In early 2015, the Borrower approached his long-standing friend to borrow money which totalled R2.5 million. The money was lent to him in five unequal instalments. The Borrower drew up an acknowledgement of debt (first AOD) which covered the first two advances in the amount R1.2 million. A second acknowledgement of debt (second AOD) was later drafted which incorporated the total amount. The capital amount borrowed to the Borrower was payable within 45 days of demand and attracted an interest of 2.5% per month.

Without the loans being formally called upon, over the course of four years, the Borrower had paid a total of R2 121 500 to Lender.

By May 2019, the Borrower was in default despite repeated requests from the Lender to make payment. At this time, the Lender alleged in a letter of demand from his attorneys that the outstanding debt amounted to R3.8 million. However in July 2019, the Borrower made a written offer via his attorneys to pay an amount of R2.5 million by December 2019. The Lender was amenable to accepting the settlement offer, provided the Borrower signed a fresh acknowledgement of debt, which was signed in August 2019 (third AOD).

The Borrower understood the third AOD to simply be an acknowledgement that he is liable to the Lender in the sum of R2.5 million. Meanwhile. The Lender understood the third AOD to mean that the Borrower intended to bind himself to make further payment of R2,5 million over and above what he had already paid (R2 121 500). The third AOD is the subject of this case.

In this judgment, the High Court held that a simple loan by an individual which qualified as a credit agreement for the purposes of the National Credit Act, 2005 (NCA) was unlawful and invalid because the lender was not registered as a credit provider.

Section 8(4)(f) provides that an agreement in terms of which payment of an amount is owed by one person to another individual or small business, and there is a charge, fee or interest payable to the credit provider in terms of the agreement, constitutes a credit agreement. Therefore, the credit provider, which meets the threshold of credit providers provided for in section 42 of the NCA, of any agreement which falls under the realm of section 8(4) of the NCA ought to be registered as a credit provider as required by section 40(1) of the NCA. This would not apply if the parties were not at arm’s length according to requirements of the NCA but this issue was not considered in the case.

In making a ruling, the court considered the aims and purposes of the NCA. The aims of the NCA are to promote and achieve a fair, transparent, responsible and accessible credit market and industry, and to protect consumers amongst others.

The court was of the view that if it held that the agreement concluded between the parties was valid and enforceable despite the credit provider not being registered, the aims of the NCA would not be achieved in the sense that irresponsible lending and unscrupulous exploitation of credit consumers would be promoted. Further to that, such an order would encourage credit providers to not register in terms of the NCA, and thus subvert the regulation and control of their activities which the NCA seeks to achieve. The court therefore held that the loan agreement was unlawful.

Another issue that was pertinent in the judgment is that the parties concluded three acknowledgements of debt (compromises) in relation to the loaned amount. In this respect, the Lender argued that in the event that the credit agreement is found to be illegal, the repayment of the loan ought to be enforced because the compromises constitute a fresh and independent cause of action which is divorced from the illegality of the loan agreement thereby allowing it to be enforced. 

The court found that the acknowledgement of debt giving effect to the loan agreement and thus giving rise to the obligation of repayment to the Lender is also wrongful.  The court held that the compromise did not transform the unlawful nature of the loan agreement. Finding is doubtful. The third acknowledgement, whatever it meant, was an agreement of compromise and carried no interest, fee or charge. The agreement to settle was not so tainted by the invalidity of the other AODs and so against public policy that it should have been unenforceable.