Unintended consequences

1. Purpose of act
The National Credit Act 34 of 2005 ("the Act") was promulgated "to promote a fair and non-discriminatory marketplace for access to consumer credit and for that purpose to provide for the general regulation of consumer credit and improved standards of consumer information; to promote black economic empowerment and ownership within the consumer credit industry; to prohibit certain unfair credit and credit-marketing practices", etc.

It would appear as if the Act will go a long way to protect unsophisticated borrowers and to regulate lenders but, as will more fully appear from this memorandum, the Act creates the possibility for unscrupulous borrowers to take unfair advantage of unsophisticated lenders.

2. Unintended (I presume) consequences of the Act
Take the following example:

A farmer who has never before acted as a money lender and who, needless to say, is not a registered credit provider, retires and, in the process, sells his farm for R900 000,00 to an unscrupulous buyer who is not related to the farmer in any way, is a natural person and who succeeds in convincing the farmer to sell the farm on inter alia the condition that R200 000,00 of the purchase price will be paid against registration of the farm into the name of the buyer and the condition that the balance of the purchase price (R700 000,00) will bear interest at prime to be paid monthly in arrears, will be secured by a mortgage bond (kustingsbrief) over the farm and will only become payable one year after registration of the farm into the name of the buyer.

The transaction is concluded on the said basis, transfer is registered in the name of the buyer and the buyer pays the interest for two months, after which he stops paying.

As all farmers know, a kustingsbrief provides excellent security and the seller instructs an attorney (hopefully not the one who drew up the deed of sale in the first place) to institute action for the recovery of the R700 000,00 and accrued interest only to be told that, in terms of the Act, he should have registered as a credit provider and, because he has not done so, the loan agreement as contained in the mortgage bond is void and he cannot claim payment of the capital or interest. To add insult to injury, he also has to repay the instalments already received with interest thereon. The attorney then also informs him that, had he insisted on the buyer buying through a company, a close corporation or a trust with at least three trustees and the buyer signing surety for such company, corporation or trust, neither the mortgage agreement nor the deed of suretyship would have been void.

In the meantime the farmer has acquired 49% of the issued shares of the small company (Butchery (Pty) Ltd), (combined asset value and annual turnover is less than R1 million),which is the owner of the butchery in the nearby town on the basis that the shares were sold to him at the par value (R49,00) and on condition that he makes R200 000,00 available to the company on an interest-bearing loan account. On suggesting to his attorney that he will use the interest on the loan account to eke out a living, he receives the terrible news that the shareholders' loan is also void, that he has lost his capital and that he will have to repay Butchery (Pty) Ltd all the interest that he has received. The attorney then also informs him that, had he taken up 51% of the shares in Butchery (Pty) Ltd, the loan would not have been void.

The said disastrous results are the consequences of the following sections of the Act, the relevant provisions of which I have underlined:

3. Applicable Provisions
3.1 The following definitions as contained in Section 1 of the Act:

'consumer', in respect of a credit agreement to which this Act applies, means
(c) the party to whom credit is granted under a credit facility ;-
(d) the mortgagor under a mortgage agreement;
(e) the borrower under a secured loan;

[It is clear that the Buyer of the farm is a consumer as defined as he is both the mortgagor and borrower and that Butchery (Pty) Ltd is a also a consumer as it is the party to whom credit is granted]

'credit provider', in respect of a credit agreement to which this Act applies, means-
(c) the party who extends credit under a credit facility;
(d) the mortgagee under a mortgage agreement;
(e) the lender under a secured loan;

[It is clear that the farmer is a credit provider as defined as he is both the mortgagee and the lender as regards the buyer of his farm and the person who extends credit to Butchery (Pty) Ltd]

'juristic person' includes a partnership, association or other body of persons, corporate or unincorporated, or a trust if-
(a) there are three or more individual trustees; or
(b) the trustee is itself a juristic person,
but does not include a stokvel;

[Butchery (Pty) Ltd is a corporate body of persons and thus a juristic person. Note the strange provision to the effect that trustees with more than two trustees are also juristic persons]

3.2 Section 4, which provides what credit agreements are regulated by the act

4 Application of Act
(1) Subject to sections 5 and 6, this Act applies to every credit agreement between parties dealing at arm's length and made within, or having an effect within, the Republic, except-
(a) a credit agreement in terms of which the consumer is-
(i) a juristic person whose asset value or annual turnover, together with the combined asset value or annual turnover of all related juristic persons, at the time the agreement is made, equals or exceeds the threshold value determined by the Minister in terms of section 7 (1); [this value is currently R1 000 000,00"]
(b) a large agreement, [generally one above R250 000,00] as described in section 9 (4), in terms of which the consumer is a juristic person whose asset value or annual turnover is, at the time the agreement is made, below the threshold value determined by the Minister in terms of section 7 (1);

[It is important to note that, because the buyer/lender of the farm is not a juristic person, the Act would apply regardless of the amount of the loan. Also note that, although Butchery (Pty) Ltd is a juristic person, the loan to it is less than R250 000,00 and does not constitute a large agreement]

(2) For greater certainty in applying subsection (1)-
(a) the asset value or annual turnover of a juristic person at the time a credit agreement is made, is the value stated as such by that juristic person at the time it applies for or enters into that agreement;
(b) in any of the following arrangements, the parties are not dealing at arm's length:
(i) a shareholder loan or other credit agreement between a juristic person, as consumer, and a person who has a controlling interest in that juristic person, as credit provider;

[Note that because the farmer does not hold a controlling interest in Butchery (Pty) Ltd the loan is regarded as an arm's length transaction]

(ii) a loan to a shareholder or other credit agreement between a juristic person, as credit provider, and a person who has a controlling interest in that juristic person, as consumer;
(iii) a credit agreement between natural persons who are in a familial relationship and-
(aa) are co-dependent on each other; or
(bb) one is dependent upon the other; and
(iv) any other arrangement-
(aa) in which each party is not independent of the other and consequently does not necessarily strive to obtain the utmost possible advantage out of the transaction; or
(bb) that is of a type that has been held in law to be between parties who are not dealing at arm's length;
(c) this Act applies to a credit guarantee only to the extent that this Act applies to a credit facility or credit transaction in respect of which the credit guarantee is granted; and
(d) a juristic person is related to another juristic person if-
(i) one of them has direct or indirect control over the whole or part of the business of the other; or
(ii) a person has direct or indirect control over both of them.


3.3 Section 8, which provides what agreements are credit agreements

8 Credit agreements
(1) Subject to subsection (2), an agreement constitutes a credit agreement for the purposes of this Act if it is-
(a) a credit facility,as described in subsection (3);
(b) a credit transaction, as described in subsection (4);
(c) a credit guarantee, as described in subsection (5); or
(d) any combination of the above.
(3) An agreement, irrespective of its form but not including an agreement contemplated in subsection (2) or section 4 (6) (b), constitutes a credit facility if, in terms of that agreement-
(a) a credit provider undertakes-
(i) to supply goods or services or to pay an amount or amounts, as determined by the consumer from time to time, to the consumer or on behalf of, or at the direction of, the consumer; and<br> (ii) either to-
(aa) defer the consumer's obligation to pay any part of the cost of goods or services, or to repay to the credit provider any part of an amount contemplated in subparagraph (i); or
(bb) bill the consumer periodically for any part of the cost of goods or services, or any part of an amount, contemplated in subparagraph (i); and
(b) any charge, fee or interest is payable to the credit provider in respect of-
(i) any amount deferred as contemplated in paragraph (a) (ii) (aa); or
(ii) any amount billed as contemplated in paragraph (a) (ii) (bb) and not paid within the time provided in the agreement.
(4) An agreement, irrespective of its form but not including an agreement contemplated in subsection (2), constitutes a credit transaction if it is-
(a) a pawn transaction or discount transaction;
(b) an incidental credit agreement, subject to section 5 (2);
(c) an instalment agreement;
(d) a mortgage agreement or secured loan;
(e) a lease; or
(f) any other agreement, other than a credit facility or credit guarantee, in terms of which payment of an amount owed by one person to another is deferred, and any charge, fee or interest is payable to the credit provider in respect of-
(i) the agreement; or
(ii) the amount that has been deferred.

[it is clear that the loan to Butchery (Pty) Ltd constitutes a credit transaction]

(5) An agreement, irrespective of its form but not including an agreement contemplated in subsection (2), constitutes a credit guarantee if, in terms of that agreement, a person undertakes or promises to satisfy upon demand any obligation of another consumer in terms of a credit facility or a credit transaction to which this Act applies.
(6) If, as contemplated in subsection (1) (d), a particular credit agreement constitutes both a credit facility as described in subsection (3) and a credit transaction in terms of subsection (4) (d)-
(a) subject to paragraph (b), that agreement is equally subject to any provision of this Act that applies specifically or exclusively to either-
(i) credit facilities; or
(ii) mortgage agreements or secured loans, as the case may be, and
(b) for the purpose of applying-
(i) section 108, that agreement must be regarded as a credit facility; or
(ii) section 4 (1) (b) read with section 9 (4), that agreement must be regarded as a large agreement if it is a mortgage agreement.

3.4 Section 40 which provides for the registration of certain Credit providers

40 Registration of credit providers
(1) A person must apply to be registered as a credit provider if-
(a) that person, alone or in conjunction with any associated person, is the credit provider under at least 100 credit agreements, other than incidental credit agreements; or
(b) the total principal debt owed to that credit provider under all outstanding credit agreements, other than incidental credit agreements, exceeds the threshold [currently R500 000,00] prescribed in terms of section 42 (1).

[Although the farmer has only entered into two credit agreements, the total principal debt exceeds R500 000,00 and accordingly the farmer will have to apply to be registered as a credit provider. This result of the Act cannot be other than unintended. Just think of the administrative burden it will create. I cannot see what benefit the registration of the farmer in my example would hold for anybody. A much fairer result would be obtained if the word "or" at the end of s40(1) (a) is replaced with the word "and"]

3.5 Section 89 (2) which deals with Unlawful Credit Agreements

89 Unlawful credit agreements
(2) Subject to subsections (3) and (4), a credit agreement is unlawful if-
(d) at the time the agreement was made, the credit provider was unregistered and this Act requires that credit provider to be registered;
(4) Subsection (2) (d) does not apply to a credit provider if-
(a) at the time the credit agreement was made, or within 30 days after that time, the credit provider had applied for registration in terms of section 40, and was awaiting a determination of that application;

[The farmer only discovers his problem when the buyer of the farm stops paying and when it is too late to apply for registration]

3.6 Section 89 (5) which deals with the effect of Unlawful Credit Agreements

(5) If a credit agreement is unlawful in terms of this section, despite any provision of common law, any other legislation or any provision of an agreement to the contrary, a court must order that-
(a) the credit agreement is void as from the date the agreement was entered into;
(b) the credit provider must refund to the consumer any money paid by the consumer under that agreement to the credit provider, with interest calculated-
(i) at the rate set out in that agreement; and
(ii) for the period from the date on which the consumer paid the money to the credit provider, until the date the money is refunded to the consumer; and
(c) all the purported rights of the credit provider under that credit agreement to recover any money paid or goods 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.

[It is clear that the farmer can never recover his R700 00,00 or his R200 000,00. His rights against the buyer of his farm and against Butchery (Pty) Ltd are either cancelled or forfeit to the State]
[Please take note that the date of commencement of s. 89 is 1 June 2007.]

Roelie Rossouw