Application of NCA

The scope of the National Credit Act 35 of 2005 ("NCA") is wide, resulting in a variety of agreements falling within the ambit of the NCA. Section 4(1) of the NCA extends the application of the Act, to every credit agreement concluded between parties dealing at arm’s length and made within, the Republic of South Africa.

Credit Agreements

In order for the agreement to be classified as a credit agreement for purposes of the NCA, it must have two essential elements: credit must be extended; and there must be a fee, charge or interest imposed for deferred payment, or a discount must be given when prepayments are made.

Credit Providers

The National Credit Amendment Act, 2014 ("the Amendment Act") came into effect on 13 March 2015 and amended Section 42, by removing the previous threshold of 100 credit agreements, and providing for a threshold based on an amount to be determined by the Minister, by notice in the Government Gazette, for the purpose of determining whether a credit provider is required to be registered in terms of the NCA. However, at this stage, the Minister has, not determined a new threshold amount. Therefore, we can only presume, that until the Minister does so, the existing threshold of R500 000 will continue to apply.

Accordingly, Section 40, read with Section 42 of the NCA, obliges persons to register as credit providers in terms of Section 45 of the NCA if the total principal debt owed to the credit provider under all outstanding credit agreements, exceeds the threshold, currently R500 000. If an employer is required to register as a credit provider, and fails to do so, he will be severely limited in his option of legal recourse in the event that the employee fails to repay the loan or any interest thereon. An unregistered credit provider is unable to claim restitution under an unlawful agreement but may be able to enforce his rights by way of an action for unjustified enrichment. The loan agreement concluded between the employer and the employee would still, however, be unlawful.

However, whether required to register or not, if the agreement falls within the ambit of the NCA, the employer would still be obliged to comply with the provisions of the NCA.

Interest Free Loans

Where credit has been extended to an employee and repayment thereof is deferred but no interest, charge or fee is imposed the loan would not fall within the definition of a credit agreement for the purposes of the NCA.

Loans bearing Interest

What, then is the position, where an interest charge is raised by the employer on a loan to an employee? As mentioned above, the NCA only applies to a credit agreement concluded between parties dealing at arm’s length. The term "dealing at arm’s length" is not defined. However, Section 4(2)(b) affords some clarity. It provides that the parties are not dealing at arm’s length, inter alia, in any 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;".

That language would appear to have been adopted from the wellknown income tax case of Hicklin v Secretary for Inland Revenue 1980 (1) SA 481 (AD). The Appellate Division was there concerned with the interpretation of section 103 of the Income Tax Act. Trollip JA had the following to say about an agreement concluded "at arm’s length" 

"For "dealing at arms" length" is a useful and often easily determinable premise from which to start the inquiry. It connotes that each party is independent of the other and, in so dealing, will strive to get the utmost possible advantage out of the transaction for himself, indeed, in the Afrikaans text the corresponding phrase is "die uiterste voorwardes beding". Hence, in an at arms’ length agreement the rights and obligations it creates are more likely to be regarded as normal than abnormal in the sense envisaged in para (ii). And the means or manner employed in entering into it or carrying it out are also more likely to be normal than abnormal in the sense envisaged by para (i). The next observation is that, when considering the normality of the rights or obligations created or of the means or manner so employed, due regard has to be paid to the surrounding circumstances. As already pointed out s 103(1) itself postulates that."

In Eden Court Holdings (Pty) Ltd v Khan (3918/12) [2012] ZAWCHC 383, the court, after referring to the Hicklin case, was dealing with a loan made by an employer to an employee, which was interest free, unless the employee terminated his employment prior to the repayment of the loan, in which event the employer had the right to charge interest at prime less 5%. The question which arose for consideration, was whether the loan agreement was subject to the NCA. The court held that the transaction displayed elements of parties who were not dealing with each other at arms’ length because it is a normal consequence of a loan agreement that the lender, for the risk he assumes, will charge interest as compensation, and not satisfy himself only with a contingent arrangement for the payment of interest. As such, the court held that the plaintiff appeared not to have been focused on striving to get the utmost possible advantage out of the transaction for itself, and therefore the parties were not dealing with each other at arm’s length.

In my view, therefore, in light of the above authorities, it may be possible for the employer to structure an interest bearing loan to his employee, to fall outside the ambit of the NCA. It would seem to us, that the key features of such a loan would include the following: the interest charged must be benevolent to the employee, certainly not more than the official rate prescribed in the Seventh Schedule to the Income Tax Act, and preferably below that rate (which may however raise tax considerations for the employee);

  • no additional penalty interest charge in the event of late repayment;
  • no repayment acceleration in the event of any failure to pay interest timeously; and
  • no security to be taken for the loan.