In a victory for consumers, a full bench in the Western Cape High Court has ruled that credit providers cannot terminate the debt review process if a consumer’s application for debt re-arrangement has been lodged with a magistrate court by a debt counsellor within 60 days of receiving it.
The case involves motor vehicle financier Wesbank, which argued that it was entitled to terminate the debt review process of customer Deon Papier because 60 days had lapsed from the day he approached a debt counsellor to restructure his debt. This despite the debt counsellor having lodged an application for debt review before a magistrate’s court and Papier making regular payments to his creditors under a debt restructuring plan.
“This is a ground breaking judgment as there had been a number of conflicting judgments about exactly when credit providers could terminate the debt review process and take legal action against borrowers,” says Adv Jan Augustyn, Manager of Investigations and Enforcement at the National Credit Regulator (NCR) which acted as Amicus Curiae in the case.
Under the National Credit Act (NCA) consumers’ assets are protected from credit providers during the debt review process. A magistrate’s court must decide whether the debt restructuring plan is realistic and if credit providers are likely to receive their money back over the longer term.
However credit providers were increasingly approaching the High Court to obtain judgment against consumers before the magistrate’s court heard the debt review application. “They were putting an end to the debt review process even where the consumer and debt counsellor had taken all necessary steps to follow the law,” says Augustyn. “This was putting the debt review process at risk.”
The High Court ruled that the objective of the NCA was to provide protection and assistance to over-indebted consumers in an environment that encouraged both borrowers and lender to participate in good faith. In its judgment, the High Court judges state that “to allow a credit provider to unilaterally terminate the consumer’s protection at the precise moment when he or she may need it the most can only be construed as absurd. It would be like providing the consumer with an umbrella and then snatching it back the moment it starts raining.”
Augustyn explains that once the application for debt re-arrangement is launched it becomes a judicial process and the consumer shouldn’t be prejudiced – even if it takes a number of months for the matter to be heard. The High Court says a typical debt review takes longer than 60 business days, often much longer, before it results in an order by the magistrate’s court.
NCR Senior Manager: Education & Strategy, Peter Setou points out that a Task Team set up by the NCR to reduce the backlog of unresolved cases under debt review found that severe capacity constraints in the court system have resulted in less than 10% of the monthly case volume being dealt with by the courts.
“Better co-operation between industry players is needed to reduce the number of debt review cases clogging up the court system,” says Setou. “The premature enforcement of credit agreements in the High Courts also drives up the costs of litigation at the expense of those least able to afford it.”
Setou says credit providers need to act in the spirit of the law if the intention of the NCA to get over-indebted consumers back on their feet and into the economy is to be met.
“The Task Team found that a major obstacle to resolving debt review cases was that some credit providers terminated the debt review process and proceeded to court without first attempting to reach a settlement with the consumer through debt counsellors,” says Setou.
The High Court ruled in the Wesbank case that credit providers could not terminate the debt review process while an application was pending at the magistrate’s court. “The magistrate’s court is the appropriate forum for credit providers to present their case if they have concerns that the consumer’s debt restructuring plan is unrealistic,” says Augustyn.
Augustyn explains that consumers lose their protection if an application to a magistrate’s court for debt re-arrangement is not made within 60 days, the magistrate’s court dismisses the application for re-arrangement or the application is withdrawn or abandoned.
“What the High Court judgment shows is that if consumers continue to make payments in line with their restructured debt plan and debt counsellors fulfil their duties by submitting an application for debt review to the magistrate’s court within 60 days of receiving it, the credit provider can’t unilaterally terminate the debt review process,” concluded Augustyn.