Republic of South Africa

IN THE HIGH COURT OF SOUTH AFRICA 
(WESTERN CAPE HIGH COURT, CAPE TOWN)
Case No: 24887/2010
Before: The Hon. Mr Justice Binns-Ward
In the matter between:

and

JUDGMENT DELIVERED: 17 APRIL 2012

BINNS-WARD J:

[4]     Section 40 of the NCA provides (insofar as relevant): 

40 Registration of credit providers

(a) that person, alone or in conjunction with any associated person, is the credit provider under at least 100 credit agreements, other than incidental credit agreements; or
(b) the total principal debt owed to that credit provider under all outstanding credit agreements, other than incidental credit agreements, exceeds the threshold prescribed in terms of section 42(1).

(a) the provisions of subsection (1) apply to the total number and aggregate principal debt of credit agreements in respect of which that person, or any associated person, is the credit provider;
(b) each associated person that is a credit provider in its own name and falls within the requirements of subsection (1) must apply for registration in its own name;
(c) a credit provider that conducts business in its own name at or from more than one location or premises is required to register only once with respect to all of such locations or premises; and
(d) …......
(3) A person who is required in terms of subsection (1) to be registered as a credit provider, but who is not so registered, must not offer, make available or extend credit, enter into a credit agreement or agree to do any of those things.
(4) A credit agreement entered into by a credit provider who is required to be registered in terms of subsection (1) but who is not so registered is an unlawful agreement and void to the extent provided for in section 89.

(5)	

(6)	
[5] The impugned provision in s 89(5) of the NCA comes into consideration because the applicant was not a registered credit provider at the time he advanced the sum of R7 million to the first respondent, and had not applied to be so registered within a month of making the loan. Section 89 deals with 'unlawful credit agreements'. It provides:

89 Unlawful credit agreements
(1) This section does not apply to a pawn transaction.

and the credit provider knew, or could reasonably have determined, that the consumer was the subject of such an order;
(b) the agreement results from an offer prohibited in terms of section 74(1);
(c) it is a supplementary agreement or document prohibited by section 91(a);

(e)       the credit provider was subject to a notice by the National Credit Regulator or a provincial credit regulator requiring the credit provider-

whether or not this Act requires that credit provider to be registered, and no further appeal or review is available in respect of that notice.

(a) induced the credit provider to believe that the consumer had the legal capacity to contract; or
(b) attempted to obscure or suppress the fact that the consumer was subject to an order contemplated in that paragraph.

(b) the credit provider must refund to the consumer any money paid by the consumer under that agreement to the credit provider, with interest calculated-

(ii) for the period from the date on which the consumer paid the money to the credit provider, until the date the money is refunded to the consumer; and
(c) all the purported rights of the credit provider under that credit agreement to recover any money paid or goods delivered to, or on behalf of. the consumer in terms of that agreement are either-

(Underlining supplied to highlight the parts of the provision most relevant in the circumstances of the current case.)
The clear effect of ss 89(2)(d) and 89(5)(a), read with s 40(4), of the NCA is that the loan agreements upon which the applicant relies to base his liquidated claim against the first respondent for the purpose of satisfying the requirements of s 9 of the Insolvency Act were unlawful and must be treated as void.
[6]     The primary contention advanced by the applicant's counsel was that the
provisions of s 89(5) should be read as directory in the sense that the words 'must
order' in the introductory phrase should be read as 'may order'. The third and fourth
respondents' counsel took issue with that interpretation, quite correctly in my view.
General principles would suggest that the unlawful transaction would fall to be treated

scope for doubt in this regard. There is nothing in the wording of s 89(5), read in both
its immediate and broader context, which gives any indication of a legislative
intention that the court should have the discretion to treat as valid a credit agreement
that is expressly stigmatised as void in terms of the other provisions mentioned. The
argument was advanced by the applicant's counsel on the premise of her

[8] If the effect of s 89(5)(c) of the NCA is that any claim based on unjust enrichment that the applicant might have must be ordered forfeit to the state, then it is clear that the applicant will have no claim, liquidated or otherwise, against the first respondent. It was therefore not surprising that it was not contended by any of the respondents that the construction of s 89(5) of the NCA was not a material issue requiring of determination, including, if necessary, the aspect of its constitutionality.

challenge to the constitutionality of s 40(4). This is because the only effect of an order in terms of s 89(5)(a) on the facts of the current case would be to confirm what has already been determined by s 40(4) read with s 89(2)(d). The facts of the current matter do not implicate s 89(5)(b).

[11] The key to finding the meaning of the provision lies in the character of what falls to be cancelled or forfeited by reason of its operation; that is in the import of the words 'purported rights'. Given their literal meaning within the context of s 89, the words would imply that nothing of substance is liable to cancellation or forfeiture, because no rights are created by a contract that is legally a nullity. But the cancellation or forfeiture of something that does not exist, being a self-evidently futile undertaking, can hardly have been what the legislature had in mind when it imposed upon the courts the mandatory duty to make the order prescribed in terms of s 89(5)(c)(i) or (ii). Allowing that much however, affords no escape from the reality that the formulation of the provision is both confused and confusing. It is unfortunate that the drafters of the statute do not appear to have borne the principles of contractual law in mind when engaged in framing a law entirely directed at regulating a certain category of contracts. This is evident, with similarly confusing effect, not only in regard to the provision in issue, but also in other parts of the Act. So, for example, in part C of chap. 6 of the Act, the concept of 'enforcement' of a credit agreement seems to include the cancellation of such an agreement, whereas in contract the remedies of enforcement and cancellation are the very antithesis of each other.

[12] The concept of a 'cancellation' of purported rights might be construed as intended to emphasise and underline the declaration of voidness required in terms of paragraph (a), (just as the declaration required in terms of paragraph (a) does no more than to lend emphasis and affirmation to what in any event follows on the provisions of s 40(4) read with s 89(2)(d), as qualified by s 89(4)). But that, by itself, could never give rise to the result of unjust enrichment comprehended in subparagraphs (i) and (ii) of paragraph (c) of the sub-section, and thus cannot be the intended meaning.
[13] Counsel were indeed unable to conceive of any right the 'cancellation' or negation whereof might give rise to unjust enrichment in the context of a performed or partially performed credit agreement that was void by reason of s 40(4) of the NCA other than the right to claim restitution. Nor can I. The recovery by a credit provider of money paid or goods delivered in terms of a transaction otherwise qualifying as a credit agreement, but which is void, by reason of s 40 read with s 89, can notionally be enforced only by way of a claim for restitution. But if the 'purported rights' are the credit provider's right to restitution, when could there ever be a situation when the cancellation of the right would not unjustly enrich the consumer? It is therefore difficult to conceive in the abstract of a case in which a court could make an order in terms of paragraph (c)(i), rather than in terms of paragraph (c)(ii), especially if the order were made contemporaneously with one made in terms of paragraph (b).

(a) It is to be determined by evaluating the relationship between means employed, namely the deprivation in question and ends sought to be achieved, namely the purpose of the law in question.
(b) A complexity of relationships has to be considered.
(c) In evaluating the deprivation in question, regard must be had to the relationship between the purpose for the deprivation and the person whose property is affected.
(d) In addition, regard must be had to the relationship between the purpose of the deprivation and the nature of the property as well as the extent of the deprivation in respect of such property.
(e) Generally speaking, where the property in question is ownership of land or a corporeal moveable, a more compelling purpose will have to be established in order for the depriving law to constitute sufficient reason for the deprivation than in the case when the property is something different and the property right something less extensive.... [The judgment was not concerned at all with incorporeal property.]
(f) Generally speaking, when the deprivation in question embraces all the incidents of ownership, the purpose for the deprivation will have to be more compelling than when the deprivation embraces only some incidents of ownership and those incidents only partially.
(g) Depending on such interplay between variable means and ends, the nature of the property in question and the extent of its deprivation, there may be circumstances when sufficient reason is established by, in effect, no more than a mere rational relationship between means and ends; in others this might only be established by a proportionality evaluation closer to that required by s 36(1) of the Constitution.

[20] The apparent object of the impugned provision is to discourage the provision of credit outside the regulatory framework provided in terms of the statute. There can be no quibble about the legitimacy of the state's objectives in seeking to regulate theprovision of credit. Nor can there be any argument against the requirement in that context that persons in the business of providing credit should be obliged to register themselves with the National Credit Regulator. The director-general of the Department of Trade and Industry ('the DG') has made an affidavit on behalf of the third respondent defending the need for the impugned decision, as has the acting chief executive officer of the National Credit Regulator on behalf of the fourth respondent.

In addition to being outdated, the previous regulatory framework has also been largely ineffective. It distorted the credit market through its differential and unequal treatment of different credit products and credit providers. It also had the result of affording different consumers different levels of protection, with the poorest and most vulnerable having the least protection.
Furthermore, as a result of the lack of enforcement of the previous statutory regime, the practices of less scrupulous providers had become the norm, and this has stigmatised certain segments of the credit market. This, in turn has discouraged reputable credit providers, in particular banks, from venturing into the low income market and from providing more affordable finance to low income earners.
Accordingly, the need for the review of the pre-existing regime was underpinned by the following concerns:
1. The fragmented and outdated legislative framework.
2. Ineffective consumer protection particularly in relation to consumers in low income groups.
3. The high cost of credit and in some areas access to credit.
4. Rising levels of over-indebtedness.
5. Reckless behaviour by credit providers and exploitation of consumers by micro lenders, intermediaries, debt collectors and debt administrators.

(a) the determination of the number of executory credit agreements to which the credit provider as 100 or more before registration is required;

aa)    any person that directly or indirectly has a controlling interest in the credit provider, or is directly or indirectly controlled by the credit provider;
bb)    any person that has a direct or indirect controlling interest in, or is directly or indirectly controlled by, a person contemplated in clause (aa); or
cc)    any credit provider that is a joint venture partner of a person contemplated in this subparagraph.

[29] I mention these considerations in the context of the required review of the apparent scope, purpose and objects of the Act merely to record my impression that the requirement that someone like the applicant had to register as a credit provider to avoid the credit transactions that he entered into with the first respondent being visited with legal voidness was an entirely incidental effect of the prescripts of the NCA, rather than one serving the Act's central objectives. In my view these considerations are relevant when it comes to weighing some of the questions mentioned earlier that are pertinent to a decision "as to whether sufficient reason exists for the forfeiture required in terms of s 89(5)(c) of the NCA, such as to negate a basis for its characterisation as an arbitrary deprivation of property.

66.2. There is a considerable imbalance of power between the consumer and the credit provider. This is due to poor consumer education levels and knowledge of consumer rights and the inability to enforce such rights through negotiation or legal action.

66.4. A transgression of the requirements of registration does not constitute an offence. There is accordingly no criminal sanction for non-compliance with the requirements of registration. In light thereof, section 89(5)(c) was considered reasonable and indeed an effective means of enforcement. Section 89(5)(c) was also informed by the fact that the criminal sanctions imposed under the previous regulatory regime did not sufficiently deter unlawful and unscrupulous lenders.
66.5. As addressed, the purpose of registration is to facilitate control and regulation of the credit industry and ultimately to protect the poor and vulnerable.

[37]    The argument that the absence of any criminal sanction for non-registration affords sufficient reason for-the deprivation of property involved in the application of s 89(5)(c) of the NCA is not persuasive. The argument is advanced as if the absence of any penal sanction was something that arose independently and therefore fell to be compensated for in some or other way. This, of course, is not so: the omission of any provision criminalising non-registration when it is required is the product of the drafting of the statute, and not a feature that required a compensating incentive for enforcement to be provided. The contention that non-registration does not carry a criminal sanction is in any event not absolutely correct. In terms of s 54 of the NCA the fourth respondent may issue a notice to any unregistered person who is engaged in any activity which requires registration to stop engaging in or offering to engage in the activity. Failure to comply with such a notice constitutes an offence. In terms of s 89(2)(e) read with s 89(5)(a) of the NCA any agreement concluded by a credit provider in breach of such a notice would also be void and subject to the provisions of s 89(5)(c), and indeed, irrespective of whether or not the notice had been given on correct or valid grounds. As the facts of the current case show, the means chosen to
incentivise compliance leads to consequences arbitrarily determined irrespective of the presence of any wilfulness or negligence on the part of the unregistered credit provider, or its degree, and notwithstanding that its failure to have registered in the particular circumstances might hold little or no threat to the public in the context of the evils or mischiefs at which the statute is expressly directed.

[42] While treating of the topic of severance, it is the appropriate stage to record that in my judgment paragraph (c) of the subsection falls to be read as a whole and in an integrating manner, as both sub-paragraphs (i) and (ii) bear indiscriminately on the credit provider's ability to claim restitution when there has been performance or partial performance in terms of a purported credit agreement which is declared void in terms of s 89(5)(a). There is thus no purpose served by striking down sub-paragraph (ii) and leaving sub-paragraph (i) intact.

[44] It has not been demonstrated that the cancellation or forfeiture provisions in terms of s 89(5)(c) of the NCA play a necessary or important part in the achievement of the objects of the statute. As I have remarked, the common law consequences of the statutory voiding of credit agreements entered into by unregistered credit providers who require registration are sufficient in themselves to incentivise compliance with the registration requirement, and there is, in addition, a framework within the Act that will remain unaffected by the invalidity of s 89(5)(c) whereby criminal and administrative sanctions can be brought to bear appropriately on persons found in default of an obligation to register as credit providers. In the face of these considerations there can be no warrant for requiring anyone to tolerate the infringement of basic rights that suspending the effect of the declaration of invalidity would unavoidably occasion.
[45] As observed earlier in this judgment, the facts of the current matter do not implicate s 89(5)(b) of the NCA. It is evident, however, that s 89(5)(b) bears a close relationship to s 89(5)(c). Section 89(5)(b) appears on its face to require a court to order an unregistered credit provider to repay any amount received from a consumer in terms of a transaction which is void in terms of s 40(4) of the Act, irrespective of questions of unjust enrichment and restitution. But the character of the practical interrelationship of paragraphs (b) and (c) is by no means clear and no light was shed on it in the argument that was addressed to the court. In the circumstances I have considered it inappropriate to grant any relief concerning s 89(5)(b) of the Act. That, if needs be, can be the subject of another case.
[46] The alleged infringement of the applicant's s 34 rights was hardly touched upon in oral argument and little need be said in that regard. The challenge to s 89(5) of the NCA founded on an alleged infringement of the applicant's rights in terms of s 34 of the Constitution is without merit in my view. Section 89(5) does not bar access by the applicant to the courts. The provision merely determines how the courtsmust determine certain issues concerning credit agreements which are void in terms of the NCA. The fact that the applicable law might be adverse in its effect on the applicant's proprietary rights does not detract in a cognisable way from his right to have it applied in a fair hearing.

[48]    The following orders are made:

(b) The order made in terms of paragraph (a), above, is referred to the Constitutional Court to determine whether it should be confirmed.

(d) There will be no order as to costs as between the applicant and the third and fourth respondents.

A.G. BINNS-WARD
Judge of the High Court

Hearing date: 	5 March 2012
Date of judgment: 17 April 2012

Applicant's counsel:	Adv. MA. McChesney 
Applicant's attorneys:	Gerhard Gous Attorneys, Stellenbosch
Van Zyl Prokureurs, Cape Town

Third respondent's counsel:	Adv. K. Pillay 
Third respondent's attorney:	State Attorney, Cape Town

Fourth respondent's counsel :	Adv. S. Budlender
Fourth respondent's attorneys:	Norton Rose South Africa, Cape Town