When is registration as a credit provider in terms of the National Credit Act required?

This question and the interpretation of section 40 of the National Credit Act 34 of 2005 (NCA) was dealt with by the Supreme Court of Appeal (SCA) in the case of Du Bruyn NO & Others v Karsten [2018] ZASCA 143.

Section 40(1) of the Act provides that a person advancing credit must be registered if the total debt owed to that person under all credit agreements exceeds a prescribed monetary threshold.

Thus, apart from a few exceptions, every person lending money, where interest or some other charge is received, regardless of the amount, may be required to register as a credit provider. This has created obvious practical difficulties for small-scale or once-off lenders, and because of this seemingly unintended result, this created legal uncertainty.

The uncertainty in the Act was worsened by certain courts finding that, despite what the Act says, the obligation to register cannot apply to once off lenders but only those who are active in the credit market (for example, the High Court of Pretoria’s judgment in Friend v Sendal).

Fortunately, the Supreme Court of Appeal has now provided clarity on this issue.

The Du Bruyn case involved an elderly couple (Du Bruyn) and their business partner (Karsten), who was like a son to the Du Bruyns, were shareholders in three related entities. In 2012 there was a fall out between Mr Du Bruyn and Mr Karsten over operational issues in the business and the parties agreed that Mr Du Bruyn would purchase Karsten’s interests in each of the three entities.

Mr Du Bruyn would have to pay Karsten a deposit and monthly instalments thereafter plus interest on the amount not paid upfront.

In addition, the Du Bruyns had to bind themselves as sureties and co-principal debtors and to register a covering bond over their property.

Karsten was not registered as a credit provider at the date on which the parties signed the agreements and accepted that he had to be registered as a credit provider to facilitate the registration of the covering bond over the Du Bruyns’ property. Karsten’s registration as a credit provider occurred seven months after the signature of the agreements.

The Du Bruyns then fell behind on their instalment payments and Karsten instituted proceedings for the balance of the purchase price owed to him under the agreements of sale.
Section 40(1) of the National Credit Act was amended in 2014 to delete any reference to 100 credit agreements and it now reads as follows:

‘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 s 42 (1).

A plain reading of s 40(1)(b) makes it clear that a person must register as a credit provider if the total principal debt exceeds the prescribed threshold in terms of s 42(1) which from May 2016, is R0,00.

Therefore, the amount of credit provided is now the sole determining factor to ascertain whether a credit provider is obliged to register.

The Supreme Court of Appeal held in the Du Bruyn case that all credit providers must register as such, regardless of whether it is a once of transaction or whether the lender is a regular participant in the credit market. Although this seems somewhat impractical, especially because of the harsh consequences that failure to register the agreement leads to it being null and void, the clarity and finality of the issue is welcomed.

It is therefore clear now that all lenders entering into a credit agreement must now be registered as such in terms of the Act and that any credit agreement entered into by a credit provider who is required to be registered and who is not so registered is an unlawful agreement and void.

The Act itself does however provide that for example agreements that are not at “arm’s length” (i.e., where there is an incentive to act against your own interests), do not constitute credit agreements:

• agreements in terms of which a company advances a loan to its shareholder, or another juristic person advances a loan to a person who has a controlling interest in the juristic person;
• agreements in terms of which a shareholder advances a loan to a company, or a person who has a controlling interest in a juristic person advances a loan to that juristic person;
• credit agreements between family members who are dependent on each other;
• credit agreements between family members when one family member is dependent on the other; and
• any other arrangement 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.

In the next article we will discuss the Income Tax implications of a loan by an individual to another individual resident in South Africa.

 

Article by BH Groenewald
Director (Tax),
BVSA Chartered Accountants (Pty) Ltd
bennieg@bvsa.ltd