Brief Summary

Credit Agreements — Registration of credit providers — Applicant sought confirmation of an order allowing it to take possession of movable assets of the Cape Leopard Trust as security for a loan — Respondents contended that the applicant was not registered as a credit provider under the National Credit Act, rendering the loan agreement illegal and unenforceable — Court held that the applicant's failure to register did not invalidate the suretyship and notarial bonds, as the Trust was a juristic person whose annual turnover exceeded the threshold, thus exempting the agreement from the NCA's provisions.

Comprehensive Summary

Summary of Judgment

Introduction

The proceedings were an urgent application initially brought ex parte in the Western Cape High Court, Cape Town, in which the applicant sought authority to take and retain possession of specified movable assets of a trust, relying on security created by a special notarial covering bond and a general notarial collateral bond.

The applicant was Merchant Commercial Finance 1 (Pty) Ltd trading as Merchant Factors. The respondents were Achiar Colyer Head N.O, Achiar Alexander Brownlee N.O, and Andrew Grant Kirkman N.O, cited in their capacities as the joint trustees of the Cape Leopard Trust (IT 1[…]).

On 12 July 2022, Dolamo J granted interim relief in the form of a rule nisi. The matter before Francis J concerned the return date of that rule nisi, which was opposed by the trustees. A patent error appeared in the wording of the interim order (referring to “immovable” instead of “movable” property), which the court corrected on the return date by substituting the correct word.

The general subject-matter of the dispute was the enforcement of the applicant’s security rights under the notarial bonds against the trust’s movable property, arising from indebtedness said to be due under loan arrangements with a close corporation and a related suretyship by the trust. The opposed return date ultimately turned on whether the underlying credit arrangements were enforceable in light of the National Credit Act 34 of 2005 and, in particular, whether the applicant was required to be registered as a credit provider.

Material Facts

It was common cause that, during the period 23 June 2016 to 2 June 2018, the applicant lent and advanced to Valoworx 33 CC (Valoworx) an aggregate capital amount exceeding R700 000, beginning with R500 000 advanced under a written term loan facility, with further advances recorded in written addenda.

It was also not in dispute that the Cape Leopard Trust executed an unlimited suretyship in favour of the applicant for Valoworx’s obligations under the term loan facility and addenda, and more generally for other indebtedness Valoworx might incur in favour of the applicant. To secure the trust’s obligations under the suretyship, the trust caused two notarial bonds to be registered in favour of the applicant on 7 July 2016, providing continuing covering security and additional cover for contingencies (amounts specified in the judgment).

Following breaches of the term loan facility, the applicant, Valoworx, and the trust concluded a written settlement agreement on 15 December 2020. Under that agreement, Valoworx and the trust admitted indebtedness in the amount of R1 094 919.8, agreed to a payment arrangement (including an initial payment and monthly instalments), agreed to pay costs on an attorney-and-client scale, agreed that upon breach the trust’s movable assets could be declared specially executable, and agreed that a certificate signed by a director of the applicant would serve as prima facie proof of indebtedness.

It was further common cause, for purposes of the return date, that Valoworx and the trust breached the settlement agreement by failing to make payments as contemplated. The applicant alleged that Valoworx and the trust were jointly and severally indebted in the amount of R1 571 307.38 as at 29 June 2022, and launched the urgent application to protect its rights under the notarial bonds, resulting in the interim order.

In the course of the opposed return date proceedings, the respondents sought leave to file a supplementary answering affidavit introducing Absa bank statements reflecting the flow of monies into Valoworx’s bank account, relevant to the dispute about Valoworx’s annual turnover. Ultimately, neither party persisted in opposition to the admission of further affidavits, and the court allowed them in the interests of justice to ensure fuller ventilation of the issues and finality.

As to what was disputed and material, the respondents’ remaining substantive defence became a denial of enforceable indebtedness based on the National Credit Act. The central factual controversy relevant to that defence was how to characterise Valoworx’s annual turnover. It was common cause that the amount of money passing through Valoworx’s bank account exceeded R1 million per annum during the relevant period. The respondents contended, however, that Valoworx acted as a middleman receiving monies on behalf of models (independent contractors), paying over 80% to them and retaining 20% as commission; on that view, Valoworx’s turnover was said to be only the retained commission, below the R1 million threshold. The applicant contended that turnover was the total monies received into the bank account in the course of business, not merely the commission component.

Two additional defences were initially raised by the respondents but were not pursued at the hearing: a challenge to urgency/ex parte procedure and a contention that certain attached items did not fall within the notarial bond security (the latter being indicated as properly addressed by interpleader proceedings).

Legal Issues

The central legal question was whether, in relation to the credit advanced to Valoworx and the suretyship and security provided by the trust, the applicant was required to be registered as a credit provider under the National Credit Act 34 of 2005, and whether the failure to register would render the relevant agreements unlawful and unenforceable, thereby defeating enforcement against the trust as surety and under the notarial bonds.

This required determination of the applicability of the NCA to the credit agreement with Valoworx, a juristic person, which turned on whether Valoworx’s asset value or annual turnover met or exceeded the ministerial threshold (stated in the judgment as R1 million) for purposes of section 4(1)(a)(i), and also raised (though ultimately not decided as necessary) whether the term loan facility constituted a large agreement as contemplated in section 9.

The dispute was primarily one of application of law to fact, underpinned by an interpretive question about the meaning of “annual turnover” in the NCA context where the statute does not define that term for section 4(1)(a)(i). The court was required to apply interpretive principles to determine the ordinary meaning of the term and then apply that meaning to the financial evidence presented.

A subsidiary procedural issue arose regarding the court’s discretion to admit further affidavits beyond the usual sequence, and a minor rectification issue arose concerning the correction of a patent mistake in the interim order (immovable versus movable).

Court’s Reasoning

The court identified that the respondents’ only pursued defence was the contention that the applicant’s failure to register as a credit provider under the NCA rendered the agreements illegal and unenforceable. The court set out the relevant NCA framework, focusing on section 4 (agreements excluded from the Act based on juristic person turnover/asset value threshold), section 7 (ministerial threshold determination), section 9 (categories of credit agreements), and sections 40 and 42 (registration requirements and thresholds for credit providers, and consequences of non-registration).

The court reasoned that, on the statutory scheme as applied to juristic persons, the applicant would not be bound by the NCA (and would not need to register as a credit provider for these agreements) if Valoworx’s annual turnover or asset value met or exceeded the R1 million threshold at the time of contracting. Conversely, if Valoworx’s annual turnover was below that threshold and the credit was not otherwise excluded, the applicant would have been obliged to register, with the potential result that agreements could be unlawful and unenforceable, defeating the trust’s liability as surety.

On the facts, the respondents relied on bank-derived evidence showing substantial inflows to Valoworx’s account during 2016 and 2017, but argued that turnover should be calculated as only the commission retained (20%), because most inflows were passed on to models. The applicant accepted the inflow amounts but contended that turnover refers to the total monies received in the ordinary course of business. The court treated the issue as whether “annual turnover” should be measured as gross receipts or as net commission.

In determining the meaning of “turnover”, the court observed that the NCA does not define the term in section 1, and that section 151(4) (which defines annual turnover for purposes of administrative fines) together with regulation 16 of the National Credit Regulations was of limited assistance, because those provisions concern a specific context and a restricted class of actors (such as credit bureaus and debt counsellors), and are directed at the assessment of administrative fines. The court also referred to interpretive principles concerning consistent usage of terms within an enactment, while emphasising that context may displace a uniform meaning where the term is used differently across sections.

The court then applied the principle that, where a statutory term is undefined, it should generally be given its ordinary meaning, and accepted dictionary use as an aid to interpretation. Relying on the Concise Oxford English Dictionary definition of “turnover” as the amount of money taken by a business in a particular period, the court concluded that turnover refers to all monies received by a business in the relevant period, not merely the margin or commission retained after onward payments to others.

The court further considered contextual indicators in the evidence, including emails regarding anticipated payments to Valoworx, which suggested that Valoworx’s business activities were not confined to commission-based representation of models and included other forms of receipts (such as anticipated settlement amounts and proceeds relating to other transactions). This supported the conclusion that turnover should not be artificially confined to commission.

On that approach, and on the evidence available, the court concluded that Valoworx was a juristic person whose turnover exceeded R1 million during the period when the loans were advanced. The result was that the respondents’ technical NCA defence failed: it was not necessary for the applicant to have registered as a credit provider in relation to the loan agreements concluded with Valoworx, and the trust as surety could not avoid liability on that basis.

Given that conclusion, the court stated that it was unnecessary to determine whether the loans fell below the threshold for large agreements under section 9, though it expressed the view that the initial term loan facility of R500 000 exceeded the monetary threshold for a large agreement.

In relation to procedure and costs, the court exercised its discretion to admit the additional affidavits because neither party persisted in opposition and no undue prejudice was identified, and the admission served the interests of justice and finality. The court directed that the costs of interlocutory applications would be costs in the cause, and applied the general principle that costs follow the result in respect of the main application. It also confirmed the attorney-and-client costs scale as sought in the rule nisi.

Outcome and Relief

The court corrected the patent error in the interim order by substituting the word “movable” for “immovable” in the relevant paragraph.

The rule nisi was confirmed and made final. The applicant was authorised to deal with the movable property in terms of the notarial bonds, and the trust was ordered to pay the costs of the application on the attorney-and-client scale. The costs of the interlocutory applications were ordered to be costs in the course.

Cases Cited

Minister of the Interior v Machadodorp Investments (Pty) Ltd and Another 1957 (2) SA 395 (A)

Singer NO v Master and Another 1996 (2) SA 133 (A)

Independent Institute of Education (Pty) Limited v KwaZulu-Natal Law Society and Others [2019] ZACC 47

Fundstrust (Pty) Ltd (in liquidation) v Van Deventer 1997 (1) SA 710 (A)

S v Williams and Others [1995] ZACC 6; 1995 (3) SA 632 (CC)

De Lange v Smuts and Others [1998] ZACC 6; 1998 (3) SA 785 (CC)

Legislation Cited

National Credit Act 34 of 2005

National Credit Regulations, GN R489 of 2006

General Notice 713 in Government Gazette 28893 of 1 June 2006 (threshold determinations referred to in the judgment)

Rules of Court Cited

No rules of court were cited in the judgment.

Held

The court held that the applicant’s failure to register as a credit provider under the National Credit Act did not render the loan arrangements unlawful or unenforceable on the facts, because Valoworx’s annual turnover exceeded the statutory threshold applicable to juristic persons, with “turnover” meaning the total monies taken/received by the business in the relevant period rather than only net commission retained.

The court further held that, in consequence, the trust could not avoid liability under its suretyship, and the applicant was entitled to enforce its security under the notarial bonds over the trust’s movable property. The rule nisi was confirmed, and costs were awarded against the trust on an attorney-and-client scale.

LEGAL PRINCIPLES

The judgment applied the principle that where a statutory term is not defined, it should generally be interpreted according to its ordinary meaning, with dictionaries serving as a permissible interpretive aid. This interpretive approach was used to determine the meaning of “annual turnover” in the NCA context relevant to juristic persons.

The judgment also applied the interpretive presumption that a word used more than once in the same statute ordinarily bears the same meaning, while recognising that the presumption may be displaced where the term is used in a materially different context within the enactment. On that basis, the court treated the “turnover” formulation in section 151 and regulation 16 (administrative fines context) as of limited utility for interpreting “turnover” for the section 4(1)(a)(i) exclusion.

On the NCA’s applicability framework, the judgment applied the principle that where a consumer is a juristic person whose asset value or annual turnover meets or exceeds the statutory threshold at the time of contracting, the relevant credit agreement falls outside the NCA’s application in terms of section 4(1)(a)(i), with the consequence (on the court’s approach to the defence) that the credit provider is not required to have registered as a credit provider for that agreement in order to enforce it.

On motion procedure, the judgment applied the discretionary principle that a court may admit further affidavits beyond the ordinary sequence where doing so serves the interests of justice, facilitates a fuller ventilation of disputes, and does not occasion undue prejudice.

On costs, the judgment applied the general principle that costs follow the result, and treated the costs of interlocutory steps taken during the proceedings as costs in the cause where they did not unduly delay or hamper the proceedings and where fairness considerations supported that outcome.

Merchant Commercial Finance 1 (Pty) Ltd Trading as Merchant Factors v Head N.O and Others (11610/2022) [2023] ZAWCHC 126 (25 May 2023)