By Bouwer van Niekerk

Nedbank Limited v Norris and Others (ECP) (unreported case no 2978/2015, 1-3-2016) (Goosen J)

The first respondent (the consumer) applied to the applicant – a registered credit provider (the bank) – for an unsecured personal loan facility (the loan). The bank presented the consumer with its quotation and terms and conditions, which the consumer accepted. The parties then entered into an unsecured personal loan agreement (the credit agreement).

Some 21 months later, the consumer applied to a registered debt counsellor (DC) to be declared over-indebted in terms of s 86(1) of the National Credit Act 34 of 2005 (NCA). The DC made a determination of over-indebtedness, and applied to a magistrate’s court for a debt restructuring order in terms of s 86(7)(c)(ii)(aa) and (bb) of the NCA. This application was brought in terms of r 55 of the Magistrates’ Courts Rules.

The bank’s attorneys served and filed a notice of intention to oppose the application, and requested a notice of set down from the DC. No such notice was forthcoming, and an order was granted in the absence of the bank being represented at the hearing of the application.

In this order, the magistrate, among others, re-arranged the interest rate payable by the consumer in terms of the credit agreement to 0%.  The magistrate also extended the period over which the outstanding balance in terms the credit agreement was to be paid, and significantly reduced the monthly payments payable in terms of the credit agreement.

Unhappy with the outcome, the bank applied to have the order rescinded. This application was dismissed. In addition to dismissing the application, the magistrate mero motu ordered that: ‘[T]he interest rates on accounts relating to the Applicant are changed to the contractually agreed rates, effective from the date hereof’ (para 7).

Still unhappy, the bank applied for the review of the magistrate’s orders.

These were the salient facts that the court was faced with in the above case. This article will analyse the court’s judgment, and will make some observational remarks as to the impact of its findings and orders.

The court’s critique of the re-arrangement order

The court found many difficulties with the magistrate’s re-arrangement order. Among these difficulties was the fact that the magistrate re-arranged the consumer’s affairs to the extent that the re-arranged payments ‘[did] not even meet the requirement to reimburse the applicant for the monthly payment it [was] obliged to make on behalf of the first respondent in respect of credit insurance cover. The order plainly [did] not meet the essential purpose of the NCA as set out in s 3(g) and (i)’ (para 42).

In addition to the above, the magistrate ordered that the consumer’s contractual obligations in respect of interest in terms of the credit agreement be reduced from a fixed rate (in this case 17,5%) to 0%. On this point, the court held the following: ‘Section 86(7)(c)(ii) confers no such power upon the Magistrates Court. A debt re-arrangement order has as its purpose the rescheduling or re-arrangement of the obligations of the consumer in such a manner as to enable the consumer to meet his/her/its obligations to the credit provider. It serves to mitigate the effect of over-indebtedness by making provision for payments within the existing means of the consumer and over an extended period. A re-arrangement order, does not, and cannot, extinguish the underlying contractual obligations. This much is plain from the wording of section 86(7). The order reducing the first respondent’s contractual obligation to pay interest on the outstanding balance of the loan is therefore ultra vires the NCA’ (para 44).

The court then proceeded to confirm that a magistrate’s court is a creature of statute, and the limitations placed on it are dictated by the statute that governs it; it has no inherent jurisdiction and ‘can accordingly not adjudicate matters which fall outside of its expressly conferred jurisdiction and cannot grant orders, other than those it is expressly authorised to grant’ (para 45). The court subsequently found that the magistrate acted ‘without jurisdiction’, and found that ‘such an order is null and void’. This being the case, the court did not find it appropriate to order that such an order is void ab initio and may be ignored, as it did not find it appropriate given the reach of the declaratory relief sought.

The rescission order was set aside, along with the mero motu order. The court (again) found that the magistrate had no jurisdiction to make such an order, as ‘the purported order tainted is tainted by gross irregularity in as much it purported to vary the terms of the re-arrangement order previously granted without having regard to the effect that the variation would have upon either the terms of the re-arrangement order or the consumer’s obligations to other credit providers’ (para 48).

Apart from setting aside the initial re-arrangement order, rescission application and mero motu order, the court granted the following declaratory relief:

‘It is declared that:

A Magistrate’s Court hearing a matter in terms of s 87(1) of the National Credit Act, 34 of 2005 does not enjoy jurisdiction to vary (by reduction or otherwise) a contractually agreed interest rate determined by a credit agreement;

A re-arrangement proposal in terms of s 86 (7)(c) of the National Credit Act that contemplates a monthly instalment which is less than the monthly interest which accrues to the outstanding balance does not meet the purposes of the Act and a re-arrangement order incorporating such proposal is ultra vires the National Credit Act and a Magistrate’s Court has no jurisdiction to grant such an order’ (para 51).

Observational remarks

I believe it is apposite to point out that a magistrate’s court may vary the interest rate applicable to a credit agreement in a debt review order where both parties consent to such an order.

I have my doubts as to whether any court can find that, by another court acting without jurisdiction, such an order is null and void; I am of the opinion (and believe it to be trite law) that a court order is valid and enforceable until such time as it is either set aside, rescinded or reviewed. However, an in-depth discussion of the merits and demerits of such an order falls outside the ambit of this article.

That being said, I am of the view that the court granted the correct declaratory relief. My opinion is founded in tested judicial findings and in practice. On the one hand, the jurisdiction of a court tasked to hear debt review applications are bound by the jurisdiction afforded to it by statute, and on the other hand practicalities dictate that basic arithmetic should prevail when making (very practical) orders regarding repayments by consumers to credit providers in such applications.

The purpose of debt review is surely not to tie consumers up indefinitely. Rather, it should be a mechanism to ensure that credit providers are paid in full, albeit over an extended period, while at the same time ensuring that consumers’ obligations are relaxed over a finite period. In my view, this process – applying for debt review, and by implication, applying for the relaxation of contractual obligations – was designed and implemented by way of statute to create a balance between the rights of credit providers and the real, practical circumstances of consumers and their ability to repay debts incurred by them. While it should be accepted that no man (or credit provider) is an island, especially in a difficult economy, the contractual rights of credit providers should not be allowed to fall by the wayside. If this should happen, it could have dire consequences, not only for the banking industry, but for all security holders, especially secured creditors. And that can only cause further harm to an industry where it is becoming increasingly difficult to execute (contractually) secured rights against consumers.

Make no mistake: Consumers’ rights are important, and should be respected as such, but the rights of credit providers to recoup the very credit granted to consumers are equally (if not more) important. The granting of credit creates the opportunity to create lasting wealth and credit providers’ appetite to supply credit should not be unreasonably spoilt in a time when the encouragement of entrepreneurship and the ancillary creation of employment opportunities are desperately needed. The juxtaposition of consumers’ rights and credit providers’ ability to sensibly and practically exercise their rights of recouping such credit should, therefore, be delicately balanced. Because without such rights, credit providers will become less and less inclined to grant credit. And that (politics, rumours of state capture and general corruption aside) may very well push an ailing economy fighting off junk status over the proverbial tipping point.

Bouwer van Niekerk BA (Law) LLB (Stell) Post Grad Dip Labour Law (UJ) Cert Business Rescue Practice (Unisa & LEAD) is an attorney at Smit Sewgoolam Inc in Johannesburg.

This article was first published in De Rebus in 2016 (June) DR 47.