“Neither a borrower nor a lender be,
For loan oft loses both itself and friend…”
Hamlet Act 1, scene 3, 75–77

The Scenario

Be wary yee deep-pocketed freely-giving friends of poor up-starters who may, let’s be honest, fail and be unable to repay your benevolence. Now, you have lost money and will lose a friend as this proceeds. You can enter into a settlement agreement with the debtor but he will most likely default. At this stage you turn to the law to undo your act of kindness. You are an astute worldly businessman and thus had the foresight to put the loan agreement in writing. The debtor has defaulted and thus you think you can simply take legal action on the agreement in terms of the law of contract. You are right, you can, but if the loan exceeds a certain threshold you are required to register as a credit provider under the National Credit Act 34 of 2005. If your loan exceeds the threshold, currently set at R 500 000 (FIVE HUNDRED THOUSAND RAND) and you have not registered, then the situation is somewhat more complicated.

Unfortunately, in that event, your options for legal recourse are severely limited. Firstly, your agreement is rendered unlawful and secondly, before the case of National Credit Regulator v Opperman and Others 2013 (2) SA 1 (CC) (“Opperman case”) the amount loaned would have been forfeited to the State for failure to register as a credit provider. Fortunately, your options for legal recourse are not enitrely non-existent. There is money (yours) at the end of the tunnel.

The National Credit Act 34 of 2005 (NCA)

The NCA regulates the provision of consumer credit and provides certain safeguards to consumers if the agreement falls within the scope of the NCA. To come within the purview of the NCA certain requirements must be met. There must be a ‘credit agreement’ between a ‘credit provider’ and a ‘consumer’ which is not excluded by the NCA. In terms of the definitions, a credit provider is, inter alia, “the party who extends credit under a credit facility” and a consumer is, inter alia, “the party to whom credit is granted under a credit facility”. A credit facility is defined as an agreement whereby the credit provider undertakes to pay the consumer an amount of money and defer repayment and charge a fee for such an arrangement as per section 8(3) of the NCA.

Unregistered Credit providers

A credit provider in a credit agreement exceeding R 500 000.00 (FIVE HUNDRED THOUSAND RAND) must be registered in terms of the NCA. This amount is calculated by determining “the total principal debt owed to that credit provider under all outstanding credit agreements” in terms of section 40(1)(b). Failure to register will render the agreement unlawful as per section 40(4). Prior to the decision in National Credit Regulator v Opperman (CCT 34/12) [2012] ZACC 29, the NCA contained a punitive provision, section 89(5)(c), which compelled courts to declare such agreements void and the credit provider would lose his rights to reclaim the money lent. This provision has been declared unconstitutional as it results in the arbitrary deprivation of the credit provider’s property and therefore is in breach of section 25 of the Constitution.

However, the provisions in the NCA requiring certain credit providers to be registered still apply and the consequence of failing to do so is that the agreement will be rendered unlawful as per section 40(4). This does not mean that an unregistered credit provider is without recourse.

The Constitutional Court explained the legal recourse that is available as follows. The unregistered creditor would not be able to claim restitution under the unlawful agreement but rather by way of an unjustified enrichment action. The specific action is that of condictio ob turpem vel iniustam causam. As the agreement is unlawful, the in par delictum rule applies and thus to be successful the plaintiff must show that he has no turpitude (dirty hands) regarding the transaction. Fortunately for unregistered credit providers in such a situation, the Court stated:

A credit agreement entered into by an unregistered credit provider who was unaware of the requirement to register appears to be a good example of an unlawful agreement where there is little or no turpitude on the part of the credit provider.
Although, courts retain the discretion to allow or deny restitution of an unjustified enrichment in such an instance, this is good authority on which to rely and be successful in any legal action of such a nature.

Conclusion

Given all of the above, here are the points to take home and think about whilst you sit on your hands to stop them from dishing out money like candy. If you are going to lend more than R 500 000.00, register as a credit provider under the National Credit Act. If you have already lent the money and have not registered, there is some cause for concern but fret not as you may claim by way of unjustified enrichment. Lastly, keep in mind that the threshold amount is calculated taking into account all outstanding debts owed to the credit provider. Therefore, if you lend Joe R200 000.00 and you lend Bob R300 000.01 (because you like him more) you have exceeded the threshold and must register as a credit provider.

Written and prepared by:
Patrick Wainwright
patrick@bkm.co.za

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