By Duncan Wild on 27 March 2015

In this case, the Constitutional Court held that entities that engage in lending that falls outside the scope of the National Credit Act 34 of 2005 (“NCA“) (e.g. to entities which exceed the value thresholds set out in the Act) do not need to be registered as credit providers under the NCA, and a failure to register does not invalidate credit agreements outside the scope of the Act.  In addition, the Court reversed the current position regarding how the common law in duplum rule applies when litigation commences. The position before this case being that interest may start running again if the creditor institutes action. The Court, however, found that commencing proceedings will not have an effect on the in duplum rule, and interest may not run again. Interest will only run again on a judgment, which effectively is a new debt which restarts any in duplum calculation.

Winskor 139 (Pty) Ltd (“Winskor“) entered into a finance agreement with Slip Knot Investments 777 (Pty) Ltd (“Slip Knot“) to borrow R12 million to finance a property development. Mr and Mrs Paulsen (“the Paulsens“) bound themselves as sureties in respect of Winskor’s liability to Slip Knot. Winskor defaulted on its obligation to repay the loan, together with a large amount of accrued interest.

Slip Knot instituted action against the Paulsen’s to recover the capital amount, interest (which had reached an amount equal to the capital amount of R12 million), additional interest that would commence from the date of the institution of proceedings, and interest on the judgment debt.

The Paulsens claimed that as Slip Knot was not registered under the NCA, the loan agreement was invalid; that if the loan agreement was invalid the maximum interest claimable, as limited by the in duplum rule, was capped at R12 million, and that as no proceedings had been instituted against Winskor, the principal debtor, even if instituting proceedings may suspend activation of the in duplum rule in general, it could not apply in this case.

The in duplum rule exists to protect debtors from excessive interest, the rule is that arrear unpaid interest may not exceed the outstanding capital balance on a loan at any time. It is important to distinguish the common law in duplum rule from the statutory version of the rule set out in section 103(5) of the NCA, which rule only applies to certain credit agreements regulated by the NCA.  The statutory version of the rule is an expanded version of common law rule, and the NCA version of the rule is unaffected by the judgment.

The first important aspect of this case is that it dealt with the Court’s expanded jurisdiction established by the Constitution Seventeenth Amendment Act, which effectively makes the Court the apex court for all matters, not only constitutional matters.  The Court’s jurisdiction now includes “an arguable point of law of general public importance.”  Madlanga J, in an aspect of the judgment that was unanimous, discussed this expanded jurisdiction and set out the following considerations for when a point of law will be considered to fall within the Court’s expanded jurisdiction:

• the point must be one of law and not of fact;
• have some degree of merit; and
• must have an impact not only on the litigants, but on a significant part of the general public.

The two substantive questions that the Court had to consider, where then: whether Slip Knot was required to register under the NCA, and its failure to do so rendered the loan agreement void; and whether the institution of proceedings suspends the in duplum rule.

On the first, the Court was unanimous in finding that the NCA only applies to certain credit agreements. For example, where consumer of credit is a juristic person above a certain size, the NCA does not seek to protect the consumer.  It would therefore be illogical to require an entity that provided credit only to consumers of that type (such as Winskor) to register under the NCA.  Moreover, section 40 of the NCA, which provides that a failure to register as a credit provider renders any agreement with the credit provider void, only applies to credit agreements regulated by the NCA. In other words, even if an entity was required to register under the Act and did not, but entered a credit agreement that was not regulated by the NCA, such agreement would not be rendered void by a failure to register.

On the second question, the members of the Court took different approaches. Madlanga J, with whom Jafta and Nkabinde JJ concurred, found that the case of Standard Bank Ltd v Oneanate Investments [1997] ZASCA 94 (“Oneanate“) which had created the rule that the institution of legal proceedings to recover a debt suspended the application of the in duplum rule allowing interest to run again, should be overturned.  Therefore, once arrear unpaid interest reaches the outstanding capital balance of a loan, interest stops running, and the institution of action to recover the debt has no effect.

MosenekeDCJ, with Mogoeng CJ, Leeuw AJ, Khampepe J and van der Westhuizen J, agreed with this result, but disagreed with Madlanga J on the scope of the finding. Whereas Madlanga J had indicated that it was appropriate only to overturn the Oneanate decision, and not develop the common law itself, Moseneke DCJ found that it was wholly appropriate for the court to develop the common law rule itself.

Finally, Cameron J wrote an dissent, in which he wrote that he would have upheld the Oneanate decision. He found that the purpose of the in duplum rule is to protect debtors from creditors who allow interest to run without taking steps to recover the debt. However, where a creditor institutes litigation, a debtor will be vindicated by a valid defence, or by paying the debt.

Download the judgment here.