C&A Friedlander Attorneys

The current economic climate has seen an increase in financial debt, with a large number of consumers being unable to meet their payment obligations to inter alia suppliers and/or lenders. As a result, businesses have been forced to demand payments and issue summons in the hopes of collecting the outstanding debt owed to them. This process is generally referred to as debt collections or, simply, collections.

When it comes to debt collection, one generally would think of a two-step approach, being the issue of a general demand for payment and, if that does not work, the issuing of summons. However, there are certain Acts that require additional formal steps before the institution of legal proceedings.

In this article, a form of credit agreement called an incidental credit agreement will be contemplated and the effect of the National Credit Act 34 of 2005 (hereinafter referred to as “the Act”) on incidental credit agreements and the litigation process will be considered.

To gain a better understanding of what an Incidental Credit Agreement is, it is necessary to consider the Act and its purpose. The Act attempts to regulate consumer credit and prohibit certain unfair marketing practices by promoting responsible credit lending. As such, it prohibits reckless credit lending, the charging of excessive fees by lenders, and provides for debt re-organisation in the case of over-indebtedness.

The Act applies to credit agreements with all “consumers”, which includes, but is not limited to, individuals, close corporations, trusts, partnerships, and companies. There is however a limitation on the Act’s application to juristic persons as the Act does not apply to juristic persons (companies, close corporations, and trusts) that have an asset value or annual turnover above the prescribed threshold, which is currently R1 million. For the sake of clarity, the Act defines a “consumer” to include all natural persons and regulates all credit agreements with natural persons irrespective of the amount involved.

In general terms, a credit agreement refers to an agreement that is entered into between a credit provider and a consumer in which the credit provider lends money or supplies goods to the consumer, either defers payment or bills the consumer periodically, and charges a fee or interest as consideration for the deferment of payment or periodic billing. There is another form of agreement recognised under the Act that does not fall squarely within the above general terms applicable to credit agreements, and this is an incidental credit agreement.

In order to understand the concept of an incidental credit agreement, let’s look at the following scenario: Company A renders services to Mr Blue and upon completion of the services, Company A presents an invoice to Mr Blue for payment. As per Company A’s standard terms and conditions, Mr Blue is required to pay the invoice within 10 days from receipt thereof, and failing to do so, will result in all outstanding amounts accruing interest at a rate of 2% per month until the outstanding amount is settled. The aforesaid constitutes an incidental credit agreement as an interest is being charged due to late payment.

The Act applies to incidental credit agreements, notwithstanding that such form of agreement does not meet the definition of a credit agreement.

The Act defines an incidental credit agreement as: an agreement, irrespective of its form, in terms of which an account was rendered for goods or services that have been provided to the consumer, or goods or services that are to be provided to a consumer over a period of time, and either or both of the following conditions apply:

  1. a fee, charge, or interest became payable when payment of an amount charged in terms of that account was not made on or before a determined period or date; or
  2. two prices were quoted for settlement of the account, the lower price being applicable if the account is paid on or before a determined date, and the higher price being applicable due to the account not having been paid by that date.

Even though the agreement falls within the ambit of the Act, it is not necessary for a person (juristic or natural) to register as a credit provider, provided that such person only supplies incidental credit. Furthermore, there are only certain sections of the Act that apply to incidental credit agreements.

In practical terms, the biggest impact of the Act on incidental credit agreements surrounds the interest that a person is entitled to charge in terms of the incidental credit agreement and the requirement of ensuring that a notice in terms of Sections 129 and 130 (“the Notice”) is sent via registered mail or delivered to an adult person at the location designated by the consumer before legal proceedings can be instituted. A person is only entitled to proceed with the issuing and serving of a summons if they have complied with the Act.

The intention of the Notice is to advise the consumer that it may refer the credit agreement to a debt counsellor, alternative dispute resolution agent, consumer court or an Ombud with jurisdiction, with the intent that the parties resolve any dispute under the agreement or develop and agree on a plan to bring the payments up to date before the expiry of a period of 10 business days from receiving the letter. Furthermore, Section 130 of the Act provides that legal proceedings may not be instituted against the Consumer unless the Consumer has been in default for a period of 20 business days and the notice has been issued in terms of Section 129 and the 10-business-day period provided therein has lapsed.

It is accordingly of utmost importance that an attorney is consulted to ensure that the correct procedure is followed in instituting action against a consumer, and to find out if the Act applies and if compliance therewith is necessary.

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).