When Should A Credit Provider Register Under The National Credit Act 34/2005?

The courts have repeatedly stated that interpreting the National Credit Act (NCA) is often a “trying exercise”. The Act has many inconsistencies that create uncertainty among the public in general. One of the questions we are often asked is whether a client still has to register as a credit provider even though the NCA is not applicable to the credit agreement. The Constitutional Court has recently provided clarity on this point.


Applicable legislative provisions

Section 40 of the National Credit Act (NCA) has been amended on 13 March 2016, which amendment will come into operation on 11 November 2016. According to section 40 of the NCA, a person must 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 R0.00 (the threshold was R500 000.00 prior to the aforesaid amendment).

According to section 1 of the NCA, an “incidental credit agreement” is defined as

“an agreement, irrespective of its form, in terms of which an account was tendered for goods or services that have been provided [or are to be provided] to the consumer … over a period of time and either or both of the following conditions apply:
  1. A fee, charge or interest become payable when payment of an amount charged in terms of that account was not made on or before the determined period or date; or

  2. Two prices were quoted for settlement of the account, the lower price being applicable if the account is paid on or before a determined date, and the higher price being applicable due to the account not having been paid by that date.”
Section 4 of the NCA stipulates that the NCA is applicable:

“to every credit agreement between parties dealing at arm’s length and made within, or having an effect within, the Republic, except:
  1. A credit agreement in terms of which the consumer is:

    1. 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 [of R1 000 000.00];

  2. A large credit agreement [therefore, higher than 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 [of R1 000 000.00].”
The consequences of failure to register as a credit provider is set out in section 89. Section 89(2)(d) states that, subject to section 89(4), a credit agreement is unlawful if at the time the credit agreement was made, the credit provider was unregistered and the NCA requires the credit provider to be registered. Section 89(4) provides that a credit agreement will not be unlawful if the credit provided applied for the registration in terms of section 40 at the time that the credit agreement was entered into or within 30 days after conclusion of the credit agreement, and was awaiting determination of that application. If a credit agreement is unlawful, the court must, in terms of clause 89(5) 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.


Is registration as a credit provider in terms of section 40(1) still required if the applicable credit agreement falls within one of the exceptions provided for in section 4?

The Constitutional Court in Paulsen and Another v Slip Knot Investments 777 (Pty) Ltd (CCT 61/14) [2015] ZACC 5 held that registration is only a requirement for those credit providers who provide credit falling within the ambit of clause 4 and are therefore subject to the NCA. The Court held furthermore that the exemptions stipulated in clause 4 evinces a conscious legislative choice not to protect this type of consumer under the Act. In light of this, the Court held it to be illogical and unnecessary to require a credit provider to register in those instances where the credit agreement is exempted under section 4 of the Act and the consumer therefore will as a result not enjoy the protection of the NCA. 


Conclusion

The Constitutional Court has clarified one of the anomalies in the NCA. If, in terms of section 4, the NCA is not applicable to the specific credit agreement, the credit provider does not have to be registered as such under the Act.


The relationship between the in duplum rule and the NCA

What is the in duplum rule?

The in duplum rule is a well-established common law principle of our law that provides that arrear interest ceases to accrue once the sum of the unpaid interest equals the amount of the outstanding capital. In case law, the courts stated that the foundation for the in duplum rule (limitation of interest) was the policy consideration that debtors whose affairs are declining should not be entirely drained dry. The rule is also aimed at encouraging creditors to exercise their rights to be repaid promptly and without delay. 


Recent case law on the in duplum rule

In Paulsen and Another v Slip Knot Investments 777 (Pty) Ltd, the Constitutional Court had to decide the correctness of the Supreme Court of Appeal’s decision in Standard Bank of South Africa Ltd v Oneanate Investments (Pty) Ltd (in liquidation) [1997] ZASCA 94 in which it was held that the in duplum rule should be suspended pendent lite (from the date of service of the process initiating the proceedings until the date of judgment). After deliberating on the public policy considerations for the in duplum rule, the Constitutional Court held that the Supreme Court in Appeal in the Oneanate only focused on the effect of the in duplum rule on creditors without sufficient consideration of the interests of debtors. The Constitutional Court concluded that the in duplum rule is not suspended pendent lite, therefore, outstanding arrear interests is not permitted to run during the course of litigation once the double of the capital debt has been reached. The in duplum rule permits interest to run anew from the date that the judgment debt is due and payable, which interest runs on the whole judgment debt (capital sum plus previously accrued interest) and not only on the original capital amount of the loan. The Court furthermore held that the post-judgment interest runs at the rate agreed upon contractually.


Interaction between the common law in duplum rule and the statutory in duplum rule in the NCA

The NCA contains a statutory version of the in duplum rule. Section 103(5) states that:

“[d]espite any provision of the common law or a credit agreement to the contrary, the amounts contemplated in section 101(1)(b) to (g) that accrue during the time that a consumer is in default under the credit agreement may not, in aggregate, exceed the unpaid balance of the principal debt under that credit agreement as at the time that the default occurs”.

Section 101 regulates the cost of credit that includes an initiation fee, service fee, interest, default administration charges, cost of credit insurance and collection costs.

In Nedbank v The National Credit Regulator (662/2009 & 500/2010) [2011] ZASCA 35 (28 March 2011) the Supreme Court of Appeal held that the statutory in duplum rule is not a codification of the common law in duplum rule. According to the Court, section 103(5) is a statutory provision with limited operation. Section 103(5) is only applicable to credit agreements that are subject to the NCA.

The Court highlighted some of the important differences between the common law rule and the statutory rule. The differences being firstly, the application of the common law rule is limited to interest whereas the statutory rule applies to interest as well as other costs of credit set out in section 101. Therefore, the statutory rule is more onerous that the common law rule. Secondly, under the common law rule, any payment made by the debtor decreases the amount of interest owning and allows interest to run again up to an amount equal to the outstanding capital amount. Conversely, the statutory rule applies for the entire duration of the default. Therefore, under the statutory rule, once the threshold is reached, no interest or costs of credit may run again irrespective of whether the debtor made any payments during the period of default. Therefore, the statutory rule provides greater protection to consumers.


Conclusion

If a credit agreement falls within the scope of application of the NCA, section 103(5) and not the common law in duplum rule is applicable. Although section 103(5) is according to the Supreme Court of Appeal not a codification of the common law rule, the section does amend and extend the common law rule in those cases where the applicable credit agreement is subject to the terms of the NCA.
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