A pawnbroker is entitled to retain only the proceeds of the sale of a pawned asset necessary to settle a consumer’s obligations under a credit agreement, the Supreme Court of Appeal (SCA) has confirmed.
This is one of several findings by the SCA in a judgment dismissing an appeal against orders made by the National Consumer Tribunal (NCT) against a pawnbroking business, The Loan Company (Pty) Ltd.
The judgment, which was handed down this month, addressed the interpretation of several aspects of the National Credit Act (NCA). These included the obligation to register as a credit provider, the permissibility of advertising and concluding credit agreements before registration, permissible interest charges, and the Tribunal’s powers to declare agreements unlawful and void, order refunds, and impose administrative fines.
Acting on complaints, the National Credit Regulator (NCR) investigated TLC’s business activities in 2017. The NCR referred the matter to the Tribunal, alleging that TLC engaged in prohibited conduct.
The Tribunal found in favour of the NCR and made several orders. It declared that TLC had repeatedly contravened several sections of the NCA. It declared that the sample transactions were unlawful and void. It ordered TLC to return to those consumers their assets, or the value thereof, and any amounts they paid towards their loans, less the loaned amount. It also imposed a fine of R250 000.
TLC appealed to the High Court in Pretoria, which dismissed the appeal with costs in 2022. The Hich Court limited TLC’s leave to appeal to the SCA to three of the contravention orders and three of the remedial orders made by the Tribunal.
Entering credit agreements before registration
The NCR alleged, and both the Tribunal and High Court confirmed, that TLC entered credit agreements before its registration as a credit provider on 31 March 2017, violating sections 40(1) and 40(3) of the NCA.
Section 40(1) mandates registration if the total principal debt under credit agreements exceeds a prescribed threshold. Section 40(3) prohibits unregistered persons from offering, extending, or entering credit agreements, and section 40(4) declares such agreements unlawful and void.
TLC argued it had applied for registration before entering the agreements and relied on section 42(3)(a), which allows credit providers to continue providing credit after applying for registration until a decision is made, if registration is required because of a new threshold.
TLC submitted it applied for registration on 9 June 2016, denied being obliged to register before the threshold changed from R500 000 to nil on 11 November 2016, and asserted no evidence existed of agreements before 9 June 2016.
The SCA found that TLC’s reliance on section 42(3)(a) was misplaced. This section applies only to specific instances – namely, when a credit provider that was never registered or that previously was not required to register is required to register because the threshold now obliges it to do so. This was not the case with TLC.
Advertising the availability of credit before registration
Section 76(3) of the NCA states: “A person who is required to be registered as a credit provider, but who is not so registered, must not advertise the availability of credit, or of goods or services to be purchased on credit.”
TLC admitted to advertising on its website before registration but argued that section 42(3)(a) permitted this if it could enter agreements post-application. The SCA dismissed this defence, noting that section 42(3)(a) was inapplicable, as established earlier.
Interest rate charges under the Act
The Tribunal found that TLC charged the correct interest rate for short-term loans. However, it highlighted a key issue: the company applied the same interest rate to agreements of different lengths, without adjusting for the actual number of days.
The Tribunal stated that TLC was obliged to take into account the actual number of days in the range of each agreement and to calculate the interest incurred for the specified number of days. This failure to tailor interest charges to the specific duration formed the basis of the dispute.
The NCA sets strict rules for interest charges. Section 100(1)(c) provides that “a credit provider must not charge an amount to, or impose a monetary liability on, the consumer in respect of … an interest charge under a credit agreement exceeding the amount that may be charged consistent with this Act”. Additionally, section 101(1)(d) requires that interest “must be expressed in percentage terms as an annual rate calculated in the prescribed manner” and “must not exceed the applicable maximum prescribed rate determined in terms of section 105”.
Regulation 40(2)(c)(iv) of the Regulations to the NCA allows credit providers to interpret a month as having either 30 days or the actual number of days. However, the SCA clarified that this flexibility has limits. Charging interest for 30 days on a 29-day agreement was deemed unreasonable because it would increase the already high cost of credit.
The Regulations specify that interest calculations depend on the daily deferred amount, which must reflect the average for the day or the amount at a specific time per the agreement. Interest can be added only at the end of the month, and charging beyond the agreement’s duration is prohibited. This ensures that consumers are not billed for time they did not borrow.
Tribunal’s power to declare credit agreements unlawful and void
The SCA addressed whether the Tribunal has the authority to declare TLC’s unregistered credit agreements unlawful and void under the NCA.
TLC argued the Tribunal overstepped its powers, asserting that only a court can declare credit agreements unlawful and void. It relied on section 164(1) of the NCA, which provides: “Nothing in this Act renders void a credit agreement or a provision of a credit agreement that, in terms of this Act is prohibited or may be declared unlawful unless a court declares that agreement or provision to be unlawful.”
The company also cited the SCA’s ruling in Vesagie NO and Others v Erwee NO and Another (2014), where it was stated that “a court is required to declare the agreement null and void ab initio” if a credit provider is unregistered.
Further, TLC contended that section 40(4), which labels unregistered credit agreements as “unlawful and void to the extent provided for in section 89”, does not grant the Tribunal declaratory powers. It highlighted that section 89 excludes pawn transactions, and pending legislative amendments would explicitly empower the Tribunal, suggesting it currently lacks such authority.
The SCA reviewed prior cases to assess the Tribunal’s role. In Chevron SA (Pty) Limited v Wilson t/a Wilson’s Transport and Others (2015), the Constitutional Court held that unregistered credit agreements are unlawful by operation of law under section 89, without needing a court order. However, the SCA noted the challenge in this case: section 89 does not apply to pawn transactions, prompting scrutiny of whether section 40(4) independently renders such agreements unlawful.
The court acknowledged the NCA’s complexity, observing that section 40(4) applies to all credit agreements, including pawn transactions, and does not reference section 164, which governs court proceedings.
The SCA rejected TLC’s interpretation of section 164(1), finding it does not override section 40(4)’s provision that unregistered agreements are unlawful. Requiring a court declaration after a Tribunal ruling would render section 40(4) “nugatory”, undermining the NCA’s consumer protections.
The SCA clarified that section 40(3) prohibits unregistered credit providers from entering agreements, and section 40(4) deems such agreements unlawful and void. This aligns with common law, where unlawful contracts are void ab initio. The court found “no rationale for distinguishing between pawn transactions and other credit agreements”, concluding that all unregistered agreements are unlawful by operation of law.
Even under section 89(5)(a), which requires a court to declare certain agreements void, the SCA noted that such agreements are inherently unlawful from inception, as supported by section 90(3): “In any credit agreement, a provision that is unlawful in terms of this section is void from the date that the provision purported to take effect.”
The SCA determined that the Tribunal acted within its mandate under section 27(a) of the NCA, which allows it to adjudicate applications and make orders provided for in the Act. By declaring TLC’s agreements unlawful and void, the Tribunal simply stated the legal position under section 40(4).
Tribunal’s refund order
The Tribunal’s decision to order refunds arose from its determination that TLC’s sample credit agreements, concluded before it was registered as a credit provider, were “prohibited and were unlawful and void”.
The SCA confirmed that the Tribunal’s power to issue such an order is derived from section 150 of the NCA. This section allows the Tribunal to require the repayment of “any excess amount charged, together with interest, at the rate set out in the agreement” or to issue other orders necessary to protect consumer rights under the Act. The SCA found this exercise of power to be “entirely appropriate” and within the Tribunal’s legal mandate.
Pawnbrokers’ rights to sale proceeds
TLC claimed the NCA’s definition of a “pawn transaction” allowed it to keep all proceeds from selling a pawned asset, regardless of the consumer’s debt. The SCA rejected this, focusing on the definition’s wording: the credit provider “is entitled on expiry of a defined period to sell the goods and retain all the proceeds of the sale in settlement of the consumers’ obligations under the agreement”.
The court emphasised that “in settlement of the consumers’ obligations” restricts retention to the loan amount and lawful charges, such as interest.
Aligning with common law, the SCA noted that pawnbrokers must return any surplus to the consumer after settling the debt. This reflects the NCA’s purpose, outlined in section 3, to ensure fairness and protect consumers, a mandate reinforced by section 2(1).
The SCA compared TLC’s interpretation to a pactum commissorium – a prohibited practice where a creditor keeps security upon default, regardless of value – which the court deemed inconsistent with the NCA.
The ruling’s implications were highlighted with an example from the sample cases. A consumer borrowed R35 000, owed R42 000, and defaulted. His vehicle, worth R100 000, was sold for R65 000, and TLC kept it all.
The SCA called this “harsh and unfair,” affirming that pawnbrokers cannot retain amounts exceeding the debt, because it undermines the NCA’s consumer protection goals and charge regulations.
Tribunal’s power to levy fines
The Tribunal’s authority to impose fines is provided for under section 151(1) of the NCA.
TLC challenged its fine, arguing the Tribunal ignored its financial position, misjudged the case’s merits, aimed to punish rather than deter, and unfairly targeted it.
The SCA dismissed these claims, noting that section 151(3) requires the Tribunal to weigh factors such as the contravention’s severity, consumer harm, and the transgressor’s co-operation with the NCR. The Tribunal’s discretion stands unless proven misused.
The court found that TLC withheld financial details – information it alone possessed – despite knowing a fine was sought.
The SCA stated: “It had ample opportunity to disclose its financial position in its own interest.” Without evidence of exceeding statutory limits or ignoring required factors, the fine was upheld, as was the High Court’s dismissal of the appeal.
