What to consider before providing credit to a family member, friend or any other familiar party
When receiving a request from a family member, friend or other familiar party for a loan (“a credit agreement”), consideration must be given to the provisions of the National Credit Act (“the Act”)
The following types of credit agreements are considered as transactions not concluded at arm’s length, as envisaged in section 4(2)(b) of the Act, and are not required to comply with the provisions of the Act:
(i) a shareholder loan or other credit agreement between a juristic person, as consumer, and a person who has a controlling interest in that juristic person, as credit provider;
(ii) a loan to a shareholder or other credit agreement between a juristic person, as credit provider, and a person who has a controlling interest in that juristic person, as consumer;
(iii) a credit agreement between natural persons who are in a familial relationship and
(aa) are co-dependent on each other;
(bb) one is dependent upon the other; and
(iv) Any other arrangement –
(aa) in which each party is not independent of the other and consequently does not necessarily strive to obtain the utmost possible advantage out of the transaction; or
(bb) that is of a type that has been held in law to be between parties who are not dealing at arm’s length;
Only credit agreements which are not concluded at arm’s length, are exempt from the application of the Act.
Section 8(4)(f) of the Act stipulates that “any other agreement, other than a credit facility or credit guarantee, in terms of which payment of an amount owed by one person to another is deferred and any charge, fee or interest is payable to the credit provider in respect of (i) the agreement; or(ii) the amount that has been deferred.”, shall be subject to the provisions of the Act.
If, for example, you advance a loan to a family member or friend and the loan agreement stipulates that interest will be charged on the loan until the loan is settled, the Act will apply and you will have to first register as a credit provider for the agreement to be valid and enforceable.
Other factors were also taken into consideration by the court in Roy Graham Fourie vs Pieter Albert Geyer case no: MKP 27/2018 where the court stated that where the acknowledgment of debt/credit agreement has “salient features of a credit agreement at arm’s length, i.e. the agreement identifies a capital amount which attracts interest, payments are deferred, collection fees are levied, and non-payment could trigger litigation accompanied by litigation costs on a punitive scale as between attorney-client”, such an agreement will fall within the ambit of the Act.
A credit agreement is unlawful if at the time the agreement was concluded the person was not registered as a credit provider, which in turn renders the agreement null and void.
You therefore run the risk of the borrower walking away with the loan amount you so generously advanced without having to repay the loan.
However, in cases where a determination is made that the credit agreement is unlawful, the credit provider (you) may claim restitution as a result of unjustifiable enrichment arising from the void agreement. The court, in this regard, has discretion to make an order to restore “simple justice between man and man” as stated in Colin Stuart Blacher vs David Josephson case no: A15/2022.
It is advisable that you consult an attorney before entering into a credit agreement with a family member, friend or other familiar party to ensure that your interests are protected.
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