Debtor & Creditor Agreements

Debtor / creditor relationships are not only the most common, but generally they are also the most important relationships for business people. Proper formulation of such relationships is essential to sound and efficient business practice.

Good credit control, which is an integral part of business practice, requires efficient screening of credit applicants, systematic checking, prompt action when an account is overdue and a constant effort to reduce debtors.

In order to safeguard a creditor against a debtor’s failure to pay, a creditor frequently demands some form of security. This can take the form of suretyship, where some other person undertakes to pay the debt if the debtor defaults. Alternatively, the debtor can pledge or mortgage certain property to the creditor until the debt is paid.

The forms in this section are designed to assist business people in their debtor / creditor relationships. Specimen forms for the securing of debts can be found in Section 1, General Agreements.

The National Credit Act No 34 of 2005 became fully operative on 1 June 2007. It replaced both the Usury Act No 73 of 1968 and the Credit Agreements Act No 75 of 1980. Apart from protecting consumers its purposes are to advance the economic welfare of South Africans and to promote an effective credit market and industry. The Act aims to prevent reckless credit granting and to assist debtors who are over committed. It applies to credit agreements regardless of the amount of credit involved, and to every Credit Agreement between parties dealing at arm’s length made within or having an effect in South Africa unless the exceptions as listed in Section 41 apply e.g. a large agreement in which the consumer is a juristic person or the credit provider is located outside South Africa. A consumer includes a juristic person with an annual turnover or asset value of less than R1 million. For the purposes of the Act, a juristic person includes a partnership, association of persons or a trust with more than three trustees. Nevertheless the Act has limited application where the juristic person is a consumer (Section 6).

For the purposes of this Act, an agreement constitutes a Credit Agreement if it is a credit facility or credit transaction or credit guarantee or any combination thereof. However, an agreement is not a Credit Agreement if it is a lease of immovable property (Section 82(b)). The Act will not apply to cash on delivery (COD) transactions but it will apply when interest is raised for the deferment of payment of an account, for example an Acknowledgement of Debt.

It is beyond the scope of this introductory discussion to provide more than a broad outline to this complex and lengthy Act and its Regulations. Of necessity attention is given to those forms affected by the Act and also to give the reader a general background of the Act.

A supplier who supplies goods and charges interest on overdue accounts is not a credit provider in terms of the Act. Examples of credit providers are a lessor under a lease of movable property, a bank under a mortgage agreement or a party who supplies goods under a discount transaction. An Acknowledgement of Debt is a credit transaction in terms of Section 8(4)(f).

A credit provider is obliged, in terms of Section 14, to register with the National Credit Regulator only if it is a credit provider under at least 100 credit agreements or the principal debt owed to it under all outstanding credit agreements exceeds R500 000-00.

The duties of a credit provider are onerous.

A credit provider, who is defined under Section 1 of the Act, must:

– be registered as a credit provider and must make a credit assessment of the consumer; – furnish the consumer with a pre-agreement statement and quotation prior to a conclusion of an agreement;