Of the many potential pitfalls inherent in making loans to friends, one of the more dangerous (but lesser-known ones) is that presented by the requirements of the National Credit Act (NCA).
It’s a serious risk – failure to comply with the NCA’s many requirements exposes you to substantial losses, including invalidity of your loan agreement and the possibility of losing all your rights of recovery.
A recent Constitutional Court judgment illustrates the point.
- A Namibian farmer lent his friend R7m for property development in Cape Town per three written loan agreements
- The lender wasn’t registered as a credit provider at the time as required by the NCA
- He wasn’t in the business of providing credit, was unaware of the requirement to register and had no intention of violating the NCA
- When the dates for the repayment of the loans had passed, the borrower was unable to pay, he accordingly advised the lender who then applied to the High Court for sequestration of his friend’s estate.
The NCA provides that –
- You are required to register as a “credit provider” in any of a variety of situations set out in the NCA. In this particular case, registration of the lender was required because the amount of the loan exceeded the set threshold (currently R500,000)
- It is irrelevant that the borrower is a friend – what counts is whether the loan falls within the definition of “credit agreement” and whether the parties are “dealing at arm’s length”
- If you fail to register as a credit provider, the NCA as it stands compels courts (they have no discretion) to both –
- Declare your agreement void, and
- Order that your right to reclaim the loan be cancelled or forfeited to the state. It is this cancellation/forfeiture provision that was under scrutiny in this case. And, as ruled originally by the High Court and now confirmed by the Constitutional Court, it is invalid – unconstitutional for breach of our Constitution’s prohibition against “arbitrary deprivation of property”.
The practical effect of that ruling, and a warning
In practice, until the invalid cancellation/forfeiture provision is amended, the common law will apply. What that means is, as the Court summarised it, that unlawful agreements are still void, but “the credit provider would be able to claim successfully from the consumer on the basis of unjustified enrichment, if the requirements of the action are met. This could include the consideration of the circumstances of each case and especially the degree of blameworthiness of the unregistered credit provider, in order to reach a just outcome”.
The critical issue is that – if you are obliged to register as a “credit provider” in terms of the NCA – you should do so. If you don’t, your agreement is void. And, although now you can at least ask a court to exercise its discretion to allow you to recover your loan, the court may well decline to do so – in which event you will lose everything. There are grey areas here so take advice in doubt.
A further practical issue is that even if you succeed in court, you could still lose everything anyway. As happened in this case, if your friend is bankrupt you are left with a (probably worthless) concurrent claim against his/her insolvent estate.
Perhaps avoid all that by heeding Shakespeare’s warning: “Neither a borrower nor a lender be; for loan oft loses both itself and friend”.
Thanks to attorneys Loubscher vd Walt