Which credit agreements with juristic persons are governed by the National Credit Act? April 2019

By DEAN RAATH, Published in Financial Law

A credit agreement governed by the National Credit Act (NCA) triggers various compliance requirements for the credit provider covering at least credit marketing, prescribed disclosure, credit assessments, documentation, amendments, communication, payment allocation, statements, pre-payments, pricing, collections and reporting. Any non-compliance may have severe consequences, including a huge administrative fine and/or suspension or cancellation of registration as a credit provider [s150]. It is therefore crucial to determine whether a credit agreement is governed by the NCA or not.

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The problem

When a juristic person is a borrower, s4 excludes some credit agreements from the NCA governance (Out NCA), whilst others are governed by the NCA (In NCA). This is determined by certain criteria (asset value and annual turnover) linked to a threshold (currently R1m). The problem is that the wording of the criteria is confusing and makes the application of the threshold unclear. The fact that a credit provider may rely on the criteria values provided by the borrower does not address this problem. This may result in credit providers reaching very different outcomes when applying the same criteria.

The confusing criteria in s4 is the following:

  • It refers to "….asset value or annual turnover…" equal to or exceeding the threshold which will make the credit agreement Out NCA [s4(1)(a)(i)] – therefore either of the criteria meeting the threshold will result in an Out NCA credit agreement.
  • At the same time, s4 also describes a credit agreement (excluding a large agreement) as In NCA if its asset value or annual turnover is below the threshold [s4(1)(b)] – therefore either of the criteria below the threshold will result in an In NCA credit agreement.

The conflict is that the different criteria can make a credit agreement with a juristic person both In and Out NCA at the same time (for example, one with an asset value of R2m and an annual turnover of R900k). Will a credit agreement with such a juristic person be Out NCA (based on the R2m asset value) or In NCA (based on the R900k annual turnover)?

Some guidance

There is no direct guidance in the NCA or from courts yet on how to apply the conflicting criteria. For a meaningful interpretation, one will have to read one of the criteria differently – but which one? A couple of things might help.

Firstly, the threshold is a maximum amount of R1m and started as such on 1 June 2006 [s7]. A legislative change will be required to increase the threshold. This has never been done. With the time value of money changing but the threshold remaining unchanged, it means that if the same juristic persons who were below the threshold in 2006 continued with normal trading and increased their asset values and annual turnovers aligned to inflation, they will still be in the same financial position today although fewer of them would still fall below the unchanged threshold.

Secondly, the definition of juristic persons [s1], although it extends the general meaning of the concept to much more than companies and close corporations, also added limits – for example, not all trusts are regarded as juristic persons.

Thirdly, the purpose of the NCA is to enhance protection for the small and vulnerable consumer. In the case of juristic persons, NCA protection is not only limited to the small ones but it limits protection even further by also excluding those credit agreements that are governed by the NCA from core NCA protection, such as the affordability and reckless lending provisions [s6].

All in all, the intention of the legislature has been:

  • to provide protection only to small juristic persons (below the threshold);
  • to provide protection only in respect of small and intermediate credit agreements;
  • to restrict the number of juristic persons qualifying for NCA protection (maximum threshold set in NCA which has remained unchanged since 2006); and
  • to be selective in terms of the protection offered (s6 exclusions).

Possible solution

Applying this legislative intention to re-interpret the two criteria for determining In and Out NCA, results in the following interpretation being arguably the most correct one:

  • s4(1)(a)(i) should be read literally (current wording) – that means if either asset value or annual turnover equals or exceeds R1m, a credit agreement is Out NCA;
  • s4(1)(b) should not be read literally (current wording) but as follows: (only) if asset value and annual turnover are below R1m, will a credit agreement be In NCA. This will be met if each criteria on its own is below the threshold (for example, asset value R800k and annual turnover R750k), notwithstanding that together they are equal to or exceeding the threshold. The reasons for this are:
    • In the case of ambiguity one should change the wording in the Act as little as possible and only in order to reach a sensible interpretation;
    • An interpretation that a credit agreement will only be In NCA if both criteria taken together are below the threshold (i) is a more drastic change from the current wording, (ii) will offer NCA protection to even fewer juristic persons (this may be against the object and purpose of the NCA), and (iii) will also conflict again with the proposed new interpretation;
    • The interpretation proposed strikes a balance: not only does it allow for a meaningful application of the conflicting criteria, but it still offers NCA protection to the maximum number of juristic persons within the limitations set out by the current wording of sections 4 and 7 (that is, minimum changes) – there is, therefore, no reason to read it otherwise.

There is a good reason why small businesses should be protected as consumers. But clarity is required and the playing field amongst credit providers should be even. There is, therefore, a clear and urgent need for this ambiguity to be resolved in the interest of all role players.

Raath is an admitted attorney. He writes in his personal capacity.