Do I need to register as a Credit Provider?

Section 40, as amended, of the National Credit Act determines which entities or persons must register as a credit provider. Now this seems to be quite obvious, if you are in the business of lending monies you need to register. However, the Supreme Court of Appeal has on the 28^th of September 2018, upset the proverbial apple cart.

We have a look at the matter of De Bruyn v Karstens, judgment in which was handed down Supreme Court of Appeal on the 28^th of September 2018. The facts in this matter, briefly summarised are as follows:

Mr du Bruyn and Mr Karstens were shareholders of three separate legal entities and in essence did business together as co-directors/ partners. At some stage the relationship between them soured to the extent that they decided to part ways. This resulted an agreement for the sale of shares being entered into wherein the intention was for Mr Karstens to sell his shares to Mr and Mrs du Bruyn for an amount of R2 000 000.00. The amount would be payable by the du Bruyns making payment of an initial amount of R500 000.00 and that the remainder of the amount would be payable in monthly instalments of R30 000.00 together with interest thereon.. What is important is that the transaction can be described as a instalment agreement and that the amount of credit made available was over R500 000.00.

The Court was posed with the question of whether Mr Karstens, the seller of the shares, in this instance should have been registered as a credit provider at the time that the agreement was concluded? It is indeed so that Mr Karstens registered as a credit provided some time after the agreements in question was concluded.

The National Credit Act, as amended, confirms that a person or entity must register as a credit provider if it, either alone or in conjunction with another person or entity, the total principal debt owed to it under all outstanding credit agreements (again barring incidental credit agreements) exceeds the threshold prescribed by the Minister. This threshold is currently R500 000.00

Taking one step back, which agreements are regulated by the National Credit Act?

Section 4(1) stipulates that the Act applies to all credit agreements between parties dealing at arm’s length, except for the following circumstances:

• The consumer of a credit agreement is a juristic person with an asset value or annual turnover which exceeds the threshold prescribed by the Minister, currently this threshold is R1 000 000.00; the consumer is the state or an organ of state;
• The agreement is a large agreement as described in section 9(4) and the consumer is a juristic person whose asset value or annual turnover is below the threshold prescribed by the Minister;
• A credit agreement where the consumer is the Reserve Bank;
• A credit agreement whereby the credit provider is entity located outside of the RSA and the agreement has been approved by the Minister.

According to Section 4 (2) ,and having regard to section 4(1), the Act shall apply to all credit agreements that are within arm’s length. The act does not define which agreements are within arm’s length, but rather excludes agreements which are not. These exclusions are agreements which are:

• Shareholder loans,
• Loans to shareholders;
• Credit agreements between natural persons who are in a familial relationship and are co-dependant or the one is dependant upon the other,
• Any other agreement in which the parties are not independent of one another and the goal is not to obtain the utmost possible advantage from the transaction, or
• It is held by law to be between parties that are not dealing at arm’s length.

The Cambridge Dictionary defines “at arm’s length” as follows: “used to describe a situation in which two people, companies, etc.operate separately from each other.”

Therefore, the question that the Court was faced with is, “Was the transaction between the parties a credit agreement and if so, was the seller obliged to register to provide credit to the purchasers of the shares”.

The Court’s finding was that indeed the sellers were obliged to so register as credit providers, specifically having regard to Section 40(1) and that the aggregate of the amount of credit provided exceeded the threshold of R500 000.00. The credit provided should furthermore have been registered at the time of the transaction and the subsequent registration cannot be applied retrospectively. This is despite the fact that the lender is not in the business of lending money, but is a one-time lender. It was found by the Court that the parties were indeed at arm’s length since the friendly relationship –a relationship that had been described as familial – between them had soured and it had become quite acrimonious.

The implications of not being registered as per Section 40(4) of the Act, is that credit provided by an entity that was obliged to be registered in terms of Section 40(1) and was not so registered, is an unlawful agreement and is therefore void and unenforceable.

How does this judgment affect the average person?

1. Every person wanting to lend or advance monies in excess of R500 000.00, to another person or entity, which transaction is at arm’s length, will have to first be registered as a credit provider.
2. Any transaction where a portion of the purchase price is paid, and the balance of over R500 000.00, is secured by security in any form and payment of the balance will be in instalments, the seller will need to register as a credit provider.
3. Any person who will need to register as a credit provider will also need to comply with legislation in this regard and credit provided will have to be in accordance with the relevant legislation.
4. Compliance will also extend to the Financial Intelligence Centre Act legislation, which means that credit checks is requisite before providing credit.
5. Persons borrowing money will be afforded more protection in that the terms of the agreement will be regulated in terms of the National Credit Act and specifically fees and interest will have to be in compliance with the act.

I have been posed with the question of how this judgment affects specifically employer – employee loans. This type of loan agreement is a common occurrence where employers lend money to employees to further studies, or to use as a deposit to purchase a house or car for example. The above judgment significantly changes the requirements relating to credit provided and specifically more informal lending between familiar parties who are not in a familial relationship as defined by section 4(1) of the act. This will impose the requirement of registration as credit provider although lending money is not that entity’s main purpose. It is foreseeable that employers will in all probability refrain from lending money to employees based merely on this requirement of registration and the further impositions that are implicit therein. When defining the familial relationship it will boil down to the merits of each matter, but having regard to the legislation and definition of “at arm’s length” it is difficult to reconcile the employer-employee relationship as familial.

This judgment of the Supreme Court of Appeal holds much weight inasmuch as all other Courts, barring the Constitutional Court, is bound by this decision. The effects of this judgment is therefore substantial and will be far-reaching.