August 22, 2019
“A bank is a place that will lend you money if you can prove that you don’t need it” (Bob Hope)
A recent High Court decision has settled the knotty question of whether your bank can take money it holds for you in one account to cover your debt to it in another, without your permission and without notice to you.
Firstly, what is “set-off”?
To understand how important this new decision is, we need to go back to our common law (unwritten law) principle of set-off. In simple terms, common law set-off allows one debt to be cancelled out by another. So if for example I owe you R1,000 and you owe me R900, I am both your creditor and your debtor, and vice-versa. If we come to blows, I can then set the one debt off against the other with the net effect that I owe you R100.
Credit-lenders, and in particular banks, used to make extensive use of this to collect debt. If for instance you fell behind in your mortgage bond or credit card payments, your bank could, if it was so inclined, take the arrears out of your current account as soon as your salary was paid into it – without your consent and without notice to you.
Banks have always argued that this ability has made it easier for them to lend money to us when we ask for it, as it reduces their risk by giving them more security if things go wrong. Giving notice or asking for consent would, they argue, allow a recalcitrant debtor to quickly withdraw the funds and frustrate the debt collection. But the other side of the coin of course is that you could suddenly find yourself without money to live, let alone to service your other debt payments – a situation particularly hard on lower earners and those struggling with mountains of debt.
Enter the NCA (National Credit Act) in 2005…
How the NCA changed things
In broad terms, the NCA (when it applies – see next paragraph) restricts set-off in such a way as to give the consumer the right to choose whether or not to consent to set-off, which accounts it may be applied to, in respect of which amounts, when it is to be applied, and in respect of which debts.
But does the NCA apply to your particular debt? In most cases, yes. In a nutshell (there are some “ifs” and “buts” here so ask your lawyer for specific advice) the NCA applies to most personal loans, home loans, overdrafts, credit card debt, asset finance agreements, lease agreements and so on. It covers consumers who are individuals and some – not all – “juristic persons” (companies and the like – take advice for details).
Which brings us to the High Court…
Nevertheless at least one bank (which is unlikely to be alone in this practice) has continued until now to apply common law set-off without consent, in other words they would take money from a customer’s account to cover the customer’s debt on a separate credit agreement. The bank argued that the NCA’s set-off restrictions did not apply on its interpretation of the NCA, in its circumstances and to its credit agreements. Importantly, its agreements omitted any mention of set-off (where an agreement does mention set-off, there is no argument – the NCA restrictions definitely apply).
Having received complaints from consumers to this effect, the National Credit Regulator asked the High Court to interpret the NCA’s provisions and to rule on the legality of the bank’s practice.
The High Court’s decision
Common law set-off without your consent as above cannot happen if the NCA applies to your credit agreement.
In a nutshell – you have the choice! Banks and other credit-lenders must ask you before taking money from one account to cover your debts in another.
December 13, 2018
“Neither a borrower nor a lender be
For loan oft loses both itself and friend” (Shakespeare)
It seems logical that the very strong consumer protections in the NCA (National Credit Act) are designed for commercial situations in which credit is advanced by “credit provider” businesses to “credit consumers”.
But does the NCA also apply to non-commercial, once-off loans? Like a loan to a friend or relative? And what about property sales?
Why should you be worried?
If you aren’t in the business of providing credit it seems counter-intuitive that you should have to worry about NCA registration when making a single loan or giving credit on a once-off basis. And in fact until now our various High Courts have been split over the question.
But that has all changed with a recent Supreme Court of Appeal (SCA) decision, and your danger is this – if you should have registered as a credit provider but didn’t, your agreement is unlawful and could be declared void. You might have to write off your whole loan.
A “family” fall out and a R2m “time to pay” share purchase deal
- A couple brought into their business a businessman who was “like a son” to them. The idea was that eventually he would take over the business and over time he became a substantial shareholder. Alas however some 12 years down the line there was a falling-out and a mutual decision to part ways.
- It was agreed that the businessman would sell his interest in the business to the couple for R2m, to be paid by way of a R500,000 deposit and monthly instalments of R30,000 p.m. Interest was payable on the deferred amount and a mortgage bond registered over the couple’s house as security.
- The businessman (as seller) registered as a credit provider (in order to get the mortgage bond registered in his favour) but only after the credit agreement was signed.
- When the business ran into trouble the couple couldn’t continue paying and the seller sued them for the outstanding balance of R1.13m. The couples’ defence was that the agreements were null and void due to non-compliance with the NCA.
- The SCA held that the seller should have registered as a credit provider before the credit agreement was entered into. He didn’t, the agreement was thus unlawful, and he loses his R1.13m.
What is excluded from the registration requirement?
So are you at risk? Firstly, the NCA has many general exclusions and situations of limited application, such as to “incidental” credit agreements, interest-free loans, larger corporates and agreements (thresholds apply – take advice for details).
Secondly, the NCA only applies if you are “dealing at arm’s length”. What does that mean in practice?
- To start with, there are specified exclusions for certain shareholder loans and for loans between family members who are “co-dependent” or “dependent” on each other. Think for example of parents supporting a student daughter or the daughter supporting her parents.
- Then there’s the much wider provision excluding “any other arrangement … in which each party is not independent of the other and consequently does not necessarily strive to obtain the utmost possible advantage out of the transaction”. That might suggest that loans to close friends are also excluded, but it’s not nearly as simple as that.The lender in this case couldn’t of course claim to be an actual family member of the couple. But he did argue that because of his “almost familial relationship” with them, he didn’t try to get the “utmost possible advantage” out of the deal and therefore the NCA didn’t apply. On the facts however the SCA disagreed, the relationship between the parties having become hostile and threatening prior to signature of the agreement. The point is that if there is an element of “independence” between you and the debtor, you are at risk.
Outside those specific exclusions, deciding whether or not a court will consider you to be “at arm’s length” is always going to involve grey areas.
Sale of property with deferred payments
There’s particular danger here for the increasing number of property sellers who, in order to attract cash-strapped buyers in these tough times, are agreeing to sell their properties on a deferred payment or instalment sale basis rather than the standard “pay in full against transfer” basis. Watch out also for a normal “pay in full” deal morphing into a “pay me the rest later” sale when the buyer can only get a bank loan for part of the total price.
If either of those scenarios apply, your sale may have to comply with both the NCA’s obligation to register as a credit provider and with the strict requirements of the Alienation of Land Act. Specific legal advice is essential before you agree to any form of “deferred payment” property sale.
The bottom line
Unless and until the NCA is amended to make it clearer, less confusing and more pragmatic, tread very carefully in lending money or giving credit – in relation to a property sale or otherwise – to anyone. Even family and friends.
Ask your lawyer for advice on your specific circumstances – do you fall into one of the exceptions or must you register as a credit provider? If you do need to register, prepare for lots of red tape and delay!