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What if a loan agreement is unlawful in terms of the National Credit Act?

We often hear about family or friends who decide to lend and advance money to a friend in need and then, for some or other reason, the friend cannot repay the money.

A number of them when doing so, never take the provisions of the National Credit Act, Act 34 of 2005 (herein after referred to as “the Act”) into consideration, simply because they do not even know of the existence of the act. It is important that if you lend and advance money to someone, you should be aware of the provisions of section 89 of the Act, before entering into a credit agreement with a consumer. (Your good act might hurt you later. Remember, the road to hell is paved with good intentions.)

The law, more specific section 89(5)(c) of the Act, expressly requires a person to be registered as a credit provider in terms of the Act before such a person can lawfully lend and advance an amount in excess of R500 000.00 (Five Hundred Thousand Rand) to another individual. In the event that the person who lends and advance the funds to another is not registered as a credit provider, that agreement will be an unlawful agreement and consequently unenforceable. In short, you will not be able to recover the amount lent and advanced from the consumer.

Previously, section 89(5)(c) of the Act, stipulated that if the loan agreement is unlawful due to the fact that the credit provider was not registered as such at the inception of the loan agreement, then the credit provider could not recover any amount paid to the consumer in terms of the agreement and any amount recovered from the consumer, will be forfeited to the state.

This however is not the case anymore. The limitation in respect of section 89(5)(c), referred to above, was declared inconsistent with section 25(1) of the Constitution of South Africa (and accordingly invalid), by the Constitutional Court in the matter between the National Credit Regulator vs Opperman and others (2013 (2) SA 1 (CC)).

The Constitutional Court ruled that an unregistered credit provider will be able to recover the amount paid to the consumer based on unjustified enrichment. However and before the unregistered credit provider will succeed with his or her claim based on unjustified enrichment, the unregistered credit provider will have to prove the following:

  1. There was no turpitude by the unregistered credit provider and that he or she has not acted dishonorably;
  • He or she was unaware of the requirement to register, where there was little or no turpitude on the part of the credit provider; and
  • The credit agreement must be declared void from its inception.

In the event that the unregistered credit provider succeeds to prove that the consumer was unjustifiably enriched, the unregistered credit provider can request the court to make an order that is just and equitable for re-payment of the amount lent and advanced to the consumer.         

Article written by Faure & Faure Inc. Director, Conrad Coetzee.

Conrad Coetzee | Director

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