SA Legal Review - The objective of the National Credit Act

FROM THE LAW BENCH

The objective of the National Credit Act

The primary objective of the National Credit Act, 35 of 2005 (“the NCA”), is reflected as being, on the one hand, to promote a fair, transparent, responsible and accessible credit market and, on the other, to protect consumers. To further the achievement of these lofty and praiseworthy aims the NCA, moreover, seeks to encourage consumers not to financially overextend themselves. Consumers should, essentially, take care to ensure that they are in a position to meet all the financial obligations that they have undertaken. The NCA, to achieve these goals, has, in addition to the various other mechanisms provided for in the legislation, also created the innovative process of ‘debt review’.

The importance of the debt review process

The importance of the debt review process is underscored by the fact that section 129, as read with section 130(3), of the NCA specifically provides that credit providers may not commence legal proceedings to enforce the provisions of credit agreements until the consumers concerned have been duly given written notice of this intention and also informed of their right to refer the matter to a debt counsellor.

The conflict between the National Credit Act and the Insolvency Act

A problem in the implementation of section 129 of the NCA could, however, potentially arise should a credit provider resolve to institute sequestration proceedings against the consumer in accordance with the provisions of the Insolvency Act, 24 of 1936. The inevitable question under such circumstances is whether or not those sequestration proceedings are to be regarded as being the “legal proceeding to enforce an agreement” that are contemplated in section 129 of the NCA.

The underlying objective of the Insolvency Act, in contradistinction to that of the NCA as noted above, is to facilitate the beneficial and equitable distribution of the assets of the insolvent to the various creditors. One of the consequences of sequestration, furthermore, is to enable the insolvent, to the extent permitted by the provisions of the Insolvency Act, to avoid fulfilling the freely assumed financial obligations. It was felt that the sequestration of a consumer before that consumer has had the opportunity of having recourse to the mechanisms provided for in the NCA and, particularly, the debt review process, could well be in conflict with the provisions of the NCA.

The Supreme Court of Appeal finding in the case of Naidoo v ABSA Bank

This very issue was recently considered by the Supreme Court of Appeal in the matter of Naidoo v ABSA Bank.1 The appellant, one Naidoo, was sequestrated by the respondent, ABSA Bank, after Naidoo failed to meet his obligations to ABSA Bank arising from certain installment sale agreements to which the provisions of the NCA undoubtedly applied. The appellant averred that it was incumbent upon the respondent to have followed the procedures contained in the NCA before commencing the sequestration proceedings against him.

The appellant conceded that the sequestration proceedings brought by ABSA Bank could not be regarded as being “legal proceedings to enforce the agreement” within the meaning of section 129 of the NCA. The appellant sought, rather, to rely on the wording contained in section 130(3) of the NCA, namely, “… in any proceedings commenced in a court in respect of a credit agreement to which this Act applies” in support of his argument that the relevant sections should be interpreted to cover all proceedings, including sequestration proceedings, where the underlying cause of action was a credit agreement in respect of which the NCA applied.

The SCA immediately concurred that sequestration proceedings were not, in and of themselves, “legal proceedings to enforce the agreement” within the meaning of section 129(1) of the NCA. 2 The Court held, therefore, that it was necessary to decide on the correct interpretation of section 130(3) of the NCA.

The Court held that since both sections 129 and 130 related to debt enforcement under Chapter 6 of the NCA it was not possible to interpret section 130(3) in isolation, as had been contended for by the appellant, but, rather, that the section must be interpreted within the context of Chapter 6 as a whole. The court found that it was clear from the language used in the legislation that the proceedings referred to in section 130(3) of the NCA could not be said to extend the ambit of section 129.

Since the appellant had conceded that sequestration proceedings could not be considered to be “legal proceedings to enforce the agreement” within the meaning of section 129(1) and as it had been found that section 130(3) did not extend the ambit of section 129, the court concluded that there was no merit in the contention by the appellant that the respondent was obliged to have complied with section 129 of the NCA before instituting the contested sequestration proceedings.

The consequences of the finding

A consequence of this judgement is that credit grantors may immediately institute sequestration proceedings against credit receivers without having first to comply with the preliminary procedures contained in the NCA. The institution of sequestration proceedings will, therefore, continue to be governed solely by the provisions of the Insolvency Act.

It has been suggested in some quarters that the decision in the Naidoo case could have serious, possibly unintended, negative consequences for consumers since the finding is, essentially, inimical to the stated goals and objectives of the NCA. The result of the judgement is that consumers will henceforth be denied the option to continue with the debt review process once they have been sequestrated. There can be no doubt that this could seriously undermine the effectiveness of the NCA. It was always hoped that debt restructuring and the liberal use of the other mechanisms and processes envisaged by, and created in, the NCA would sufficiently aid over-indebted consumers suitably to resolve their debt problems and so avoid sequestration and the consequences, including the stigma, generally attaching to insolvency. It seems, however, that the hope of debt rehabilitation without the necessity of resorting to sequestration could be dashed under circumstances where credit providers elect rather to sequestrate credit receivers than to make use of the mechanisms provided for in the NCA.

Until such time, however, as either the NCA or the Insolvency Act, or both pieces of legislation, are suitably amended in the light of the Naidoo finding that judgement will inevitably continue to influence the attitudes and actions of credit grantors.

1 2010 (4) SA 597 (SCA).
2 The High Court decision in the matter of Investec Bank Ltd & another v Mutemeri & another 2010 (1) SA 265 (GSJ) that an application for sequestration was not a legal proceeding pursuant to which the creditor enforced a debt and did not, thus, amount to a legal proceeding to enforce an agreement under section 129 of the NCA, was confirmed

Courtesy: The EAAB - Estate Agency Affairs Board

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