DEBT CLEARANCE LEGAL ARTICLES
When it comes to debt clearance, it is always necessary to ensure that you make educated decisions. You can only do this if you have familiarised yourself with the laws and do’s and don’ts that apply to you and your situation. The advent of the National Credit Act (hereafter NCA) has brought many uncertainties in terms of its application and interpretation and one particular matter of contention is the introduction of S103(5) and how it affects the operation and application of the common law in duplum rule, which has been applied to credit agreements for over a century. The question becomes, “Does S103(5) of the NCA replace, vary or extend the common law in duplum rule or not?”
The common law in duplum rule
The common law in duplum rule provides that interest on a debt will stop accruing once the total amount of arrear interest accrued equals the outstanding principal debt. The rationale behind this rule was that debtors who were behind on payments should not be at the mercy of never-ending interest charges and ultimately be in a position where they are owing more than twice the amount of their capital debt. Therefore, once the total amount of interest equal to the amount outstanding principal debt has been reached, the creditor (or lender) is prohibited from continuing to charge arrear interest. However, once the debtor makes a payment and reduces the outstanding capital debt, the creditor may once again commence with charging arrear interest – to that amount equal to the initial capital outstanding as at the time of default. It is important to note that the common law in duplum rule only applies to arrear interest and not any other charges, meaning that a longer period of interest can be levied.
S103(5) of the NCA
According to the aforementioned provision, “Despite any provision of the common law or a credit agreement to the contrary, the amounts contemplated in S101(1)(b) to (g) [initiation fees, service fees, interest (contractual and default), costs of any credit insurance, default administration charges, and collection costs]that accrue during the time that a consumer is in default under the credit agreement may not, in aggregate exceed the unpaid balance of the principal debt under that credit agreement as at the time the default occurs”. This provision has consumer protection as its main aim and the implications of this provision confirm this. Firstly, the net is cast significantly wider in terms of the application of the provision. Unlike the common law rule, S103(5) is applied to a number of costs (as envisaged by S101(1)(b) of the NCA ) of which the practical implication is quite simple – the limit of the amount equal to the unpaid balance outstanding will be reached much quicker than in the case where only arrear interest accrued is considered. A further consumer friendly implication is that S103(5) is applicable throughout the entire period of default, and therefore for as long as the client is in default, the creditor (or lender) may not levy any further charges – even if the consumer makes payments to these reduce the outstanding capital amounts on these accounts.
The Supreme Court of Appeal had an opportunity in the matter of Nedbank v The National Credit Regulator to address the many uncertainties presented by the two versions of the in duplum rule. In this matter, the parties (which included other commercial banks as well) sought a declaratory with respect to whether S103(5) of the NCA abolished the common law in duplum rule in so far as it concerned credit agreements falling within the ambit of the NCA . The court was very clear in its judgment, in that the aforementioned provision is not a code and that it is ‘no more than a specific rule applicable to specific circumstances’, which in this case refers to a credit agreement governed by the NCA . The court further concluded that purely because a provision deals with the same subject matter as a common law rule, it does not follow that the statutory provision incorporates all aspects of the common law rule and finally relied on the rule of statutory interpretation that a provision shall not be interpreted to alter the common law more than is necessary unless the legislative intention to do so is clearly reflected in the enactment. The court held that S103(5) is not a codification of the in duplum rule and that the rule in S103(5) is only applicable to credit agreements that fall within the ambit of the NCA .
One may conclude that the intention of the draftsman of this provision was tasked with the objective to protect the consumer and it may follow that the creditors and lenders may continue to seek reparation by testing other avenues of the act to protect their interests. But for now, it is settled, the common law in duplum rule is very much applicable (in relation to credit agreements concluded prior to 1 June 2007) and in no manner does the implementation of S103(5) replace, vary or extend the common law in duplum rule, both rules has its place. To complete our online assessment, please click here!
Beulah Roberts : Candidate Attorney
Kim Armfield & Associates Attorneys
Tel.: 021 949 1758