Etienne van der Merwe of Lanham-Love Attorneys writes:
If you have lent money to anybody, be it a company, individual, friend or family at a market-related interest rate, there is a very good chance that the loan agreement is unlawful, void and unenforceable as you may battle to ever see your money again.
This is the result of a recent court ruling which spelt out the exact meaning of certain provisions of the National Credit Act (NCA).
On 28 September this year, the Supreme Court of Appeal (SCA) handed down a very significant and far-reaching judgment which may have catastrophic financial
consequences for any business or person who provides arm’s length financial assistance, in the form of a loan, to anybody else.
The appeal concerned the question as to when registration as a credit provider in terms of National Credit Act 34 of 2005 (the NCA) is compulsory.
A certain Mr and Mrs Du Bruyn made an offer to purchase a Mr Karsten’s shares in three business entities for the sum of R2 million to be paid in instalments. Mr
Karsten was in effect their erstwhile partner and they bought him out.
The terms of re-payment were that a deposit of R500 000 was to be paid up front and thereafter monthly instalments of R30 000 for a period of five years. Interest was
to be levied on the outstanding balance.
It was common cause that Mr Karsten was not registered as a credit provider in terms of section 40 of the NCA at the date of conclusion of the sale agreements.
The Du Bruyns subsequently defaulted on their instalment payments. When Mr Karsten duly issued legal proceedings against them, the Du Bruyns contended that the
sale agreements were null and void due to non-compliance with the NCA.
Their case was that the sale agreements constituted credit and therefore Mr Karsten was obliged to have been registered as a credit provider at the time the agreements
were concluded on 26 April 2013.
They argued that Mr Karsten’s subsequent registration, on 27 November, was insufficient. The non–compliance with sections 40(3) and 40(4) of the NCA rendered the
agreements as well as a mortgage bond registration and certain suretyship undertakings unlawful and void, so contended the Du Bruyns.
In an earlier decision, the High Court had held that a once-off transaction does not require registration – it was thought that the NCA is aimed at institutional
players and not small businessmen like Mr Karsten.
The SCA overruled that decision. It found that although the previous approach was sensible and pragmatic, it was difficult to marry such an approach with Section
40 of the NCA which is clear and unambiguous.
Section 40 makes it obligatory for a lender (any lender) to register as a credit provider. There are certain exemptions – for instance, a ‘friendly’ loan not aimed to benefit the lender and subject to no interest or a nominal interest rate does not require registration.
Neither does a shareholder’s loan to his company. But all other money-lending transactions, however insignificant, are subject to the NCA and renders the ‘lender’ subject to the duty to register as a ‘credit provider’.
The SCA found in favour of the Du Bruyns with the result that Mr Karsten was unable to recover a debt which was on the face of it due and payable. His neglect to register as a credit provider cost him dearly.
The NCA does provide for certain remedies in favour of aggrieved (non-registered) lenders but these are difficult to enforce and [are] speculative in nature. So, lenders beware!
Details: Lanham-Love Attorneys 011 268 6565.