Set-off allows the termination of obligations without an exchange of performance. Where parties are indebted to one another, set-off operates automatically under the common law when the requirements for set-off are satisfied. Under sections 90 and 124 of the National Credit Act (NCA), the process is not automatic and is more cumbersome and onerous on the credit provider.
Whether credit providers are regulated by the common-law is uncertain and the National Credit Regulator has asked the High Court for clarity on the meaning of s124 of the NCA in this context.
The common law requirements for set-off are simple. Reciprocal debts must exist between the same parties in the same capacities (so a creditor cannot bring a claim in a representative capacity, such as a trustee). This is referred to as the “mutuality requirement”. The second requirement is that the debts must be of the same kind to be capable of set-off. Thirdly, both debts must be due and payable and therefore enforceable. Lastly, the debts must be liquidated; in other words, capable of speedy and easy proof. The contract between a bank and its customer includes an implied right of common law set-off with no requirement for express or written consent from the customer nor is the bank required to notify the consumer of the set-off in advance.
Section 90(2)(n) of the NCA prohibits an automatic set-off without compliance with s124 of the NCA. That section sets out the conditions for set off in terms of a credit agreement incorporating a clause authorising the appropriation of funds from a debtor’s account in set-off of a consumer’s obligation in terms of a credit agreement. Section 124 says that a creditor must get the customer’s authorisation, specifying:
- the account from which the funds can be withdrawn;
- the debt which is to be paid;
- the amount which may be transferred; and
- the date of the transfer.
The credit provider must also notify the customer of the intended set-off together with details of the transaction before collecting funds from the account in terms of the authorisation. The pending litigation is important to both customers and credit providers, particularly banks. If the court finds in favour of the National Credit Regulator, credit providers will face these restrictive requirements when using set-off to collect debts.
The litigation will make the position clear but if the NCA is found to trump the common law, credit providers may simply implement the NCA requirements or may opt for example to take additional security. An effect on the accessibility and cost of credit is probable.