For years some banks, and other creditors have, without prior notice and without immediate knowledge to its customers, deducted money from their savings- and current accounts for amounts owed in terms of their credit card debt. The legal principle banks and creditors relied on in doing so is logical in origin and in our legal system referred to as the principle of set-off.
The basic principle determined that one debt may be cancelled by another debt where the separate debts of debtors are owed to one another.
The legal requirements for set-off to take place are the following:
• The debts must be of the same nature;
• The debts must exist between the same parties; and
• The debts must be fully enforceable; and
• The debts must be liquidated.
The High Court in Johannesburg on the 27th of June 2019 handed down judgment in the case between The National Creditor Regulator v Standard Bank. The case dealt with the question whether a creditor, in terms of the National Credit Act, is at liberty to set-off debts owed to it by a consumer from other accounts held by the consumer.
It was argued on behalf of consumers that the implications of set-off would leave debtors and indigent persons unable to meet its monthly expenses if set-off is applied without the consumers’ knowledge. This was particularly worrisome for the Human Rights Commission who actively participated as a friend of the Court in the case.
The Human Rights Commission put evidence before the Court that traversed the far-reaching implications of set-off especially insofar as many consumers found themselves in deeper waters following set-off being applied prior to debit orders being processed. This also included consumers under debt-review who were unable to meet their monthly obligations.
The Court found that the National Credit Act prohibits creditors from applying the principle of set-off without the consumers’ consent to do so or without prior authorisation.
The practical implications of the judgment handed down by the Court have far reaching implications for creditors who entered into credit agreements that falls under the ambit of the National Credit Act:
• A creditor must inform its debtor of any intended set-off to any account, asset, or amount deposited by or for the benefit of its debtor;
• The nature of the debt that will be set-off by creditor must be identified;
• The date on which the intended set-off will be effected by the creditor;
• The debtor should have given its express consent for set-off by the creditor
The sanction, should a creditor fail to adhere to the above, is severe. Should a Credit Agreement be found to be in contravention of the above, a Court or Forum may declare such provision in a credit agreement void and further burdensome, declare the entire credit agreement null and void.
One can accept that consumers may often not grant the required consent which will place a burden on creditors to recover funds on outstanding accounts. This will entail that credit providers will have to ensure that they implement effective debt collecting procedures and ensure that they obtain some form of security for their outstanding debts such as entering into surety-agreements for the outstanding credit with third parties.
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Wilco du Toit is a junior associate in the litigation department at Barnard Incorporated.
Legalex (Pty) Ltd, registration number 2003/003715/07, is an authorized Financial Services Provider (FSP 5277) and underwritten by Guardrisk Insurance Company Limited (FSP 26/10/75)