Prof M Kelly-Louw

BIURIS, LLB, LLM, LLD (UNISA) AND DIPLOMA IN INSOLVENCY LAW AND PRACTICE (AIPSA) (UJ)

Admitted Advocate of the High Court of South Africa

Department of Mercantile Law

University of South Africa

P O Box 392

Pretoria

0003

Tel: (012) 429 8477 Cell: 082 875 3742

Fax: (012) 429 3343

E-mail:

Date: 7 March 2013

For attention: Mr André R Hermans
Committee Secretary: PC Trade and Industry

Dear Mr Hermans,

RE: Comments on proposed National Amendment Bill of 2012 (By Dr MG Oriani-Ambrosini)

I refer to the abovementioned matter. I provided the drafters of the National Credit Act 34 of 2005 (‘NCA’) of expert advice during 2005 and I also specifically drafted the consequential amendments to this Act set out in Schedule 2. I also assisted with drafting the 2006 Regulations to this Act. It is my expert opinion, based on the various reasons set out below, that the current National Credit Amendment Bill of 2012, in its current form,should not be approved.

  1. Proposed amendment to s 1 of the NCA – definition of consumer

The proposed amendment to the definition of a consumer set out in s 1 of the NCA is extremely confusing and ambiguous. It is unclear what is meant with the term ‘business-to-business transaction’ and there is no definition given for this in the Bill. Allowing this type of amendment will have a huge and possibly negative impact on the full scope and the application of the NCA and what the Act tries to achieve (see ss 3–6 and 8–10 and for a complete discussion of the application and scope of the current NCA, see M Kelly-Louw Consumer Credit Regulation in South Africa (2012)(Juta and Co Ltd)in Chapter 2). Allowing this amendment will makeit uncertain in which instances the Act will apply. For instance, natural persons (individuals), stokvels and certain trusts have the full protection of the NCA and certain juristic persons (see s 4 read with s 6) have very limited protection, but the proposed amendment will totally confuse the issue of whether or not the NCA will apply where any of these persons and entities conclude credit agreements. This proposed amendment cuts into the very policy decision that was taken by the Department of Trade and Industry (‘DTI’) to provide limited protection to certain juristic persons (ie, only small businesses).

It is not really clear what the objective of this proposed amendment is. The proposed amendment does not achieve what it sets out to do (see the objectives of this proposal set out in the Memorandum to the Bill). Is the objective simply to make the NCA applicable only to individuals or is it to limit the application of the Act when a consumer concludes credit agreements only for ‘personal’ usage? What will this then, for example, mean to a consumer running a very small business (eg, spaza shop) if he want to apply for credit? What about a stokvel applying for credit? It is most likely that their credit in the latter instance will be deemed to be a transaction that constitutes a ‘business-to-business’ transaction and stokvels will then in general lose their protection in terms of the NCA if the proposed amendment is accepted. The proposed amendment thus entails that in each instance one would have to look at the purpose for which the credit was incurred, rather than who needs the protection and who the consumer is. Also what would the situation be if credit is initially obtained for personal use, but then later used for business purposes? Also when will it be considered that credit is for ‘personal use’ and when is it used for ‘business-to-business’ purposes. This does not make sense.

It is true that juristic persons (businesses) don’t need the same amount of protection than natural persons (individuals), but it must be remembered that small juristic persons have extremely limited protection (eg, caps to interest rates, protection from reckless lending and provisions dealing with over-indebtedness provisions (eg, they can’t go for debt counselling) don’t protect them) and it is unclear what the amendment aims to do in this regard. Small juristic persons basically only have the benefit of some disclosures that need to be made and general credit rights which are really insignificant. Close attention should also be given to the background to the drafting of the NCA and why it was needed in the first place and the pressure that SMME’s placed on government regarding opening access to finance and why the current Act is drafted as it is, before any amendments to the current Act is made (for a complete discussion of the background to the NCA and for the reasons why the Act was drafted in the first place, see M Kelly-Louw Consumer Credit Regulation in South Africa (2012) (Juta and Co Ltd) at 7–18). The SMME’s played a significant role as to why the NCA was needed. So this type of amendment is something that should first properly be discussed at a policy level by the DTIafter a comprehensive discussion with all the relevant stakeholders.

  1. Amendment to s 86 of the NCA

A few reasons why debt review has not been as successful

It should be borne in mind that the main objective of debt review is still that credit providers should get the full amount that they are owed. Debt review is simply to provide the consumer with a ‘breather’ – a last attempt to sort out his debt before the credit provider forecloses against him or sequestrate him. It is not to provide him with a payment holiday. Many are under the mistaken impression that the reason why debt review has not been as successful as it was hoped is that the problem lies with the NCA and its Regulations. But, this is not the core problem – many of the practical and procedural problemswere solved by the judgment delivered in National Credit Regulator v Nedbank Ltd and Others 2009 (6) SA 295 (GNP) and the latest Regulations (see GN R362 in Government Gazette 35327 of 10 May 2012) dealing with these very issues. There are many other real reasons why debt reviews sometimes fail and theyrelate more to the practical application of debt review, which has nothing to do with the Act or its Regulations. For instance:

  • Not all consumers will be able to utilise debt review because–
  • some wait too long and then a successful debt restructuring is no longer possible (by then their debt had already spiralled out of control).
  • sometimes a debt review is just not possible – no way of paying off the debt even if payment dates are extended and the instalments reduced and paid off over a longer period of time; and
  • sometimes consumers are just ‘too poor to go under debt review’ – particularly where they have become unemployed or possess no assets.
  • Many debt review cases presented to court simply propose unworkable repayment plans that have no possible chance of success and would just delay the inevitable.
  • Attorneys/debt counsellors and consumers themselves to not place all the financial facts before court (ie, the full picture) and this cause many debt reviews to fail.
  • In many court cases it seems that badly prepared (or ill-informed) attorneys have neglected to present to courts the facts that were needed for a successful debt review. Attorneys are responsible to advise consumers of what should be placed before court, so unless the consumer is deviant and dishonest regarding his circumstances, blame may be placed on attorneys for not properly guiding their clients (consumers) and why debt review sometimes fail.
  • Consumers are often of the mistaken view that going under debt review will mean that they get to keep their assets (eg, house or car). Sometimes you need to sell the assets to create a workable restructuring of debt.
  • Many consumers themselves are also guilty for the failure of debt review – the middle- and high-income group often refuse to down grade their lifestyle (eg, no longer driving expensive cars and living in upmarket residential areas and putting their children in public schools). Sometimes moving to a cheaper residential area and driving a cheaper car may solve some of the over-indebtedness. Problem, however, is with the low-income group that cannot down grade their lifestyle any further.

Proposal to suspend interest while under debt review

Courts can do certain things to restructure the debts – eg,declaring the agreement reckless credit, extending the repayment period, reducing the instalment amount, or postponing the payment dates. But what it cannot do is reduce the interest rate or suspend the interest rate.The Amendment Billaims tosuspend the interest for a period of up to five years.I fail to see how this would assist the consumer. Sight should also not be lost of the application and protection of the statutory in duplum rule (see s 103(5) of the NCA) which adequately protects the defaulting consumer where the arrear interest and other cost of credit equals the outstanding principal amount and which suspends the accrual of further interest and other costs of credit beyond this point and operates for as long as the consumer is in default (for a full discussion see M Kelly-Louw ‘The statutory in duplum rule as an indirect debt relief mechanism’ (2011) 23(4) SA Merc LJ 352; M Kelly-Louw ‘Better consumer protection under the statutory in duplum rule’(2007) 19 SA Merc LJ 337; and see also Nedbank Ltd and Others v National Credit Regulator and Another 2011 (3) SA 581 (SCA)).In terms of the proposal put forward in the Bill the consumer will after five years of being under debt review still have to pay off the interest as well. It is uncertain how this will assist the consumer in the five-year period. What is more important, however, is what actually happens in the five years that the consumer is under debt review. A better solution might be to rather have the option that the interest rate may be reduced in certain circumstances and for a certain period. At least the consumer will then benefit from that and although the credit provider will lose some of the interest, it might still be better off in the end if the consumer later recovers from debt review. Of course, it is expected that credit providers will object to such an amendment, but I propose that this suggestion at least be discussed as a possible option.

  1. Conclusion

The Amendment Bill, in its current form, should not be approved. Approving this type of piecemeal amendment to the NCA is undesirable. The matter should be dealt with by the DTI, after a proper consultation with the various stakeholders and specialists dealing with consumer credit law. A holistic approach is needed to correct some of the provisions of the NCA (again in my view there are not such serious flaws in the Act as has been advocated by the different role-players). In my view, a major overhaul of the NCA is not needed, but there are a few amendments that are needed to simply sort outthe practical application of the NCA and some places where the NCA does not capture the essence of the policy decisions of DTI. The proposed Amendment Bill, however, fails to deal with the real issues that need to be addressed by an Amendment Bill.

Please do not hesitate to contact me should you have any further queries.

Yours faithfully,

Prof M Kelly-Louw

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