Category Archives: Creditors

DO MY DEBTS LAST FOREVER?

B3Prescription was introduced as means of protecting South African consumers from dishonest credit providers, who are responsible for recklessly lending credit and have contributed to the detrimental debt crisis many South Africans face today.

What does prescription mean?

  • The Prescription Act 68 of 1969 (PA) says that a debt (payment of money) is extinguished/expired after the lapse (passing) of a specific time period.
  • South Africa has different laws which specify time periods, for example, the PA says contractual and delictual debts extinguish after 3 years from when prescription starts.
  • Prescription may be delayed or interrupted.

It is important to bear in mind that not all debt prescribes after a period of three years. Debt related to a cheque, for example, only prescribes after 6 years. The purpose of prescription in South Africa is to compel creditors and collections agents to collect money owed to them within a specified period and not delay collection so that it accumulates massive amounts of interest and costs.

What are the consequences of an extinguished debt?

  • The debtor is not liable to the creditor for a debt after the time period has lapsed.
  • The creditor may not institute legal action against the debtor for a debt.

When does prescription start?

As soon as the debt is due (a debt is due once the creditor can identify the debtor and the facts from which the debt arises).

  • If the debtor prevents the creditor from gaining knowledge of the debt (excluding debts arising from agreements) prescription runs from when the creditor has knowledge of the existence of the debt.

An important point to remember is that it’s perfectly legal for a debt collector or attorney to demand payment for a prescribed debt. It is up to a debtor to raise prescription as a defence.

References:

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

MUST I REGISTER AS A CREDIT PROVIDER WHEN SELLING MY FARM?

A2bPurchasers have increasing difficulty obtaining financing for the purchase of farms and other agricultural land. Many sellers of these properties consider granting the purchaser a bond for the purchase amount, to be paid off over a period of time. Worse, some accept an acknowledgement of indebtedness and consent to judgment as sufficient protection, prior to shaking hands and signing off on the transfer agreements.

Previously, the mere registration of the bond or the notice confirming the instalment sale of a property registered at the Deeds Office was sufficient. Together with the required written agreement, it constituted protection to the incidental money lender in the event of a defaulting purchaser.

The National Credit Act

The National Credit Act has changed everything. The Act provides, inter alia, that in any credit agreement where the credit amount exceeds R500 000, the lender is to be registered as a credit provider. This includes the occasional private farm seller, even if it is a once-off arrangement with no intention by the seller to provide credit to any other person ever again. Failure to register as a credit provider prior to a transaction that can be defined as a “credit transaction” is a transgression of the Act.

The consequences

Should the credit provider not be registered and the purchaser defaults on the payment agreement, section 89(5) of the National Credit Act is unequivocally prescriptive on how the courts are to deal with such circumstances. The credit agreement is void as from the date it was entered into. The credit provider must refund all payments made in terms of the agreement together with stipulated interest. Most importantly, all purported rights of the credit provider to recover any money paid or the goods that were delivered to the consumer, are cancelled, or the property forfeited to the state, unless a court finds that such forfeiture will unjustly enrich the purchaser.

Many sellers, and even attorneys, are either unaware of this provision or blatantly flaunt the requirement as they “trust” the purchaser and “know” that the full repayment will be made, including the interest. The problem only manifests when the worst case scenario does occur and the well-known and trusted purchaser defaults on the payments. Many of the sellers who acted as credit providers relied on such repayments and interest either to fund another farm purchase or worse, their retirement.

Forfeiture of property

The Constitutional Court previously considered the validity of this section of the National Credit Act and specifically of the clause relating to forfeiture of the property to the state in the light of the Bill of Rights, regarding the right not to be arbitrarily deprived of property and the so-called Limitation clause. J van der Westhuizen delivered a majority judgement on 10 December 2012 which declared the arbitrary forfeiture of property to the state prescribed in section 89(5)(c) of the National Credit Act to be inconsistent with section 25(1) of the constitution, and thus invalid.

This judgement should, however, sound an urgent alarm to any and all unregistered credit-providing farm sellers. The intention of the National Credit Act is to discourage the provision of credit outside the framework set by the legislature. The Act thus has to punish those that do not comply with the requirements thereof, and the punishment is severe.

The punishment

Should the farm seller therefore not have registered as a credit provider, and the purchaser defaults on his payments, the seller is at risk – a very real and serious risk. Unless a court orders that the circumstances will unjustly enrich the purchaser, the seller may not only forfeit all payments and interest, but will have to obtain a court order that the seller is entitled to recover the farm from the defaulting purchaser.

If the credit agreement is unlawful as from inception in terms of the National Credit Act, the agreement cannot be enforced and the defaulting party cannot be compelled to perform. In the law, pursuance of such agreement must then be made in terms of unjustified enrichment, and specifically the conditio ob turpem vel iniustam causam. In short, the requirements are that the ownership must have passed with transfer, transfer must have taken place in terms of an unlawful agreement, and the claimant must tender back everything received.

However, to be successful the claimant must be able to prove that he acted free of turpitude and show that the actions were not dishonourable. The banker-playing credit-providing farm seller might not forfeit the farm as the court’s discretion has been unconstitutionally curtailed in section 89(5)(c), but is still far from the position he could have been in had he simply registered as a credit provider.

Conclusion

Civil obedience regarding the legislation of the country creates a stable, safe, just and equitable society with a strong economy and an affinity with investors. Compliance with the National Credit Act not only ensures confidence in immovable property as an investment, but will protect those who want to play banker.

For further reading see National Credit Regulator vs Fillippus Albertus Opperman and others, case number CCT34/12 [2012] ZACC 29 and case law quoted by both the majority judgement and descending judgment written by J Cameron.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

WHAT IS MEANT BY REAL SECURITY?

A2_bReal security means that, on the basis of a creditor’s right against the debtor (principal debt), a creditor acquires a limited real right in the property of the debtor as security for the payment of the creditor’s right (principal debt) by the debtor. Real security differs from personal security in that a creditor does not acquire a limited real right in the property of the debtor in the case of personal security, but only acquires a creditor’s right against a third party as security for the payment of the principal debt by the debtor. Such a third party is normally surety of the debtor.

A requirement for real security is the existence of a valid and enforceable principal debt. The real security is accessory to the principal debt, in other words the real security is terminated automatically if the principal debt is paid in full.

If the object of security is moveable property, real security can be in the form of either pledge or notarial bond. In the case of pledge the object of pledge (corporeal or incorporeal moveable property) must be delivered by the pledgor (debtor) to the pledgee (creditor). Physical control of the pledge object is a requirement for the establishment and continuation of a limited real security right to the security object. The pledgee has the obligation to maintain the pledged property within reason and, on termination, to return the property to the pledgor. A notarial bond can be registered in respect of specified, corporeal moveable property of the debtor (mortgagor) in favour of the creditor (mortgagee) in the deeds registry. After registration of this bond, the mortgagee acquires a limited real right to the encumbered property without delivery thereof to the mortgagee.

Immoveable property of the debtor serves as the object of security in that a mortgage is granted by the debtor (mortgagor) to the creditor (mortgagee) and registered in the deeds registry. A mortgage is a liquid document which grants the mortgagee a limited real right in respect of the immoveable property of the mortgagee without the physical control of the property being passed to the mortgagee. More than one mortgage can be registered over the same immoveable property at the same time. Priority is given, in this case, to mortgagees in the order that the mortgages were registered (prior in tempore, prior in iure).

The pledge of the mortgagee (creditor) can, if the principal debt is not paid in full by the mortgagor or pledgor (debtor), have the security object sold in execution and is entitled to the proceeds of the sale in execution for payment of the principal debt. In the case of insolvency of the pledgor or mortgagor, the pledge or mortgagee acquires a preferent claim to the proceeds of the sale of the security object.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.