Reinstatement triumphs acceleration clauses in credit agreements subject to the National Credit Act

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By Langelihle Mnyandu, Associate, and Kirsten Kern, Partner Banking and Financial Services Regulatory, Bowmans

The National Credit Act No. 34 of 2005 (NCA) provides a mechanism for  consumers who have fallen into arrears on their credit payments and face impending debt enforcement action, to reinstate their credit agreements.  To do this, consumers must remedy their default by paying the full arrear amounts, along with the credit provider’s permitted default charges and reasonable costs of enforcing the credit agreement.

In Nkata v FirstRand Bank Limited and Others [2016] ZACC 12 (the Nkata judgment), the Constitutional Court was required to decide whether a reinstatement of a credit agreement had validly taken place. A brief synopsis of the facts of this case is as follows.

Ms Nkata had two mortgage bonds registered with FirstRand Bank Limited (FirstRand) to finance her property acquisitions. The Constitutional Court agreed that the mortgage agreement, providing for the two mortgage bonds, was a credit agreement for purposes of the NCA.  When Ms Nkata failed to meet her obligations under the credit agreement, and repeatedly fell into arrears, FirstRand obtained a default judgment against her for the outstanding amount due and also obtained a writ to attach and sell the property in execution. Ms Nkata and FirstRand entered into a settlement agreement in terms of which she agreed to pay her arrears of R87 500. Her account was also debited with, amongst others, what FirstRand referred to as ‘attorney’s fees and counsel’s day fee’. When she defaulted on her payments for the third time, FirstRand eventually sold off the property in a public auction – even though she had once again taken steps to settle the arrear payments due at that time.

The Constitutional Court had to decide on whether Ms Nkata’s actions in settling her arrears before the property was sold by FirstRand were sufficient to have successfully reinstated the credit agreement, in terms of section 129(3) of the NCA and, particularly, whether reinstatement happens by operation of law or through a consultative process between the consumer and the credit provider.

FirstRand had argued that section 129(3) requires a consultative process for a credit agreement to be reinstated and that a consumer cannot, without more, unilaterally reinstate the agreement merely by making payment of all amounts that are overdue, together with the credit provider’s prescribed default administration charges and the reasonable costs of enforcing the agreement up to the time the default was remedied, as contemplated in section 129(3).  FirstRand also argued that the payment of arrear instalments does not always mean the consumer wishes to reinstate the credit agreement and resume possession of the property.

On the first point, the Court found that Ms Nkata had successfully reinstated the credit agreement by paying all her arrear instalments and the creditor’s permitted default charges and reasonable enforcement costs. This was done before FirstRand obtained the default judgment against her and before the subsequent sale of the property. Consequently, FirstRand could not rely on the section 129(4) exceptions to challenge the reinstatement. In addition, the Court unequivocally stated that in order to reinstate the credit agreement Ms Nkata did not have to pay the full accelerated amount, but rather only the arrear instalments due.

On the second point, the Court found that it is the consumer who has the power to reinstate a credit agreement – and that he or she may do so at any time before the credit provider cancels the agreement. Further, the Court added, the consumer is not compelled to give notice to, or seek the consent or cooperation of, the credit provider before reinstatement can be effective. This, the Court held, is because reinstatement occurs by operation of law and to hold that reinstatement does not occur automatically after payment is made in the manner prescribed by section 129(3), would unduly limit the value to the consumer of the remedy of reinstatement.

This decision is indeed a victory for consumers who have fallen into arrears under a credit agreement that is subject to the NCA, as it overrides any acceleration clause which would otherwise be triggered by the consumer’s default under such an agreement.  It means that although a consumer may have defaulted on payments under a credit agreement, the credit provider cannot invoke an acceleration clause for payment of the full outstanding amount where the consumer has paid the arrear amounts and the permitted costs and charges contemplated in section 129(3). To come to a contrary conclusion, as the Court correctly held, would defeat the very purpose of section 129(3), which is meant to operate as “a rescue mechanism that is available to the consumer precisely when she has fallen into arrears and may be liable for the full accelerated outstanding debt”.

The effect of this decision is that an acceleration clause is rendered inoperative and unenforceable when reinstatement is lawfully triggered. A credit provider’s efforts to retrieve the full accelerated debt owing under the credit agreement, such as by way of a sale in execution of the underlying property, would be thwarted where reinstatement is triggered by the consumer prior to cancellation of the credit agreement. Further, provided there has been compliance with section 129(3), the consumer is not required to give notice to the credit provider of his or her intention to reinstate the credit agreement. Payment in a manner that complies with section 129(3) would be sufficient to automatically trigger reinstatement.

The Nkata judgment has been lauded as offering a lifeline to consumers facing impending enforcement action, provided that they comply with the provisions of section 129(3) of the NCA. For credit providers, on the other hand, it means that simple reliance on acceleration clauses will not be sufficient to assist the credit provider to enforce its rights – especially against consumers who regularly fail to make payments by the stipulated dates.  Credit providers will instead have to be proactive and act swiftly where consumers default on their payment obligations under credit agreements if they wish to cancel those agreements.

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