By Gerhard Buchner
The credit explosion
‘Reckless lending continues unabated’ says Angelique Arde in the Star 14-2-2015. The cause of the Marikana revolt, is the impoverishment of lowly paid and over indebted mine workers that is in turn due to the excessive Emolument Attachment Orders (EAO) issued against their wages, is the opinion of Bobby Godsell, the previous CEO of Anglogold Ashanti Limited (Rene Vollgraff ‘Don’t let employer collect debts, says Godsell’ 4-11-2013 Mail & Guardian (www.mg.co.za, accessed 13-4-2015). It is estimated that there were more than three million EAOs by 2014. Arde’s article claims there were 22,5 million credit active consumers at the end of September 2014, of which 10,05 million had impaired credit records. The only criterion for the granting of loans to consumers by most credit providers is whether or not the consumer is employed. It was soon realised by attorneys and debt collectors that the legal processes provided for, in the Magistrate’s Courts Act 32 of 1944 (MCA), for the collection of debts, presented a lucrative opportunity to generate large fees and commissions. Regrettably these processes also lent themselves to easy exploitation of ignorant and vulnerable debtors and consumers.
The lofty ideal of the National Credit Act 34 of 2005 (NCA), envisaged in s 3: ‘… to promote and advance the social and economic welfare of South Africans, promote a fair, transparent, competitive, sustainable, responsible, efficient, effective and accessible credit market and industry, and to protect consumers’, remains an elusive pipe dream.
The question that arises is why the NCA, promulgated by much fanfare from the government, has failed to prevent the ballooning of consumer debt, the collection of which has become a national crisis?
In my opinion the following factors have contributed thereto:
The MCA
Certain draconian amendments to the MCA were introduced during 1976. Their aim was to enable attorneys to benefit financially from an effective debt collection process that would counter the threat posed by debt collectors. Provision was also made for the arrest and detention of debtors who failed to pay their debts in terms of court orders for a maximum period of 30 days. Imprisonment for failure to satisfy a judgment debt was eventually declared unconstitutional (Coetzee v Government of the Republic of South Africa, Matiso and Others v Commanding Officer, Port Elizabeth Prison and Others 1995 (10) BCLR 1382 (CC)).
These draconian amendments to the MCA and their consequences can be summarised as follows.
Sections 57, 58 and 65J(2) of the MCA provided for the obtaining of a written consent from a debtor in terms whereof the debtor consented to a default judgment for the amount stated therein, an undertaking to pay the debt in monthly instalments, consenting to the issuing of an EAO for deductions against the debtor’s wages by his or her employer, to consent to pay collection commission and legal costs on an attorney-and-client scale as laid down by the relevant provincial law society. There is no obligation on the attorney to consider the debtor’s financial position at all in preparing the written consent for signature by the debtor. Attorneys and debt collectors typically ensure that the following clause or something similar, usually untrue, is incorporated into all written consents: ‘I confirm that after the satisfaction of the Emolument Attachment Order I will have sufficient means for my own and my dependents’ maintenance.’
Default judgments and EAO’s in terms of ss 57 or 58 are granted and issued routinely by clerks of the court. Judicial oversight was deliberately avoided by these amendments to accelerate the granting of default judgments and the issuing of EAO’s until very recently but only in respect of matters to which the NCA applies. Ostensibly clerks of the court had to tax the claims for attorney-and-client costs and collection commission. This resulted in gross irregularities in the claiming of unjustified and unsubstantiated amounts of fees, commissions and disbursements by many attorneys. Clerks of the court simply did not have the skills to carry out these tasks, or were overwhelmed by the sheer volumes, or in some instances bribed.
Section 65J(5) makes it obligatory for the debtor’s employer to make the payment deductions as set out in the EAO from the debtor’s wages, failing which the employer’s assets could be attached by way of a writ and sold in execution in satisfaction of their employee’s debt. Credit providers soon realised that their ‘unsecured debt’ is secured by the employer. This contributed greatly to the credit explosion.
Attorneys ensured that the Attorneys Act 53 of 1979 empowered the law societies of the various provinces to prescribe collection commission and attorney-and-client fees for debt collection matters under their jurisdiction. In reg 47 of the NCA, the legislator attempted to curtail costs in collection matters, but strangely, reg 47(b)(ii) still provides for collection costs on an attorney-and-client scale and collection commission to be charged in terms of the Attorneys Act. This incentivises lucrative debt collection practices and exploitation of consumers by attorneys on an unprecedented scale.
Unscrupulous attorneys and debt collectors typically incorporate a clause into their sS 57 and 58 written consents, which purportedly contains a consent by the debtor to the jurisdiction of a specifically named court, that is many hundreds of kilometres away from the debtor’s places of residence or employment as well as his or her employer’s place of business. Justification for this, it is argued, is to be found in the provisions of s 46 of the MCA. This makes it impractical and financially impossible for debtors or most employers to oppose any legal proceedings instituted by these attorneys (Van Heerden v Muir 1955 (2) SA 376 (A)). Unscrupulous attorneys select courts where clerks of the court are lax in enforcing the rules, can be bribed, or otherwise cajoled into obedient compliance. This type of unseemly ‘forum shopping’ sometimes manifested itself by the dumping of large numbers of process with clerks of courts large distances away from the particular attorney’s own practice that would then be mechanically stamped by the obliging clerk. A further procedural ruse and indeed abuse resorted to by attorneys in this regard was based on a misapplication of s 28(1)(f) of the MCA based on a distorted interpretation of the judgment in Muller v Möller and Another 1965 (1) SA 872 (C). In that case it was held that the signing by a debtor of a s 57 or s 58 consent to the jurisdiction of a specific court, constituted an appearance before that court with the concomitant absence of any objection to the jurisdiction of the court, as is envisaged by s 28(1)(f). The facts in that matter, however, do not conform to the typical set of facts where an unrepresented debtor has signed a consent to judgment in terms of either ss 57 or 58 of the MCA and in no sense appears before the court.
The amendments contain ineffectual provisions, which provide ostensible protection to debtors but have no practical value. The vast majority of debtors do not have the financial resources or level of sophistication to defend or protect their rights in the courts. Law clinics, legal resource centres and legal aid offices do not have the resources to assist large numbers of consumers.
The debt collection procedures introduced by these amendments to the MCA, lend themselves to abuse and the exploitation of debtors by attorneys and debt collectors on a large scale notwithstanding the legislator’s ineffective attempts to curtail the exploitation. Peter Allwright of Horizon Forensics states: ‘Clerks of the court are being bribed, or organisations themselves are duplicating the stamps, signatures and case numbers and completely bypassing the courts’ (Jan Bornman ‘Court officers in dock’ 6-8-2013 Times Live (http://m.timeslive.co.za, accessed 13-4-2015)). The introduction of these debt collection procedures, which are not only legally unsound, ethically indefensible and subversive of consumers’ rights, also resulted in debt collection becoming an attractive field of endeavour for both the attorneys’ profession and debt collectors.
Field agents
Attorneys and debt collectors, alike, in furtherance of their objective to boost fee income employ the services of ‘field agents’ whose task it is to collect as many signed consents to default judgment and EAO’s as possible in the shortest possible time. Signatures of debtors are often falsified or forged on the consents by field agents. Such agents, who have country-wide networks, usually visit debtors at their places of employment unannounced to embarrass them. They often coerce, deceive or cajole debtors into the signing of written consents at their places of employment. The threefold consents to the jurisdiction of a particular court, consent to judgment, as well as consent to an EAO are presented for signature without any explanation, nor is the debtor’s financial position considered. Debtors invariably sign the consents without reading them simply to rid themselves of the embarrassing presence of the field agents. Many consumers, even if they would read such documents would not understand the import thereof. To compound matters, attorneys and debt collectors often turn a blind eye to the malpractices by field agents.
Failure to implement certain provisions of the MCA: Rule 4(2)
Rule 4(2) of the MCA, introduced on 23 August 2010, requires every request for default judgment, in terms of s 59, to be supported by an affidavit containing such evidence as may be necessary to establish that all requirements in law had been complied with. Attorneys and debt collectors file such compliance affidavits as a matter of course when applying for judgments based on signed consents in terms of ss 57 or 58 received from field agents.
Where the debtor did not sign the written consent in the presence of the attorney or debt collector, the standard affidavit alleging compliance with all requirements in law required by r 4(2) is, in my opinion, legally flawed. The requirements of the rule can only be met if an affidavit by the field agent is also filed to confirm compliance with the provisions of r 4(3). This rule requires the debtor to sign the written consent in the presence of two witnesses whose addresses and telephone numbers appear on the consent.
A further affidavit would be required from a representative of the credit provider who is able to confirm that all the requirements of the NCA had been complied with as far as the conclusion of the credit agreement is concerned. That could be done by a person, for example, employed by the credit provider who has access to the records of the credit provider (R v Varachia 1958 (4) SA 529 (T)). Neither attorneys nor debt collectors, for obvious reasons, can state under oath that these peremptory provisions of the NCA have been complied with as is required by r 4(2). Yet, in large numbers of cases processed by the courts, attorneys would glibly depose to affidavits in terms of r 4(2).
The legislator: Analysis paralysis
Attorneys have strongly resisted the repeal of ss 57, 58 and 65J(2) of the MCA on the grounds that the alternative procedures for the execution of judgments provided for in the MCA are ineffective because of corruption, high costs and the systemic dysfunctionality of the courts. The question arises as to why the seriously flawed debt collection system created by ss 57, 58 and 65J(2) of the MCA should be perpetuated, given that it provides the framework for the exploitation of vulnerable consumers.
The playing fields between attorneys and debt collectors have long since been levelled, which negates the original reason for the promulgation of ss 57, 58 and 65J(2) and makes their repeal on legal and ethical grounds a matter of urgency. Arranging for an acceptable and fair process to replace these draconian measures is not insurmountable. The legislator, under pressure from attorneys and various government departments, has made numerous amendments to the NCA and MCA in a vain attempt to curtail widespread consumer exploitation through the abuse of the legal system without addressing the cause thereof.
The present legislation is fundamentally flawed and is subversive of the advancement of consumer protection and the development of an efficient, accountable and sustainable consumer credit industry.
Gerhard Buchner BA LLB (Stell) is an attorney at Gerhard Buchner Attorney in Johannesburg.
This article was first published in De Rebus in 2015 (May) DR 32.
