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Application of the National Credit Act to surety agreements

by Jan-Hendrik Gous on 26 July 2018


In the recent case of Shaw & another v Mackintosh & another (267/17) [2018] ZASCA 53, the Supreme Court of Appeal had to consider the position of sureties under the National Credit Act, No. 34 of 2005 ("the Act").  

Facts of the case

The first respondent, Mackintosh, loaned an amount of money to the second respondent company.  An acknowledgement of debt ("AOD") was subsequently signed in terms of which the company acknowledged its indebtedness to Mackintosh.  Provision was made for the loan amount to attract interest until it was finally repaid.  The agreement furthermore provided for the applicants in this case to bind themselves as joint and several co-principal debtors with the company for the repayment of all amounts owing by the company to Mackintosh.  When the company defaulted on its payments and subsequently went into liquidation, Mackintosh sued the applicants as sureties.

The dispute between Mackintosh as the creditor and the sureties turned on whether their relationship was governed by the Act.  A "credit agreement" for purposes of the Act is defined in section 8 thereof and includes a "credit facility", "credit transaction", "credit guarantee", or any combination of the aforementioned.  A "credit guarantee" is defined in section 8(5) as an agreement in terms of which "a person undertakes or promises to satisfy upon demand any obligation of another consumer in terms of a credit facility or a credit transaction to which this Act applies".  

It was common cause that as far as the principal debt between Mackintosh and the company was concerned, the AOD fell outside the scope of operation of the Act.  This was due to the amount of the debt involved and the company's turnover.  Mackintosh accordingly argued that his agreement with the sureties constituted a credit guarantee which was excluded from the operation of the Act due to the fact that the principal agreement with the company was not itself subject to the Act.  The sureties on their part argued that their agreement with Mackintosh constituted a stand-alone "credit transaction" in terms of section 8(4)(f) of the Act and that the AOD did not bind them as sureties, but that they rather became parties to the agreement as co-principal debtors.  It was argued that Mackintosh failed to register as a credit provider as required by the Act, and that the agreement between them was subsequently void in terms of the Act.

Court's decision

The court found that the agreement between the creditor and the sureties was not governed by the provisions of the Act given that the agreement between them constituted a credit guarantee based on an agreement to which the Act does not apply.  The definition of "credit guarantee" requires an undertaking by a person to satisfy on demand the obligations of another person arising from a credit facility or a credit transaction to which the Act applies.  Section 4(2)(c) of the Act furthermore determines that the Act only applies to a credit guarantee to the extent that the Act applies to a credit facility or credit transaction in respect of which the credit guarantee was granted.  In this case the principal debt between Mackintosh and the company was not subject to the provisions of the Act, and as such it cannot be said that the surety agreement was regulated by the Act.  The court dismissed the sureties' argument that a stand-alone agreement was formed on the basis that they were not granted a loan, and that their involvement only arose when they undertook or promised to pay on demand the admitted indebtedness of the company.

Analysis of court's decision

Although it can be said that the court arrived at the correct conclusion, its reasoning in reaching the judgement must be questioned.  The court held that the Act does not apply to the suretyship due to the fact that it constituted a credit guarantee as defined in the Act.  The court held that "if the agreement between the appellants and Mackintosh is a credit guarantee as defined, it does not fall within the NCA…".  It is however clear from section 8(5) of the Act that an agreement can only be a "credit guarantee" should it be based upon an agreement which is subject to the Act.  There can only be one type of "credit guarantee" under the Act: one which is based on a credit facility or credit transaction to which the Act applies.  In this matter the surety agreement did not constitute a credit guarantee as defined in the Act and for that reason it was not subject to the Act.  

A surety agreement which does not constitute a credit guarantee within the meaning of the Act, could however represent another type of credit agreement.  The sureties in this case argued that their agreement constituted a "credit transaction" in terms of section 8(4)(f).  This section determines that an agreement is a credit transaction if it is an agreement, "other than a credit facility or credit guarantee, in terms of which payment of an amount owed by one person to another is deferred, and any charge, fee or interest is payable to the credit provider…".  The court rejected this argument on the basis that no loan was granted to the sureties and that their involvement only arose after they undertook to pay on demand the company's admitted debt.   

The court refrained from considering in detail the position of sureties who bind themselves as co-principal debtors.  It has been held that a surety who binds itself as surety and co-principal debtor remains a surety whose liability arises wholly from the contract of suretyship (see in this regard Firstrand Bank Ltd v Carl Beck Estates (Pty) Ltd).  Signing as surety and co-principal debtor does not render a surety liable in any capacity other than a surety who has renounced the benefits of excussion and division.

Conclusion 

Before signing a surety agreement, a surety would do well to ascertain whether the principal debt falls under the operation of the National Credit Act.  The surety will only be entitled to a defence in terms of the Act if the principal debt in terms of which the suretyship is provided is itself subject to the Act.    



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