Drafting loan agreements in consideration of the National Credit Act
02 Jun 2020
IMPORTANT CONSIDERATIONS
Mr X wants to finance a law tech start-up started by his son’s friend currently studying computer engineering at the University of Pretoria. Your client (Mr X) sends you an instruction to draw up a loan agreement for a transaction.
The instruction all seems quite straightforward, however, there is a lingering thought that does not seem to go away, namely the applicability of the National Credit Act (“NCA”). The thought soon subsides, and you think to yourself that Mr X is not in the business of providing financing and this is a once-off transaction, surely the NCA will not apply.
Just to make sure that you are covered you insert a clause in the Agreement in terms which the Parties “contract out of the NCA” and the borrower absolves the lender from complying with the obligations imposed by the NCA. All good? Not necessarily.
Where the agreement is a credit agreement that exceeds the threshold contemplated in s 42(1) of the NCA (now R0 – GN 513 of 11 May 2016 Government Gazette No. 39981), irrespective of whether it is a single transaction and irrespective of whether the credit provider is a regular participant in the credit industry, the NCA will apply.
Parties cannot contract out of the NCA. Neither may the parties agree that the credit provider is absolved from any of his obligations or duties in terms of the NCA, nor that the credit provider may do anything unlawful in terms of the NCA. Any such provision will be void as from the date that it is purported to take effect.
One should instead look at the parties, the type of agreement and the exclusions expressly provided for in the NCA.
For purposes of this note, it will be regarded that the transaction will have an effect within the Republic of South Africa or, alternatively, that it will be made within the Republic of South Africa.
ARMS LENGTH TRANSACTION
As a point of departure, one needs to establish whether or not the parties will be dealing at arm’s length.
The NCA lists various “arrangements” in which the parties are not dealing at arm’s length for purposes of the Act:
(a) agreements in terms of which a company advances a loan to its shareholder, or another juristic person advances a loan to a person who has a controlling interest in the juristic person;
(b) agreements in terms of which a shareholder advances a loan to a company, or a person who has a controlling interest in a juristic person advances a loan to that juristic person;
(c) credit agreements between family members who are dependent on each other;
(d) credit agreements between family members when one family member is dependent on the other; and
(e) 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.
The list provided is not closed. Any other arrangement of a type that has been held in law to be between parties who are not dealing at arm’s length will not be an arm’s length transaction for the purposes of the NCA.
If the Parties to the transaction are not dealing at arm’s length, the NCA will not apply, and it will not be required to consider any of the other exemptions.
THE CONSUMER
If the Parties are dealing at arm’s length, the next important consideration will be the type of Consumer.
Where a Consumer is a Juristic Person, there may be certain situations where the NCA will not apply.
A “Juristic Person” has a specific meaning assigned to it in the NCA. It is worth noting when the Consumer is a trust, there are further important considerations that must be kept in mind – A Trust will only be seen as a “juristic person” in terms of the NCA if there are three or more individual trustees or if the trustee is itself is a juristic person as contemplated in the NCA.
If it is established that a Consumer is a juristic person as contemplated in the NCA, then one needs to have a look at the asset value or annual turnover of the juristic person (the combined asset value or annual turnover of all related juristic persons, at the time the agreement must be considered).
If the Consumer is a juristic person and if its asset value or annual turnover exceeds the threshold value determined by the Minister in terms of section 7 (1) if the NCA, then the NCA will not apply to the transaction. A threshold of R1 million was determined by the Minister under GN 713 in GG 28893 of 1 June 2006 (this threshold still applies at the time of writing this note).
Where the asset value or annual turnover does not exceed the threshold, the next important consideration relates to the type of agreement that will be concluded.
If the Agreement is a “large agreement” as contemplated in section 9 (4) of the NCA, then, notwithstanding, the asset value or annual turnover of the Consumer, the NCA will not apply to the transaction.
The NCA specifically defines a “large agreement” –
(4) A credit agreement is a large agreement if it is—
(a) a mortgage agreement; or
(b) any other credit transaction except a pawn transaction or a credit guarantee, and the principal debt under that transaction or guarantee falls at or above the higher of the thresholds established in terms of section 7 (1) (b).
(own emphasis added)
The threshold for a “large agreement” is R250 000.00 was determined by the Minister under GN 713 in GG 28893 of 1 June 2006 (this threshold still applies at the time of writing this note).
SO, WHAT ABOUT SURETIES?
Generally, where money will be advanced to a juristic person, one would want to also bind a natural person for the due and proper performance of the juristic person.
The question then arises, whether the surety or guarantee agreement entered into by the credit provider and the surety / guarantor will fall within the ambit of the NCA.
Section 4 (2) (c) of the NCA, stipulates that:
For greater certainty in applying subsection (1)— this Act applies to a credit guarantee only to the extent that this Act applies to a credit facility or credit transaction in respect of which the credit guarantee is granted.
A “credit guarantee” is specifically defined in section 8 (5) of the NCA as:
(5) An agreement, irrespective of its form but not including an agreement contemplated in subsection (2), constitutes a credit guarantee if, in terms of that agreement, a person undertakes or promises to satisfy upon demand any obligation of another consumer in terms of a credit facility or a credit transaction to which this Act applies.
Should the underlying agreement fall outside of the NCA, and the surety / guarantee agreement falls within the definition of “credit guarantee” as stipulated in the NCA, then the surety / guarantee agreement will also not be subject to the NCA. The inverse is also applicable, where the underlying agreement falls within the ambit of the NCA, then the surety / guarantee will be subject to the NCA.
Keeping the above considerations in mind, there are various ways which the transaction for Mr. X can be structured to ensure that it does not fall within the ambit of the NCA.
RELEVANT CASE LAW
Whenever dealing with a situation where a possibility exists that the NCA may be applicable, be sure to have a look at the following case law:
General application of the NCA –
Du Bruyn NO and Others v Karsten (929/2017) [2018] ZASCA 143; 2019 (1) SA 403 (SCA) (28 September 2018)
AODs –
Friend v Sendal (A973/2010, 24425/2009) [2012] ZAGPPHC 162; 2015 (1) SA 395 (GP)
Settlement Agreements –
Ratlou v Man Financial Services SA (Pty) Ltd (1309/17) [2019] ZASCA 49; 2019 (5) SA 117 (SCA)
MY CLIENT DID NOT REGISTER AS A CREDIT PROVIDER, AND I THINK HE HAD TO. WHAT NOW?
Where a credit agreement (as contemplated in the NCA and not excluded as contemplated above) is entered into by the Consumer and the Credit Provider did not register as a credit provider in terms of section 40 of the NCA, the agreement will be invalid. However, this notwithstanding, the Creditor retains his right to claim restitution based on unjustified enrichment. This was confirmed in National Credit Regulator v Opperman and Others 2013 (1) SA 1 (CC).
CONCLUSION
Navigating the ins and outs of credit agreements and the NCA can get complicated. By using the contracts.tech contract creation tool, you will be guided through the relevant questions relating to the applicable of the NCA, and your contract will change and adapt based on the information provided. Be sure to give it a try!
See also:
- Drafting written resolutions – Important considerations
- Consumer alert – Risk of not registering as a credit provider
- Are credit providers over-charging on the credit they provide?
- Credit providers beware – Reinstatement of credit agreement despite acceleration
