The Importance Of Considering The Applicability Of The National Credit Act When Entering Into Agreements by Eric Migdal

  1. Consider the following example:
  • A enters into an agreement with B to sell his shares in a company. A allows B to pay the purchase price over a period of 4 months and charges interest in respect of the amount which has been deferred for payment.
  • A is not in the business of providing credit and has never intended to participate in the credit industry. This is a once-off transaction. A is not registered with the National Credit Regulator as a credit provider as he does not consider himself to be subject to the provisions of the National Credit Act (“NCA”). After all, A is merely disposing of his shares in his company on the basis that B, who cannot afford to pay the purchase price in one lump sum, will pay over a period of 4 months and will pay A interest on the purchase price.
  1. Unfortunately for A and B the sale of shares agreement can be rendered unlawful and void due to non-compliance with the provisions of the NCA. This has been made clear in a recent judgment handed down by the Supreme Court of Appeal (“SCA”).
  2. The NCA regulates the credit industry in South Africa. Section 40 of the NCA inter alia provides that:-
    1.  a person must apply to be registered as a credit provider if that person enters into a credit agreement in terms of the NCA;
    2.  a person who is required to be registered as a credit provider, but who is not so registered, must not offer, make available or extend credit, enter into a credit agreement or agree to do any of those things;
    3. a credit agreement entered into by a credit provider who is required to be registered in terms of the NCA but who is not so registered is an unlawful agreement and void to the extent provided in Section 89.
  3. Section 89 inter alia provides that a credit agreement is unlawful if, at the time the agreement was made, the credit provider was unregistered and the NCA requires that credit provider to be registered.
  4. In the case of Friend vs. Sendal 2015 (1) SA 395 (GP) a full bench of the High Court found that the requirement to register as a credit provider was directed at the participants in the credit market and that, notwithstanding the fact that an agreement may be a credit agreement in terms of the NCA, this did not necessarily mean that the credit provider was obliged to register in terms of Section 40. The court found in Friend’s case that as the credit provider did not participate in the credit industry and did not frequently provide credit and, as this was a once-off transaction, the NCA did not apply.
  5. However, in the recent case of Du Bruyn NO & Others v Karsten (929/2017 [2018] ZASCA 143 (28 September 2018) the Supreme Court of Appeal (“SCA”) found that Friend’s case was wrongly decided.
  6. Briefly, the facts in De Bruyn’s case were as follows:
  • De Bruyn set up his business in 1984.  He introduced Karsten to the business and the latter eventually held 50% of De Bruyn’s companies.  In 2013 De Bruyn and Karsten decided to part ways.  Sale of share agreements were entered into with the purchase price to be paid over a period.  A covering mortgage bond was registered over immovable property in order to secure the payment of the purchase price.
  • Karsten, who was the seller of the shares to De Bruyn, was not registered as a credit provider in accordance with Section 40 of the NCA at the date that the sale agreements were entered into in April 2013.  However, Karsten did make application to register after the sale agreements were entered into and the registration occurred on 27 November 2013.  The covering bond was registered early in 2014.
  1. The SCA, inter alia, stated as follows in De Bruyn’s case:“While it may be reasonable, and indeed eminently sensible, to interpret Section 40 as being inapplicable to once-off transactions where the role players are not participants in the credit market, it is difficult to reconcile this interpretation with the language of the provision, its context and purpose. The Legislature has set thresholds that trigger the obligation to register where a single transaction is in excess of the prescribed amount.”
    The only conclusion to be drawn is that the requirement to register as a credit provider is applicable to all credit agreements once the prescribed threshold is reached, irrespective of whether the credit provider is involved in the credit industry and irrespective of whether the credit agreement is a once-off transaction”.
  2. The SCA therefore declared the sale agreements entered into between De Bruyn and Karsten unlawful due to Karsten not having been registered with the National Credit Regulator (“NCR”) as a credit provider at the time the agreements were entered into. It did not assist the parties that Karsten became registered after the sale agreements were entered into.
  3. The finding in De Bruyn’s case is important and has clarified the uncertainty created by Friend’s case (which was critised in other judgments). It is now clear that if a credit agreement which is subject to the NCA is entered into, the credit provider must be registered with the NCR in terms of Section 40 at the time the credit agreement is entered into, even if this is a once-off transaction and the credit provider is not involved in the credit industry. Failure to so register will render the agreement unlawful and void.
  4. Care must therefore be taken, when entering into an agreement to determine whether the agreement is subject to the NCA. While there are various criteria, exceptions and exclusions which must be considered in order to determine whether an agreement is a credit agreement subject to the NCA, a simple starting point is to consider whether payment of an amount owing in terms of the agreement is deferred and whether a fee, charge or interest is payable in respect of the amount which has been deferred. If these criteria are present, a careful analysis of the agreement is required to determine whether the NCA applies to the agreement.
  5. Applying the aforesaid principles, a simple loan between two friends, no matter how small, which may be a once-off transaction where the lender is not in the business of lending money, provided that it is at arm’s length and a market related interest is charged, would in the normal course be subject to the NCA.  If the lender is not registered as a credit provider, the agreement could be declared unlawful and void.