Banks hold significant power in financial transactions and with this comes great responsibility. Their licence to negotiate with individuals using pooled resources obtained from members of the public, gives them the upper hand in bargaining, and as the adage sadly goes: power corrupts.
South Africa was spared some of the calamitous consequences of the 2007-2008 financial crisis because, amongst others, it enacted legislation in 2005 that demanded more responsibility from credit providers, the biggest of which are banks. This was the National Credit Act, No. 34 of 2005 (or NCA for short), which aimed to regulate the credit industry in South Africa, ensuring fairness and transparency in lending practices as well as consumer protection. By contrast, the United States passed similar federal legislation only after the 2007-2008 financial crisis, resulting in the formation of their Consumer Financial Protection Bureau which has been in the news recently.
The primary aim of the NCA is to prevent credit providers exploiting consumers while recognising that the negotiating power between consumers and credit providers favours the latter. The Act obliges them not to induce their customers to enter into contracts that contain provisions that it has declared to be unlawful. The 2008 financial crisis taught us that the levelling of the playing field is good for the financial sustainability of credit providers in recognition of the critical role that they play in a country’s fiscal system. The recent judgment in the matter of Absa Bank and the Serfonteins (ABSA Bank Limited v Johan Serfontein and Another (740/2023) [2024] ZASCA 11) highlights how banks must comply with these protections and what happens when they don’t.
In 2003, Serfontein junior took out a small overdraft of R22 000 with Absa. Over the years, this facility grew and was secured by Serfontein junior’s farm, and with his father acting as surety. However, by August 2017, their debt had ballooned to over R6.2 million. Engagements between Absa and the Serfonteins culminated in the parties signing an acknowledgement of debt in 2018, giving Absa the right to sell the farm to recover the outstanding loan. The farm was subsequently sold for R6 million in 2019, and Serfontein junior was notified of the sale and asked to vacate the farm. The Serfonteins, however, challenged this agreement in court, claiming it was invalid and the sale of the farm void under the NCA. The High Court in Bloemfontein ruled in their favour, but Absa took the matter on appeal to the Supreme Court.
The appeal
The Supreme Court formulated a number of questions that required determination in order to make a decision, but the important ones were the following:
Firstly, was whether the acknowledgement of debt that was signed in 2018 a supplementary agreement under the NCA, or was it a self-standing agreement that was not subject to the NCA? As it was closely tied to the original loan agreement, the court found that it was indeed a supplementary agreement and thus subject to regulation under the NCA. Secondly, did it contain unlawful provisions? The court found a number of provisions that were contrary to the NCA, including the important one that allowed Absa to sell the property without a court order.
The Supreme Court also then queried whether the acknowledgement of debt could be declared void. The answer to this was also yes. As unlawful provisions were found in the agreement, the NCA provides options for either declaring the entire agreement void or removing the offending clauses. In this case, however, as the improper clauses were so deeply embedded in the agreement and removing them would make the contract unworkable, the court declared them void. Finally, the sale of the farm was also declared void because it was based on the void acknowledgement of debt.
Lessons learned
This ruling reinforces the importance of consumer protection laws and highlights how banks must follow the provisions of the NCA even when structuring additional or supplementary agreements outside of formal loan contracts. The matter further serves as a warning against hidden clauses that bypass legal protections and as seen here served to deliberately circumvent the NCA.
For borrowers, it is a reminder to carefully review any agreements related to loans, especially those that grant a lender sweeping powers over their assets. If in doubt, seeking legal advice before signing can help avoid costly disputes at a later stage.
For banks, it’s a caution that contracts must be fully compliant with the NCA to withstand legal scrutiny. Any attempt to sidestep consumer protection laws through the hiding of unlawful provisions or documents within and tied to supplementary agreements will not hold up in court. And particularly, if they are intended to circumvent the NCA.
Ultimately, fair and transparent lending practices should benefit both financial institutions and borrowers and are rightly in place to ensure a more stable, sustainable and just financial system for all.
“To whom much is given, much is required.” (Luke 12:48)
This article was prepared by Fani Dingiswayo and Dalen Mmako.