The National Credit Act, No 35 of 2005 (NCA) was enacted to promote a fair, transparent, responsible and accessible credit market, and to protect consumers. These goals are to be attained by, among others, encouraging consumers to fulfil the financial obligations for which they are responsible. The NCA makes provision for various mechanisms to give effect to its purposes, with the most noteworthy and contemporary of these being the process of debt review.
In stark contrast to the NCA is the Insolvency Act, No 24 of 1936 (Insolvency Act), with one of its main functions being the beneficial distribution of an insolvent's estate to various creditors. When sequestration proceedings are instituted, an insolvent is to an extent allowed to circumvent and avoid the fulfilment of his financial obligations.
In light of the differences in the purposes for which the Acts were promulgated, it stands to reason that the compulsory sequestration of a consumer in terms of the Insolvency Act, before he or she has had recourse to mechanisms such as debt review that are focused on satisfaction of the consumer's financial obligations, may conflict with some of the provisions of the NCA. However, there is no substantive mention of the Insolvency Act or its provisions in the NCA.
Section 129, read together with section 130(3) of the NCA, provides that a credit provider may not commence "any legal proceedings to enforce [a credit] agreement" before giving the consumer notice in writing and informing the consumer of his or her right to refer the matter to a debt counsellor. The question therefore arises if sequestration proceedings instituted under the Insolvency Act by a credit grantor qualifies as a "legal proceeding to enforce an agreement" under section 129.
This matter was dealt with extensively in Naidoo v ABSA Bank 2010 4 SA 597 (SCA), an appeal to the Supreme Court of Appeal (SCA) by the appellant who was sequestrated at the respondent's instance in the Durban High Court on 25 May 2009. The appellant had failed to meet his payments to the respondent under instalment sale agreements to which the NCA applied and the appellant contended that the procedures set out in the NCA should have been followed before ABSA launched the sequestration proceedings.
In support of its case, the appellant implicitly conceded that sequestration proceedings are not "legal proceedings to enforce the agreement" within the plain legal meaning of section 129(1)(b) of the NCA and instead purported to have a wider interpretation attributed to the relevant sections. The appellant relied on the strength of the phrase "in any proceedings commenced in a court in respect of a credit agreement to which this Act applies" in section 130(3) of the NCA to argue that the relevant sections should be interpreted to cover all proceedings of which the underlying cause of action is a credit agreement to which the NCA applies, including sequestration proceedings.
The SCA made it clear from the outset that it agreed with the concession of the appellant that sequestration proceedings are not in and of themselves "legal proceedings to enforce the agreement" within the meaning of section 129(1). However, the interpretation of section 130(3) was at issue.
The court confirmed the case of Investec Bank Ltd & another v Mutemeri & another 2010 (1) SA 265 (GSJ) in which the High Court held that an application for sequestration is not a legal proceeding whereby the creditor "enforces" a debt and hence it does not amount to a legal proceeding to enforce an agreement under section 129 of the NCA.
Sections 129 and 130 are concerned with debt enforcement under Chapter 6 of the NCA and the court held that section 130(3) must be interpreted in the context of the chapter in which it is situated and not in isolation, as was argued by the appellant. On doing so, Cachalia JA confirmed the Mutemeri case and held that it was clear from the language that the proceedings referred to in sections 130(3) do not extend the ambit of section 129. Given that the appellant accepted that sequestration proceedings are not "legal proceedings to enforce the agreement" within the meaning of section 129(1), and as section 130(3) was held not to extend the ambit of section 129, the court concluded that the appellant's assertion that the respondent had to comply with section 129 was without merit. A credit grantor may now proceed immediately with sequestration proceedings without the necessity of having regard to the preliminary procedures provided for in the NCA. In essence, the issue of sequestration proceedings remains to be dealt with in terms of the all-encompassing provisions of the Insolvency Act.
The judgment has sparked debate and raised concerns as to how this precedent, that does not give the consumer the option to continue with debt review when he is sequestrated, will affect the efficiency of the NCA. As pointed out above, one of the methods of fulfilling the aims of the NCA is the principle of satisfaction by the consumer of all of his financial obligations and many academics have suggested that the decision in Naidoo is inconsistent with this goal and aim.
An over-indebted consumer may have the financial potential to overcome his debt if assisted by debt restructuring and other mechanisms, and may consequently use the processes of the NCA to avoid becoming insolvent and having the stigma arising out of this title attached to him. However, any potential that the consumer may have to fulfil his or her financial responsibility may be undermined by a credit provider who applies for sequestration directly. It appears as if a lacuna exists in this regard and that the rectification of the conflicting objects of two of the most influential Acts in our legal system may well be necessary in order to provide for the protection of consumers as envisaged in the NCA.