Lender beware

The circumstances under which individuals should register as credit providers for purposes of the National Credit Act 34 of 2005:

The question might seem odd at first, should a natural person that loans out money (say to friends or peers) register as a credit provider with the National Credit Regulator? For some time, there has been confusion about the answer to this question, mainly given the fact that many see the National Credit Act 34 of 2005 (“NCA” or “Act”) as an instrument designed to regulate ‘actual’ credit providers or participants in the credit market, such as banks or (gasp) loan sharks. Accordingly, the NCA could never be something that applies to individuals, who – for example – out of the warmth of their hearts loan a few hundred thousand bucks to friends… right? Wrong.

Under certain circumstances, the requirement to register as a credit provider applies to individuals as well, and the risk of failing to register as a credit provider should these circumstances be present would be the inability to enforce the credit/loan agreement to recover your money, should the borrower default on payment. If a good Samaritan were to find themselves in such a predicament, they would either have to forfeit the loan or engage in lengthy legal proceedings to recover their funds – with the most viable option being to claim unjustified enrichment against the defaulting borrower.

So what are the circumstances under which an individual would have to register as a credit provider in order to secure their rights when lending out money?

Section 3 states that the purposes of the NCA are to “to promote and advance the social and economic welfare of South Africans; promote a fair, transparent, competitive, sustainable, responsible, efficient, effective and accessible credit market and industry; and to protect consumers”. The objects of the Act can thus be summarised as being to promote fair credit, protect consumers and, in particular, the vulnerable. These circumstances can be present in a business relationship as much as in a private relationship, as illustrated by the recent supreme court of appeal judgement of Du Bruyn NO and Others v Karsten 2019 (1) SA 403 (SCA).

The salient facts of the matter are as follows: Mr Karsten entered into commercial transactions for the sale of certain assets (shares and business interests) with Mr and Mrs Du Bruyn in a number of companies that were built by the Du Bruyns. These agreements, for all intents and purposes constitute credit agreements, for purposes of section 8 of the NCA. Karsten was very much like a son to the Du Bruyns, before things went south and it was decided all business relations should be severed between the parties, by way of the aforesaid commercial transactions. Karsten was not a registered credit provider at the time that the agreements were concluded; however, he was eventually registered sometime afterwards.

After a making a few payments towards the loan the Du Bruyns defaulted, and when Karsten instituted proceedings to claim the remaining monies, the Du Bruyns argued that the agreements were null and void because Karsten was not a registered credit provider at the time that the agreements were concluded. This matter was argued all the way up to the Supreme Court of Appeal, where the Court, despite bemoaning the impracticalities of the current wording of the NCA, found in favour of the Du Bruyns for the following reasons:

  • the agreement between the parties, for all intents and purposes, constituted a credit agreement as defined in section 8 of the NCA, read with section 4(1), which states that that “the NCA shall apply to every credit agreement where the parties are dealing with each other at arm’s length”;
  • the agreement between the parties was an “arm’s length agreement” for purposes of section 4(2) of the NCA (which sets out the circumstances in which parties can be considered as not dealing at arm’s length, therefore excluding them from the provisions of the NCA) because, despite their previously close relationship, the parties were independent of the other and were consequently striving to obtain the utmost possible advantage out of the transaction at the time that the agreements were concluded; and 
  • all of the above circumstances being present, Karsten was obliged to register as a credit provider as prescribed by section 40(1)(b) of the NCA, which makes it clear that that “a person must register as a credit provider if the total principal debt under all outstanding credit agreement exceeds the prescribed threshold in terms of section 42(1)”. At the relevant time, this prescribed threshold was R500 000.00, however on 11 May 2016 the Minister for the Department of Trade and Industry published a new determination of the threshold which has reduced the threshold to nil i.e. R0.00 .

What does this case mean for the individual “good” Samaritan? In a nutshell, it means that one needs to be careful who one loans any amount of money to. If one loans money in an arm’s length fashion, either by way of a written or verbal loan agreement, and is not registered as a credit provider, one must be aware that such an agreement would be unenforceable should the borrower ever default.

Deborah Mutemwa-Tumbo, Executive Chairwoman, Tumbo Scott Incorporated