“Neither a borrower nor a lender be, for loan oft loses both itself and friend, and borrowing dulls the edge of husbandry”- William Shakespeare
The Du Bruyn and Others v Karsten Judgment is extremely important given the volatile business environment that we are living in. Many South Africans have experienced the destructive economic effects of the national lockdown in response to Covid-19. Struggling individuals and businesses will be forced to seek capital at the doors of friends, family members and the informal credit sector with the hope of keeping afloat.
Businesses and individuals operating outside the credit industry should be wary of the implications of the Supreme Court of Appeal judgment on once-off credit transactions and loan agreements as such transactions and their underlying agreements could be declared void if the entity or person providing the loan is not a registered credit provider.
In order for the National Credit Act 34 of 2005 (NCA) to apply, a transaction must fall within the definition of a “Credit Agreement” outlined in section 8 of the NCA. Such transactions include an agreement in terms of which the repayment of an amount loaned by a credit provider to a consumer, or payment for goods or services, is deferred; and interest or other charges are payable in respect of such deferment.
Section 40(1) of the NCA places an obligation on a credit provider to register as such if the total principal debt under all outstanding credit agreements exceeds a certain threshold. The Minister is empowered by the NCA to determine such threshold by way of notice in the Government Gazette, which he has set at R0 (11 May 2016).
Sections 40 and 89 of the NCA also provide that an unregistered credit provider cannot offer, make available or extend credit. A credit provider must be registered at the time of entering into a credit agreement. In the absence of such registration, a credit agreement may be declared unlawful and void. If a credit agreement is unlawful, despite any other legislation or any provision of an agreement to the contrary, a court must make a just and equitable order including but not limited to an order that the credit agreement is void as from the date it was entered into.
In Friend v Sendal the full bench of the Gauteng Division of the High Court, through a sensible and reasonable interpretation of section 40 of the NCA, found that it would be inapplicable to once-off transactions where the role players are not participants in the credit market. This was based on a literal interpretation of the words in section 40(1)(b) “it is the total principal debt…under all outstanding credit agreements”- the sole determinant of the obligation to register as a credit provider being the respondent’s frequency of providing credit under section 40(1)(b).
Interestingly, the court held that since section 2 of the NCA provides that when interpreting its provisions, such interpretation must give effect to the purpose set out in section 3, and “bearing in mind that the purpose of the NCA is to protect consumers”, that the transaction in question could not fall within the ambit of section 40(1).
An intricate question lies at the heart of this case: whether there was an obligation to register as a credit provider where the principal debt exceeds the statutory threshold even if the agreement is a single transaction, and the credit provider is not involved in credit industry.
The Supreme Court of Appeal in Du Bruyn and Others v Karsten held that although the decision in Friend was “pragmatic and made good sense”, it did not align with the actual wording of section 40(1)(b). The court indicated that the wording of the section clearly made the total amount of credit awarded the “sole determinant” of whether a credit provider has to register. Therefore, even once-off transactions and those not participating in the credit market must comply.
In essence, the SCA overruled the decision in Friend and found that while it may be reasonable and sensible to interpret section 40 of the NCA as being inapplicable to once-off transactions where the role players are not participants in the credit market, it is inconsistent with the language, context and purpose of the NCA. To have found otherwise would have been “to substitute what is justifiably seen as regulatory overreach with judicial overreach”.
The SCA has indicated obiter dictum that this issue is a subject for the legislature to remedy, and that it is not for the court to “accommodate deficient drafting by attributing a meaning to section 40(1)(b) that was not justified by the wording of that statute”. There is accordingly no doubt that robust action is necessary on the part of the legislature to address this issue. Until such time, a party who performed in terms of an illegal contract may rely on the remedy of condictio ab turpem vel iniustam causam under enrichment law. The central requirement of the condictio is that the amount claimed must have been transferred pursuant to an agreement which is void and unenforceable because it is illegal. To use this enrichment claim (condictio), a party must allege and prove that: the transfer of property or payment of money to the other party occurred, the transaction or performance was illegal, and the other party failed to perform (unjust enrichment).
The result of the Du Bruyn judgment is that once-off loan agreements run the risk of
being declared void in the absence of registration as a credit provider. This
judgment places an onerous burden on South African individuals who extend
credit on a once-off basis, as between family members and friends. It is
imperative that those extending credit ensure that all of the provisions of the
NCA are adhered to. Parties should exercise extreme caution before entering
into any sort of loan agreement, especially during these difficult economic