On 8 August 2018, an application was made to the Western Cape High Court for a declaratory order. As judgement was yet to be delivered at the time of the writing of this article, it is based on the court papers, both founding and opposing, found on the website of the First Applicant. The main order sort is that of the interpretation of the National Credit Act 34 of 2005 (“The NCA”) as follows:
1.1 Upon a proper Interpretation, collection costs, as referred to in Section 101(1)(g), as defined in Section 1, and as contemplated in Section 103(5) of the NCA, includes all legal fees incurred by the credit provider in order to enforce the monetary obligations of the consumer under a credit agreement, charged before, during and after litigation;
1.2 Upon a proper interpretation, Section 103(5) of the NCA applies for as long
as the consumer remains in default of his/her credit obligations, from the date of default to the date of the collection of the final payment owing, irrespective of whether judgment has been granted or not during this period;
1.3 Legal fees, including the fees of attorneys and advocates, in as much as they
comprise part of collection costs as contemplated in Section 101(1)(g) of the NCA, may not be claimed or recovered by a credit provider pursuant to a judgment, unless such fees have been taxed.
The Application is brought in the interests of 10 private individuals who are clients of the First Applicant; all of whom are judgment debtors and alleged to be victims of exploitative and questionable debt collection practices enabled directly or indirectly by certain of the Respondents. The court is thus further petitioned:
2. That an independent expert be appointed to re-calculate the outstanding amounts of the EAOs granted against the Third to Twelfth Applicants in accordance with the provisions of this Court Order;
3. That the Tenth to Sixteenth Respondents provide to the Applicants, in terms of section 65(4) (as read with Section 92 and Section 93 where applicable) and Section 68(1) of the NCA, copies of, inter alia, the following documents in order to assist with the above recalculation:
3.1 The pre-agreement quotation;
3.2 The credit agreement;
4. That the Tenth to Sixteenth Respondents be ordered to repay to the particular debtor, within 7 days of receipt of the recalculation, any amount found to be due and owing after such a recalculation;
The Application is viewed as a natural sequel to both the cases of Lonmin Ltd and Others v CG Steyn Inc t/a Steyn Attorneys and Others (M619/16)  ZANWHC 10 (“the Lonmin case”) and The University of Stellenbosch Legal Aid Clinic and Others v Minister of Justice and Correctional Services and Others; Association of Debt Recovery Agents NPC v University of Stellenbosch Legal Aid Clinic and Others; Mavava Trading 279 (Pty) Ltd and Others v University of Stellenbosch Legal Aid Clinic and Others  ZACC 32 (“Stellenbosch Legal Aid Clinic case”).
In the Lonmin case, substantively the same relief as the current matter was sought. However, in that case, the Application was dismissed primarily because of the Applicant’s failure to join all affected parties. Unsurprisingly, the Applicants in the present case cite an expansive array of 49 Respondents, including the National Credit Regulator (“the NCR”), two Law Societies, all of the major banks and the Banking Association of South Africa (“BASA”).
The chief protagonists of the application are the First and Second Applicants, namely the University of Stellenbosch Law Clinic, and Summit Financial Partners (Pty) Ltd, both of whom have previously collaborated in the Stellenbosch Legal Aid Clinic case. In that case, the constitutionality of Sections 65J(2)(a) and (b) of the Magistrates Court Act 32 of 1944 were successfully challenged and amended to provide for judicial oversight over the granting of Emoluments Attachment Orders(“EAOs”).
Applicants’ Considerations And Background
The Applicants contend that it is the poor and uneducated and that are often preyed on by microlenders. While the NCA has its purposes rooted in shaping a responsible credit market, the incongruent bargaining power between consumers and credit providers often results in exorbitant costs, thereby encroaching on debtor’s basic socio-economic rights.
Furthermore, defaulting consumers are often faced with a debt collector or lawyer armed with agreements that provide for acknowledgements of debt or consents to judgment. Most consumers, unable to appreciate the legal complexity therein, unwittingly sign themselves into debt traps that are tethered to untaxed legal costs.
Respondents Opposing Matter
Based on the First Applicant’s website At the time of this article, answering affidavits had been filed by five of the Respondents, including the NCR, the Law Society of the Northern provinces and BASA.
Main Orders Sought And Respondent’s Counter Arguments
1. Interpretation of Collection Costs
The NCA defines “Collection costs” as:
‘…an amount that may be charged by a credit provider in respect of enforcement of a consumer’s monetary obligations under a credit agreement but does not include a default administrative charge.’
The Applicants contend that the definition of ‘collection costs’, properly interpreted, includes legal fees incurred during enforcement, thereby placing such fees squarely under the limitations of Section 103(5).
The NCR submits that the interpretative approach should be a hybrid of the actual text, considered with the purposes of the NCA. While the NCA seeks to correct historical imbalances and protect consumers, the NCR notes that the Act also prescribes that the interests of credit providers should not be disregarded.
The Applicants argue further that collection costs often result in additional debts that far exceed the principal amount and which are then enforced through EAOs that are rarely taxed.
The NCR however contends that such issues are rightly regulated by the Magistrates Courts Act 32 of 1944 which provides for judicial discretion over legal costs, with the granting of EAOs similarly also regulated by the Act. Therefore these provisions clearly favour an interpretation that costs do not necessarily have to be taxed in all circumstances – to do otherwise would minimise judicial autonomy.
BASA disagrees with the Applicants’ contention that collection costs include legal fees and are thus limited by Section 103(5). BASA contends that the issue is a matter of settled of law but confirms that it would support a declarator that legal fees may not be recovered from the consumer unless agreed upon or taxed.
2. Period During Which Section 103(5) Operates
The Applicants contend that this Section applies solely from the date of default to date of final payment under the credit agreement, irrespective of whether judgment has been granted within this period.
The Applicants further seek an order declaring that legal costs incurred in the collection process under the NCA are only due and payable once taxed. They contend that failure to do so results in no protection being afforded to credit consumers.
In response, the NCR explores the genesis of Section 103(5), noting that it extends on common law in duplum by including the charges listed under Section 101(b) to (g). In the NCR’s view, these charges only accrue during the time that the consumer is in default under the credit agreement.
While the NCR supports the Applicant’s interpretation that for the purposes of Section 103(5), the listed charges include legal costs, the NCR’s crucial point of departure is that this interpretation operates only while the debt remains under the credit agreement. Once judgment has been attained, a new debt is formed in terms of the judgment. According to the NCR, this interpretation accords with the common law position that a judgment creates a new debt.
BASA however submits that this would lead to inequitable results that untenably favour the debtor. According to BASA, the Applicants’ expectation that a debtor should not be left worse off after a judgment than before it, is misdirected as inhibited agency is a natural corollary of a judgment.
3. Collection Costs vs ‘Soft Collection Costs’
The Applicants go on to address the common argument that ‘collection costs’ encompass only pre-litigation costs at the so called ‘soft collection’ phase. The Applicants argue that the NCA does not expressly make any such distinction and it does not follow that legal costs for judicial processes are collateral to the agreement.
They reason that where a credit agreement provides for costs and a court orders such, the basis stems from a term within the agreement only and not from any legal tie or lis between the parties. The Applicants thus contend that their interpretation of ‘collection costs’ is logical and does not alter the common law.
BASA however argues that upholding Applicants’ interpretations would unjustly deprive courts of the power to award such costs and severely limit the right of credit providers to recover such costs. Furthermore, such a manifestly unfair situation is in fact a fundamental departure from the common law and would lead to absurd and counter-productive trends.
The Applicant further points out that an agreement may be reinstated after legal proceedings have commenced or even after judgment has been attained, a contention upheld in the case of Nkata v Firstrand Bank Ltd and Others (CCT73/15)  ZACC 12 where the Constitutional Court made no distinction between pre and post litigation costs.
Furthermore, the Applicants argue that judgment cannot amount to a novation of the credit agreement and is a naturally following consequence of enforcement, ultimately culminating in and embodied by the EAO’s that secure payment. Accordingly, Section 103(5) remains effective throughout these processes as the agreement is never cancelled.
BASA, however, argues that the Applicants’ reliance on the Nkata case is misplaced as novation was never raised in that matter. Furthermore, the court held that reinstatement of an agreement was by operation of law and Section 129(3) of the NCA effectively negated the consequences of a judgment in favour of a credit provider.
The NCR on the other hand argues that the pre-judgment scope of the NCA seeks to maintain credit agreements, with judicial interventions to be utilised as a last resort. Accordingly, following the Applicants’ interpretations would incentivise credit providers to cancel agreements. However, once a judgment process commences, further actions then rightly fall within the scope of the judicial system; a contention shared by the Twelfth Respondent which bases its disagreement on the fact that such interpretations effectively neuter the role of the judicial system.
In opposing the Application, the two Law Societies (Twentieth and Twenty First Respondents) firstly contend that, the Application itself is a non-starter, and raises in limine that the special defence of lis pendens must prevail as the Lonmin case referred to above is currently under appeal to the Supreme Court of Appeal.
On the merits, the costs issue differentiates between soft collection costs and legal costs obtained collaterally to a judgment, as well as costs involved in executing such judgment. By analysing the impugned provisions, these Respondents submit that Regulation 47 of the NCA provides for a clear distinction between collection costs under the agreement, which is limited by those incurred under the listed legislation.
While the Application was heard from the 12th to the 14th August 2019, the judgment promises a substantial impact on the debt collection industry and the legal fraternity insofar as it impacts collections. The chances are good that whatever the judgment the matter will be appealed all the way to the Constitutional Court.
It is submitted that should the Applicants ultimately be successful in the matter, the true effects of the judgment will likely only be felt once its compliance takes hold and the credit market responds accordingly. In addition there are practical issues as how one actually taxes the collection commission and other onto going costs associated with an Emoluments Attachment Order collection, as these are ongoing costs that occur as and when payments are made and can not be taxed in advance.
By Neville Naidoo (Candidate Attorney)