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;

– furnish the consumer with the copy of the agreement and with periodic statements of account;
– protect the confidentiality of any information pertaining to a consumer;
– report to the National Credit Register or to a Credit Bureau details of a credit agreement
that he has entered into. When a consumer is in default the credit provider may propose that he seek advice to resolve any dispute. He must maintain a record of the credit application.
If a credit agreement is reckless by virtue of the credit provider failing to conduct an assessment, or entering into a credit agreement despite the fact that the consumer did not generally understand the risks, or the consumer is over indebted, the court may declare that the credit agreement is reckless. The court may then make an order setting aside all or part of the consumer’s rights and obligations or suspend the force and effect of the credit agreement.
If a consumer is in default under a credit agreement, the credit provider is obliged to send a notice in terms of Section 129 (1) to the consumer before commencing any legal proceedings.

4.1 Business Credit Application.doc
Should be used when screening a business applicant. This is an opportunity to have directors/members of a company/ close corporation/ partnership sign a suretyship and accept liability? for the conditions of business.? The National Credit Act requires a credit provider to register with the National Credit Regulator if it provides credit for at least 100 credit agreements,or the total debts owed to it under all outstanding credit agreements exceeds R500,000.
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4.2 Personal Credit Application
Aids the creditor to screen a consumer applicant.
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?4.3 Receipt on Account
Provides a receipt for payment on account, i.e. where less than the full amount of the debt is tendered.
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4.4 Payment in Full
Used to terminate obligation/s.
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4.5 Offer of Settlement
An offer of settlement from a debtor to a creditor on a disputed account. The form gives reasons for the dispute, but these may be omitted if desired.
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4.6 Offer of Settlement by Instalments
Similar to Form 4.5 but proposes instalment payments.
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4.7 Advice of Credit Rejection
Used for instances when the granting of credit presents a at risk of non-payment.
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4.8 Credit Report
Enables a firm to record a credit history and thus to regulate the account.
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4.9 Letter of Credit Limit
Warns a customer that he/she is either approaching, or has reached his/her credit limit. It is advisable? to have credit limits sharply defined and to keep customers fully informed as to their limit.
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4.10 Request for Payment of Outstanding Account
A polite request for settlement of account.
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4.11 Letter of Overdue Account (1st Letter)
Requests payment of an overdue account. The first letter of this nature should be couched in friendly? terms.
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4.12 Second Letter of Overdue Account (2nd Letter)
Provides a letter, which should follow Form 4.11.
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4.13 Overdue Account (3rd Letter)
Inquires into a customer?s failure to resolve his account and requests payment for the third time. The? letter invites the customer to propose a settlement plan and seeks to retain the goodwill of the? customer.
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4.14 Payment by Instalments
Similar to Form 4.6 but is from the creditor to the debtor.
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4.15 Letter of Demand
A formal letter of demand prior to legal proceedings being instituted against the debtor.
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4.16 Hand-Over Advice to Attorney
A letter of instruction to an attorney to collect an overdue account. The attorney will require all invoices and documentation pertaining to the account before he can act effectively. Legal costs can be avoided by approaching the Clerk of the Small Claims Court (which is situated at many Magistrates' Courts). This facility is available to natural persons only and for money claims up to R7,000.
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4.17 Request to Attorney for Report on Collections
A brief request,which is all that is required.Usually a telephone call elicits a speedier and more? comprehensive response.
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4.18 Notice in Terms of Sec129(1)(a) of NCA No34 of 2005.doc
It is obligatory for a credit provider to send a notice in terms of Section 129(1)(a) prior to the institution? of proceedings. A credit provider is defined as follows: a) the party who supplies goods or services under a discount? transaction,incidental credit agreement or instalment agreement; b) the party who advances money or credit under a pawn transaction; c) the party who extends credit under a credit facility; d) the mortgagee under a mortgage agreement; e) the lender under a secured loan; f) the lessor under a lease; g) the party to whom an assurance or promise is made under a credit guarantee; h) the party who advances money or credit under any other credit agreement; i) any person who acquires the rights of a credit provider under a credit? agreement.
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