The Test for NCA Applicability
The National Credit Act No. 34 of 2005 (“the NCA” or “Act”) has had a significant impact on transactions involving deferred payment and interest in South Africa.
However, it has almost become trite law to refer to the interpretive challenges that arise out of the poor drafting, while at the same time praising it’s good intentions. See, for example, Nedbank Ltd and Others v The National Credit Regulator and Another (662/2009, 500/2010)  ZASCA 35 (28 March 2011) at 2.
The purpose of this article is to give a broad understanding of when the NCA applies to a transaction.
The applicability of the Act to a transaction can have far-reaching consequences as the NCA is extensive in its consumer protection. It places many obligations and restrictions on the credit provider whose transaction is subject to the Act and conversely provides many benefits to the consumer in such a transaction.
To determine the applicability of the NCA to any particular transaction involves answering a two-fold enquiry drawn from the provisions of Section 4 of the Act:
- Does the Consumer in the agreement fall within the NCA (Section 4)?
- Does the transaction fall within the definition of credit agreement as set out in Section 8?
The construction of Section 4 is such that if the answer to the first question is negative, then there is no need to proceed to the second question. But if it is positive, then the transaction still has to clear the hurdle of the second question to fall within the ambit of the Act.
Section 4(1) of the NCA, states :
“Subject to sections 5 and 6, this Act applies to every credit agreement between parties dealing at arm’s length and made within, or having an effect within, the Republic, except a credit agreement in terms of which the consumer is-
(i) a juristic person whose asset value or annual turnover, together with the combined asset value or annual turnover of all related juristic persons, at the time the agreement is made, equals or exceeds the threshold value determined by the Minister in terms of section 7( 1);
(ii) the state; or
(iii) an organ of state;
(b) a large agreement, as described in section 9(4), in terms of which the consumer is a juristic person whose asset value or annual turnover is, at the time the agreement is made, below the threshold value determined by the Minister in terms of section 7(1); “
As at the date of this article the threshold is an annual turn-over or asset value exceeding R 1 million in terms of Section 7(1)(a) as read with Government Gazette GG 28893 of 1 June 2006, Schedule 2. While a large agreement is R 250 000 or over in terms of Section 7(1)(b) as read with Government Gazette GG 28893 of 1 June 2006, Schedule 3(2).
When dealing with juristic persons and the NCA it is important to note that:
- the NCA definition of juristic person is not the common South African legal definition of juristic person. It extends beyond incorporated entities to include partnerships, associations or other unincorporated bodies of persons and trusts if there are three or more individual trustees or the trustee is itself a juristic person.
- Section 6 of the NCA excludes the application of numerous provisions of the Act to juristic persons, importantly the sections governing the charging of interest and the reckless lending provisions.
In broad terms, the following applies to the first question:
|NCA Applies to||NCA Does Not Apply to|
|Any individual (including sole proprietors)||Juristic Persons with assets and/or annual turnover more than R 1 million|
|Juristic Person with Assets and/or Annual Turnover of less than R 1 million and the transaction size is less than R 250 000||Where the debtor is the state or an organ of state|
|Where the creditor is the Reserve Bank|
What is a Credit Agreement?
Section 8 of the NCA defines what credit agreements are and separates the definition into four categories.
|CREDIT FACILITIES Section 8(3)||CREDIT TRANSACTIONS Section 8(4)||CREDIT GUARANTEES Section 8(5)||ANY COMBINATION OF A CREDIT FACILITY OR CREDIT TRANSACTION Section 8(6)|
|(a) a credit provider undertakes— (i) to supply goods or services or to pay an amount or amounts, as determined by the consumer from time to time, to the consumer or on behalf of, or at the direction of, the consumer; and (ii) either to— (aa) defer the consumer’s obligation to pay any part of the cost of goods or services, or to repay to the credit provider any part of an amount contemplated in subparagraph (i); or (bb) bill the consumer periodically for any part of the cost of goods or services, or any part of an amount, contemplated in subparagraph (i); and (b) any charge, fee or interest is payable to the credit provider in respect of— (i) any amount deferred as contemplated in paragraph (a) (ii) (aa); or (ii) any amount billed as contemplated in paragraph (a) (ii) (bb) and not paid within the time provided in the agreement. (eg credit cards and overdrawn Cheque accounts)||(a) a pawn transaction or discount transaction; (b) an incidental credit agreement, subject to section 5 (2); (c) an instalment agreement; (d) a mortgage agreement or secured loan; (e) a lease; or ( f ) 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— (i) the agreement; or (ii) the amount that has been deferred||a person undertakes or promises to satisfy upon demand any obligation of another consumer in terms of a credit facility or a credit transaction to which this Act applies. ( for example a suretyship)||a particular credit agreement constitutes both a credit facility as described in subsection (3) and a credit transaction in terms of subsection (4) (d)— (a) subject to paragraph (b), that agreement is equally subject to any provision of this Act that applies specifically or exclusively to either— (i) credit facilities; or (ii) mortgage agreements or secured loans, as the case may be, and (b) for the purpose of applying— (i) section 108, that agreement must be regarded as a credit facility; or (ii) section 4 (1) (b) read with section 9 (4), that agreement must be regarded as a large agreement if it is a mortgage agreement.|
Also note that Section 8(2) of the Act excludes insurance policies, leases of immovable property and stokvel agreements from the ambit of the NCA.
When the Act was initially introduced, there was some confusion with the potential overlap in the definition of credit facilities and incidental credit agreements. Fortunately, the court in JMV Textiles (Pty) Ltd v De Chalain Spareinvest 14 CC and Others (15136/09)  ZAKZDHC 34 at 14, clarified what a credit facility is with example:
“…the proper starting point is to identify the type of transactions contemplated in sub-sect (a). They are of two types. The first is the supply of goods or services at the consumer’s request and either the deferment of the obligation to pay the price or periodic billing of part of the amount. The second is the payment by the credit provider of amounts to either the consumer or third parties at the consumer’s request, where the obligation to repay is deferred or is the subject of periodic billing in respect of part of the amount. The former aptly describes the position with store charge cards or accounts and the latter the position with credit cards. In the case of a store card the customer is allowed to buy goods up to a determined limit, payment is deferred to the end of the month and the customer is billed monthly. A fee may be charged for the right to use the card and if the full balance is not paid monthly interest is chargeable on the shortfall. The customer decides how much to pay each month subject to paying a stipulated minimum amount such as 10% of the amount owing. With a credit card the position is similar save that the card provider pays amounts to persons from whom the cardholder buys goods or obtains services and may also disburse cash to the cardholder. Repayment is deferred and the monthly billing results in interest being levied if the full amount is not paid, as the customer is free to do subject to making a minimum payment. In some cases a fee is charged for the right to use the card. All of this is part and parcel of the agreement under which the card is issued.”
While credit facilities is a broad definition, that of credit transactions is made up of several separate definitions for each of the specific transactions, which are defined in Section 1.
The definitions of the various credit transactions (excluding incidental credit agreements, which will be dealt with later) are:
|Pawn Transaction||Discount Transaction||Instalment Agreement||Mortgage Agreement||Secured Loan||Lease|
|an agreement, irrespective of its form, in terms of which— (a) one party advances money or grants credit to another, and at the time of doing so, takes possession of goods as security for the money advanced or credit granted; and (b) either— (i) the estimated resale value of the goods exceeds the value of the money provided or the credit granted, or (ii) a charge, fee or interest is imposed in respect of the agreement, or in respect of the amount loaned or the credit granted; and (c) the party that advanced the money or granted the credit is entitled on expiry of a defined period to sell the goods and retain all the proceeds of the sale in settlement of the consumer’s obligations under the agreement||an agreement, irrespective of its form, in terms of which— (a) goods or services are to be provided to a consumer over a period of time; and (b) more than one price is quoted for the goods or service, the lower price being applicable if the account is paid on or before a determined date, and a higher price or prices being applicable if the price is paid after that date, or is paid periodically during the period||a sale of movable property in terms of which— (a) all or part of the price is deferred and is to be paid by periodic payments; (b) possession and use of the property is transferred to the consumer; (c) ownership of the property either— (i) passes to the consumer only when the agreement is fully complied with; or (ii) passes to the consumer immediately subject to a right of the credit provider to repossess the property if the consumer fails to satisfy all of the consumer’s financial obligations under the agreement; and (d) interest, fees or other charges are payable to the credit provider in respect of the agreement, or the amount that has been deferred;||a credit agreement that is secured by the registration of a mortgage bond by the registrar of deeds over immovable property||an agreement, irrespective of its form but not including an instalment agreement, in terms of which a person— (a) advances money or grants credit to another, and (b) retains, or receives a pledge to any movable property or other thing of value as security for all amounts due under that agreement;||(a) temporary possession of any movable property is delivered to or at the direction of the consumer, or the right to use any such property is granted to or at the direction of the consumer; (b) payment for the possession or use of that property is— (i) made on an agreed or determined periodic basis during the life of the agreement; or (ii) deferred in whole or in part for any period during the life of the agreement; (c) interest, fees or other charges are payable to the credit provider in respect of the agreement, or the amount that has been deferred; and (d) at the end of the term of the agreement, ownership of that property either— (i) passes to the consumer absolutely; or (ii) passes to the consumer upon satisfaction of specific conditions set out in the agreement;|
There have been issues with these definitions, such as the lease of movable property being contray to the normal commercial and legal understanding of lease in which ownership does not pass at the end of the agreement. Besides this, definitions such as mortgage agreement have been amended and there is also questions over the overlapping definition of discount transactions and incidental credit agreements, which could have serious implications.
This type of credit transaction is a very important one as in terms of Section 5 of the NCA many of the more onerous provisions of the Act are excluded from application to Incidental Credit Agreements. These include:
- Pre-agreement disclosures
- The form and content of the agreements
- Unlawful agreements and unlawful provisions in agreements
- Reckless credit granting
- Registration requirements
- Marketing practices
- Surrender of goods
- The consumer cooling-off right; and
- The dispute settlement mechanisms of the NCA
The definition of incidental credit is defined under Section 1 as:
“…an agreement, irrespective of its form, in terms of which an account was tendered for goods or services that have been provided to the consumer, or goods or services that are to be provided to a consumer over a period of time, and either or both of the following conditions apply:
(a) a fee, charge or interest became payable when payment of an amount charged in terms of that account was not made on or before a determined period or date; or
(b) two prices were quoted for settlement of the account, the lower price being applicable if the account is paid on or before a determined date, and the higher price being applicable due to the account not having been paid by that date;”
So for example if one were to take a supplier of goods or services who engages in the common practice of allowing their customers to pay their account 30 days from date of statement. The purpose of such a deferment of payment is not to benefit such a supplier with interest or deferred payment charges but merely a way to facilitate commercial convenience. However one of the challenges that such a supplier encounters with such deferred payment is customers who exceed the payment terms. As a result some of these suppliers will use one or both of the “carrot and stick” motivational approaches to ensuring timely payment – the stick being charging interest on overdue accounts and the carrot being giving an “early settlement discount” on the purchase price if the customer pays before the due date. These are the types of transactions which are intended to fall within the definition of incidental credit agreements.
As to when such an incidental credit agreement comes into being is defined in Section 5(2) which reads as follows:
“The parties to an incidental credit agreement are deemed to have been made that agreement on the date that is 20 business days after –
(a) the supplier of the goods or services that are subject of that account, first charges a late payment fee or interest in respect of that account; or
(b) a pre-determined higher price for full settlement of the account first becomes applicable,
unless the consumer has fully paid the settlement value before that date.”
Three Categories of NCA Impact on Transactions
To understand the impact of the NCA on transactions, the writer divides transactions into three broad categories of impact:
- Transactions that fall outside the NCA (no impact)
- Incidental Credit Agreements ( limited impact under Section 5)
- “Full-blown” Credit agreements (full impact in terms of the provisions of the Act)
For a credit provider who does not wish to be burdened by the application of the NCA to their transactions, these categories are a descending order of preference. Therefore many credit providers try to ensure they construct transactions which fall outside of the NCA definition of credit agreement or argue that their existing transactions are not credit agreements. However, for credit providers who wish to benefit financially from the business of deferred payment, the chances are that they will have to be content with full compliance with the NCA.
The most important form of credit guarantee is suretyship.
Section 4(2)(c) provides:
“this Act applies to a credit guarantee only to the extent that the Act applies to a credit facility or credit transaction in respect of which the credit guarantee is granted”
What in effect this subsection is saying is the that the suretyship, being an accessory agreement, follows the main agreement (Da Silva v Slip Knot Investments (661/2009)  ZASCA 174 (2 December 2010)). So therefore if :
- the main agreement falls outside the NCA, the suretyship will too;
- if the main agreement is an incidental credit agreement, then the suretyship will be too; and
- if the main agreement is a “full-blown” credit agreement, then the suretyship will be as well.
All credit providers or suppliers operating within South Africa should be fully aware of the impact of the NCA on the transactions in which they allow any form of deferred payment, charge interest or charges. They should contract in a manner which does not unintentionally compromise themselves and be aware of alternative methods of transacting.
The NCA with it’s poor drafting and the resultant ambiguty can be challenging and therefore requires a sound knowledge of it’s application to transactions.