Loaning Money? Have you Registered as a Credit Provider?
Credit agreements feature prominently in mainstream civil litigation. What is a credit agreement? When does a credit provider have to register as such? And what are the consequences for failing to register as a credit provider? These are the questions that have been considered and answered in the recent court case discussed below.
The Supreme Court of Appeal confirmed that where a credit agreement exceeds the threshold set out in Section 42(1) of the National Credit Act, a person is required to register as a credit provider by virtue of the unambiguous text of Section 40. The current threshold prescribed for the registration of a credit provider is zero. Consequently, where money is advanced in terms of a credit agreement, by a person who is not registered as a credit provider, such agreement stands to be declared unlawful and unenforceable, regardless of the amount advanced.
The current legal position relating to registration as a credit provider played out in the recent case of Fourie v Geyer 2019 JDR 1553 (NWM). Fourie launched an application for payment of approximately R1,3 million plus interest. The underlying cause of the claim was an acknowledgment of debt (AOD) provided by Geyer in August 2015.
Geyer raised a defence that the AOD is a credit agreement which renders it subject to the National Credit Act. The reasoning for this position is that payment under the AOD was deferred for 60 days from date of signature with interest levied at the rate of 18 percent. Geyer also submitted that previous loans made by Fourie to him exceeded the then threshold of R500 000. It was therefore argued that Fourie was obliged to register as a credit provider and his failure to register rendered the agreements unlawful and unenforceable in terms of the National Credit Act.
Fourie argued that the AOD was not an arm’s length transaction due his 18 year relationship with Geyer and previous loans made to Geyer’s wife and daughter. It was further argued that even if the AOD was found to be a credit agreement, none of the capital amounts exceeded the then applicable threshold of R500 000, at any given time.
In deciding whether the transaction was concluded at arm’s length, the court held that the AOD has the salient features of a credit agreement in that it identifies a capital amount which attracts interest, payments are deferred, collection fees are levied, and non-payment could trigger litigation accompanied by litigation costs on a punitive scale. Consequently, it was held that the relationship between the parties, which underpins the AOD, overwhelmingly demonstrates anything but a familial relationship. The agreements which gave rise to the AOD were clear business transactions which were advantageous to Fourie clearly concluded at arm’s length.
In addressing the final enquiry as to whether the AOD constitutes a credit agreement, the court held that Section 8(4)(f), which defines a credit agreement, is clear and unambiguous. Section 8(4)(f) provides that a credit agreement is any agreement in terms of which payment of an amount, owed by one person to another, is deferred and any charge, fee or interest is payable to the credit provider.
The court held that the only requirement under Section 8(4)(f) is that payment owed to another is deferred with charges, fees or interest. As the AOD was concluded for the capital sum in excess of R500 000 and this amount exceeded the then threshold, payment was deferred and interest was charged. Accordingly, the AOD was clearly a credit agreement.
The court ruled that Fourie should have registered as a credit provider and as a result of his failure to do so, the court held that the AOD, as a credit agreement, stands to be declared unlawful.
While the court commented that Fourie may find a remedy by claiming under the law of unjustified enrichment, it is noteworthy that to prove such a claim would be a more onerous and depending on the facts of a particular case, it may not even be possible.
The fact that a credit agreement is declared invalid and unenforceable simply because the credit provider was not registered at the time of the loan leaves much room for abuse by persons seeking to avoid their obligations under a credit agreement. It appears that the National Credit Act may have gone too far in defining the credit market which may result in the unintended consequence of bona fide loans between friends and related parties being unlawful and unenforceable resulting in the friend or related party avoiding liability to their lender.