1 July 2009 by

'Over-indebtedness' under the National Credit Act: Yet another hurdle for the creditor?

The introduction of the National Credit Act of 2005 (the Act) has brought many difficulties for creditors who, in good faith, try to recover outstanding debts from their debtors.

In terms of Section 86 of the Act, any consumer may apply to a debt counsellor established in terms of the Act to have himself declared to be over-indebted. The debt counsellor must take certain steps once he has made a recommendation. He can recommend that the consumer is not over-indebted but his credit providers should agree to a debt re-arrangement, or that the consumer is over-indebted and recommend to the court that the consumer's credit agreement(s) be declared as reckless credit.

If all the particular consumer's credit providers accept the recommendation, then a consent order is obtained in court to the effect of the recommendation. Alternatively, court proceedings continue.

The position has to some extent improved with the recent decision by the Witwatersrand Local Division in First Rand Bank v B L Smith & Another WLD 2008 (unreported). The debt claimed by the plaintiff creditor was one which fell within the ambit of the Act. Action was instituted after the defendants applied to a debt counsellor to be declared to be over-indebted.

The debt counsellor found the defendants to be over-indebted and notified the plaintiff that the application for debt-restructuring had been successful.

The Act itself does not provide for a time limit within which the debt counsellor must take steps after notice has been given and no sanction is imposed in the event that the debt counsellor fails to take further steps.

Section 88 of the Act prohibits a credit provider from litigating against the consumer based on the credit agreement in a case where he has received a notice from the debt counsellor, unless the consumer is in default under the credit agreement and fails to comply with a debt re-arrangement agreement or order of court, or the court has found the consumer not to be over-indebted.

In First Rand Bank v B L Smith & Another, the plaintiff had received the notice at the time it instituted action. However, neither the debt counsellor nor the consumer took further steps in terms of the Act.

The court found that the failure by the debt counsellor to follow the provisions set out in Section 86 of the Act should prevent him and/or the consumer from benefiting from the abovementioned prohibition on the institution of action by the credit provider.

A dishonest debtor could otherwise frustrate the rights of legitimate creditors by initiating proceedings in terms of the Act and then unilaterally staying the process mid-stream. A credit provider would then never be able to enforce its right to payment through litigation as he does not control the debt re-structuring process.

The court found that, where the process was not followed by the debt counsellor and/or debtor to its conclusion, then the notice would lapse once a reasonable time (namely three months) had expired for the process to have been followed. Upon expiry of the three-month period, the notice would no longer validly interrupt the creditor's right to institute legal proceedings against the debtor.

Lucinde Rhoodie and Liuba Baldjiev

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