CC was a family business in a healthy financial state, and there had been no bad blood or mistrust between the brothers. Not only that, but Mr Mason had had minimal involvement in the financial side and was ill-equipped to do the financial “deep dive” into the CC’s historical records that might have uncovered how the theft had been fraudulently accounted for. He had no reason to suspect that his concerns about the accuracy of his own loan account meant that his brother was stealing. The CC’s claim against the deceased had not prescribed and the appeal was dismissed.
One key takeaway from this case is that courts can, in appropriate cases, be slow to hold an innocent party to a stringent standard of “reasonable care” in taking steps to discover a concealed fraud; otherwise, one might have expected that the deceased’s winery and olive farm should have sounded blaring alarms. We know from previous judgments[7] that the SCA can be unsentimental in upholding prescription due to a defrauded creditor not having exercised reasonable care. It is an open question whether the SCA may have been influenced in this case by the gut feeling of injustice if the executrix (who presumably also noticed the wine and olive farms during her husband’s lifetime) could get away with retaining the estate’s ill-gotten gains simply because her brother-in-law had been too innocent or slow to deduce that he was being stolen from. Regardless, the best practice remains the same: always trust your suspicions and always investigate, or run the risk of inadvertently losing whatever claim you may have.
This article was prepared by Pierre Burger.
[1] Section 12(1) of the Prescription Act (Act 68 of 1969) (Act).
[2] Section 12(3) of the Act.
[3] Ibid.
[4] Gunase v Anirudh 2012 (2) SA 398 (SCA) paras 14-15; Uitenhage Municipality v Molloy 1998 (2) SA 735 (SCA) at 742A-C.
[5] (1286/2023) [2025] ZASCA 44 (14 April 2025)
[6] In the alternative. Her primary defence was to deny that the deceased had misappropriated any funds.
[7] WK Construction (Pty) Ltd v Moores Rowland and others [2022] All SA 751 (SCA) – a company defrauded by one of its directors could have acquired a reasonable suspicion that its auditors had been negligent in signing off on the AFS and its claim against the auditors had therefore prescribed – notably, the party pleading prescription in this case was not the party that had committed the fraud ; Bester & others NNO v Gouws & others (851/2019) [2020] ZASCA 174 (17 December 2020) – the prioritisation of other issues by a liquidator in a large and complex insolvency cannot be a justification for not exercising reasonable care to ascertain the facts giving rise to a debt arising from a fraudulent pyramid scheme.