In Nedbank vs The National Credit Regulator (662/2009 & 500/2010) [2011] ZASCA 35 the Supreme Court of Appeal (SCA) made an order on the influence of a letter of demand as per section 129(1)(a) of the National Credit Act (“NCA”) on the debt counseling process. In terms of the NCA, a credit provider is required to deliver a section 129 letter to a consumer. This letter’s purpose is to inform the consumer that legal action may be taken against the consumer if the consumer fails to take action (which includes applying for debt review or alternative dispute resolution) to reach an agreement with the credit provider on repayment of outstanding debt.

The SCA judgment was an appeal of a case brought by the National Credit Regulator where the NCR sought a declaratory order on various vague and debatable provisions of the NCA, specifically issues regarding debt review.

Debt review is a process where a consumer who has become over-indebted can approach a debt counsellor to restructure the repayments of the credit agreements. Normally, all credit agreements will be included in the debt review process, which results in creditors being unable to enforce the credit agreements, litigate and attach a consumer’s assets to settle any outstanding debts.

The NCA provides for an exception: if a credit provider takes steps to enforce a credit agreement before the consumer applies for debt review, the relevant credit agreement is excluded from the debt review process.

The question that arouse was whether a section 129 letter provides for an exception to the above rule. More specifically, whether a section 129 letter can be regarded as a “step taken by the credit provider to enforce a credit agreement” and thus excludes the particular debt from a subsequent debt review application in terms of section 86 of the NCA. There NCR and banks differed on when a credit provider is regarded as having begun to enforce a credit agreement and therefore at what stage the agreement is excluded from the debt review process.

The NCR argued that the section 129 letter does not exclude the debt from being included in the debt review process due thereto that the letter is only a notification to a consumer and not a step to enforce the credit agreement. On the other hand the banks argued that a creditor starts to enforce a credit agreement once it issues a section 129 letter, and therefore the relevant credit agreement is excluded from the debt review process.

The bank’s argument was upheld by the SCA. Judge Du Plessis held “that by giving the notice envisaged by s 129(1)(a) the credit provider ‘has proceeded to take the steps contemplated in section 129 to enforce that agreement’: a debt review relating to that specific agreement is thereafter excluded.” The effect of this is that debt counselling will not shield a consumer from the consumer’s creditors if the creditor delivered a section 129 letter to the consumer before the consumer have applied for debt counselling.

Thus, if a creditor issues a consumer with a section 129 letter of demand before an application for debt review have been made, the creditor is allowed to take legal action against the consumer to recover an outstanding debt. If the consumer then applies for debt counselling, the process will exclude any debt for which the consumer have received a letter of demand.

A consumer can however still apply for debt review in respect of the other credit agreements.

About the Writer:

Annelene Dippenaar is an admitted attorney, practicing since 2006. She has advised various clients, including registered banks, credit providers and other listed companies on the National Credit Act 34 of 2005. Since 2010 she has been employed by Compuscan, a registered credit bureau, as legal advisor and compliance officer. Annelene obtained a BA. (Law), LLB and LLM at the University of Stellenbosch and is currently writing her doctors thesis.

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