Supreme Court of Appeal judgment a mixed bag for consumer protection

The Supreme Court of Appeal (SCA) recently ruled on two important aspects of the National Credit Act (NCA). The decision will affect what credit agreements consumers can include under the debt review process and the total amount of fees and interest credit providers can charge consumers in default, says Peter Setou, Senior Manager: Education & Strategy at the National Credit Regulator (NCR).

The case dates back to 2008 when the National Credit Regulator (NCR) launched an application to the North Gauteng High Court for clarity on several matters pertaining to the debt counselling process. Some of the parties took some of the findings of the High Court on appeal to the Supreme Court of appeal in Bloemfontein.

In the Supreme Court of Appeal case, one of the aspects of the NCA which came under the spotlight was the applicability of the common law in duplum rule as applied by the South African courts to a similar provision in the NCA section 103(5).

The common law rule dictates that the unpaid and arrear interest that a consumer owes may not exceed the outstanding capital at the time. Once the unpaid interest reaches the unpaid capital sum, the interest ceases to run. However, when debtors start to repay their debt, (as is the case under debt review), the payments have the effect of decreasing the interest amount and it may run again until it equals the outstanding capital. Any payments by the debtor must be appropriated first to the interest.

The banks contended that the common law should be applied and when a consumer in respect of an agreement under the NCA makes any payments it has the effect of decreasing the interest and costs and the latter may run again.

The SCA ruled that the NCA differs from the common law rule in that it is not only limited to interest but also includes initiation fee, service fee, credit insurance, default administration charges and collection costs.

The SCA interpreted the NCA to read that when the total of the charges referred to above, which accrue while the consumer is in default reaches the amount of the unpaid principal debt, no further charges may be levied (even if the consumer in the interim makes payments) until the default is cured.

The reason why the NCR approached the High Court for a declaratory order in respect of this section is because it disagreed with the banks’ and other credit providers’ interpretation of the NCA in this regard.
As part of its reasoning for granting the order, the SCA said that the NCA was intended to provide a measure to address the socio-economic ills and abuses, as well as to protect the consumer against indebtedness.

“The court said this section of the law helped to prevent unreasonable over-indebtedness of the consumer,” says NCR manager of Strategy and Education, Peter Setou.

The High Court did not make an order as requested by the NCR in respect of the interpretation of section 86(2) read with section 129 of the NCA and the NCR appealed against this decision of the High Court. This relates to the question under which circumstances can credit agreements be excluded from the debt review process.

“When consumers become over-indebted they can approach a debt counsellor in order for their debt to be rearranged,” explains Setou. “Normally all the consumer’s credit agreements would fall under the debt restructuring process. This means that the credit provider cannot enforce the agreement and take the consumer to court (issue a summons) or attach their assets to settle outstanding debt while they are under debt review.”

But under the NCA, an exception to this is when the credit provider has already taken steps to enforce a credit agreement. That credit agreement is excluded from the debt review process.

“In practical terms this means the credit provider can then take further legal action against the consumer to enforce the agreement,” he says.

There was some confusion about when exactly a credit provider had started to take steps to enforce the credit agreement and at what stage the credit agreement will be excluded from the debt review process. The NCA provides that before a credit provider can enforce an agreement, it must issue a Section 129 Notice to the consumer, warning that legal action may be taken against them unless they follow the steps in section 129. The banks argued that as soon as this notice had been issued, the enforcement procedure had been started and that particular credit agreement is excluded from the debt review process.

“The NCR argued that the notice to a consumer is only a notification and not a step to enforce the credit agreement, because, this will have the effect that if a consumer was even one month in default, their credit provider could issue them with a Section 129 Notice and they would not be able to apply for debt restructuring to help them pay back their debts.

The SCA agreed with the banks’ approach and interpretation of the Act saying that as soon as a consumer received a Section 129 Notice in respect of a specific agreement, that agreement is excluded from debt review. “The consumer can, however, still apply for debt review in respect of the other agreements,” adds Setou.

It is, however, important to note that courts still have discretion and may still refer such matters back to the debt counsellor with a request for the debt counsellor to evaluate the consumer’s circumstances and make a recommendation to that court.

“The NCR is currently assessing this judgement as well as its implication for consumers and the industry at large,” he concludes. “We will decide on the way forward once we have concluded this process.”