A High Court judgment in March 2023 applied good law and common sense in finding that a loan between parties who had a closely knitted friendship was not an arms’ length transaction and was therefore not governed by the National Credit Act, 2005 (NCA).
A credit transaction is not governed by the NCA if the parties are not dealing at arms’ length. The parties are not arms’ length in any agreement in which the one party is not independent of the other and consequently does not necessarily strive to obtain the utmost possible advantage out of the transaction (s 4(2)(b)(iv)).
The evidence showed that the parties had a closely knitted friendship as a result of which the lender assisted the borrower with a loan of R117 000 to enable the borrower, her close friend, to realise her dream of setting up a franchise business. The lender funded the loan from an access bond facility she had with her bank. The loan was on the basis that the borrower would pay the same interest rate that the lender was being charged by her bank. The lender stood to gain nothing from the transaction and there was no benefit to her.
The parties did not strive to gain the maximum possible benefit for themselves out of the transaction. On the contrary, the parties assisted each other as friends. Even five years later the lender only claimed what was agreed upon, namely the capital and the interest she paid to the bank.
This is a welcome decision to avoid anyone reneging on an agreement between family members or friends by falling back on non-compliance with the NCA. But for the Minister irrationally declaring the threshold for registering as a credit provider for all credit agreements as zero, s 40 of the NCA would never have been seen as governing loans of this nature. Borrowers in single transactions are not unprotected. The common law prohibiting usurious transactions, and declaring contracts that are against public policy unenforceable, still applies.