It is one of the most famous lines from Shakespeare’s Hamlet - “Neither a borrower, nor a lender be; for loan oft loses both itself and friend” - and is advice for all ages. Because when it comes to loans between peers and family, matters can become tricky.
The Supreme Court of Appeal recently entered the fray, in a ruling between people once so close they considered each other family, making clear one of the most contentious interpretations of the National Credit Act (NCA): At what point does one have to register as a credit provider?
Before 2016, the threshold value was set at above R500 000. With amendments to the NCA, it was reduced to zero. So the literal interpretation is that if you want to lend someone money or sell them assets or shares where the purchase price is repaid in instalments, and where interest is charged, you must be a registered credit provider.
The case before the Appeals Court, De Bruyn v Karstens, involved a dispute between Mr De Bruyn and Mr Karstens, who was like a son to the De Bruyns. In 2012 they had a fall-out over operational issues in their business. De Bruyn made an offer to purchase Karstens’s interest in three entities for R2 million, to be paid in instalments plus interest.
Separate sale agreements for the three entities were then drawn up and signed on April 26, 2013. Karstens, though, was not a registered credit provider under section 40 of the NCA when the sales were concluded.
He had applied to be one on October 22, 2012 but was only registered on November 27, 2013.
In May 2013, De Bruyn defaulted on instalment payments and Karstens sued for the balance of purchase price (plus interest) of R1133169.
The court found Karstens’s later registration as a credit provider was insufficient and that he was therefore non-compliant with Section 40(3) and 40(4) of the NCA, which voided the agreements, including the mortgage bond registration and the suretyship undertakings.
The application was further dismissed with costs.
The court relied on a strict interpretation of the NCA, which requires obligatory registration as a credit provider, even for a once-off provision of credit, if the amount was not less than R500000 (the threshold in 2013, when the credit was extended) and is an arm’s length transaction, despite the fact that the lender is not active participant in the credit industry.
In contract law, an arm’s length agreement is one made by two parties freely and autonomously of each other, and without some special relationship, such as being a relative, or one party having control of the other.
Where there are familial ties, in order to avoid legal and tax consequences - and for the contract to stand up to legal scrutiny - the parties need to show the transaction was concluded through a disinterested third party.
So while arm’s length would not apply to loans between friends and family, it would apply if an agreement was negotiated by a lawyer or other professional, with interest, initiation fees and other costs built in.
Riccardo Petersen, a director at Norton Rose Fulbright South Africa, says the judge made the ruling “reluctantly”.
“The court found that the requirement to register as a credit provider is applicable to all credit agreements once the prescribed threshold (currently zero) is reached, irrespective of whether the credit provider is involved in the credit industry and irrespective of whether the credit agreement is a once-off transaction.
“If you read the judgment, the court said this is an imperfect solution, but it is one for the legislature to remedy.”
Aidan Kenny, a director at Werksmans Attorneys, viewed the ruling as a victory for consumers: “The decision is welcome - it protects consumers in terms of the allowable fees that are charged on loans, which are regulated in terms of the NCA.
“It also means that if you’re offering someone a substantial loan, and you’re charging fees, you have to be registered as a credit provider.”
What about pre-existing agreements? Kenny says if taken to court, such contracts could be declared invalid because they would be unlawful, which is why it’s important to register as a credit provider beforehand.
“Registration as a credit provider can take months and it’s expensive. In Karstens’s case, it took almost a year.”
For once-off lenders, the cost is a hindrance. At the current threshold of R0, it will cost R500. If, for example, you’re lending someone R200000, you may have to pay around R8000.
Petersen says once-off lenders now need to consider alternative funding arrangements, which might include not charging interest, fees or charges on their loans (other than mortgage agreements and secured loans) to avoid the onerous credit provider registration requirements and costs, the risk of not being repaid and becoming involved in litigation to recover any money owing to them.
Karstens could still claim for restitution, to be put in the same position as he was before he made the loan.
Petersen said in terms of Section 89 (4) of the NCA, you can submit an application for registration as a credit provider before extending the loan, which Karstens had done, but the court didn’t appear to have considered that.
The ruling will have huge financial implications for lenders. Petersen says he hopes the issue will be taken to the Constitutional Court, because it will punish the benevolent lender and potentially put them “hopelessly” out of pocket.