Section 129 of the National Credit Act No. 34 of 2005 (hereinafter “the NCA”) provides a mechanism for Consumers who have fallen into arrears on their credit payments, and face debt enforcement action. This mechanism allows Consumers to “reinstate” their credit agreements by paying the full outstanding monies and the permitted and reasonable costs of enforcement of the credit agreement.
After a credit agreement has been reinstated, the Consumer is to continue to meet obligations in terms of the agreement and the Credit Provider will continue to receive the monthly payments.
However, this process has been discussed in the case of Nkata v Firstrand Bank Limited and others (hereinafter “the Nkata case”) and the outcome thereof has a potentially broader impact. At present, if a Consumer defaults on a payment, the Credit Provider can obtain an order against him/her. Such order often provides that the property secured by the credit agreement can be sold at a sale in execution and despite the Debtor paying the outstanding amounts, the order remains alive and can be enforced by the Creditor at any given stage if the Debtor defaults again.
The effect of Section 129 is thus that if the Consumer reinstates the credit agreement, the judgment granted against the Debtor is no longer valid. The Creditor cannot enforce it anymore and would have to approach a Court afresh to obtain a new order based on a new default. The effect of the reinstatement is to interrupt the formal debt collection process.
Section 129 briefly explained
Section 129(3) reads as follows:
“Subject to subsection (4), a consumer may at any time before the credit provider has cancelled the agreement, remedy a default in such credit agreement by paying to the credit provider all amounts that are overdue, together with the credit provider’s prescribed default administration charges and reasonable costs of enforcing the agreement up to the time the default was remedied.”
This Section allows a Consumer to reinstate a credit agreement, if that credit agreement is subject to the NCA.
Section 129(4) provides that:
“A credit provider may not re-instate or revive a credit agreement after -
(a) the sale of any property pursuant to -
(i) an attachment order; or
(ii) surrender of property in terms of section 127;
(b) the execution of any other court order enforcing that agreement; or
(c) the termination thereof in accordance with section 123.”
Section 129(4) thus provides a cut-off point after which reinstatement can no longer occur. First Rand Bank (hereinafter “FRB”) requested an interpretation of this Section in the Nkata case, that will ensure this cut-off point is at the earliest stage of an execution process.
The Constitutional Court dealt with the reinstatement of a credit agreement which had already become the subject of debt enforcement proceedings.
Ms Nkata (hereinafter “Nkata”) was a Credit Consumer in terms of a credit agreement with FRB. She defaulted on payments made on a bond agreement and FRB proceeded to obtain a court order against her in which her property (her residence) was declared executable.
However, after the court order was granted, Nkata paid the outstanding monies and continued to pay her monthly instalments in terms of the credit agreement and entered into a settlement agreement with FRB. The settlement agreement provided that she would pay the monies she owed and FRB would not sell her home in execution. The settlement agreement was never made an order of court and despite it, FRB proceeded to sell her home in execution.
Nkata approached the High Court for relief and the Court held that as she had reinstated the credit agreement, FRB could not have sold her home in execution. FRB appealed against this judgment to the Supreme Court of Appeal which held in FRB’s favour that Nkata did not meet the requirements of Section 129 in order to reinstate the credit agreement. Nkata appealed this decision to the Constitutional Court.
The Constitutional Court had to decide whether Nkata’s actions in settling the arrears before the property was sold by FRB were sufficient to have successfully reinstated the credit agreement, in terms of Section 129(3) of the NCA and, particularly, whether reinstatement happens by operation of law or through a consultative process between the Consumer and the Credit Provider.
FRB argued that Section 129(3) requires a consultative process for a credit agreement to be reinstated and that a consumer cannot unilaterally reinstate the agreement merely by making payment of all amounts that are overdue.
On the first point, the Court found that Ms Nkata had successfully reinstated the credit agreement by paying all her arrear instalments and the Creditor’s permitted default charges and reasonable enforcement costs. This was done before FRB obtained the default judgment against her and before the subsequent sale of the property. Consequently, FRB could not rely on the Section 129(4) exceptions to challenge the reinstatement. In addition, the Court unequivocally stated that in order to reinstate the credit agreement Nkata did not have to pay the full accelerated amount, but rather only the arrear instalments due.
On the second point, the Court further held that it is the Consumer who has the power to reinstate a credit agreement unilaterally – and that he or she may do so at any time before the Credit Provider cancels the agreement - as reinstatement occurs by operation of law.
The Constitutional Court judgment is a victory for Consumers who have fallen into arrears under a credit agreement that is subject to the NCA, as it overrides any acceleration clause which would otherwise be triggered by the Consumer’s default under such an agreement.
However, on the flip side hereof, allowing reinstatement to occur right before a sale in execution is finalised may result in the public losing confidence in the now insecure process of public auctions as well as lower prices being offered and settled on at such auctions.
Credit Providers will have to be proactive and act swiftly where Consumers default on their payment obligations under credit agreements if they wish to cancel those agreements.
Written by Arinda Truter, Associate, SchoemanLaw Inc.