Debt counselling: Challenge and proposed solution

August 1st, 2012

By Brett Bentley

It has been over five years since the full implementation of the well-intentioned National Credit Act 34 of 2005 (NCA). However, despite its good intentions, some debtors may feel frustrated by the outcome after pursuing debt relief in terms of the provisions of ss 86 to 88 of the Act.

For the past five years the National Credit Regulator (NCR) has tried – to borrow from an old proverb – to ‘make a silk purse out of a pig’s ear’ by pursuing a course of court declaratory orders in terms of the provisions of s 16(1)(b)(ii) of the NCA and other litigation. The fact that this piece of legislation is itself a ‘pig’s ear’ in terms of its drafting has been diplomatically stated by the courts, as illustrated by Malan JA’s statement in Nedbank Ltd and Others v The National Credit Regulator and Another 2011 (3) SA 581 (SCA) at para 2:

‘Unfortunately, the NCA cannot be described as the “best drafted Act of parliament which was ever passed,” nor can the draftsman be said to have been blessed with the “draftsmanship of a Chalmers”.’

This is particularly evident in the debt review/debt rearrangement provisions of the Act, through which the NCA tried to reinvent an already-invented wheel (being s 74 administration orders under the Magistrates’ Courts Act 32 of 1944), albeit that wheel was a bit outdated.

Section 74 administration orders are, however, limited to agreements other than credit agreements (as originally defined in terms of the Credit Agreements Act 75 of 1980 and now defined in the NCA – see s 74G(7) of the Magistrates’ Courts Act), where debts are due in future, and debt relief is limited to ‘credit agreements’ as defined in s 8 of the NCA (see s 86 of the NCA). Administration orders deal with debts that are already due and owing, whereas, in order to deal with credit agreements, debt relief must also deal with future obligations.

In 2008 the South African Law Reform Commission, in light of the introduction of debt counselling, proposed the abolition of s 74 administration orders and invited comment. Based on the reason that the two forms of debtor assistance offered relief to two different forms of debt, among other reasons, the commission adapted its approach and appointed researchers to investigate the amendment of s 74.

The net result was a proposal by the commission that, inter alia

  • the notice period in s 74A(5) is too short and should be increased;
  • debts not yet due (future debts) should not be paid until such debts become due and payable;
  • administrators should be required to register and should be regulated;
  • the amount of R 50 000 (the current maximum amount for administration orders, which amount has not been changed since the early 1990s) should regularly and automatically be adjusted;
  • consideration should be given to whether appointments should be limited to persons who practise in the area of a particular court;
  • the sale of administration files should be regulated;
  • measures aimed at ensuring that proper charges are levied should be improved;
  • provision should be made for access to information and proper reporting; and
  • old administration orders should lapse after the expiry of a specified period

(South African Law Reform Commission ‘Administration orders: Proposed Amendments to section 74 – 74W of the Magistrates’ Courts Act, 32 of 1944’).

These proposals are now the subject of a number of consultative workshops with various interested parties and a final report and proposal is expected later this year.

Meanwhile, the operation of the debt relief provisions of the NCA have not, as the NCR had hoped, turned the ‘pig’s ear into a silk purse’.

Firstly, in the case of Nedbank v The National Credit Regulator, at para 4, the court refused to grant the regulator what it sought, namely an order to the effect that:

‘The reference in section 86(2) to the taking of a step in terms of s 129 to enforce a credit agreement is a reference to the commencement of legal proceedings mentioned in section 129(1)(b) and does not include steps taken in terms of section 129(1)(a) …’.

In other words, it is the institution of legal proceedings and not the expiry of the notice period in terms of the s 129(1)(a) notice that enables a credit provider to elect to exclude a particular credit agreement. This being rejected, the net result is that any credit provider who properly sends a s 129(1)(a) notice and the prescribed ten days expire without the debtor going under debt relief has the ability to exclude its debt from any subsequent debt relief/rearrangement. This was not, however, the actual intention of s 129(1)(a) notices. Wallis J in BMW Financial Services (SA) (Pty) Ltd v Donkin 2009 (6) SA 63 (KZD) held, at para 10:

‘That notice invites the debtor to refer the credit agreement (not the debt) to a debt counsellor, alternative dispute resolution agent, consumer court or ombud with jurisdiction. The purpose of such reference is either to resolve a dispute that may exist in relation to that agreement or to reach agreement on a plan that will enable the debtor to bring his or her payments under the agreement up to date. In other words, what is contemplated is a consensual process mediated by the person to whom the credit agreement has been referred. This is a process entirely distinct from the general debt review under s 86, which depends upon the debtor being over-indebted.’

Secondly, in terms of Collett v FirstRand Bank Ltd 2011 (4) SA 508 (SCA), the Supreme Court of Appeal interpreted when the provisions of s 86(10) can be implemented by a creditor provider.

Section 86(10) states:

‘If a consumer is in default under a credit agreement that is being reviewed in terms of this section, the credit provider in respect of that credit agreement may give notice to terminate the review in the prescribed manner to –

(a) the consumer;

(b) the debt counsellor; and

(c) the National Credit Regulator, at any time at least 60 business days after the date on which the consumer applied for the debt review.’

The crisp question in the Collett case was whether the provisions of s 86(10) could be invoked after a debt counsellor had referred a debt review to court in terms of s 86(8)(b) for an order in terms of s 87(1), or whether that right only exists prior to the referral to court. Without going into the full legal reasoning, the court held that the credit provider’s rights in terms of s 86(10) to terminate the debt relief exist at any time before a final debt rearrangement order in terms of s 87(1)(b)(ii) has been made by the court.

One of the reasons for arriving at this conclusion was the debtor’s right in terms of s 86(11), which in itself poses challenges for the process. This subsection provides:

‘If a credit provider who has given notice to terminate a review as contemplated in subsection (10) proceeds to enforce that agreement in terms of part C of chapter 6, the magistrate’s court hearing the matter may order that the debt review resume on any conditions the court considers to be just in the circumstances.’

An additional challenge to debt review is the fact that various debts fall outside the ambit of credit agreements as defined in terms of s 8 of the NCA, and therefore outside the powers conferred on debt counsellors and the courts in terms of ss 86 and 87.

The scenario below assists in illustrating the dilemma for an over-indebted debtor.

Mr X is a distressed debtor. His debts are:




Arrears? Section 129(1) notice sent?

Credit agreement?

1 Mortgage bond No No Yes
2 Sectional title levy Yes No No
3 Municipal rates Yes No No
4 Credit card Yes Yes Yes
5 Public school fees Yes No No
6 Bank overdraft Yes Yes Yes
7 Clothing account Yes No Yes
8 Pharmacy account Yes No No
9 Unsecured loan Yes No Yes
10 Furniture account No No Yes


Mr X goes to a debt counsellor to resolve his debt problems. The debt counsellor charges Mr X a fee (which, despite following NCR written recommendations, it is submitted has no basis in law as it is neither regulated by nor contained in the NCA). The debt counsellor then requests any s 129(1)(a) notices Mr X may have received (for present purposes the issues concerning the sending and receipt of s 129(1)(a) notices as contained in Rossouw and Another v FirstRand Bank Ltd 2010 (6) SA 439 (SCA) and subsequently in Sebola and Another v Standard Bank of South Africa Ltd and Another (CC) (unreported case no CCT 98/11, 7-6-2012) (Cameron J) will be ignored). Mr X hands the debt counsellor the two notices he received in respect of the credit card and bank overdraft debts. The debt counsellor then confirms that these were received more than ten days earlier. In addition, the debt counsellor establishes which debts are in fact credit agreements as defined in the NCA (as indicated in the table).

The debt counsellor advises Mr X that only six of his debts are credit agreements and that two of these could be excluded because s 129(1) notices were sent over ten days ago, but that he will try to get the voluntary cooperation of creditors to include all the debts in a debt review, and he sends out the 17.1 forms (notification to credit providers and credit bureaus in terms of s 86(4)(b)(i) and (ii) of the NCA). Creditors 2, 3 and 5 object on the basis that their debts are not credit agreements as defined, but are statutory obligations (relying on authority such as Nelson Mandela Bay Metropolitan Municipality v Nobumba NO and Others 2010 (1) SA 579 (ECG) and Dlamini v The Body Corporate of Frenoleen (KZP) (unreported case no AR 611/09, 11-3-2010) (Swain J)). Furthermore, creditors 4 and 6 object to the inclusion of their debts on the basis of their s 129(1) notices and the expired ten days. Creditor 8 objects to the inclusion of his debt on the basis that it is not a credit agreement as defined in s 8. This leaves the debt counsellor with four debts to proceed with should he refer the matter to court.

Notwithstanding this, the matter is referred to court for a debt rearrangement order in terms of s 86(8), but Mr X, in an effort to stave off legal action by the creditors excluded from the debt relief, pays some of their arrears and, as a result, fails to make payment on his mortgage bond account. The bank holding the mortgage bond, creditor 1, ascertains that now 60 days have elapsed since the date on which M X applied for the debt review and sends a s 86(10) notice before the debt counsellor can get the s 87 hearing heard in court, thereby excluding this debt from the debt rearrangement, which is finally granted for only three of Mr X’s debts, namely in respect of creditors 7, 9 and 10.

The debt counsellor suggests that Mr X consult a debt administrator in terms of s 74 of the Magistrates’ Courts Act to see if he can assist with creditors 2, 3, 5 and 8. Mr X is then charged another fee by the debt administrator, who proceeds to check if these debts are below R 50 000. Unfortunately for Mr X, they exceed this threshold and he is left to deal with these creditors, together with the others that fell outside the debt rearrangement, on his own. He has now fallen further in arrears with his mortgage bond and creditor 1 is threatening to foreclose on his house. As a result, and on the advice of the debt counsellor, he goes to see an attorney to draft an in limine plea based on his over-indebtedness in terms of s 86(11). He will again have to make payment, this time to the attorney to draft the necessary plea. This defence of over-indebtedness could be heard any time from a year to three years later, at which stage the court could hold that he is over-indebted and refer this debt back to the court hearing the s 86(8) application for inclusion in the s 87 debt rearrangement.

The absurdity of the whole process and the large costs that the already over-indebted debtor would have to incur is hopefully clearly illustrated in this hypothetical case study.

The solution, I submit, is to be found in a single rational process for over-indebted debtors whereby all their debts can be dealt with. This solution is in the form of a better drafted, time-tested and easy to amend and improve s 74 administration order.

In addition, an administration order application is a quick, easy and inexpensive procedure (standard application is ten pages long, takes one month to grant and has an average cost of R 1 200), while the debt rearrangement application is a time-consuming, costly and complicated process (applications differ from court to court and are approximately 70 pages long, take up to two years to grant and cost an average of R 8 000, made up of the debt counsellor and legal fees). (These time periods and costs were provided by law firm Booysen & Co, which deals with administration orders and debt counselling and which made submissions to the South African Law Reform Commission on the proposed amendment to s 74 administration orders when the commission called on interested parties to do so.)

The proposals suggested by the commission regarding s 74 administration orders should be implemented, save to the extent that they conflict with the following –

the expansion of s 74 to deal with credit agreements, while providing secured credit providers with some form of protection and right of repossession of goods in certain instances;

  • by implication from the extension of the point above, the power of s 74 to deal with future debts;
  • the unification of all debt administrators and debt counsellors into a single body governed by the NCR;
  • the legislating of an administrative framework for payment distribution agents to make them legally compliant and to set out the procedures to deal with the collection, administration and distribution of all payments in terms of administration orders; and
  • the exclusion of debtors from the process of the new administration orders, not by a threshold amount of the total debts, but by virtue of the fact that a sequestration of the debtor’s estate would be possible in terms of costs and benefit to the general body of creditors.

These suggestions are not comprehensive and I further submit that a task team would have to be appointed to research the amendment and ensure that the rights and obligations of creditors and debtors are protected in a balanced manner.

This would require the Justice Department and the Department of Trade and Industry working together on the project, as the s 74 administration order process is administered by the Department of Justice, while the NCA is administered by the Department of Trade and Industry.

Hopefully a pragmatic and rational approach is adopted and the problems in the current system of debt relief are sorted out and a viable path followed.

Brett Bentley BA LLB (UKZN) is an attorney at Bentley Attorneys in Durban.

This article was first published in De Rebus in 2012 (Aug) DR 36.