BASA and major banks appeal court ruling on loan agreements and debt review

The Banking Association South Africa (BASA) and five major lending banks have filed an application to appeal a recent order by the North Gauteng High Court in Pretoria, in a legal battle that could redefine consumer credit relationships.

The court's declaratory order, handed down by a full bench on 12 May, affirmed that an application for debt review, or a debt review order, does not remedy the default status of the original credit agreement under section 103(5) of the National Credit Act (NCA).

This section is pivotal for consumers as it caps the total interest, fees, and charges accruing on a defaulted credit agreement, thereby safeguarding borrowers from potential exploitation by lending entities.

This ruling positions the notion of 'default' as permanently tied to the original credit agreement, irrespective of whether the agreement is under debt review or has undergone restructuring.

The case was initiated by Chantelle Scott, a registered debt counsellor at SS Debt Counsellors, against BASA, the National Credit Regulator, the Debt Counsellors Association, Standard Bank, FirstRand Bank, Nedbank, Absa, and Capitec, as well as ministers of trade and justice.

Scott sought clarification on the term 'default', advocating that it inherently links to the original credit agreement's standing and is not negated by subsequent debt review actions.

Scott also sought the order that an application for debt review and/or a debt review order did not purge and/or cure the 'default' of the original credit agreement, and that the amounts that accrue during the time that a consumer is in default under the credit agreement may not, in aggregate, exceed the unpaid balance of the principal debt under that credit agreement as at the time that the default occurs.

The case dealt with the application of the so-called in duplum rule, designed to prevent lenders from accumulating excessive interests and charges beyond double the amount owed at the time of default—regulations that have seen varied interpretations since the NCA's introduction in 2007.

The crux of the court's examination was the application of section 103(5) when an individual's responsibilities under the credit agreement undergo modifications via a debt rearrangement agreement or debt review order.

Scott submitted that section 103(5) continues to apply for as long as the consumer is in default of the original credit agreement, whether or not the re-arranged credit agreement or re-arranged credit order was in effect.

However, BASA contended that when an over-indebted consumer’s payment obligations under a credit agreement have formally been rearranged by agreement or court order and the consumer is meeting his/her rearranged payment obligations, the consumer is not in default as contemplated in section 103(5).

BASA unsuccessfully argued that a re-arrangement agreement or order purged the default under the existing credit agreement, with the effect that section 103(5) no longer applied. It also argued that any additional interest that was paid was the cost of enjoying the benefits of a longer period of time, allowing them to charge more interest and other charges.

In its court papers for leave to appeal filed by its lawyers Cliffe Dekker Hoymeyr Inc on 30 May, BASA said the court misconstrued that default was required for debt review and did not consider the legal effect of a debt rearrangement credit agreement (RCA) and a debt rearrangement credit order (RCO).

“What the Court did not do is consider, and give effect to, the legal effect of the amendment of the credit agreement’s repayment terms and the adjustment of the instalment amount and the repayment term as a result of the RCA or RCO,” BASA said.

“Once there is an amendment of the credit agreement effect must be given to that amendment and that effect is that the consumer is no longer in arrears because parties have prospectively amended the instalment amount and the repayment term to enable the repayment of the full outstanding balance under the credit agreement (including the arrear amounts) over an extended repayment term with reduced instalment amounts. If the consumer is no longer in arrears, he or she cannot at the same time remain in “default”.”

BASA also argues the court failed to correctly engage in the interpretive exercise of the debt review regime and that it mischaracterised the main issue.

“The judgment affects both consumers and credit providers in different ways throughout the country. Its implications reach far beyond the immediate interests of the parties. Importantly, it will negatively impact consumer’s access to credit,” argues BASA in its papers.

“It has several unintended consequences as submitted by BASA in relation to the insensible and unbusinesslike results arising from the applicant’s interpretation. Long-term repayment plans (e.g., 60 months or more) may no longer be viable. Credit providers may require that the debt re-arrangement agreement or order, by way of payment, purge the default under the credit agreement as soon as possible and not over an extended repayment term.”

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