High Court rules that the common law principle of set-off is not applicable to debts arising from credit agreements regulated by the NCA

September 1st, 2019
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National Credit Regulator v Standard Bank of South Africa Limited (GP) (unreported case no 44415/16, 27-6-2019) (Keightley J)

On 27 June, Keightley J from the Gauteng Local Division, Johannesburg ruled in the case of the National Credit Regulator v Standard Bank of South Africa Limited (GP) (unreported case no 44415/16, 27-6-2019) (Keightley J) on the correct interpretation of the National Credit Act 34 of 2005 (NCA).

The matter arose as a result of various complaints received by the National Credit Regulator (NCR) by consumers against Standard Bank regarding its practice of applying the common law principle of set-off against amounts received by consumers into accounts they hold with Standard Bank.

Relief sought by the applicant

The NCR, as the applicant in the matter sought a declaratory order to the effect that credit providers are not entitled to rely on the common law principle of set-off to satisfy debts that are owed by consumers in terms of credit agreements that are subject to the provisions of the NCA.

Issue for determination

The question for determination by the High Court was whether ss 90(2)(n) and 124 of the NCA render the common law right of set-off inapplicable in respect of credit agreements that are subject to the NCA.

Common law set-off scheme v statutory scheme of set-off

The common law principles of set-off allows banks to have the right to transfer cash from an account holder’s bank account to pay off other debts held with them, such as credit cards or loans. This practice is known as the right to ‘set-off’, or to combine accounts.

It becomes evident when regard is had to the provisions of ss 90(2)(n) and 124 of the NCA that the common law principle of set-off and the statutory scheme of set-off in terms of the NCA, sit at two diametrically opposing sides. The statutory scheme of set-off (gleaned from s 124 of the NCA) reveals that there are certain requirements set out under s 124 of the NCA, which a credit provider must comply with. In terms of s 124 of the NCA, the creditor must comply with the following process before a set-off can be applied –

  • the consumer must provide consent and authorisation, which specifies the account/s from which the set-off will be applied to;
  • in respect of which amounts the set-off is to be applied to; and
  • in respect of which obligations must the set-off be effected against.

Arguments advanced by the parties

The NCR argued that properly interpreted, ss 90(2)(n) and 124 of the NCA displaced the common law principle of set-off in respect of credit agreements concluded in terms of the NCA. The NCR contended that the statutory scheme of set-off was a significant departure from the common law principle of set-off, in that it introduced stringent safeguards designed to protect the consumer.

The South African Human Rights Commission (SAHRC), aligned itself with the submissions of the NCR further adding that in answering the question of whether ss 90(2)(n) and 124 of the NCA, render the common law right of set-off inapplicable in respect of credit agreements that are subject to the Act, regard must be had to the socio-economic and institutional context within which these provisions operate, as well as the impact of set-off on the debt review process on the one hand and the economic welfare of citizens on the other. The SAHRC led expert evidence from a debt counsellor who adduced evidence that the use of the common law principle of set-off by banks, often renders debtors incapable of complying with their debt repayment plans, because the income with which they intend to make payment is claimed by the bank, before they are able to honour obligations to other creditors under the repayment plan. Accordingly, the SAHRC argued for an interpretation, which would better promote the purport, spirit and purposes of the Bill of Rights and favour the dignity of the debtor. Such an interpretation, the SAHRC argued, was one where the NCA is to be interpreted to prohibit the application of the common law principle of set-off to debts arising from credit agreements as regulated by the NCA.

Standard Bank, the respondent in this matter, disagreed with the relief sought by the NCR arguing instead, that the common law principle of set-off was applicable to credit agreements concluded in terms of the NCA as the NCA had not expressly ousted the application of the common law principle of set-off to these agreements. In making this argument, Standard Bank focused on the language of the provisions, in particular the wording of s 90(2)(n). Although accepting that an interpretive exercise must be holistic, taking into account context and purpose of the legislation in question, Standard Bank argued that sight must not be lost to the actual words used by the lawmakers. Thus, Standard Bank submitted that if it had been the intention of the lawmakers to oust the application of common law set-off to credits agreements concluded in terms of the NCA, the lawmakers would have expressly stated this.

Salient features of the judgment

In her judgment, Keightley J, stated that all parties were ad idem that there was no ‘express exclusion of common-law set-off’ in either ss 90(2)(n) or 124 of the NCA and set-off is still permissible under the NCA. Keightley J, highlighted that where the parties were at cross-roads, was on the form of set-off permitted. The NCR and SAHRC were of the view that the ‘only form’ of set-off permitted is the statutory scheme established under ss 124 and 90(2)(n) of the NCA. Standard Bank, on the other hand, argued that the statutory scheme did not displace the common law right to set-off in respect of credit agreements subject to the NCA.

Keightley J, highlighted that the main object of the NCA was to protect consumers and held at para 63 that:

‘The system of set-off established under s 124 is plainly designed to represent a complete break from the past application of the common-law principle of set-off, and its overt purpose is to safeguard the rights of consumers in the set-off process’ (our italics).

According to Keightley J, the statutory scheme introduced by s 124 of the NCA ‘promotes equity in the credit market by balancing the respective rights and responsibilities of credit providers and consumers’. The common law principle of set-off, which did not impose any restrictions on the credit provider or provide safeguards was at odds with this balancing exercise and retained ‘the upper hand for credit providers with little actual benefit to consumers’. This, Keightley J, held had a detrimental effect on the socio-economic welfare of the debtor. As a result, Keightley J, was constrained not to accept the interpretation advanced by Standard Bank as it was incongruent to the objects of the NCA and did not promote the basic constitutional rights to socio-economic welfare, dignity and possibly, the property of consumers.

Consequently, Keightley J declared that in light of ss 90(2)(n) and 124 of the NCA, the common law right to set-off is not applicable in respect of credit agreements, which are subject to the NCA.

What does the ruling mean going forward?

Henceforth, for debts arising from such credit agreements, which are subject to the NCA, a credit provider must comply with the requirements set out under s 124 of the NCA. In terms of s 124 of the NCA, the creditor must comply with the following process before a set-off can be applied: The consumer must provide consent and authorisation, which specifies the account/s from which set-off will be applied, in respect of which amounts when set-off is to be applied, and specify in respect of which obligations the set-off is to be effected.

Conclusion

This judgment is likely to have widespread ramifications for the financial sector as a whole and, in particular, the banking sector and debtors throughout SA on all agreements that are subject to the NCA. From the point of view of debtors, the ruling protects them as consumers, but from the credit providers’ perspective the judgment adds another layer of requirements, which they must comply with when using set-off, to collect debts and it may force them to take additional security measures, which might have an effect on access to and cost of credit for consumers.

Mohamed Shafie Ameermia BA LLB (Wits) LLM (UP) BA (Hons) Business Administration (TGSM&L) Fellowship in American and International law and Arbitration (SWIICL-Dallas-TX, USA) is a Commissioner and Peacemore Mhodi LLM (UKZN) is a Research Advisor at the South African Human Rights Commission in Johannesburg.

This article was first published in De Rebus in 2019 (September) DR 22.