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The Dangers of Providing Once-off Finance

by Matthew Thomson

In a decision handed down by the North Gauteng High Court, Van Heerden v Nolte, the position of credit providers providing once-off finance was clarified with regard to National Credit Act application and registration.

In the facts of the matter, the plaintiff purchased a property from the defendant which later emerged as being encumbered. Therefore the defendant was not entitled to make transfer of the property. The plaintiff and defendant agreed (orally) that the Plaintiff would advance certain sums of money to the defendant, subject to the payment of interest, in order for the defendant to take such steps as necessary to enable the transfer of the property. The loan amounts exceeded the threshold of section 40(1)(b) (currently R500 000.00) for the amount of principal debt outstanding in favour of one credit provider.

The Plaintiff sought to enforce the Defendant’s obligation to repay the amounts on the basis of the agreements held between them, to which the Defendant filed an exception.

In his judgment, Murphy J discussed the decision handed down in Friend v Serdall (unreported), based on similar facts, which found that s40(1)(B) “must be seen as having been directed at those who are in the credit market or industry or at those who intend to participate in the credit market and/or industry”.

Accordingly, the court found that a single debt, exceeding R500 000.00, does not require the credit provider to be registered. Although the Murphy J criticized the interpretation of the court in Friend, he found that he was not bound by this decision, as it involved only one credit agreement whereas the matter before him involved at least two. Therefore, he found that the Plaintiff was indeed required to register as a credit provider. He chose to follow a strict interpretation of section 40, disregarding the purposive interpretation favoured in the Friend judgment.

The court thus allowed the exception, on the basis that the Plaintiff had failed to establish a cause of action, due to its reliance on the credit agreements. As discussed previously in the article Am I required to register as a Credit Provider?, where a credit agreement has been concluded by a provider who was required to be registered, the agreement is void ab initio (Section 89).

Instead of contract, the provider must rely on the principles of unjustified enrichment in order to recover the amounts which were advanced to the consumer.

In handing down such a judgment, the North Gauteng High Court has sent out a stern warning to all parties considering extending finance to even just one person or entity. The Constitutional Court held a similar view in National Credit Regulator v Opperman and others (regarding multiple credit agreements to a single consumer) and it is likely that the Friend decision will not survive further scrutiny.

This will mean that even a single credit agreement, where the principal debt exceeds R500 000.00 will require the credit provider to be registered in terms of the Act.

Even more concerning is the proposed change in the threshold value to just R1.00 which would mean, in light of these recent decisions, that all persons extending finance would need to register.

29 January, 2015

**Please note that these comments are summarised, may not be applicable to your particular situation and do not constitute legal advice. Please consult your legal professional should you wish to obtain a formal legal opinion.**