Reinstatement of Credit Agreement

Section 129(3) of the National Credit Act, 34 of 2005 allows a debtor who is in default to reinstate the credit agreement that he/she has with a credit provider. Reinstatement allows the debtor to resume possession of the property that has been repossessed by the credit provider under an attachment order. In other words, and to a certain extent, it places the debtor back in the position as if he / she had not defaulted.

How and when

Section 129(3) and (4) stipulates the requirements that need to be met by the debtor who is seeking reinstatement as well as the circumstances where reinstatement will not be allowed.

Section 129(3) states that:

“Subject to subsection (4), a consumer may –

  • at any time before the credit provider has cancelled the agreement re-instate a credit agreement that is in default by paying to the credit provider all amounts that are overdue, together with the credit provider’s permitted default charges and reasonable costs of enforcing the agreement up to the time of re-instatement; and-
  • after complying with paragraph (a), may resume possession of any property that had been repossessed by the credit provider pursuant to an attachment order.”

Section 129(4) states that:

A consumer may not re-instate a credit agreement after-

  • the sale of any property pursuant to-
  • an attachment order; or
  • surrender of property in terms of section 127;
  • the execution of any other court order enforcing that agreement; or

                  the termination thereof in accordance with section 123.”

Consider the following scenario: You register a mortgage bond with your local bank in order to obtain financing to purchase land, where you intend on building your dream house. The loan or mortgage agreement falls within the ambit of the National Credit Act. Circumstances arise that result in you being unable to meet your obligations under the said credit agreement and you fall into arears. The bank then takes the necessary steps to inforce the agreement in order to recover the moneys owed to them and obtains judgement by default against you.

Just as they notify you that they are going to sell your house, you manage to raise enough money to pay your arrears. The bank agrees to give you another chance on condition that you keep up with your payments and should you fail, they will continue with the judgement obtained and will proceed to sell your house. However, soon thereafter you default again but manage to bring your arrears up to date.

As time goes on, you hit another financial storm and default on your payments once more. Despite notices from the bank to pay, you fail to comply and the bank executes on the judgement it obtained against you when you first defaulted and your house is then sold at public auction.

The following questions arise:

  1. Did you successfully reinstate your credit agreement in terms of section 129(3) of the National Credit Act by paying your arrears the first time even though you did not express your intention to do so?
  2. What about the banks’ unpaid legal costs and other costs incurred in enforcing the agreement?
  3. If you did successfully reinstate the credit agreement, what then happens to the judgement obtained against you?

This is the situation that Ms Nkata found herself in, in Nkata v First Rand Bank Limited 2016 (4) SA 257 (CC), which started in the Western Cape High Court and went all the way to the Constitutional Court.

In relation to the above noted questions, the majority judgement of the Constitutional Court held that as long as a credit agreement was not cancelled it was eligible for reinstatement. Reinstatement in terms of section 129(3) took place by operation law and thus the debtor seeking reinstatement did not need give notice of their intention to do so but simply needed to meet the requirements set out in the said section. Furthermore although upon default the full accelerated debt may be demanded, payment of the overdue amount (the arrears), sufficed for purposes of reinstatement.

Regarding payment of the credit providers default charges and reasonable costs of enforcing the agreement, the Court held that section 129 (3) does not preclude reinstatement where a debtor has paid the overdue amount but was not given notice of the credit providers costs. This is because those costs only become due and payable once they are agreed or taxed and if the credit provider does not notify the debtor of the costs and demand same, the payment of the arrears will suffice for reinstatement. In addition the Court stated that this view or interpretation of section 129(3) prevents credit providers from arbitrarily debiting costs and suddenly thwarting reinstatement by saying their costs were not paid when debtor had no knowledge of these costs.

Thus when one examines the above scenario, the judgement given by the majority in the Constitutional Court suggests that having paid your arrears when you first defaulted and judgement was granted against you, and in the absence of the bank demanding costs from you, you would have successfully reinstated the credit agreement.

However what is to become of the judgement against you and the subsequent execution against your property?

Regarding section 129(4) (b) the Court held that the barrier to reinstatement of a credit agreement applies only when proceeds from a sale in execution have been realised. Thus, any time before the above happens, and if the agreement has not been cancelled, a debtor may reinstate the credit agreement. Furthermore once a credit agreement has been reinstated, the default judgement and attachment order for sale in execution are rendered ineffectual, i.e. without force or effect.

To a large extend, the interpretation of Section 129(3) and (4) by the majority judgement of the Constitutional Court may influence the way credit providers’ deal with habitual defaulters. Why run the risk of a debtor reinstating at the last moment during a sale in execution, after incurring substantive costs to enforce the agreement. Cancellation may be the better option.

Kgolofelo Makhuthudisa