The National Credit Act, 2005 (NCA) protects individuals who have concluded credit agreements with unscrupulous lenders. The NCA’s reckless lending provisions indulge individuals who are parties to credit agreements with elaborate protections if, having regard to information which must be collected by the lender relating to the individual’s financial circumstances and ability to repay, credit should not have been advanced.
Reckless lenders preying on individuals are punished severely, but credit agreements concluded by lenders with small companies whose assets or turnover (including those of the companies’ corporate relatives) exceeds R1 million per year are not subjected to the same scrutiny. Under the NCA, a credit agreement concluded with a company which, together with its associates, has assets or annual turnover exceeding R1 million, is not afforded the same protections which are afforded to individuals who conclude such agreements, regardless of the means of the individual.
A credit agreement concluded between a creditor and an individual which would have been subject to the consumer-friendly scrutiny of the NCA will be enforceable against a company whose assets or annual turnover exceeds R1 million. So a startup company whose business is to acquire expensive capital goods and onsell them at a modest margin, for example, will probably not be afforded the protections afforded by the NCA to individuals who, regardless of their net worth, conclude credit agreements on exactly the same terms.
Few lenders give credit without security. A loan to a small company is often predicated on the shareholder or director who signs on behalf of the company binding themselves as surety for their company’s obligations under the loan agreement. While an individual who guarantees the obligations of a credit agreement which is subject to the NCA will be protected by the NCA’s reckless lending provisions, if a credit provider concludes a credit agreement with a company whose turnover or assets (together with those of its associates) exceeds R1 million and includes in such agreement a surety under which the director / shareholder signing on behalf of the company binds him/herself as surety for performance of the company’s obligations under the credit agreement, the surety will not be subject to the NCA’s reckless lending protections if the underlying credit agreement concluded with the creditor by the company is itself not subject to such protections.
Directors of small and medium companies must accordingly be cautious when signing credit agreements on behalf of their companies in need of credit because the agreement itself will probably not be subject to most of the consumer-friendly provisions of the NCA and, if the agreement includes a suretyship by the director/shareholder, the director/shareholder will probably have no recourse under the NCA, even if the underlying credit agreement or suretyship would have fallen foul of the NCA had it been concluded by an individual (as opposed to an individual acting on behalf of a company).
A director should never sign surety for the debts of his or her company unless (i) the company is very small and has minimal assets and turnover; (ii) he or she is sure the company will not default on the loan; or (iii) he or she is sure that the repayments required of him or her will be manageable if the company defaults.
Check for suretyship undertakings hidden in credit agreements concluded on behalf of your company because these undertakings will more than likely be enforceable. Bear in mind that a claim against a surety is often the preferred recourse for creditors, who do not want to waste time and money pursuing claims against principal debtors in liquidation.
These issues were considered and decided in Judge Satchwell’s 2008 judgment in the case of Firstrand Bank Ltd v Carl Beck Estates (Pty) Ltd and Another (56174/2007)  ZAGPHC 423, where the Court interpreted and applied the relevant provisions of the NCA.
We have recently seen the plight of several shareholder/directors of small companies who, in the course of trying to save their businesses in a difficult economic climate, faced exactly these issues. We think the legislature should consider amending the NCA so that the NCA assists such shareholder/directors. Excluding juristic persons (and individuals who sign surety in respect of their debts) from protection against reckless lending merely because the assets or turnover of the underlying debtor (together with those of its affiliates) exceeds R1 million is arbitrary and may lead to individual directors who sign surety under duress having no protection against unscrupulous creditors lending recklessly.
As things stand, an individual worth R100 million can rely on the protections afforded by the NCA when signing a credit agreement in his or her personal capacity to the same extent that a supermarket cashier who concludes such a credit agreement. But a distressed company in freefall, with zero profit and a turnover of R1.2 million, in desperate need of credit, has no such protection. Pity such company’s directors who, in a good faith attempt to save the company, sign surety for the credit sought. The law is not on their side.
Matthew van der Want
22 October 2018