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Impact of NCA on sections 57, 58, 65 and Acknowledgements of Debt

20 Jun 2007

The BIGGEST NEW is placing regulatory burden, on the shoulders of Credit Providers. Oh boy, oh boy and how their duties, responsibilities and paper trails have increased!  


National Credit Act of South Africa No.34 of 2005
Impact of NCA on sections 57, 58, 65 and Acknowledgements of Debt

By Andre Maas
 20 June 2007

 Print: Impact of NCA on sections 57, 58, 65 and AODs

Although reasonable caution has been taken and a lot of time invested in drafting this paper, this paper is not a legal opinion. This paper is a gathering of threads to use as a guide to understand the workings of the National Credit Act. Please be careful. Do not jump to conclusions. This act works as a whole. It is single body of law spreading over 173 sections, 9 chapters of regulations, and 45 prescribed forms. It replaces and combines into one the Credit and Usury Acts. You can always contact Debtpack directly, if you need assistance or advice with the National Credit Act of South Africa.
read on...read on...read on...


To deconstruct previous complexity the drafters introduce new concepts, new categories, new definitions. They have created new bodies, new tribunals and new officials. IT IS NEW.

The BIGGEST NEW is placing regulatory burden, on the shoulders of Credit Providers. Oh boy, oh boy and how their duties, responsibilities and paper trails have increased!

The National Credit Act is all encompassing. If a transaction is not for cash, it is for credit. If it is for credit then you are a credit provider contracting a credit agreement. There is no escape. Read Section 90. “An agreement is unlawful if it defeat the act”.

At it’s heart the National Credit Act prevents exploitative usury. It achieves this by placing the duty to prevent on Credit Provider’s shoulders. This is clever.

As regulating ordinary, non interest bearing, 30 day Accounts would be counter productive, and recognising that Money lending is not core thereto. (i.e. Raising interest and charges is after the fact and incidental thereto), the National Credit Act lumps 30 day accounts and utility bills, under the single catch all phrase, - “Incidental Credit Agreement”. Then right upfront, in sections 4 & 5, the Act, excludes them, largely, from the implications of the Act. Do not take this act lightly. It’s impact will be LARGE! Every Credit Policy, every Credit Granting process, every Collections process, every Legal process is affected.

Debtpack converts Credit Policies into a Credit Solutions.

The NCA places the duty to manage the myriad of details linked to credit granting and enforcement on the credit provider shoulders. To stay out of trouble you need to act in terms of your carefully thought out policies. Turning non core processes to strategic advantage is what we do. Contact Debtpack today for assistance with formulating credit policies.

How do you Pay Off a Capital Amount?

This paper is divided into three parts.

  1. Introduction
  2. Controllable Risk and
  3. Inherent Risk.

Introduction

What are the characteristics of an Incidental Debt Agreement?

In  What is an incidental credit agreement, I stated that the NCR’s definition of a Credit Agreement excludes ‘Invoice Debt’ sold on 30 day account. This is because both of the following elements must be present at the conclusion of the agreement. Namely;

  1. The parties agree that payment is to be deferred; AND
  2. A charge or interest will be raised on the amount deferred.
as charges and/or interest are not raised from the start but only in the event of non payment, a 30 day account is not a Credit Agreement. But 20 business days after you first raise charges or interest on a 30 day account the NCA deems that agreement to be an Incidental Credit Agreement.
  • The 1st characteristic of an incidental credit agreement is that payment is deferred.
  • The 2nd characteristic is that charges and interest are also deferred until a forthcoming event which may or may not happen. i.e. late payment.

In the same Paper I stated that the Invoice Total is the Invoice Debt. The Invoice Debt does not fall due in a series of instalments.

  • This is Incidental Debt’s 3rd characteristic. It is a Capital Amount.
The NCA aims to control “mashonisas” – “credit sharking” and only needs to intervene once credit related fees and charges are raised, and then only 20 businesses thereafter.
Quite Practical really.

If you pay off a Capital Amount is it a Credit Agreement?

It is the 3rd characteristic of an Incidental Credit Agreement which raises the question: Can you pay off a Capital Amount? Isn’t agreeing to pay a fixed amount off in instalments a Credit Transaction as defined by the NCA?

Section 8(4) which defines Credit Transactions includes an instalment agreement and in subsection (f) says that if an amount is deferred and a charge, fee or interest is payable in respect of the agreement or the amount deferred then it is a Credit Transaction.

National Credit Act Section 8(4) - Credit Agreements

(
4) An agreement, irrespective of its form but not including an agreement contemplated in subsection (2), constitutes a credit transaction if it is;
    • a pawn transaction or discount transaction;
    • an incidental credit agreement, subject to section 5 (2);
    • an instalment agreement;
    • a mortgage agreement or secured loan;
    • a lease; or
    • any other agreement, other than a credit facility or credit guarantee, in terms of which payment of an amount owed by one person to another is deferred, and any charge, fee or interest is payable to the credit provider in respect of
      1. the agreement; or
      2. the amount that has been deferred.

Thus on the face of it, if a Credit Provider agrees that a consumer can pay a Capital Amount off in Instalments, AND any fee, charge or interest IS payable in terms of that agreement or on the amount deferred, then the parties are concluding a Credit Transaction in terms of the NCA.

Why is this an issue?

  1. You must register as a Credit Provider if you have more than 100 credit agreements.
  2. You must register as a Credit Provider if the Capital owed exceeds R500, 000.
  3. Credit Providers are subject to the Act’s reckless lending requirements.
  4. To ensure that you are not lending recklessly, i.e. sufficient Net Income, you need to check at least the following; previous applications for credit, concluded and existing credit agreements, payment patterns, negative data, administration orders, compromises and debt reviews, judgments; present Income, previous income, assets and liabilities; education level, qualifications, business history, reasons for changing or leaving jobs; identity details such as name, ID Number, birth date, marriage status, family details, contact numbers and addresses. (Credit Bureaus and the NCR will collate and keep all of the above).
  5. Pre Agreement Statement & Quotations must be given.
  6. Small Agreements have a specific formal format.

But this is CRAZEEE!!

The debtor already owes me the money. I am not lending it. It is already lent! It is the Debtor’s default that has caused this and now, now that I want to assist, I first have to establish if the debtor can afford it! Crazeee!

Well the NCA is simply enforcing you to do your homework up front. This is the crux!

What did you agree to up front?
Section 5(3)1 states that a person can only recover a fee, charge or interest “in respect of a deferred amount” if the parties agreed thereto “ON or BEFORE the date on which the relevant goods or services were supplied”.

Thus if you negotiate terms, interest and fees after delivery, one of two things happens.
    • You conclude a new separate standalone “loan agreement" or “Acknowledgment of debt”.
    • You “novate” and conclude a new agreement to replace the old agreement.

Loan Agreement

For a proper “Loan Agreement” to be concluded, the following must be certain.

    • That it is a loan contract; (Your Summons will read “Monies Lent and Borrowed”)
    • That money was advanced in terms of the loan;
    • That the loan is repayable.

Point (2) above raises the interesting NCA fact that a consumer cannot waive the “exceptio non numerate pecuniae”. A debtor can thus say, Yes we did agree, Yes I did sign, Yes everything is correct But I never received any money2. The agreement was signed in anticipation of receipt which has not happened. So please give me the money first. Thus for 30 day accounts, a loan agreement is not ideal.

The parties should rather agree to and sign an “Acknowledgment of Debt and Undertaking”. The undertaking being the core of the matter, it doesn’t help if the debtor agrees to owe but doesn’t agree to pay.

Acknowledgement of Debt and Undertaking

In an acknowledgment part a consumer acknowledges that an “amount of money” is owed to the credit provider. In the undertaking part the consumer undertakes to pay the debt. The acknowledgment part is important because it;

    • Defines the Amount owed.
    • It establishes that money is owed.
    • It cancels any underlying non-delivery and/or non-performance issues.

An Acknowledgment of Debt is an ideal “ Liquidated Sum Due”.

Novation
Novation is, literally, the “renewal” of an obligation by discharging it and replacing it by a new one. In our law it has become known as “voluntary novation” in the sense that it is based on a consensual act and the intention to substitute one valid and enforceable obligation by another.

Debtpack’s AOD specifically states that novation does not take place. In other words the underlying reason for the money being owed, is not expunged. This ensures that the AOD cannot be seen a “Loan Agreement”.

If the original agreement enabled credit charges and interest then charges and interest can be passed through to the AOD. If not, you cannot contractually agree to raising charges, fees and interest now [1].

The problem with an AOD is that time does not necessarily solve all things. The consumer can still default, although for less. This is where S57 and S58 become useful but more about that later.

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