Could a sale of shares be subject to the National Credit Act?

“My company holds shares in a larger construction company worth about R5 million. I’m looking at selling my shares to an interested party that the construction company is also happy with. However, the party can only pay a deposit of R1,5 million and thereafter the remainder in monthly installments over a period of 18 months with an interest of prime plus 1%. My bookkeeper says I must be wary of falling under the National Credit Act. Could this be a possibility?”

In terms of the National Credit Act an agreement can be considered a credit agreement if it is a credit facility, a credit transaction, a credit guarantee, or any combination of the above.

In the case where a party sells his shares to a purchaser and the agreement determines that payments of an amount owed by one person to another are deferred and that interest, fees or charges are payable, the possibility exists that such agreement could be seen as a credit transaction as defined by the National Credit Act. 

In the matter of Vesagie NO and Others v Erwee NO and Another, the Supreme Court of Appeal found that a sale of shares, where payment of an amount owed by one person to another is deferred and interest is charged by the seller, does constitute a credit transaction. The Court accordingly declared the contract null and void because the seller was not registered as a credit provider in terms of the National Credit Act. 

The National Credit Act, subject to certain exclusions, requires that a person or entity must apply to be registered as a credit provider if the total principal debt owed to that credit provider under all outstanding credit agreements exceeds the threshold determined by the Minister of Trade and Industry. On 11 November 2016 a new threshold of R0 came into effect, resulting in all credit providers (even if you only have one credit agreement) to register as a credit provider with the National Credit Regulator. Failure to register as a credit provider could result, amongst others, in the credit agreement being declared void and unlawful.

In short, should you contemplate structuring a sale of shares by deferring payment of an amount due,  with interest charges, it must be understood that the possibility exists that you may need to register as a credit provider or risk the agreement potentially being determined null and void if challenged. So be prudent and obtain the necessary legal advice before you conclude the sale of shares transaction.

December 14, 2016

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