On 22 August 2019, the High Court of South Africa, North West Division, Mahikeng (“High Court“) declared to be unlawful an acknowledgement of debt (“AOD“) between friends of some 18  years relating to a capital amount of R 831 000 lent and advanced between them. When the lender friend enforced the AOD in the High Court, the borrower friend dispensed with the friendship niceties and successfully argued that the AOD was unlawful for failure by the lender friend to register as a credit provider as required in terms of the National Credit Act, No. 34 of 2005, as amended (“NCA“).

What happened?

The judgment which is the subject of this note is Fourie v Geyer (MKP27/2018) [2019] ZANWHC 42 (“Fourie Judgment“). Mr Ryan Graham Fourie (“Fourie“) launched an application in High Court against his friend Mr Pieter Albert Geyer (“Geyer“) for the repayment by Geyer of R 1 303 120.05 inclusive of interest at a rate of 18% per annum. In terms of the AOD, Geyer had acknowledged in writing that an amount of R 831 000 calculated as at 13 August 2015 was owing by Geyer to Fourie. This amount was constituted by the following three loans made by Fourie to Geyer – 

• R 461 000  for outstanding rentals;
• R 270 000 in respect of the Geyer’s indebtedness to ABSA Bank Limited for loans which Fourie settled on behalf of Geyer; and
• R 100 000  in respect of commission due to Fourie arising from the sale of an immovable property.

Which arguments were raised in Court?

In response to the loan repayment claim by Fourie, Geyer raised the following points in his defence– 

• the AOD deferred the repayment of the loan for a period of 60 days from the AOD signature date and interest was levied on the outstanding amount; therefore, the AOD was a credit agreement falling within the scope and ambit of section 8(4)(f) of the NCA;
• since the AOD involved a capital amount in excess of R 500 000, Fourie should have registered as a credit provider as required in terms of section 40 of the NCA; and 
• the AOD was unlawful on the basis that in terms of section 89(2) of the NCA, a credit agreement is unlawful if at the time the relevant agreement was concluded the credit provider was required in terms of the NCA to be registered but was not so registered.

Fourie raised the following arguments in response to the defence by Geyer–

• in terms of section 4(1), as read with section 4 (2)(b), of the NCA, the NCA applies to credit agreements between parties dealing at arms length (that is, an agreement concluded by the parties acting freely and independently of each other and without some special relationship);
• when the AOD was concluded, Fourie and Geyer were not dealing at arms length since they had been friends for 18 years;
• even if it were found that the AOD was subject to the NCA, the three loans that constituted the capital amount in the AOD did not exceed the threshold of R 500 000 as was applicable at the time in terms of Government Gazette 28893 of 1 June 2006. In terms of section 42(1) of the NCA, only credit providers with an aggregate number of credit agreements exceeding the threshold of R 500 000 were required to register as such.

What did the Court say?

The High Court dismissed the application by Fourie with costs and agreed with Geyer that (i) the NCA applied to the AOD and (ii) the AOD was unlawful because Fourie was not registered as a credit provider when the AOD was signed. Petersen AJ said the following– 

• “It is common cause that the applicant [Fourie] and respondent [Geyer] have been friends for the past 18 years. The applicant [Fourie] has come to the financial rescue of the respondent [Geyer] and his family on a number of occasions. They engaged in formal business dealings underpinned by rental agreements in respect of property owned by the applicant [Fourie]. The applicant [Fourie] on his version was entitled to commission on the sale an immovable property owned by the respondent [Geyer]. A common sense assessment of this relationship demonstrates that the mere fact that the parties were friends, who just happened to engage in business dealings, where one friend advanced loans to the other in times of need, does not, detract from the fact that in so doing they were transacting at arm’s length.”; [Emphasis added]
• “From a legal perspective, adopting a pragmatic approach to the AoD, it is clear that the AoD as drafted has the salient features of a credit agreement at arm’s length. The agreement identifies a capital amount which attracts interest, payments are deferred, collection fees are levied and non-payment could trigger litigation accompanied by litigation costs on a punitive scale as between attorney-client. In a familial relationship in the ordinary sense, it would ordinarily be out of kilter that loans would be advanced to family members with the expectation of interest and the lurking notion of litigation with punitive cost orders.”; and 
• “The AoD executed in favour of the applicant [Fourie] by the respondent [Geyer] was for a capital amount of R831 000,00. On its own that amount exceeds the threshold of R500 000,00 applicable at the time the AoD was concluded. The applicant [Fourie] was therefore, in my view, required to register as a credit provider in terms of section 40(1) of the NCA.”

What does this mean for me?

The following are practical lessons from the Fourie Judgment for businesspeople who help friends and families with loans and companies which are not financial services provider but lend money on an ad hoc basis–

• a familial relationship does not guarantee that when a lender friend claims repayment of money from the borrower friend, the borrower friend will not dispense with friendship niceties and defend himself or herself with the most potent legal arguments in Court;
• whilst the threshold for registration as a credit provider was R 500 000 at the time of the conclusion of the AOD in the Fourie Judgment, as of 11 November 2016, the Minister of Trade and Industry prescribed that the threshold is nil; 
• therefore, every person who intends to provide credit in terms of a credit agreement must register as a credit provider to avoid the relevant loans being unlawful; 
• although Fourie was unsuccessful in his claim against his friend Geyer, Petersen JA said that he (Fourie) could still recover his loan based on unjustified enrichment (that is, by convincing a Court that Geyer’s estate was increased unjustifiably at the expense of Fourie); therefore, claimants in Fourie’s position would still have legal recourse notwithstanding the unlawfulness of the relevant credit agreement; and 
• to avoid unnecessary legal costs, lenders must seek legal advice before extending loans.