In Nedbank Limited v Jones and Others, the Western Cape Division of the High Court held that a court hearing an application for debt review in terms of section 86 of the National Credit Act, 2005 ("NCA") cannot vary the contractually agreed interest rate in a credit agreement and cannot grant a debt review order in terms of which a debtor's monthly repayments do not cover the interest on the outstanding balance. The court held that any such order is ultra vires the NCA, and is therefore null and void. In FirstRand Bank Ltd v McLachlan and Others, the Supreme Court of Appeal affirmed the correctness of the decision in the Jones decision.
Background
In the McLachlan decision, the second and third respondents, Roshen and Komarie Maharaj, concluded a loan agreement with FirstRand Bank Ltd in order to fund the purchase of an immovable property. After the Maharajs experienced financial difficulties, they lodged an application with a debt counsellor in terms of section 86 of the NCA for debt review.
The debt counsellor prepared a debt repayment proposal and, in terms of section 86(8)(b) of the NCA, referred the matter to a magistrate for a debt review order to be granted. The magistrate subsequently granted an order declaring the Maharajs to be over-indebted and ordered that their obligations in terms of the loan agreement be re-arranged (the "debt review order").
The effect of this order was that the monthly instalments owing by the Maharajs would not cover the monthly interest accruing on the outstanding balance in terms of the loan agreement.
Recission of the debt review order overturned
The Jones case was decided after the award of the debt review order and, based on this decision, FirstRand successfully applied to the Magistrate's Court for rescission of the debt review order. However, the decision to rescind the debt review order was overturned on appeal, with the High Court holding that the Jones case did not have application because the debt review order was granted prior to the decision in the Jones case.
The Supreme Court of Appeal held that:
- the legislature's declared purpose of the debt review procedure is to provide a mechanism for resolving over-indebtedness based on the principle of satisfaction by the consumer of all responsible financial obligations;
- section 86 of the NCA empowers a court to "re-arrange" or "re-structure" a consumer's obligations under a credit agreement, but it does not empower a court to extinguish the underlying contractual obligations;
- section 86 of the NCA does not permit the award of a debt-review order which has the effect that, at the end of the period stipulated in the debt review order for repayment of the amounts owing by the consumer, the consumer's obligations are not satisfied; and
- the decision in the Jones case did not create new law, but merely pronounced on the meaning of the NCA, as it was promulgated in 2005.
- Accordingly, contrary to the High Court's decision, FirstRand was entitled to rely on the Jones decision despite the fact that it was decided after the award of the debt review order.
The court also held that the rescission of the debt review order was not definitive of the parties rights, as the Maharajs could have reapplied for a debt review order. Contrary to the decision of the High Court, the Magistrate's decision to rescind the order was not appealable.
As a result of the McLachlan decision, it is now settled that a debt review order which has the effect that a consumer's financial obligations remain permanently unsatisfied, is ultra vires the NCA and is therefore null and void.
Originally published 26 May 2020
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