When is the National Credit Act Applicable to a Credit Agreement?

The National Credit Act (hereinafter referred to as the “NCA”) of South Africa is a comprehensive piece of legislation designed to protect consumers in the credit market. Naturally, protection for consumers places stringent regulations on credit providers.

Applicability of the NCA

In assessing the applicability of the NCA to a transaction, a two-fold inquiry is conducted in terms of Section 4 and Section 8 of the Act.

Section 4

According to Section 4(1), the NCA applies to every credit agreement entered between parties dealing at arm's length within the Republic of South Africa, or to agreements that have an effect within the Republic. However, there are specific exceptions outlined as follows:

• The NCA does not apply when a consumer is a juristic person, such as a company, close corporation, or trust, where the asset value or annual turnover exceeds the threshold determined by the Minister of Trade and Industry. The current threshold is set at R1 million.


• The second exception is when the consumer is the state or an organ of the state.


• The third exception pertains to large agreements, as described in Section 9(4) of the NCA. In these scenarios, if the consumer is a juristic person, has an asset value or annual turnover that falls below the Minister's threshold (currently set at R250,000 or more), the NCA does not apply to the transaction. This provision aims to exclude larger and more sophisticated entities from specific obligations under the NCA, acknowledging their heightened ability to manage intricate financial transactions.

Section 8

The second step in determining NCA applicability involves making use of Section 8, which categorizes credit agreements into credit facilities, credit transactions, credit guarantees, and combinations of these. Credit facilities consist of the supply of goods or services with deferred payment or periodic billing, while credit transactions encompass various specific agreements like pawn transactions, installment agreements, and leases. Notably, insurance policies, leases of immovable property, and stokvel agreements are excluded from the Act's scope.

Exploring Incidental Credit Agreements

Incidental credit agreements are arrangements where you buy goods or services and can pay for them later, often involving informal credit extensions like deferred payment or early settlement discounts.

In MNV Textiles (Pty) Ltd v Chalain Spareinves 14 CC 2010 (6) SA 173 (KZD), the court clarified that a key distinction between a credit facility and an incidental credit agreement lies in the payment terms. In an incidental credit agreement, fees, charges, or interest are only triggered if the consumer fails to repay their debt by the agreed-upon date. Interest is specifically applied to compensate the credit provider for delayed payments.

According to the NCA, an incidental credit agreement is deemed to be official about 20 days after the seller adds those extra charges or offers discounts. This rule helps to make things clear about when the special rules for these agreements kick in, making it easier for everyone involved.

An Impact Analysis on Transactions and the NCA

The NCA’s impact can be categorized into three main groups: transactions falling outside the NCA, incidental credit agreements, and full-blown credit agreements.

Transactions Outside the NCA: These are transactions that are not subject to the NCA's provisions. Credit providers often prefer these transactions because they are not burdened by the Act's requirements. They may structure their agreements to fall outside the NCA's definition of credit agreements or argue that their transactions do not qualify as credit agreements under the Act.

Incidental Credit Agreements: These agreements have a limited impact under Section 5 of the NCA. They involve situations where goods or services are provided with deferred payment options or early settlement discounts. While some provisions of the NCA are excluded from incidental credit agreements, they still need to adhere to certain regulations.

Full-blown Credit Agreements: These agreements have the full impact of the NCA's provisions. They involve formal credit arrangements where deferred payments, interest charges, or credit guarantees are explicitly outlined. Credit providers engaging in such agreements must comply with all the requirements and regulations set forth by the NCA.

Applicability to Credit Guarantees

Credit guarantees such as suretyship, and their application under the NCA are contingent upon the nature of the main agreement:

If the main agreement falls outside the scope of the NCA, the credit guarantee will also be exempt from the Act's provisions.

If the main agreement is an incidental credit agreement, the credit guarantee will similarly be subject to the limited impact provisions of Section 5. If the main agreement is a full-blown credit agreement, the credit guarantee will be fully subject to the NCA's regulations and requirements.

Consequences of Non-Compliance

If a credit agreement falls within the scope of the NCA but the credit provider is not registered with the National Credit Regulator (NCR) as required by Section 40 of the Act, a competent court may declare the agreement as unlawful and void ab initio (from the beginning) in terms of section 89(d) of the Act. This can have severe consequences for the credit provider, as they may not be able to recover the loan amount or any associated charges and may even have to pay back any interest collected.

Conclusion

In conclusion, credit providers operating in South Africa must familiarize themselves with the intricacies and the nuances of the NCA and the requirements placed on credit providers in terms of transactions involving deferred payments, interest, or credit. Careful structuring of contracts is imperative to avoid unintended legal ramifications. Despite the Act's drafting challenges, a thorough understanding of its application to transactions is a requirement for effectively engaging in credit transactions whether it be as the consumer or the provider.

By: Abigail Salzwedel
Candidate Attorney