The High Court in Bloemfontein has given its reasons for voiding an acknowledgement of debt (AOD) incorporating a power of attorney (POA) between Absa Bank and two clients, one of whom had an outstanding overdraft of more than R6 million.
On the strength of the AOD/POA, Absa sold a farm belonging to one of the clients to a trust.
The court granted an order in September 2022 voiding the AOD/POA from the date it was entered into and the sale of the property. Judge Corné van Zyl delivered reasons for the judgment in March this year.
The clients, who were the applicants in the matter, contended that the AOD/POA was unlawful and therefore void because it constituted a supplementary agreement as forbidden by section 89 of the National Credit Act (NCA).
Alternatively, they argued, if the AOD/POA was found not to be a supplementary agreement, it was an unlawful credit agreement because it contained numerous contraventions of the provisions of section 90(2) of the NCA.
Absa, the first respondent, rejected both contentions.
It said the AOD/POA did not add to the credit agreement. It was entered into four years after the credit agreement, and after the default in terms thereof occurred.
In any event, Absa said, the AOD/POA did not transgress any of the provisions of section 90(2).
Background
In 2003, Absa and the first applicant, “JS”, concluded an agreement for an overdraft facility of R22 000. The limit was increased over time, and by 2014, the facility was R5.2m, R2m of which had to be repaid by July 2015, which JS failed to do. By August 2017, the full outstanding amount was R6.2m.
Absa held mortgage bonds over JS’s property, a farm in the Free State, as well as over the remaining extent of the property, which was owned by the second applicant, “JHS”.
In May 2018, the first applicant signed an AOD, acknowledging indebtedness of R6.7m to Absa. When Absa handed over JS’s account to its Legal Recoveries Division, the applicants signed an AOD incorporating a POA authorising Absa to sell the property.
On the strength of the AOD/POA, in September 2021, Absa sold the property to a trust for R6m. The trustees were the second and third respondents.
In March of that year, JS informed Absa that he would be lodging a complaint with the Ombudsman for Banking Services (OBS), alleging the bank had extended credit to him recklessly. In August, the OBS advised JS that his case would not succeed.
Was the AOD/POA a supplementary agreement?
The court first determined whether the AOD/POA was a supplementary agreement. The applicants contended that it was, whereas Absa contended that it did not qualify as one.
Judge Van Zyl made the following observations:
- The NCA does not define a “supplementary agreement”.
- The Supreme Court of Appeal (SCA), in National Credit Regulator v Lewis Stores (Pty) Ltd, said section 2 of the NCA enjoins a court, when interpreting the Act’s provisions, to do so in a manner that gives effect to the purposes of the Act set out in section 3.
- The SCA said the over-riding purpose of the Act is “to promote and advance the social and economic welfare of South Africans, promote a fair, transparent, competitive, sustainable, responsible, efficient, effective and accessible credit market and industry and to protect consumers”.
- The starting point in interpreting the legislation is to consider the language used in the light of the ordinary rules of grammar and syntax; the context in which the provision appears, the apparent purpose to which it is directed, and the material known to those responsible for its production.
- The SCA took the view that an agreement can be supplementary only if it deals with the same subject-matter as the main agreement – that is, the regulation of the credit and the repayment thereof.
The High Court said that, on Absa’s own case, the AOD/POA did not constitute an amendment of the existing credit agreements between the applicants and the bank. In this regard, clause 12 of the AOD/POA specifically determined that it did not constitute a novation of any of the “clients’ obligations to Absa in terms of the underpinning and main agreements”.
The aforesaid showed that the AOD/POA dealt with the same subject-matter as the main agreement (the regulation of the credit and the repayment thereof). This was “explicitly evident” from certain clauses in the AOD/POA, Judge Van Zyl said.
In addition, the SCA, in the Lewis Stores judgment, specifically mentioned documents that contain a waiver of statutory rights as an example of a supplementary agreement. The AOD/POA contained such a waiver clause, Judge Van Zyl said.
The judge consequently found that the AOD/POA was a supplementary agreement.
Did the supplementary agreement contain unlawful provisions?
Having found that the AOD/POA was a supplementary agreement, the court turned its attention to whether it contained provisions that made it unlawful – because it included provisions that would be unlawful if they were included the main credit agreement.
Section 89(2)(c) of the NCA determines that a credit agreement is unlawful if it is a supplementary agreement or document prohibited by section 91(a). The Act has been amended to the effect that section 91 now contains two sub-sections.
Sub-section (2) states: “A credit provider must not directly or indirectly require or induce a consumer to enter into a supplementary agreement or sign any document that contains a provision that would be unlawful if it were included in a credit agreement.”
Section 90 of the NCA determines the provisions in a credit agreement that make it unlawful.
Judge Van Zyl found that several clauses in the AOD/POA would be unlawful if they had been included in a credit agreement. Therefore, she declared the AOD/POA void from the date the agreement was entered into.
Was the AOD/POA a credit agreement?
Judge Van Zyl said she might have erred in concluding that the AOD/POA was a supplementary agreement prohibited by section 91(2) and therefore constituted an unlawful agreement in terms of section 89(2)(c). She therefore considered the alternative basis of the applicants’ case: the AOD/POA was, first, a credit agreement and, second, contained unlawful provisions.
Section 8 of the NCA provides for the classification of credit agreements. Judge Van Zyl said section 8(4)(f) provides for a catch-all category of credit agreements that fall outside the other definitions in section 8 and determines as follows:
An agreement, irrespective of its form but not including an agreement contemplated in sub-section (2) constitutes a credit transaction if it is 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.
Judge Van Zyl said that, on a literal interpretation, the AOD/POA met the above definition because payment of the amount owed was deferred until the sale of the property, and interest, charges and fees were payable. Consequently, the AOD/POA constituted a credit agreement.
The judge said her earlier findings regarding the provisions that were unlawful in terms of section 90 were, mutatis mutandis, applicable when the AOD/POA was considered to be a credit agreement.
However, there was one distinction.
“When I considered the AOD/POA on the basis of being a supplementary agreement, I found it to be an unlawful agreement in terms of section 89(2)(c), read with section 91(2) of the Act. When considered on the basis of constituting a credit agreement, the presence of the unlawful provisions therein constitutes a transgression of sections 90(1) and (2) of the Act,” she said.
