This case – Nkata v Firstrand Bank Limited and others  ZACC 12 – deals with the “reinstatement” of a credit agreement under the National Credit Act, No. 34 of 2005 (the “NCA”). In this context “reinstatement” means the remedying by a consumer of his/her default under his/her credit agreement. As is explained in more detail later in this article, the effect of such a reinstatement is to interrupt the formal debt collection process.
Introduction to sections 129(3) and (4) of the NCA
Sections 129(3) and (4) of the NCA should be read together, as subsection (4) is a qualification to subsection (3). Section 129(3) reads as follows:
“Subject to subsection (4), a consumer may at any time before the credit provider has cancelled the agreement, remedy a default in such credit agreement by paying to the credit provider all amounts that are overdue, together with the credit provider’s prescribed default administration charges and reasonable costs of enforcing the agreement up to the time the default was remedied.”
This section allows a consumer to “reinstate” (remedy a default in) a credit agreement, if that credit agreement is subject to the NCA.The consumer can do so by paying in full all arrear amounts, the credit provider’s permitted default charges and the reasonable costs of enforcing the agreement. In a sense, the consumer is thrown an eleventh hour lifeline in instances when he/she has fallen into arrears with his/her repayments under his/her credit agreement and is consequently faced with debt enforcement proceedings by the credit provider.
Section 129(4), which qualifies section 129(3), provides that:
“A credit provider may not re-instate or revive a credit agreement after -
(a) the sale of any property pursuant to -
(i) an attachment order; or
(ii) surrender of property in terms of section 127;
(b) the execution of any other court order enforcing that agreement; or
(c) the termination thereof in accordance with section 123.”
Section 129(4) previously read that the consumer could not reinstate a credit agreement after any of the eventualities set out in that subsection had occurred. However, section 129(4) was recently amended to the effect that the credit provider may not reinstate or revive a credit agreement in those instances. The change causes much debate as to what the legislature actually intended by this amendment but we will not deal with the amendments to section 129 in any detail in this article. For further information in respect of this amendment see Brits ‘The “reinstatement” of credit agreements: Remarks in response to the 2014 amendment of section 129(3)-(4) of the National Credit Act’ 2015 De Jure 75-91.
Nkata v FirstRand Bank Limited and Others  ZACC 12
In Nkata v FirstRand Bank Limited and Others  ZACC 12 the Constitutional Court (the “CC”) recently dealt with the reinstatement of a credit agreement which had already become the subject of debt enforcement proceedings. The Western Cape High Court, which first heard the matter, and consequently both the Supreme Court of Appeal (the “SCA”) and the CC, were faced with interpreting sections 129(3) and (4) before the amendment by the National Credit Amendment Act, No. 19 of 2014 was effected (i.e. on their previous wording). However, the case is still relevant as it seems that the modified subsections have not been changed in substance and that they maintain the consumer’s right to remedy his/her default before the relevant agreement is cancelled (see Brits referenced above).
Briefly, the facts of the case were that the applicant, Ms Nkata, bought a property in March 2005. Between 2005 and 2006, Ms Nkata registered two mortgage bonds in favour of the first respondent (the “Bank”) over the property. In 2007, the property became the primary residence of Ms Nkata. A few years later, in 2010, Ms Nkata repeatedly fell into arrears which resulted in the Bank delivering section 129(1) notices in terms of the NCA (it was common cause that the mortgage agreement was a credit agreement under the NCA).
What could have proved fatal to the Bank’s case was that the notices were incorrectly addressed to Ms Nkata (in the circumstances of this particular case, the defective notices alone did not save Ms Nkata). In July 2010, the Bank issued summons, alleging compliance with section 129(1)(a) of the NCA. The summons was found to have been correctly served by the sheriff although Ms Nkata denied receipt thereof. Ms Nkata failed to enter an appearance to defend which resulted in the registrar of the Western Cape Division of the High Court, Cape Town granting default judgment against her for the full outstanding amount owed to the Bank. A writ was issued authorising the sheriff to attach and take the property into execution. Another important point to note is that the Western Cape High Court, which first heard the matter, delivered its judgment before judgment was handed down in Gundwana v Steko Development CC  ZACC 14 (the Gundwana judgment disallows all registrar-issued default judgments and writs of execution involving debtors’ homes and requires judicial oversight for that process). Ms Nkata later became aware of the default judgment which had been granted against her when a Bank representative called her to inform her that the proposed sale in execution of the property by public auction was set for 10 December 2010.
In November 2010, Ms Nkata launched an urgent application to the Western Cape High Court for the rescission of the default judgment against her. However, before the court could hear her application, she entered into a settlement agreement with the Bank. The sale in execution was cancelled and Ms Nkata undertook to pay set monthly instalments, failing which the Bank would be entitled to sell the property, and certain legal costs as taxed or agreed. The settlement agreement was never made an order of court.
In March 2011, a date which proved to be pivotal, Ms Nkata paid all of her outstanding arrears. Although never presented to Ms Nkata or demanded from her, the Bank began debiting legal costs to her bond account. Thereafter, Ms Nkata fell into and out of arrears on numerous occasions. The Bank, in March 2013, informed Ms Nkata of its intention to sell the property in execution at a public auction on 24 April 2013. Such a sale occurred but transfer and registration were suspended by agreement between the parties pending the outcome of the litigation launched by Ms Nkata in May 2013.
When the matter was heard, the Western Cape High Court refused to rescind the default judgment due to Ms Nkata’s unsatisfactory explanation for the delay in bringing the rescission application. The court also held that the settlement agreement between Ms Nkata and the Bank divested Ms Nkata from her right to an order of rescission. As a result, the default judgment stood. Interestingly, the Western Cape High Court, of its own accord, raised a different defence for Ms Nkata – reinstatement under section 129(3) of the NCA. It held that Ms Nkata had reinstated her mortgage agreement when she paid her arrears in full in March 2011. The court held (with both the SCA and the CC later concurring) that a debtor does not have to pay the full accelerated debt but only the arrears. Reinstatement was also available to Ms Nkata as the Bank had not cancelled the agreement. However, Ms Nkata had not paid the Bank’s reasonable legal costs (as required by section 129(3) of the NCA) but these costs had not been demanded by the Bank, nor agreed upon or taxed. The Bank had unilaterally imposed these charges by debiting them to Ms Nkata’s bond account. No communication by Ms Nkata of her intention to reinstate her credit agreement was necessary as reinstatement occurs by operation of law once the consumer makes payment of certain amounts. The default judgment, although not rescinded, became of no force and effect because Ms Nkata had in fact reinstated her credit agreement with the Bank before the sale of the property, which sale was also set aside.
On appeal to the SCA, the SCA reversed the Western Cape High Court order, finding that the Bank had already “executed” the default judgment before Ms Nkata’s attempted reinstatement of her credit agreement in March 2011 and that reinstatement was precluded in terms of section 129(4)(b) of the NCA.
The CC then had to determine whether the credit agreement had in fact been reinstated. In its interpretation of “execution” of a court order enforcing a credit agreement, the CC held that a barrier to reinstatement of a credit agreement, under section 129(4)(b) of the NCA, only comes about if the proceeds from a sale in execution have actually been realised. It was further held that although the Bank had incurred legal costs in enforcing the agreement, those costs were not yet due and payable. The Bank had not given Ms Nkata notice of the legal costs nor demanded payment thereof. The nature and extent of the legal costs had not been agreed or taxed. The Bank unilaterally determined the extent of the legal costs and debited those costs against the bond account of Ms Nkata, resulting in the legal costs losing their separate nature. Legal costs would become due and payable only when they are reasonable, agreed or taxed and on due notice to the consumer. The credit provider is required to take active steps to recover reasonable costs for enforcing a credit agreement.
The CC’s majority judgment found that:
the credit agreement was reinstated, within the meaning of section 129(3) of the NCA, in March 2011 when Ms Nkata paid her arrears (i.e. by operation of law);
the default judgment and subsequent warrant of execution had no legal force;
the public auction was set aside;
the property may not be transferred to or registered in the name of the purchaser; and
the Bank was to pay all of Ms Nkata’s costs from the High Court to the CC.
The CC judgment has far reaching consequences not only for credit providers but also for litigation practitioners. From the outset of the case, the section 129(1)(a) notice was not “delivered” properly and this may entitle the consumer, in certain circumstances, to a rescission of judgment. Even if a rescission of default judgment is not granted (for example, due to an unreasonable delay in bringing such an application for rescission), the credit provider may incur legal costs all the way up until execution only for a consumer to reinstate a credit agreement by paying certain stipulated amounts right before a sale in execution. Allowing reinstatement to occur right before a sale in execution is finalised (i.e. before the flow of sale proceeds and the registration and transfer of the property take place) may result in the public losing confidence in the now insecure process of public auctions as well as lower prices being offered and settled on at such auctions. The CC judgment may be a saving grace for certain defaulting consumers, especially those faced with losing their homes, but its practical implications for South African commercial life may be far from welcome.
Written by Tayla Lowe, associate (Corporate & Commercial Law) with the assistance of Francois Terblanche, director (Corporate & Commercial Law), Knowles Husain Lindsay Inc.
Knowles Hussain Lindsay