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Law
Tuesday, May 1, 2007
Of juristic persons and suretyships

The final portions of the National Credit Act 2005 come into force 1st June 2007, specifically the sections affecting the manner in which credit agreements are entered into and regulated (most sections had come into effect as of 1st June 2006 and 1st September 2006).

However, not all credit agreements will fall within the ambit of the Act, nor will any related suretyships.
In explaining the position Grant Herholdt, director with the Commercial Litigation Department of Garlicke & Bousfield Inc., notes that sections 4(1)(a)(i) and 4(1)(b), exclude credit agreements if the consumer is:
• a juristic person (that is, a company, close corporation, partnership, association or certain trust) whose asset value or annual turnover exceeds R1 million; or,
• other juristic person where the credit agreement is defined as a ‘large agreement’ (that is, a mortgage bond or one that relates to a principal debt equal to or exceeding R250 000).

“It is expected that many lenders will encourage a consumer to apply for credit through the vehicle of a juristic person falling within the exemption categories,” he believes. “Second prize will be for lenders to encourage credit agreements where the application of the Act is limited.”
In these latter cases we are still dealing with ‘juristic persons’, but whose asset value or annual turnover is below R1 million and the credit agreement is either small or intermediate (that is, not a mortgage bond or the principal debt is less than R250 000). In such cases the following sections will not apply:
• Chapter 4, Part C dealing with credit market practices and Part D dealing with over-indebtedness and reckless credit;
• Chapter 5, Part A, section 89 (2) (b) dealing with unlawful agreements relating to negative option marketing;
• Chapter 5, Part A, section 90 (2) (o) dealing with unlawful provisions in a credit agreement relating to variable interest rates charged on the principal debt; and
Chapter 5, Part C dealing with the consumer’s liability, interest, charges and fees.

To recap, the whole Act only applies to natural persons whose have less than R1m in assets and take out ‘small’ or ‘intermediate’ agreements.

Suretyships

The next issue is the question of suretyships. These are very important where a loan is agreed with a ‘juristic person’, the idea being to make a natural person ultimately liable in the event of default. Suretyships are usually obtained from the individuals who are authorised to represent the juristic person, but in their personal capacities.
As such the suretyship will fall within the ambit of the Act only if the underlying credit agreement does.
Where the application of the Act is limited as mentioned earlier the connected suretyship is limited too.
Comments Mr Herholdt, “In the current situation, and on a strict interpretation of section 8(5) of the Act, a surety accepts the obligations of a consumer to the extent the Act applies to the underlying agreement. It is trite law that a surety’s obligations to a creditor cannot exceed that of the principal debtor. Conversely, a credit provider has the same obligations towards a surety as it has towards the principal debtor.”
He adds that as a consequence the Act cannot impose a stricter duty on a credit provider in its relationship with a surety than it does on the credit provider by the Act in its relationship with the principal debtor. “The Act is therefore limited in its application to suretyships to the extent that it is limited in its application to the underlying credit agreement.”
On this basis, the credit provider, in its relationship with a surety, may avoid the sections of the Act dealing with credit marketing practices, over-indebtedness, negative option marketing, variable interest rates and a surety’s liability for interest, charges and other fees payable in respect of the principal debt, to the extent that (i) the principal debtor is a juristic person whose asset value or annual turnover, and those of its related juristic persons, is below R1 million and (ii) the application of the Act is limited in respect of the underlying credit agreement due it being either a small or intermediate agreement.
“There is little doubt that this position will eventually be tested by the Courts.”
 

Copyright © Insurance Times and Investments® Vol:20.4 1st May, 2007
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