When friends part way and the NCA
By Amien Hoosain
Du Bruyn NO & others v Karsten, a judgment of the Supreme Court of Appeal (SCA) on 28 September 2018, dealt with compulsory registration as a credit provider under the National Credit Act (NCA).
In terms of section 40(1)(b) of the NCA, subject to limited exceptions, a person must register as a credit provider if the total of the loan amounts lent out by that person to individuals (and small juristic persons) is not less than R500 000.
Mr Du Bruyn set up his business of sealing industrial leaks in 1984. Mr Karsten was “like a son” to Du Bruyn, and the latter took the former into the business in 2000, with a view to Karsten eventually taking over the “family” business. Over time Karsten acquired substantial shareholding in the business.
But in 2012 they had a falling out, and agreed that they should part ways. Karsten was unable to raise the funding to buy Du Bruyn out. So they agreed in writing on 26 April 2013 that Du Bruin would buy Karsten out for R2 million, with R500 000 payable by 1 May 2013, and the remainder in monthly instalments of R30 000, with interest on the deferred amount at 5%.
Karsten registered as a credit provider under the NCA on 27 November 2013.
The businesses started to decline, and despite selling personal assets to stay afloat, Du Bruyn defaulted on the instalments. Karsten instituted legal proceedings for the balance of the purchase price (R1 133 169) in November 2014.
Du Bruyn’s defence was that the agreement was void, as at the time the parties entered into the agreement, Karsten was not registered as a credit provider.
|–||prior High Court judgments that had held that the NCA was directed only at those in the credit industry, and did not apply to single transactions where credit was provided, irrespective of the amount involved; and|
|–||an exception in the NCA to compulsory registration: if the parties are not independent of each other, and consequently do not necessarily strive to obtain the utmost possible advantage out of the transaction.|
The SCA judgment commenced with the following:
“That the … NCA is not a model of clarity, has been bemoaned by the High Court, this Court and the Constitutional Court on a number of occasions. This appeal is yet another example of the inconsistencies and resultant confusion to which the NCA has given rise.”
The SCA disagreed with the prior High Court judgments:
“… the only conclusion to be drawn is that the requirement to register as a credit provider is applicable to all credit agreements once the prescribed threshold is reached, irrespective of whether the credit provider is involved in the credit industry and irrespective of whether the credit agreement is a once-off transaction. That is an imperfect solution is readily accepted, but it is for the legislature to remedy, rather than for the courts to attempt to accommodate deficient drafting by attributing a meaning to s 40(1)(b) that is not justified by the wording of the statute.”
In endeavouring to prove that the exception applied, Karsten relied on the erstwhile “familial” relationship between him and Du Bruyn, and the relatively low interest rate charged. But the evidence to the contrary was that relations between them had soured to the extent of being positively hostile in the weeks leading up to the signing of the agreement, Karsten had threatened to apply for the liquidation of the business, and both parties had instructed their respective attorneys, through whom they conducted negotiations.
The SCA held Karsten’s conduct was incompatible with “the actions of someone who was not acting independently and who was not trying to gain the utmost advantage of the situation.”
Accordingly, the SCA declared the agreement to be unlawful due to non-compliance with the NCA, and Du Bruyn won.