When is the National Credit Act applicable to a credit agreement?

The purpose of the National Credit Act, Act 34 of 2005 (“NCA”), is inter alia to promote and advance an effective and accessible credit market and industry, and to protect consumers.

To determine if the NCA is applicable to a specific transaction or agreement, one must first consider if the consumer involved in the transaction falls under the definition contained in section 4 of the Act. Thereafter one will consider if the specific agreement is a credit agreement under section 8 of the Act.

Section 4(1) of the NCA states as follows:

“Subject to sections 5 and 6, this Act applies to every credit agreement between parties dealing at arm’s length and made within, or having an effect within, the Republic, except 

(a) a credit agreement in terms of which the consumer is-
(i) a juristic person whose asset value or annual turnover, together with the combined asset value or annual turnover of all related juristic persons, at the time the agreement is made, equals or  exceeds the threshold value determined by the Minister in terms of section 7(1);
(ii) the state; or
(iii) an organ of state;
(b) a large agreement, as described in section 9(4), in terms of which the consumer is a juristic person whose asset value or annual turnover is, at the time the agreement is made, below the threshold value determined by the Minister in terms of section 7(1);”

In terms of section 8(2) of the NCA, an agreement, irrespective of its form, is not a credit agreement if it is –
(a) an insurance policy;
(b) a lease agreement for immovable property, or
(c) a stokvel.

When do parties deal at arm’s length?
The NCA only applies to credit agreements between parties dealing at arm’s length.

In the matter of Hicklin v Secretary for Inland Revenue 1980 (1) SA 481 (AD), the arm’s length criterion was described by Judge Trollip, as follows:
“It connotes that each party is independent of the other and, in so dealing, will strive to get the utmost possible advantage out of the transaction for himself.”

Section 4(2)(b) of the NCA states that parties are not dealing at arm’s length in the following arrangements:
(i) a shareholder loan or other credit agreement between a juristic person, as consumer, and a person who has a controlling interest in that juristic person, as credit provider;
(ii) a loan to a shareholder or other credit agreement between a juristic person, as credit provider, and a person who has a controlling interest in that juristic person, as consumer;
(iii) a credit agreement between natural persons who are in a familial relationship and- 
(aa) are co-dependent on each other; or 
(bb) one is dependent upon the other; and
(iv) any other arrangement – 
(aa) in which each party is not independent of the other and consequently does not necessarily strive to obtain the utmost possible advantage out of the transaction; or
(bb) that is of a type that has been held in law to be between parties who are not dealing at arm’s length.

The Courts have in certain circumstances found that the NCA is applicable to credit agreements entered into between parties, even if the parties are family members.
One such example was in the matter of Beets v Swanepoel (2150/09) [2010] ZANCHC 55, where the Northern Cape High Court in Kimberley dealt with the question of what an agreement at arm’s length means. In this matter the plaintiff, the mother of the defendant, submitted that the specific loan agreement was not an arm’s length transaction, given the family relationship between the parties and the favourable repayment and interest rate terms.

The court however found that section 4(2)(b)(iii) (aa) or (bb) did not apply to the agreement as no co-dependence or dependence by one party in the other could be established. 

The court further held that although the parties were family members, they were in fact and in law independent of each other, with both striving to gain maximum benefit from the transaction for themselves. Therefore, the transaction was indeed an arm’s length transaction to which the provisions of the NCA applies.

The interpretation of the NCA can be complex and it is therefore important that you get legal advice if f you intend to enter into a credit agreement. It is also important to understand the provisions of the NCA, and especially when it is necessary to register as a credit provider in terms of the Act.

Contact one of our experts in the Dispute Resolution Department to assist you with any National Credit Act questions or queries.

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