It is common commercial practice for businesses to require problematic debtors to sign payment plans coupled with acknowledgements of debt (“AODs”) in their favour. The rationale behind this practice is usually to try and expedite recovery of this debt in court when the debtor, more often than not, defaults on the payment plan.
Given the importance of these documents in debt recovery, diligent attention should be given to the terms of the AODs, to ensure compliance with applicable legislation and the enforceability of their provisions, as recent case law illustrates.
The National Credit Act 34 of 2005
In the case of Friend v Sendal 2015 (1) SA 395 (GP), the court held that AODs which make provision for deferred payment of a debt (e.g. a payment plan) may constitute credit agreements to which the Act applies. This is subject to certain exceptions, for instance the Act would not apply to such an AOD if it is entered into between a business and a juristic person and a) the juristic person has an asset value or annual turnover of over R1 million or b) the debt is over R250 000 (see Sections 4(1)(a) and (b)).
The consequences of non-compliance with the Act are draconian. For instance, in the matter of Du Bruyn v Karsten 2019 (1) SA 403 (SCA), which concerned a once-off loan between former close friends, it was held that a failure to register as a credit provider rendered the agreement unlawful. It is therefore imperative to ascertain whether the Act applies to the AOD in question, and, if so, to ensure compliance both at the stage when the AOD is concluded and when it is sought to be enforced.
It is savvy to include a suretyship clause in an AOD where the principal debtor is a juristic person, as this provides an avenue for enforcement even if the juristic person is liquidated. There are certain formalities which need to be complied with when a suretyship is concluded (it must be reduced to writing and signed by the surety) and in addition, it has repeatedly been held that a suretyship constitutes a credit guarantee for the purposes of the above Act.
This means that, if the Act applies to the AOD by the principal debtor, it will also apply to the suretyship. The converse is also true, and an individual who stands surety cannot avail himself of the provisions of the Act if it does not apply to the AOD by the principal debtor – Shaw & Another v Mackintosh & Another 2019 (1) SA 398 (SCA).
Consent to judgment clauses
It is most tempting for businesses to insert a “consent to judgment” clause in their AODs, providing that, if the debtor and/or surety defaults on the payment plan, they consent to judgment being entered against them for the outstanding amount. Whilst there is indeed a mechanism in Section 58 of the Magistrates Court Act which allows for a debtor to consent to judgment prior to the institution of legal proceedings against it, this is a specific procedure and can, inter alia, not be used if the AOD was not signed pursuant to a letter of demand.
In addition, it was recently held in Avnet South Africa v Lesira Manufacturing 2019 (4) SA 541 (GJ), with reference to the case of Eke v Parsons 2016 (3) SA 37 (CC) that parties are not at liberty to simply approach the court to make an agreement an order of court where the agreement has not been preceded by litigation. This means that, for all intents and purposes, a consent to judgment clause in an AOD which is not preceded by a letter of demand in the Magistrates Court, or a summons in the High Court, does not avail the business in seeking judgment against the debtor and/or surety without first proving its claim.
For assistance in drafting a compliant, enforceable acknowledgment of debt, please do not hesitate to contact our offices.
Contributor: Tamsin Jones (Senior Associate) (Litigation Department) (Umhlanga Office)
Telephone: 031 566 2207
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