We often receive queries from clients regarding the applicability of the National Credit Act, 2005 (the "NCA") in respect of intended transactions or commercial agreements. The NCA is regrettably often overlooked, which can have disastrous consequences for the lender, for the reasons which we set out below.
The Purpose of the NCA
Consumers have often been subjected to unfair lending practices, or subjected to terms that are highly adverse to the consumer. Together with legislation such as the Consumer Protection Act, 2008, the NCA came into effect to regulate the lending industry as well as terms of lending arrangements. The overarching purpose of the NCA is encapsulated in its purpose as set out in section 3 of the NCA, which purpose is to “promote and advance the social and economic welfare of South Africans’ to achieve ‘a fair, transparent, competitive, sustainable, responsible, efficient, effective and accessible credit market and industry, and to protect consumers".
Application of the NCA
In terms of section 4(1) of the NCA, the NCA applies to every credit agreement between parties dealing at arm’s length and concluded, or having an effect within, in South Africa, subject to section 5 & 6 of the NCA. Moreover:
-A “credit agreement” is defined in terms of section 1 as an agreement that meets all the criteria set out in section 8 of the NCA.
-A credit agreement includes a credit facility, a credit transaction and credit guarantee, and credit is regarded as an amount as owing by one person to another, and that amount is deferred, and a charge/interest/ fee is payable to the credit provider in respect of the agreement.
- Section 40 of the NCA places the obligation of a credit provider to register with the National Credit Regulator (regardless of whether the credit provider is located outside of South Africa) IF the credit provider is obliged to register, or a credit agreement is brought within the scope of the NCA.
Currently, any credit agreement above NIL loaned to a consumer in South Africa, where interest (or similar a charge/fee) is charged (subject to the exceptions below or where the parties are not transacting at arm’s length) on the loan would indeed be within the ambit of the NCA, unless of course it falls within the exceptions below.
The NCA applies to every credit agreement having effect in South Africa (including foreign inward loans) except where:
In terms of section 4(1)(a)(i) of the NCA, the borrower (“consumer”) is a juristic person whose asset value or annual turnover, together with the combined asset value or annual turnover of all related juristic persons, at the time the agreement is made, equals or exceeds the threshold value determined by the Minister (currently R1million); or
In terms of section 4(1)(b) of the NCA, the credit agreement is a large agreement (which large agreement is currently above R250.000 and the consumer is a juristic person whose turnover asset value or annual turnover is below R1million.
With reference to the above and to be clear, section 4(2)(a) of the NCA states that for greater certainty, the asset value or annual turnover of a juristic person at the time a credit agreement is made, is the value stated as such by the juristic person at the time it applies for or enters that arrangement.
(Of importance to note, is that the asset value or annual turnover is considered at the time the agreement is made. Accordingly, if the asset value or annual turnover of the consumer (borrower) will only be R1million at a future date and not at the time of entering into the agreement, then the exception described in section 4(1)(a)(i) will not apply and the credit agreement will be subject to the NCA, unless the agreement is a large agreement (currently R250,000.00 or above) which exception is referred to in section 4(1)(b) of the NCA.
If the asset value or annual turnover of the consumer (borrower) is R1million or above at the time of entering into the agreement, then the exception described in section 4(1)(a)(i) will apply, and any amount can be advanced to the consumer as the exception in the said section will apply. However, if the asset value or annual turnover of the consumer (borrower) is less than R1million at the time of entering into the agreement, and an amount less than R250,000.00 is advanced, then the NCA will indeed apply to the credit agreement.
Effect of non-compliance
In terms of Section 89 (5) of the National Credit Act 34 of 2005, if a credit agreement is unlawful, despite any provision of common law, any other legislation or any provision of an agreement to the contrary, a court must order that it is void ab initio (from the beginning). It is also essential that the credit provider is registered as such with the NCR at the time of the granting of the credit/entering into the credit agreement, as the credit provider cannot hope to resolve same by registering as a credit provider later on. This may place the credit provider in an awkward position, in that the funds for the loan have been advanced to the borrower, but the underlying agreement could be void, with the effect that the lender may not recover the loan amount, or any other charges incurred, but may have to pay the borrower the interest back too.
The Take-Away
If you intend on entering into a transaction in terms whereof the transaction may be regarded as a credit agreement (in terms of the Act) it is of utmost importance that you obtain advice as to whether you are required to register as a credit provider with the NCR. Failure to do so may have devastating consequences. Spence Attorneys can assist with compliance advice pertaining to credit agreements (including fintech startup projects) as well as assist with registration with the NCR. Email natalie@spencelaw.co.za if we can work with you on your project or provide advice.
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DISCLAIMER: The above should not be construed as legal advice, nor substituted for legal advice or acted upon, and it may contain errors and/or omissions. Always seek legal advice from an attorney. Spence Attorneys and/or Natalie Macdonald-Spence will not be held liable for any person acting and/or failing to act on the information contained herein.