Banking & Finance Law | Esselaar Attorneys

Credit Law: Section 89(5)(c) of the NCA declared unconstitutional

Paul Esselaar — Mon, 26 Jun 2023 12:11:22 +0000

In the May/June edition of CLR Paul Esselaar wrote about a decision by the Western Cape High Court in which s 89(5)(c) of the National Credit Act was declared unconstitutional for being inconsistent with the right to property in s 25(1). In other words it was found that the section infringes the lender’s right not to be arbitrarily deprived of property; the property in this case being the right to reclaim the loan amount. This decision was confirmed by the Constitutional Court on 10 December 2012 (National Credit Regulator v Opperman and Others (CCT 34/12) [2012] ZACC 29 (10 December 2012)). See ‘Section 89(5)(c): Breaking the NCA’s big stick’ by Paul Esselaar in the May/June edition of CLR.

It is not necessary to rehash the facts here. Suffice it to say that it involves a loan between two individuals and that the consumer reneged on the loan.

Section 89(5)(c) prescribes that a court must give a particular order in cases where a credit agreement was entered into by an unregistered credit provider; the court has no discretion in the matter. Firstly, the credit agreement must be declared void. Secondly, the credit provider must refund the consumer any money paid. Lastly (and the section says ‘and’), the court must order that ‘all the purported rights of the credit provider under that credit agreement to recover any money paid or delivered to, or on behalf of, the consumer in terms of that agreement are either (i) cancelled, unless the court concludes that doing so in the circumstances would unjustly enrich the consumer; or (ii) forfeit to the State, if the court concludes that cancelling those rights in the circumstances would unjustly enrich the consumer.’

There are many interpretive difficulties arising from the section which are discussed in detail in the judgment (see paras 25 to 56). In the end the court held the following (para 55):

[t]he most plausible meaning of s 89(5)(c) is the one the High Court gave it. The interpretation reflects what common sense tells one the aim of the provision is, in view of the NCA as a whole: consumers have to be protected against uncontrolled credit providers and therefore credit providers are required to register; credit providers who do not register in contravention of the NCA face severe consequences; courts must declare the agreement void and order either that all rights perceived to follow from the agreement (including restitution) are cancelled or forfeited to the state.

According to the credit provider the effect of this provision is to prevent the lender from recovering the money lent thereby limiting the common-law right to restitution. See paras 14 to 18 for a recap of the relevant private law principles, but in short, the right to restitution may already be limited under the common law when a party acted wrongly (the par delictum rule).

The question is whether depriving the lender of his right to claim restitution, in this case to claim the money lent, constitutes an ‘arbitrary deprivation of property’ in terms of s 25 of the Constitution. The court held that the right to claim restitution of the money lent is indeed a form of property (see paras 57 to 64). A deprivation of property is arbitrary ‘when the law does not provide sufficient reason for the particular regulatory deprivation in question, or when it is procedurally unfair’ (para 68). The fact that the court is denied any discretion ‘to decide on a just and equitable order’ due to the peremptory formulation (ie the court must…) results in an arbitrary deprivation of property (para 69). As a result s 89(5)(c) results in the arbitrary deprivation of property in breach of the right set out in s 25(1) of the Constitution (para 72).

Of course, the enquiry does not stop there. The section could have been saved had the court held that the limitation was reasonable and justifiable in terms of s 36(1) of the Constitution. When considering this, the court has to, amongst other things, take into account whether the section uses disproportionate means to achieve its purpose and whether less restrictive means to achieve its purpose are available. The purpose of s 89(5)(c) is obvious. It is a punitive measure which must serve as a deterrent and it must ‘protect the public against unscrupulous lenders’ (see para 70). The court held that s 89(5)(c) is disproportional because it fails ‘to allow a court a discretion to distinguish between credit providers who intentionally exploit consumers and those who fail to register because of ignorance and lend money to a friend on an ad hoc basis’ (para 76). The court pointed out that the common law allows a court a discretion in this regard.

Consequently, s 89(5)(c) was declared unconstitutional and therefore invalid with immediate effect. The court declined the opportunity to read a discretion into the provision as it held that ‘[i]t is preferable for the legislature to address the problematic content of the provision comprehensively, because it is part of an important piece of legislation with laudable objectives, rather than for a court to venture into patch-work legislating.’ (para 84)

So what is the position now? Credit agreements entered into by an unregistered credit provider are still void in terms of s 89(5)(a). In terms of s 89(5)(b), the credit provider must still refund any money paid by the consumer under that agreement with interest. Given that s 89(5)(c) is invalid, the credit provider would be able to claim the amount lent back from the consumer in cases where the requirements for a claim based on unjustified enrichment are met. The success of such a claim would depend, in part, on ‘the circumstances of each case and especially the degree of blameworthiness of the unregistered credit provider’ (see para 85 and the discussion of the common law principles in paras 14 to 18). See Van der Merwe et al Contract General Principles 4 ed (Juta 2012) at page 179 for a comprehensive discussion of the principles which are applied to determine whether a party is entitled to restitution.

This means that unscrupulous credit providers are not necessarily off the hook. A court may still find that the unregistered credit provider is not entitled to recover its performance based on common law principles. This case dealt with a loan between two (presumably now ‘ex’) friends and the lender in this case was not aware of the requirement to register as he was not in the business of lending money (see para 4 of the judgment). If one applies the common law, it is likely that Mr Opperman would be able to claim the loan amount back. The person who is completely bona fide in not knowing that his actions may lead to an illegal contract is not considered blameworthy and is therefore entitled to restitution (see Bhyat’s Departmental Stores (Pty) Ltd v Dorklerk Investments (Pty) Ltd 1975 (1) SA 267 (T) and Wylock v Milford Investments (Pty) Ltd 1962 (4) SA 298 (C) 319). It is likely that a court will be less forgiving in cases where the lender is a juristic person who engages in the business of lending money.

Whatever the case may be, s 89(5)(c) is no longer valid and any argument that a credit provider is not entitled to restitution will have to be based on the common law.

As an aside: Cameron J gave a dissenting judgment. He faults the majority judgment for ignoring the phrase ‘rights of the credit provider under that credit agreement’ and found that s 89(5)(c) cannot refer to the right to claim restitution as that right does not arise from the agreement. In fact, no rights can arise from the agreement in any event, as it is void and consequently there are no rights that can be forfeited to the state. Thus s 89(5)(c) has no ‘effective punitive force.’ He declined to declare the provision unconstitutional as it is preferable to ‘acknowledge the drafting error, and to leave Parliament to correct it.’ The effect of this decision is much the same as declaring the sub-section unconstitutional.

(This article was published in the January 2013 edition of the Consumer Law Review which is published by Juta & Co. You can subscribe by creating a profile at www.jutalaw.co.za. Back issues are available under ‘Newsletters’.)

Draft NCA Regulations on Affordability Assessments published

Paul Esselaar — Mon, 26 Jun 2023 12:10:12 +0000

The Department of Trade and Industry has published draft regulations on, “Affordability Assessment for the Amendment of
Regulations for matters relating to the functions of the National Consumer Tribunal and Rules for the Conduct of
matters before the National Consumer Tribunal”.

This is a crucial piece of legislation for credit providers as it can turn their business model on its head (currently credit providers conduct their own affordability assessments based on in-house business decisions. The regulations will standardise this approach which may amount to a reduction in competition between credit providers as they are forced to follow an identical process).

People wishing to comment have until the end of August 2014 to submit their comments. Please contact us at paul@ea.law.za if you would like a copy of the draft Regulations.

Drowning in Red Tape: The new threshold for registration as a credit provider

Paul Esselaar — Mon, 26 Jun 2023 12:06:15 +0000

With all the pieces of legislation that are constantly being updated it is easy to miss changes to legislation that are really important – especially if that change comes in the form of a Regulation (something typically drafted by a ministry such as the Department of Trade and Industry(DTI)) instead of an amendment to an Act (which requires parliamentary approval). One such game-changer came into force with little (if any) fanfare in the form of Government Gazette notice 513 which was signed by Minister of Trade and Industry Rob Davies on the 14th April 2016 and comes into effect on the 11th November 2016 (see s42(2) as to why it is delayed by 6 months).

The notice is only 7 lines long and all it does is change the threshold ‘required by section 42(1)’ to ‘nil (R0)’. So far that seems pretty innocuous stuff – until you realise what this means…

Section 42 of the National Credit Act is the part of that Act that deals with the requirement to register as a Credit Provider. Before this notice that threshold was at R500 000. Essentially what this meant is that – before 11 May 2016 – if you loaned R499 999 to a person and received 1% interest on this per month you still needed to comply with several of the provisions of the National Credit Act (you are still considered to be a ‘Credit Provider’) but you did not need to register as a Credit Provider with the National Credit Regulator. This is vitally important as (in the past) the failure to register as Credit Provider when you needed to should have resulted in you forfeiting the entire loan amount to the state (in terms of section 89(5)).

Section 89(5)(c) has now changed (thanks to the Constitutional Court judgment of National Credit Regulator v Opperman and Others (CCT 34/12) [2012] ZACC 29) so that a credit provider who is unregistered will be able to recover the capital amount loaned but not any additional fees or interest.

So what does this all mean for you? Well, to take an extreme example this means that if I loan R10 to Joe Soap and we agree that he will repay an amount of R15 to me then I need to register with the National Credit Regulator as a Credit Provider.

Seriously.

If I don’t register as a Credit Provider then I will not be able to recover the R5 in interest / fees that I charged Joe Soap but I can recover the R10 capital amount.

So let’s take this a little further. The reduction of the threshold to register to R0 means that:

Any company providing an employee loan (of any amount) where they charge interest and/or a fee must register as a credit provider; and
Small loans between people who know each other but still act at arm’s length will effectively become impractical (as there will be no incentive to loan the money).

While I recognise that the National Credit Regulator has had to deal with schemes where companies use elaborate structures to avoid crossing the threshold (and so avoid having to register as a credit provider) it is amazing that this fundamental change to the way smaller loans are granted (especially by small businesses and people who know each other) has not received greater publicity. Until it does it seems very likely that a great number of people trying to provide small loans on terms generally more favourable than commercial credit providers will suddenly find themselves rueing their kindly nature when they realise that they:

cannot legally recover interest or fees for those credit agreements before they are registered, and
they still need to register as a credit provider.

Once again this action by the DTI begs the question as to whether they really thought this through?

– Paul Esselaar, May 2016

Paul Esselaar and Elizabeth de Stadler will be presenting an update on the National Credit Act at the University of Cape Town on the 30th May 2016. For more information on this please click here.

The National Credit Act update

Paul Esselaar — Mon, 26 Jun 2023 12:05:18 +0000

Date: Monday, 17 May 2021 – 09:00 to Wednesday, 19 May 2021 – 11:00

The National Credit Act Amendment Act 7 of 2019 has real consequences for credit providers and debt counsellors in particular. This course focuses on the likely impact that the changes will have in the market.

This course highlights the changes to the National Credit Act and gives feedback on the changes to the legislation as well as updates on recent case law related to the NCA. Attending this course will help you to make strategic decisions on how best to react to the changes.

Join us for a four-hour course, held over two days, which will deepen your understanding of the NCA.

For more information go to: http://www.lawatwork.uct.ac.za/lw/courses/national-credit-act

Beware Repricing Practice

Paul Esselaar — Mon, 26 Jun 2023 12:02:22 +0000

Joan Muller of the Financial Mail interviewed Paul Esselaar on the emerging practice of banks increasing the mortgage interest rate when a new loan is entered into by a consumer in order to change the loan from being in a juristic person’s name to being into their own name. (It is better from a Capital Gains Tax (CGT) perspective to have a property in your personal name and SARS has provided consumers with a window of opportunity to transfer the property without attracting CGT so that consumers can move the property into their personal name. The problem is that neither SARS nor the consumer could anticipate that the self-same loan would now have a higher interest rate than before).

To view the article from the Financial Mail HERE

Deciphering the Bayport judgment and why it is a BIG DEAL

Paul Esselaar — Mon, 26 Jun 2023 11:20:38 +0000

In November 2021 the Supreme Court of Appeal provided a judgment (Bayport Securitisation Limited and Another v University of Stellenbosch Law Clinic and Others (507/2020) [2021] ZASCA 156 (4 November 2021)) which – surprisingly – seems to have largely gone unnoticed by journalists interested in consumer rights. The appeal was against a declaratory order granted by the Western Cape High Court and has severe implications for debtors in South Africa.

On reading (and re-reading) the judgment it seemed possible that the reason this judgment has not created big flashing red lights for consumer journalists is due to a lack of clarity as penned by acting Judge M V Phatshoane?

The purpose of this article is to provide our interpretation of what this judgment means in practice, how this has changed our view of the National Credit Act no.34 of 2005 and what the implications of the judgment are.

Up until November 2021 it was the collective opinion of most attorneys as well as Judge AJ Hack of the Western Cape High Court that a credit provider was only entitled to recover double the amount of capital that it had loaned as at the date of default. This is best illustrated by an example:

Credit provider A loans Joe Soap R10 000.
Joe Soap repays R5000 of the capital amount but then loses his job and defaults on the loan repayments. Thus, at date of default the remaining capital amount due was R5000.
Credit provider A now wants to recover the loan from Joe Soap and sues out a summons claiming the R5000 plus:
1. a service fee (s101(1)(b)),
2. interest (s101(1)(c)),
3. credit insurance (s101(1)(d)),
4. default administration charges s (s101(1)(e)), and
5. collection costs (s101(1)(f)).
In terms of section 103(5) all the fees, charges and interest mentioned above cannot exceed R5000. This meant that – in practice – the credit provider would know that it would never be able to recover more than R10 000 from Joe Soap as all its fees would be capped at an amount equal to the default capital amount (i.e. R5000 capital outstanding + R5000 in interest, fees, charges and legal fees).

Micro lenders would be well aware that trying to recover a debt from a consumer often would not be cost effective as it is easy for legal costs to exceed the default amount (in our example R5000) which in turn would mean that even if the credit provider was completely successful it could end up paying more to the attorneys than it recovered from the debtor. This also meant that consumers with small debts could never face massive litigation costs where they need to pay for attorneys and advocates’ fees as – even if they lost – the ‘recoverable amount’ would only ever be double the capital amount due at the time of default. In short it dissuaded credit providers from starting litigation for small debts as it was commercially illogical.

All this changed with the Supreme Court of Appeal judgment on 4 November 2021. In the appeal the five appeal court judges were tasked with deciding whether Judge Hack of the Western Cape High Court was correct in his interpretation of section 103(5) of the National Credit Act? They unanimously agreed that Judge Hack had erred.

More specifically they found that all litigation costs (legal costs to recover the debt as well as interest and costs of execution after judgment) do not form part of the rule created by section 103(5) of the National Credit Act (see paragraph 19 of the judgment).

Once again this is best illustrated by returning to our previous example but applying the law as set out by the Supreme Court of Appeal:

Credit provider A loans Joe Soap R10 000.
Joe Soap repays R5000 of the capital amount but then loses his job and defaults on the loan repayments. Thus, at date of default the remaining capital amount due was R5000.
Credit provider A now wants to recover the loan from Joe Soap and sues out a summons claiming the R5000 plus:
1. a service fee (s101(1)(b)),
2. interest (s101(1)(c)),
3. credit insurance (s101(1)(d)),
4. default administration charges s (s101(1)(e)), and
5. collection costs (s101(1)(f)),
6. litigation costs
Credit provider A succeeds and gets a judgment for R10 000 plus:
1. Interest at 7% per annum (current prescribed rate of interest) up until date of payment,
2. Litigation costs (probably on an attorney client scale) up until judgment
3. Execution costs to recover the debt after judgment.

In theory the debtor could now face a claim for R50 000 if litigation costs and execution costs (such as sheriff’s fees) and interest after the date of judgment amount to R40 000. (Note that legal costs of R40 000 are perfectly possible if the matter went to trial).

Hopefully it will now be clear why this judgment is a BIG DEAL as small loans now have the possibility of costing the debtor far in excess of the amount that was loaned (in our example the debtor ends up paying an amount that is 500% greater than the loan he received from credit provider A)!

Here is a list of the winners and the losers:

WINNERS

Credit providers who can now go back to their debtors’ book and hand over a significant percentage of the debtors’ book to attorneys to collect,
Attorneys who would have a significant increase in the number of matters being referred to them by credit providers

LOSERS

Debtors who have defaulted on their loans

There is also a possibility of a silver lining as the credit market might react by being more willing to provide micro-loans now.

The last question on this judgment is whether it will be appealed by the Stellenbosch Legal Aid clinic to the Constitutional Court. Certainly, the judgment has a massive effect on consumers and the credit industry and so it would be surprising if this judgment is not appealed.

In the meantime consumers wanting loans should be far more careful now than before as defaulting on even a small loan could have devastating consequences…

NCA Minimum Expense Norms: When = equals ?

Paul Esselaar — Mon, 26 Jun 2023 11:04:56 +0000

In 2016 I wrote an article detailing how to calculate the minimum expense norms in terms of Regulation 23A(9) of the National Credit Act Regulations. In essence, the table creates a table of minimum ‘deemed’ expenses that a debtor has in order to combat the problem of debtors lying about what their monthly expenses were (in order to get the credit provider to give them a loan).

At a high level, the table was intended to follow three steps:

Determine the income band where the debtor fits in. There are 5 separate bands which are:
1. Earning R800 or less
2. Earning between R800.01 and R6250.00
3. Earning between R6250.01 and R25 000.00
4. Earning between R25 000.01 and R50 000.00
5. Earning more than R50 000.01.
Once you know which band the debtor falls in you know what the ‘minimum monthly fixed factor’ is. Like the income bands there are five of them:
1. R0.00
2. R800.00
3. R1 167.88
4. R2 855.38
5. R4 905.38
The final step is to add a percentage amount to the sum based on the amount of income which exceeds the minimum amount. The way this was intended to work (and how I set it out in the original article) is as follows:
1. Income of R20 000 means the debtor falls within bank d) above which means that their minimum expense is R 2 855.38.
2. The amount of income above the minimum bank is R20 000 – R6250.01 = R13 749.99.
3. 8.2% of R13 749.99 is R1 127.50.
4. R1 127.50 + R2 855.38 = R3 982.88
5. SO: The debtor either has:
  1. a minimum monthly expenditure of R3 982.88, OR
  2. He must prove that his expenses are less than R3 982.88, OR
  3. He has expenses greater than R3 982.88.

All of that is necessary to bring us to the problem which is a tiny little typo in Table 1’s last column. At present the column reads:

‘Monthly Fixed Factor = % of Income Above Band Minimum’

What it should have read is:

‘Monthly Fixed Factor + % of Income Above Band Minimum’

Obviously, this is easy to miss as the only change is replacing the ‘=’ with a ‘+’ sign.

So what does this mean? Right now there is a good argument that credit providers can rely on the Minimum Monthly Fixed Factor alone and do not have to add the Monthly Fixed Factor percentage. In my example above what this would mean is that the creditor would be allowed to accept a debtor alleging that their minimum expenses were R2 855.38 rather than the higher bar of R3 982.88.

While this may seem to be a trivial point, the issue really becomes emphasised in the largest income threshold. For example, a person wishes to get a loan of R20 million. He approaches a bank who asks him what his monthly income is. He says it is R100 000 per month. In terms of the way the Regulations are currently published the bank would be entitled to assume that his minimum expenses per month are R4 905.38 rather than the R8 280.38 which the legislature (presumably) intended.

While there may be an argument that the Regulations must be interpreted to correct the obvious error, in the meantime a gap has been created for debtors to lie about their monthly expenses and for credit providers to validly grant loans by assuming a lower minimum expense norm. This also means that credit providers who granted loans when the debtor had too many expenses may just have a way to avoid the loan being declared reckless.

Finally, if this article seems complicated that is because it actually is (and that is the fault of the Regulations!). Please contact us if you want to discuss what this means for you.