Common Law Right to Set Off No Longer Applicable in Respect of Credit Agreements

National Credit Regulator v Standard Bank of South Africa Limited (44415/16) [2019] ZAGPJHC 182; [2019] 3 All SA 846 (GJ) (27 June 2019)

The judgment handed down by Honourable Judge Keightley on 27 June 2019, in the Johannesburg High Court was welcomed by the South African Human Rights Commission and consumers alike.

The applicant in the matter, is the National Credit Regulator, an independent juristic person, entrusted with the regulation of South Africa’s credit industry. Among many, one of its prime functions is ensuring the National Credit Act be enforced.

The Respondent in this matter, Standard bank had, had numerous complaints against it for their practice of debiting the accounts of their clients without prior consent and crediting other accounts said clients also held with them. This practice referred to hereinabove is known as the common law right to set off and until the handing down of this judgment, the same was prejudicially enforced in everyday banking practice.

The South African Human Rights Commission sought leave not only to be admitted as amicus curiae (friend of the court) but also to present evidence pertaining to the ramifications in applying the common law right to set off to the debt review process. The respondent did not oppose the SAHRC’s appointment as amicus curiae but did oppose the adducing of the evidence. The Respondent’s opposition proved futile and the SAHRC was successfully joined in on the motion and received leave to proffer the aforementioned evidence.

In a nutshell, the National Credit Regulator approached the court for a declaratory order to clarify whether sections 90(2)(n) and 124 of the National Credit Act rendered the common right of law set-off applicable in credit agreements.

The respondent’s defence lay in a loophole in the National Credit Act which afforded them the option to fall back and rely on the common law right to set-off if the initial credit agreement bore no clause pertaining to the set-off procedure. Thus silence on setting off and the consumer not being informed or aware of the same in the first place afforded the respondent the ideal opportunity to utilise common law procedures.

This said loophole comes as no surprise, the National Credit Act and the manner in which same was drafted has been deplored by various courts over the years. Often being referred to as confusing and lacking in clarity, the Supreme Court of Appeal has even gone as far as to sound off on how inarticulate the act is.

Section 90(2)(n) of the National Credit Act deals with the regulation of consumer credit agreements and the unlawful provisions of a credit agreement.

Section 124 of the National Credit Act states various provisions for a set-off clause to be deemed valid, such as;

S124(1), read with S124(1)(e) written prior authorisation by the consumer being given beforehand.

S124(1)(a) said set off only being applied against a specific account/asset or amount authorised by the consumer.

S124(1)(b) Set-off only being utilised to satisfy specific obligations named by the consumer.

S124(1)(c) & (d) Set-off can only occur in respect of amounts specified, and set authorised dates as agreed to by the consumer in the credit agreement.

S124(2) The credit provider is obligated to furnish the consumer with adequate notice in the prescribed manner before set-off may be effected.

It is more than evident that the provisions of S124 of the National Credit Act afford the consumer vastly more control over the process.

The Respondent averred that common law set-off was a primary banking practice as it allowed the banks to recover the debt owed to the establishment almost immediately when funds were deposited into a client’s account. In response to this, the SAHRC submitted that debiting consumers’ accounts often left them in dire financial straits, mostly resulting in said consumers not being able to purchase the basics such as food, fuel, for the rest of the month or to satisfy their other financial obligations.

The SAHRC thus submitted that this was a gross infringement of consumers’ socio-economic, and basic human rights. Further to this, the SAHRC went on to submit that the commons law right to set off and how same was currently being applied in banking practice was also detrimental to South Africa’s credit industry.

In their application to adduce further evidence, the SAHRC filed an affidavit deposed to by a ‘seasoned’ debt counsellor, a one, Mr Slot. This affidavit extensively detailed Mr Slot’s professional opinion and experience of how the common law practice of setting off was annihilating the debt review process in South Africa. He averred that consumers under debt review were constantly being put in a position where they were defaulting in terms of their debt review court order due to setting off being applied against them and thus their funds were not readily available to satisfy their court-ordered payments, placing them further into financial disparagement. He went on to submit that in his experience, the common law practice of setting off was sending South Africa’s credit industry further into dejection.

The court ultimately held that while the common law right to set off was still being applied in banking practice, it would render s90(2)(n) & s124 quite honestly, useless. Judge Keightley quite simply put it as, “It is clear to me that so long as common-law prevails as an alternative form of set-off, s124 and s90(2)(n) will serve no purpose.” Judge Keightley also went on to submit that s124’s main purpose was to establish the break from the common-law practice.

The National Credit Regulator and South African Human Rights Commission was thus successful in their application and the declaratory order was handed down by Judge Keightley, “in light of sections 90(2)(n) and 124 of the National Credit Act 34 of 2005, the common law right to set off is not applicable in respect of credit agreements which are subject to the National Credit Act.” The Respondent was also ordered to pay the applicant’s costs, along with that of counsel.

This declaratory order will hopefully in future aid in the simplification and understanding of the often ‘bemoaned’ National Credit Act.

By Tarryn Fulton