COMMON LAW SET‑OFF AND THE NATIONAL CREDIT ACT, 2005

By Tracy-Lee Janse van Rensburg, Director

In terms of the recent judgment handed down by Keightley J in the matter between the National Credit Regulator and The Standard Bank of South Africa Limited 2019 (5) (SA) 512 (GJ), Keightley J ruled that the common law right to set‑off is not applicable to credit agreements, which are subject to the National Credit Act, 2005 (“NCA“). It would therefore seem that, pending an appeal of this judgment, common law set‑off may not be applied in circumstances, where the NCA is applicable.

Following on a number of complaints that were lodged with the National Credit Regulator (“NCR“) by consumers in relation to, amongst others, The Standard Bank of South Africa Limited’s (“Standard Bank“) practise of applying common law set‑off against amounts received by consumers into various banking accounts held with it, the NCR applied for a declaratory order that “in light of sections 90(2)(n) and 124 of the NCA, the common law right to set‑off was not applicable in respect of credit agreements subject to the NCA“.

Whilst the NCR and Standard Bank agreed that sections 90(2)(n) and 124 of the NCA established a statutory scheme for set‑off which was quite distinct from the common law, the issue before the court was whether set‑off was only permissible under the scheme envisaged in section 90(2)(n) of the NCA, read together with section 124 of the NCA, or whether the NCA only applied when set‑off was specifically provided for in a credit agreement, failing which the common law right to set‑off was not ousted by the provisions of the NCA. It was Standard Bank’s position that, on a proper interpretation of the terms of the NCA, provided that a credit agreement did not contain any specific provision regulating set‑off, the NCA would not oust the bank’s common law right to apply set‑off. Given that this same view has been adopted by a number of credit providers within South Africa, the interpretation of the provisions of the NCA and thereby the decision of the court under this judgment will have an impact on both financial institutions and consumers within South Africa.

In terms of section 90(2)(n) of the NCA, a provision in a credit agreement is unlawful if it attempts to authorise or permit a credit provider to satisfy an obligation of a consumer by making a charge against an asset, account or amount deposited by or for the benefit of such consumer and held by such credit provider, or a third party, except in terms of a standing debt arrangement or to the extent permitted by section 124 of the NCA. In turn, section 124 of the NCA expressly dictates the parameters against which set‑off may be applied.

The parties were in agreement that, to the extent a credit agreement included a provision for set‑off, such provision would have to comply with the requirements set out in section 124 of the NCA, which included:

1. that the consumer’s prior written authorisation is obtained;
2. set‑off may only be applied against the asset, account or amount specifically named by the consumer in such authorisation;
3. set‑off may only be applied to satisfy those obligations specifically named by the consumer in the authorisation;
4. set‑off can only occur in respect of the amounts and on the dates specified in the authorisation; and
5. the credit provider is required to give notice to the consumer before any set‑off may be effected.

Consumers accordingly have a considerable amount of control over the statutory process of set‑off under the NCA, which is a marked departure from the common law principles of set‑off which provides that where two parties are mutually indebted to one another and both debts are liquidated and fully due, the one debt may extinguish the other without requiring payment.

Standard Bank, in presenting its argument to court, placed particular emphasis on the wording of section 90(2)(n) of the NCA and submitted that on a plain reading of the section it is only an express provision of a credit agreement which would be unlawful if it did not accord with section 124 of the NCA. In turn, the NCR submitted that sections 124 and 90(2)(n) of the NCA should be interpreted purposively by the court to exclude the continued application of common law set‑off in credit agreements regulated by the provisions of the NCA. In addition the South African Human Rights Commission, which was admitted as amicus curiae in the matter and supported the NCR’s arguments, highlighted the importance of interpreting a statute in its socio‑economic and institutional context.

Keightley J, in delivering the judgment, highlighted the importance of adopting a purposive approach in interpreting the provisions of sections 90(2)(n) and 124 of the NCA. The court found that the accepted principles of interpretation required that a meaning must be given to sections 124 and 90(2)(n) of the NCA which is consistent with the purpose of the NCA, its context as well as the Constitution of South Africa. As the purpose of the NCA was to balance the rights and interests of consumers with those of credit providers, section 124 had at its heart the requirement that the consumer who owes a credit provider money must have a say in and must authorise whether and how set‑off is to be applied in respect of the various credit balances in their account(s). Keightley J further found that, in interpreting a statute, our courts must assume that the provisions are included for a purpose, which must be realistic.

The court therefore rejected Standard Bank’s interpretation of sections 90(2)(n) and 124 of the NCA and found that the provisions were not consistent with the underlying purpose of the NCA or the context within which the NCA was adopted. Keightley J confirmed that a reading in is permissible for interpretational purposes and that, unless an express exclusion of the common law is read in, effect cannot be given to section 124, read with section 90(2)(n), of the NCA. As such, the court held that the correct interpretation of section 124 of the NCA would exclude the operation of common law set‑off in all credit agreements which are regulated pursuant to the provisions of the NCA.

Accordingly, going forward and pending an appeal of this judgment, any debt arising from a credit agreement which is subject to the provisions of the NCA will have to comply with the provisions of section 124 of the NCA in relation to any contemplated set‑off by the credit provider. Whilst the judgment will serve to protect consumers, it is likely to have an adverse effect on financial institutions within South Africa should they wish to apply set-off under agreements subject to the NCA. The judgment is also likely to have an impact on our court’s interpretation of statutes going forward.