In the unprecedented times South Africans are now facing, many individuals and businesses will have no alternative but to take out loans to survive the challenging economic environment.
As noble as it might be to provide loans to friends or their businesses, if it is not correctly done in compliance with prevailing laws, the lender itself may be faced with substantial hardship.
This short article will seek to highlight some important considerations to take into account when you consider making a loan to a friend or their business.
COMPLIANCE WITH THE NATIONAL CREDIT ACT (2005) (“NCA”)
EXEMPTION FROM THE APPLICATION OF THE NCA
To determine whether the NCA will apply to your proposed loan transaction, careful consideration should be given to the definition of a “credit agreement” under the NCA, as well as the grounds for exemption of the application of the NCA to a credit transaction between parties.
The incorrect reliance by parties on the application of the exemptions in Section 4 of the NCA to their credit agreement may have far-reaching consequences for the parties.
To test whether your proposed loan transaction is likely to be exempt from the provisions of the NCA, we invite you to make use of our Smart Questionnaire. By answering a few short questions on our interactive questionnaire, you will obtain a quick and accurate indication of whether your transaction will be exempt from the NCA’s provisions or not. To start with the Smart Questionnaire, either –
- Click on the link – https://sstlaw.n-abler.biz/Home/Selection; or
- Visit the Tech Enabled Law page on our website at sstlaw.co.za
REGISTRATION AS CREDIT PROVIDER
In circumstances where your proposed loan to a friend or their business constitutes a “credit agreement” under the NCA and your transaction is not exempted from the application of the NCA on one of the grounds listed in Section 4 of the NCA, you will be required to formally register as a credit provider in terms of Section 40 of the NCA.
In terms of Section 40(3) of the NCA, credit providers who fail to register may not enter into any credit agreements or offer, extend or make credit available to consumers.
Whether the transaction is a once-off transaction or whether you are frequently involved as a credit provider in the credit market, if your transaction is not exempted under Section 4 of the NCA, you will be required to formally register as a credit provider (De Bruyn NO and Others v Karsten 2019 (1) SA 403 (SCA)).
CONSEQUENCES OF FAILURE TO REGISTER AS CREDIT PROVIDER
Failure to register as a credit provider, in circumstances where the credit provider is compelled to do so under Section 40 of the NCA, will result in the credit agreement being unlawful in terms of Section 89(2)(d) of the NCA.
In terms of Section 89(5) of the NCA, when a credit agreement is unlawful, despite any other legislation or any provision of an agreement to the contrary, a court must make a just and equitable order including but not limited to an order that
the credit agreement is void as from the date the agreement was entered into. This means that the agreement will be treated as if it never came into existence in the first place and the credit provider will be unable to enforce the terms of the credit agreement, and further will not have a claim, based on the credit agreement, for the amounts paid or credit extended.
In these circumstances, the credit provider will have to approach a court on the basis of unjustified enrichment, which in principle means that he would have to claim back the money that was lent on the basis that the lender was impoverished without justification.
The enrichment action relevant to unlawful credit agreements is the condictio ob turpem vel iniustam causam. Its requirements are generally described as follows:
- ownership must have passed with the transfer;
- the transfer must have taken place in terms of an unlawful agreement; and
- the claimant must tender the return of what he or she received,
(National Credit Regulator v Opperman and others 2013 (2) BCLR 170 (CC)).
In order to be successful, ordinarily the party who claims on the basis of unjust enrichment must be free of turpitude (improbity) and show that he or she has not acted dishonourably. It is based on the underlying principle that the law should discourage and deter illegality and should not render assistance to those who defy it.
Although it may therefore still be possible for an unregistered credit provider to claim back its money from a borrower in circumstances where the credit agreement was declared void for unlawfulness, the claims process may be more complicated, take longer than under a lawful credit agreement and add additional risks to the prospects of recovery.
In terms of Section 151(1) of the National Credit Act (2005) the Tribunal may impose an administrative fine in respect of prohibited or required conduct in terms of the National Credit Act (2005). These administrative fines could be very substantial, being as much as 10% of the respondent’s annual turnover during the preceding financial year or an amount of R1 000 000 (One Million Rand).
To determine the amount of the administrative fine, the Tribunal, amongst other things, take the following into account-
- the nature, duration, gravity and extent of the contravention;
- any loss or damage suffered as a result of the contravention;
- the behaviour of the respondent;
- the market circumstances in which the contravention took place;
- the level of profit derived from the contravention;
- the degree to which the respondent has co-operated with the National Credit Regulator and Tribunal;
- whether the respondent has previously been found in contravention of this Act.
For assistance with any aspect of your proposed loan agreement, feel free to contact our experienced team of lawyers to assist you in taking the right actions at the right time to protect you.
LLB; LLM (Import/Export Law)
Corporate and Commercial Law
Phone: 012 361 9823