Is registration as a credit provider under the National Credit Act 34 of 2005 (“the NCA”) required for a once-off credit agreement? This was the issue in the case of Du Bruyn NO & others v Karsten (929/2017) [2018] ZASCA 143 (28 September 2018).
Mr. De Bruyn and Mr. Karsten conducted business together as shareholders in two companies and as members of a close corporation. A falling out between the parties led to Mr. De Bruyn buying out Mr. Karsten in terms of three separate but identical sale agreements, for a total amount of R 2 million for the shares in the two companies and the member’s interest in the close corporation. The purchase price was payable by way of a deposit of R 500 000 and monthly instalments of R 30 000. To provide security for outstanding balance of the purchase price, Mr. and Mrs. De Bruyn undertook to register a bond over their immovable property within 60 days.
At the date of the conclusion of the agreements of sale on 26 April 2013 Mr. Karsten was not registered as a credit provider in terms of section 40 of the NCA. He became a registered credit provider on 27 November 2013. The registration of the bond was only effected by the De Bruyns in early 2014. When the De Bruyns defaulted on the instalment payments, Mr. Karsten instituted proceedings against the De Bruyns for the balance of the purchase price, in November 2014. The De Bruyns contended that the agreements were null and void due to non-compliance with the NCA, because Mr. Karsten was not a registered credit provider.
The Gauteng Division, Pretoria, per Mavundla J, held that the contracts were valid and granted judgment in favour of Mr. Karsten. For this view the court relied expressly on the decision of the full court of that division in Friend v Sendal 2015 (1) SA 395 (GP). On appeal in the De Bruyn case the Supreme Court of Appeal (SCA) had to consider whether the decision in Friend was correct to find that the NCA was directed only at those in the credit industry and, irrespective of the amount involved, did not apply to once-off credit transactions. Section 40(1) of the NCA provides as follows:
- Registration of credit providers
(1) A person must apply to be registered as a credit provider if the total principal debt owed to that credit provider under all outstanding credit agreements, other than incidental credit agreements, exceeds the threshold prescribed in terms of section 42(1).
[Sub-s. (1) substituted by s. 10 of Act 19 of 2014 (wef 13 March 2015).]
The threshold at the time of the sale agreements was R 500 000. The SCA held that while it may be reasonable and sensible to interpret section 40(1) as being inapplicable to a once-off transaction where the role players are not participants in the credit market, it is difficult to reconcile that interpretation with the language of the provision, its context and purpose. The SCA accordingly held that the only conclusion to be drawn is that the amount of the principal debt is the sole factor determining whether registration as a credit provider is obligatory. The registration requirement is therefore applicable to all credit agreements, once the threshold amount is reached, irrespective of whether the credit provider is involved in the credit industry and irrespective whether the agreement is a once-off transaction. In the result the appeal was upheld and the sale agreements were declared unlawful and void due to non-compliance with section 40(1) of the NCA.
The SCA acknowledged that their finding is an imperfect solution, based on deficient legislative drafting, but held that it is for the legislature to remedy the position.
The current threshold prescribed by the Minister of Trade and Industry in terms of section 42(1), as of 11 May 2016, is nil. Therefore, currently every person who provides credit, in terms of a credit agreement which is not excluded by any other provision from the application of the NCA, must register as a credit provider.
If a credit provider fails to register as required, the agreement will be unlawful and in terms of section 89(5) of the NCA a court must then make “a just and equitable order”, including but not limited to an order that “the credit agreement is void as from the date the agreement was entered into”. This section previously also provided for forfeiture of the credit provider’s right to restitution in such a case, but the Constitutional Court in National Credit Regulator v Opperman and Others [2012] ZACC 29; 2013 (2) BCLR 170 (CC); 2013 (2) SA 1 (CC) (10 December 2012) found the forfeiture provision to be unconstitutional, and the NCA was amended accordingly. Currently, therefore, it is up to the courts to make “a just and equitable order” in the event of a credit agreement being unlawful and void on account of the credit provider’s failure to register as such.