LEGAL CHALLENGES IN 2015 INA MEIRING

TOPICS > Section 103(5): The guideline issued by the NCR > Excluded agreements subject to the NCA > Prescription > Payment distribution agents 2

PROPOSED GUIDELINES: SECTION 103(5 ) > Section 103(5):”Despite any provision of the common law or a credit agreement to the contrary, the amounts contemplated in section 101 (1) (b) to (g) that accrue during the time that a consumer is in default under the credit agreement may not, in aggregate, exceed the unpaid balance of the principal debt under that credit agreement as at the time that the default occurs.” > Principle 4.2:Once the consumer has purged the default by paying all the arrears in relation to the section 101(1)(b)-(g) charges, section 103(5) no longer applies. If the consumer defaults again, section 103(5) becomes operative and the amounts that accrued during the first period of default should be added to the amounts that accrue during the second period of default and any subsequent periods of default to determine the amount of the section 101(1)(b)-(g) charges that should not exceed the balance of the unpaid principal debt. The balance of the unpaid principal debt that should be used in these circumstances is as at the second period of default and any subsequent periods of default 3

DEFAULT: SECTION 103(5) > It is therefore important to determine - > the moment when a consumer falls into default, because that moment determines the amount of charges that may accrue during the period the consumer is in default; and > the moment when the default is cured or purged, because only then would the credit provider again have an enforceable right to the charges outlined in section 101(1)(b) to (g). 4

WHEN IS THE DEFAULT CURED? > If novation were to occur in respect of a credit agreement, the novation will result in the extinguishing of the credit agreement and the replacement of that credit agreement with a new credit agreement. Default is thus cured. > The credit provider would not be entitled to enforce the “old” agreement, and will only be able to rely on the new credit agreement for such purposes. The credit provider thus “loses” the right to pursue the consumer for any default in respect of the old agreement. > Apart from discharging the obligations between the parties, a novation also releases pledges and securities held in respect of the old agreement and results in the discharge of sureties. 5

NOVATION > Because it is a new agreement, the credit provider must- > conduct a fresh credit assessment in respect of the consumer as contemplated in section 81(2) of the NCA; > provide the consumer with a pre-agreement statement and quotation in the prescribed form, which allows the consumer 5 (five) business days within which to consider whether to enter into the contemplated credit agreement or not (see section 92 of the NCA); > release existing accessory obligations such as suretyships and other securities and pledges and replace them with new agreements for these purposes. 6

RESTRUCTURE AGREEMENTS > If the parties have voluntarily restructured a debt, the result which is that the parties agree that consumer is no longer in default of the original agreement, and in terms of which the consumer will only be in default of he/she defaults on the repayment obligations in terms of the restructure agreement, such an agreement will also purge the default for purposes of section 103(5) > It is clear from a reading of section 3 and of sections 86 to 88 of the NCA that restructure agreements are encouraged as are the eventual fulfilment of the consumer's financial obligations. 7

RESTRUCTURE AGREEMENTS > In terms of section 2(1), the NCA must be interpreted in a manner that gives effect to the purposes in section 3. The purposes of the NCA as set out in section 3, include (amongst others) the following– > promoting responsibility in the credit market by encouraging responsible borrowing, avoidance of over-indebtedness and fulfilment of financial obligations by consumers; > promoting equity in the credit market by balancing the respective rights and responsibilities of credit providers and consumers; > addressing and preventing over-indebtedness of consumers, and providing mechanisms for resolving over-indebtedness based on the principle of satisfaction by the consumer of all responsible financial obligations; and > providing for a consistent and harmonised system of debt restructuring, enforcement and judgment, which places priority on the eventual satisfaction of all responsible consumer obligations under credit agreements. 8

RESTRUCTURE AGREEMENTS > The restructure agreement is a mechanism for resolving a consumer's over-indebtedness based on the principle of satisfaction by the consumer of all responsible financial obligations. > In Imperial Bank v Kubheka (Unreported judgment 2010 JDR 0077(GNP)) the court stressed the importance to provide for debt re-organisation in cases of over indebtedness (par 19) > The court further emphasised that the objective of the NCA in making it possible for the parties to a credit agreement to resolve their dispute or bring payment up to date, should always be primary without comprising each other's right (par 58). 9

EXCLUDED AGREEMENT SUBJECT TO THE NCA > First National Bank, a Division of FirstRand Bank Ltd v Clear Creek Trading 12 (Pty) Ltd and Another 2014 (1) SA 23 (GNP): > There is no objection in principle to parties agreeing to make a normally excluded agreement subject to the National Credit Act 34 of > FNB wanted to enforce a home loan agreement which stated in clause 1 that it was 'governed by the National Credit Act'. While the defendants raised several defences located exclusively within the NCA, FNB argued that the agreement was not subject to the NCA because it was excluded from its ambit by s 4(1)(b) read with s 9(4): It was a 'large agreement' as defined and the consumer was a juristic person whose asset value exceeded the statutory threshold. 10

EXCLUDED AGREEMENT SUBJECT TO THE NCA > FNB argued that the reference to the applicability of the NCA was probably a mistake and should be ignored by the court. FNB did not, however, bring an application for the rectification of the agreement. > Held: The parties would in principle be held to their agreement. If FNB's stance were that the reference to the NCA was a mistake, it should have applied for the rectification of the agreement. In absence of such an application oral submissions about the non-applicability of the NCA carried little weight. Nor did the NCA's stated objective of protecting consumers preclude those falling outside its ambit from agreeing to have its protection extended to them. To the contrary, such an agreement would advance the objectives of the NCA by extending its protection to the parties involved. In summary, considerations of contractual freedom, the pacta sunt servanda principle, and public policy dictated that the court should enforce clause 1 of the agreement 11

PRESCRIPTION > National Credit Amendment Act 19 of 2014 (“NCAA”) > Section 126B has been added by section 31 of the NCAA, and reads as follows: > "(1) (a) No person may sell a debt under a credit agreement to which this Act applies and that has been extinguished by prescription under the Prescription Act, 1969 (Act No. 68 of 1969). > (b) No person may continue the collection of, or re-activate a debt under a credit agreement to which this Act applies— > (i) which debt has been extinguished by prescription under the Prescription Act, 1969 (Act No. 68 of 1969); and > (ii) where the consumer raises the defence of prescription, or would reasonably have raised the defence of prescription had the consumer been aware of such a defence, in response to a demand, whether as part of legal proceedings or otherwise.’’. 12

PRESCRIPTION > Investec Bank Ltd t/a Investec Private Bank v Ramurunzi 2014 (4) SA 394 (SCA) > “Where, in apparent contravention of s 129(1)(b) of the National Credit Act 34 of 2005 (the NCA), a credit provider institutes action to enforce payment of a debt arising from a credit agreement prior to delivery to the consumer of a notice of default, the action is not void but subject to the court making an order in terms of s 130(4) as to how the proceedings are to be continued. In the present case this meant that prescription of the debt concerned had been interrupted by service of the summons despite the absence of proper delivery of a s 129 notice to the consumer.” 13

PAYMENT DISTRIBUTION AGENTS (“PDA”) > In terms of section 7(c) of the National Payment System Act 78 of 1998 ("NPS Act"), a person (who is not a bank) may as a regular feature of that person's business accept money or payment instructions from any other person for purposes of making payment on behalf of that other person to a third person to whom that payment is due, if the money is accepted or payment made in accordance with directives issued by the Reserve Bank from time to time in terms of section 12. > The South African Reserve Bank ("SARB") has issued Directive 1 of 2007 published under GN 1110 in GG of 6 September 2007 ("Directive"). > In terms of the Directive, a PDA would be acting as a "payer service provider", which is a person who accepts money or the proceeds of payment instructions, as a regular feature of the person's business, from a payer (i.e. the consumer) to make payment on behalf of that payer to multiple beneficiaries (i.e. credit providers). > Contravention of this Directive is an offence in terms of section 12 of the NPS Act. 14

PAYMENT DISTRIBUTION AGENTS > NCAA: “payment distribution agent” means a person who on behalf of a consumer, that has applied for debt review in terms of this Act, distributes payment to credit providers in terms of a debt-rearrangement, court order, order of the Tribunal or an agreement” > Section 44A: registration of payment distribution agents. > Nedbank Ltd v Thompson and Another 2014 (5) SA 392 (GJ) > The Thompsons fell behind with their payments under a debt review order which included their mortgage bond obligations to Nedbank. The 'default' was caused by the PDA erroneously deducting a payment from the Thompsons' contribution before paying the creditors. 15

PAYMENT DISTRIBUTION AGENTS > The bank invoked s 88(3)(b)(ii) of the NCA to obtain judgment against the Thompsons. > This subsection provides that if 'the consumer defaults on any obligation in terms of a re-arrangement agreed between the consumer and credit providers, or ordered by a court or the Tribunal', the credit provider may (subject to ss 86(9) and 86(10) of the NCA) enforce the credit agreement concerned. > At the time that Nedbank brought its application, the net shortfall owing to the bank was only R440,91. 16

PAYMENT DISTRIBUTION AGENTS > The court, dismissed the application by Nedbank: > The appointment of the PDA by the debt counsellor was an administrative one over which the consumer had no control. > Section 7 of the NPS Act did not create an agency relationship between the PDA and the consumer. > In the absence of an agreement between the PDA and the consumer that the former would act as the latter's agent, it could not be held that the PDA in question acted as the agent of the consumer and that its actions or inactions would bind the consumer. > Accordingly the 'default' was not a default by the Thompsons, and the requirements of s 88(3)(b)(ii) were not met. 17

PAYMENT DISTRIBUTION AGENTS > “ But even if this were the wrong conclusion, ss 2(1) and s 3 of the NCA required the word 'defaults' in s 88(3)(b)(ii) to be interpreted to exclude minor, unwitting and excusable defaults of the nature which occurred here, with the result that for that reason too the requirements of s 88(3) had not been met” (i.e. … “promoting equity in the credit market by balancing the respective rights and responsibilities of credit providers and consumers”. 18

DIRECTIVE 1 > The PDA must – > ensure that it is appointed as an agent of each payer when acting as payer service provider; > as a payer service provider, keep records of payments to third persons which must include, inter alia, the date, amount and payer of the transaction. Such records must be retained for a period of five years; > ensure that the services it provides, including the systems that it uses, are safe and efficient so as not to introduce risk, including reputational risk, into the NPS; > inform its banker of its involvement in payments to third persons who, in turn, must inform the payment system management body in a format acceptable to that body. 19

THE PDA AS AGENT OF THE CONSUMER > In terms of the contract of mandate, the one party (the mandatary) undertakes to perform a mandate or task for the other (the mandator). The contract of mandate usually creates rights and duties only between the parties to it. It may however, also be combined with an authority given by the mandator to the mandatary in terms of which the mandatary has the power to represent the mandator. > In contrast, in the case of agency, the agent concludes a juristic act on behalf of or in the name of another, the principal and the agent can also create, alter, or extinguish rights for its principal. > The PDA acts as mandatary and not as agent when authorised by the consumer (via the debt counsellor) to pay the money to the credit provider; 20

THANK YOU 17 February 2015 Legal notice: Nothing in this presentation should be construed as formal legal advice from any lawyer or this firm. Readers are advised to consult professional legal advisors for guidance on legislation which may affect their businesses. ©2014 Werksmans Incorporated trading as Werksmans Attorneys. All rights reserved.