LAW MATTERS: Common law set-off cannot be applied to regulated credit agreements
JOHANNESBURG - “That the National Credit Act 34 of 2005 (NCA) is not a model of clarity, has been bemoaned by the High Court, this Court and the Constitutional Court on a number of occasions” – The Supreme Court of Appeal in Du Bruyn & others v Karsten.
The ambiguous provisions of the NCA were once again before the court in the recent case of National Credit Regulator v Standard Bank of South Africa Limited; this time in the context of set-off.
Common law set-off vs. statutory set-off South Africa has a strong tradition of common law, being that body of law which is not to be found in any Act of Parliament, but has been applied by the courts and citizens for generations.
At common law, the principle of set-off essentially provides that, where parties are mutually indebted, the debts cancel each other out. Common law set-off operates automatically. There are certain requirements for set-off to operate, but those are beyond the scope of this article.
In the context of the financial sector, set-off can allow a bank to extract funds standing to the credit of one account in order to satisfy a debt owed by a consumer in another account.
Section 90(2)(n) of the NCA effectively renders a provision of an agreement which is subject to the NCA unlawful to the extent that it authorises set-off without the requirements of section 124 being met. Section 124 imposes stringent requirements that must first be met before the bank may apply set-off. The consumer must, amongst other things, consent to the bank applying set-off and stipulate which debts may be set off against which accounts and for exactly how much.
The High Court judgment
The National Credit Regulator (the NCR) brought an application pursuant to the many complaints it received from consumers in relation to Standard Bank and its practice of set-off. The NCR sought a declaratory order to the effect that the common law principle of set-off had no application to credit agreements governed by the NCA.
The Respondent, Standard Bank, had been debiting the accounts of its clients in order to satisfy arrears on accounts. Standard Bank alleged that this practice was an important mechanism for debt recovery and that it was authorised to do so by the common law principle of set-off.
The NCR argued that, properly interpreted, section 90(2)(n) and section 124 of the NCA are at odds with the common law principle of set-off.
Standard Bank argued that the common law principle of set-off is not expressly prohibited by section 90(2)(n) and section 124 of the NCA. Accordingly, it argued, if it does not stipulate set-off in its credit agreements with consumers, it does not have to adhere to the requirements set out in section 124 of the NCA and may continue to apply set-off in terms of the common law.
The High Court rejected Standard Bank’s argument on the basis that it does not conform with the underlying purpose for which the NCA was enacted – to promote and advance the socio-economic welfare and protection of consumers. The High Court granted the NCR’s declaratory order, thereby prohibiting banks (and other credit providers) from applying the common law principle of set-off in respect of credit agreements regulated by the NCA.
This ruling has widespread ramifications for lenders by creating an extra layer of red tape for debt recovery.
It is more important than ever that the agreements used by financial institutions are fully compliant with section 124 of the NCA.
Benjamin Meadows is an Associate at Cox Yeats Attorneys practising in the Corporate & Natural Resources Law Team. His areas of focus are Business Law and Litigation.
Marikha Calo a Candidate Attorney, completing her articles within the Corporate & Natural Resources Law and Construction Teams. They can be contacted on 031 – 536 8500 or via email: [email protected] and [email protected]