In terms of section 8(1)(c) of the National Credit Act ("the Act"), a credit guarantee may constitute a credit agreement. The Act applies to all credit agreements, subject to certain conditions contained under section 4 of the Act. An agreement constitutes a credit guarantee if a person undertakes or promises to satisfy upon demand any obligation of another consumer in terms of a credit facility or a credit transaction to which the Act applies.
This principle was recently confirmed by the Supreme Court of Appeal ("SCA") in the matter of JC Da Silva V Ribeiro and LD Boshoff v Slip Knot Investments 777 (Pty) Limited (Case No. 661/09) ("Ribeiro Judgment"). In summary, the SCA held that where parties enter into a subsequent agreement to guarantee the obligations under an initial agreement, to which the Act does not apply, that credit agreement is also an agreement to which the Act does not apply.
The facts of the Ribeiro Judgment are as follows: In 2007 the respondent concluded two loan agreements with RB Merit Investments (Pty) Limited ("RB Merit") wherein the appellants bound themselves as sureties for the two loans granted to RB Merit. The loan agreements were further secured by mortgage bonds registered by the respondent over the property on which RB Merit was to build a hotel. Subsequent thereto, RB Merit and the appellants breached their obligations under the loan agreements. The parties concluded a further agreement in 2008 ("the settlement agreement"), which the SCA summarised as follows:
"(i) the applicant had lent and advanced amounts of R22,5m and R1m to R.B. Merit in terms of the loan agreements;
(ii) the outstanding amount still owing under those agreements was an amount of R35 641 117.69;
(iii) R.B. Merit would, on 11 January 2008, pay R7,6m to the applicant and the balance would be apportioned towards repayment of the outstanding amounts under the two loan agreements;
(iv) R.B. Merit would provide a bank guarantee to the applicant in an amount of R20,4m before 18 January 2008;
(v) the respondents would then be liable to pay the balance of the amount of R28 196 336.48 as follows: by 15 May 2008 an amount of R800 000, and by 1 December 2008, the balance together with any interest."
RB Merit settled its debts; however the appellants were unable to discharge their obligations. The respondent approached the South Gauteng High Court for the payment of the sum of R10 659 157.18. The appellants contended that the sum was not due because the credit agreement was concluded outside the auspices of section 89(2)(d) of the Act. This section provides that a credit agreement is unlawful if, at the time of the conclusion of the credit agreement, the credit provider was unregistered. It was contended that in terms of section 89(5) the credit agreement should be declared void by the court as from the date the agreement was entered into. It was common cause that the respondent was not registered as a credit provider.
The respondent asserted that the settlement agreement was concluded as a result of the appellants' and R.B. Merit's failure to fulfil their undertakings under the initial loan agreements. Hence, it contended, the settlement agreement was a 'credit guarantee' and not a credit agreement. The respondent further argued that, by virtue of s 8(5), read with s 4(2)(c), the Act is applicable to a credit guarantee only to the extent that it also applies to a credit agreement in respect of which the guarantee was granted. Accordingly, the settlement agreement, properly construed, was a credit guarantee, which also fell beyond the ambit of the Act.
The appellants contended that when RB Merit settled its obligation to the respondent, they became the principal debtors. According to their interpretation of the settlement agreement, they became the borrowers or credit receivers and hence the settlement agreement was a credit transaction covered by the Act.
The SCA confirmed the reasoning of the High Court in rejecting the contention that the initial loan agreements were irrelevant to determining the issue. The settlement agreement specifically referred to the appellants' obligations under the loan agreements and also the fact that at the time the agreement was concluded the appellants still had the obligation to guarantee R.B. Merit's commitments to the respondent. It was therefore held not to be a credit transaction. If it was not a credit transaction at the time the settlement agreement was concluded, it could not have become one, after R.B. Merit was released from its obligations. This would mean that the agreement was not void at the time that it was concluded, but became so once R.B. Merit had discharged its obligations under the very agreement. This result, said the high court, would be absurd.
The SCA further held that the settlement agreement did not constitute a novation of the initial loan agreement and the 'obligations and undertakings as accepted by the sureties in terms of the agreement have as their origin on the initial undertakings and obligations attributable to the sureties in the initial loan agreements'. The fact that the parties also recorded that 'this agreement shall be the sole record of the subject matter contained herein' – a point the appellants relied upon to avoid the consequences of the initial agreements – does not detract from the fact that the parties explicitly intended not to extinguish, but rather to confirm, the obligations arising from the initial agreements. The appeal was accordingly dismissed with costs.
The matter illustrates that it is of substantial importance to consider the manner in which credit guarantees are concluded in securing the indebtedness of third parties. When an underlying credit agreement is not governed by the Act, an agreement concluded subsequently thereto securing the debt of the initial agreement will, ordinarily as a consequence, be exempted from the ambit of the Act. However, care must be taken not to novate or extinguish the original obligations.