An outstanding credit score and good financial standing afford consumers several credit products. However, prior to approving a credit application, section 81(2) of the National Credit Act 34 of 2005 (hereinafter referred to as the NCA) requires that creditor providers perform affordability assessments of the debtors (borrowers). To accurately determine affordability, the debtor is obligated to truthfully provide all the financial information required by the creditor in accordance with section 81(2) of the NCA. It is imperative that during the assessment, all factors are considered fairly and unbiased. Further, section 81(2) of the NCA also obligates creditors to ensure that the debtors are aware of the risks, costs, and obligations associated with the credit agreement.
For purposes of this article, assume that the credit agreement is legally compliant, however without suretyship.
What are NINA debtors and the challenge?
NINA is an acronym for “No Income No Assets". It presupposes that, for whatever reason, the debtor is completely without any assets that can be liquidated or sources of income which can be utilised to fulfil their debt obligations. Other categories of over-indebted debtors may invoke debt review in terms of section 86 of the NCA, or apply for administration orders in terms of section 74 of the Magistrates’ Court Act 32 of 1944 to outwit the sequestration processes. Alternatively, they can apply for voluntary surrender, wherein the debtors must prove that all creditors will be advantaged from the surrender of their remaining assets (concursus creditorum). The Constitutional Court in Stratford v Investec Bank 2015 3 SA 1 (CC) described the 'advantage' as “a reasonable [financial] prospect” that will ensue. The court also highlighted the reasonability test imperative to investigate whether the debtor took reasonable measures to fulfil their credit obligations.
The core issue is the non-existence of legal remedies for NINA debtors in the National Credit Act 34 of 2005, Magistrates' Court Act 32 of 1944, Insolvency Act 24 of 1963 or any other legislation. NINA debtors cannot seek refuge in debt review or administration orders (debt repayment restructuring processes) due to the inability to furnish any sources of income and/ or assets, nor can they prove the 'advantage' to creditors for purposes of voluntary surrender in accordance with Stratford v Investec Bank. The lack of procedures is arguably systematic unfair discrimination based on financial status as contemplated in section 9 of the Constitution of the Republic of South Africa.
Comparative interpretation of s 87A(5)(c)(ii) of the amended NCA
The United States (the US) adopted the straight-discharge mechanism as contemplated in section 727 of Chapter 7 of the Bankruptcy Reform Act of 1978. The straight-discharge purports to condone (debt forgiveness) the credit preceding unsuccessful debt restructuring processes. The debtor must have made multiple bona fide attempts to honour the restructured credit agreement. NINA automatically qualify for the straight discharge by virtue of the inability to restructure.
The National Credit Amendment Act 7 of 2019, although not yet in force, purports to adopt an approach similar to the US straight-discharge mechanism. Section 87A(5)(c)(ii) empowers the National Credit Regulator with the discretion to refer debtors' cases to its Tribunal for consideration to extinguish the debt in whole or part. The qualifying factor is similar in that South African debtors will also be required to have initially attempted to honour the restructured credit agreement. Also, in the interpretation of section 87A(5)(c)(ii) it is imperative to adopt the teleological approach of statutory interpretation in order to factor in the financial historical background of NINA debtors, the purpose of the Act, the intention of the legislature and constitutional values. This provision interpreted teleologically, has the power to effectively redress the lack of legal remedies catering to NINA debtors, thereby undoing the decades of unfair discrimination based on financial status.
For South African NINA debtors to automatically qualify for the straight discharge, the word 'may' in section 87A(5)(c)(ii), which grants the NCR discretionary powers to refer debt cases to the Tribunal, must be replaced with or at least read-in as 'must'. The purpose thereof is to make it compulsory for the NCR to refer NINA debtors' cases to the tribunal for full condonation (forgiveness) of the debt because there is absolutely nothing else that can be done. The straight-discharge, if adopted in South Africa, would be a move from the traditional insolvency law which has always purported to benefit creditors. The approach would ensure the dignity and equal treatment of the poorest debtors instead of burying them in principal amounts and compound interests they will not, if not never, be able to pay.
This article merely constitutes personal, yet professional, interpretation of the amendment. The courts and the NCR may interpret the provisions differently. However the interpretation and approach, the goal must ultimately be reflective of the international changes in insolvency and credit laws moving towards a balance of interests between creditors and debtors; and safeguarding the constitutional rights of poor South African debtors (more so NINA debtors). South Africa would be catching up to countries such as the United States and Germany that are already leading on the balancing act.
SOURCES
1. National Credit Act 34 of 2005.
2. National Credit Amendment 7 of 2019.
3. Magistrates' Court Act 32 of 1944.
4. Bankruptcy Reform Act of 1978.
5. The Constitution of the Republic of South Africa, 1996.
6. National Credit Regulations.
7. “Debt relief for South African NINA debtors and what can be learned from the European approach” by Melanie Roestoff & Hermie Coetzee – University of Pretoria.
8. Inspired by Jani van Wyk - University of Pretoria.
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