In the past few years, consumers have faced serious economic challenges caused first by the Covid-19 pandemic and then by successive interest rate hikes. As a result, many consumers find themselves in a position where they are unable to meet their financial obligations and face the risk of having assets which they have financed, repossessed by credit providers due to lack of payment. Fortunately, the National Credit Act 34 of 2005 (hereafter referred to as the NCA) provides consumers with the option of surrendering the goods to the credit provider before repossession.
Section 127 of the NCA provides a ‘self-help’ tool for consumers who are unable to meet their financial obligations in respect of instalment agreements. An example of an instalment agreement would be vehicle finance agreements. Section 127(1) states that a consumer may notify the credit provider of his intention to terminate the agreement. The notification may be sent to the credit provider either before the consumer is in default, or alternatively when the consumer is already in default on the instalment agreement.
This notification by the consumer must inform the credit provider that the goods will be returned to them, if the credit provider is not already in possession of the goods, within five business days. It is worth noting that the court, in MFC Bank (a division of Nedbank Ltd) v Botha [2013] ZAWCHC 107 (15 August 2013), held that in order to give effect to the surrender process, termination of the credit agreement must be in writing. Therefore, a consumer cannot merely return the goods without the necessary written notification.
Once the credit provider has received this written notice and is in possession of the goods, section 127(2) requires the credit provider, within ten business days, to provide the consumer with a written notice indicating the estimated valuation of the goods.
Upon receipt of this notification from the credit provider, section 127(3) provides that the consumer may elect to withdraw their notice to terminate within ten business days and retake possession of the goods, provided they are not in default. Therefore, should such a consumer not be satisfied with the valuation, they can retake possession of the goods. Should they elect to withdraw the notice, the instalment agreement will be reinstated and they will have to perform all obligations, including making payments, as stipulated in the agreement.
In Edwards v Firstrand Bank Ltd t/a Wesbank [2016] 4 All SA 692 (SCA) the Supreme Court of Appeal held that in instances where the consumer is in default of the agreement prior to notifying the credit provider of his intention to terminate, the consumer cannot retake possession of the goods. It follows that consumers who are already in default of the instalment agreement cannot elect to withdraw the notice to terminate and, should they wish to reinstate the instalment agreement and retake possession of the goods, they will have to ensure that the account is no longer in default. This will mean that the consumer must pay any outstanding amount which is due, including interest which may have accrued on the account, prior to taking repossession.
If the consumer does not respond to the notice by the credit provider stating the estimated valuation of the goods within the stipulated period, section 127(4) states that the credit provider must sell the goods as soon as practicable for the best price reasonably obtainable. In most instances, the credit provider meets this requirement by placing the goods on public auction.
After the goods are sold, section 127(5) requires the credit provider to credit or debit the consumer’s account with a payment that is equivalent to the proceeds of the sale, less any expenses which were reasonably incurred by the credit provider in connection with the sale of the goods. So, should a consumer’s account, for example, have an outstanding amount of R100 000 before the goods are sold, the goods are sold for R30 000 on auction, and the credit provider incurs costs of R5 000, the credit provider is required to credit the consumer’s account with an amount of R25 000 (R30 000 – R5 000).
In addition to the above, the credit provider must provide the consumer with a written notice stating the following:
- The settlement value of the agreement immediately before the sale;
- The gross amount realized by the sale;
- The net proceeds of the sale after deducting the credit provider’s permitted default charges (if the account was in arrears/default at the time of sending the notice of intention to terminate) and, if applicable, reasonable costs incurred in connection with the sale; and
- The amount credited or debited to the consumer’s account.
If the amount credited to the consumer’s account after the sale of the goods is less than the settlement value of the goods immediately before the sale, as in the example above, section 127(6) states that the credit provider may demand payment from the consumer of the remaining balance when providing the consumer with this written notice. This is calculated by subtracting the amount for which the goods were sold and the costs incurred to sell the goods from the total outstanding balance immediately before the sale of the goods. This remaining balance is usually referred to as the shortfall. Using the example above, the outstanding balance immediately before the sale was R100 000, the goods were sold for R30 000 and the costs incurred were R5 000, the outstanding amount will be R75 000 (the shortfall). The consumer will be liable for that amount and will have to pay that amount. It is important to note that the instalment agreement will not be terminated at this point but will only be terminated once the consumer settles the outstanding balance.
In the event that the amount credited to a consumer’s account exceeds the outstanding amount immediately before the sale of the goods, but another credit provider has a registered credit agreement with the same consumer in respect of the same goods, the NCA stipulates that the credit provider must pay over the excess amount to the National Consumer Tribunal (hereafter referred to as the Tribunal). The Tribunal may proceed to order that the excess amount be distributed in a manner that is just and reasonable.
Should there be no other credit provider that has a registered credit agreement in respect of the same goods with the same consumer, the NCA states that the credit provider must remit the excess amount to the consumer. Once the excess amount is paid to the consumer, the instalment agreement is terminated and no further obligations will burden the consumer in respect of that agreement.
The advantage of the above voluntary surrender process is that it provides a consumer who realizes that they will not be able to meet their repayment obligations, with the option to sidestep a default and consequent legal action which will inevitably result in legal costs for which he or she will be liable. The other advantage is that the goods may be sold speedily and will not depreciate as much if the consumer had held on to the goods for a longer period.
The disadvantage of the process is that in the event that the sale of the goods does not cover the full outstanding amount immediately before the sale, the consumer will remain liable for the above-mentioned shortfall, which may also include accrued interest. Another disadvantage is that in the event that the consumer was in default prior to notifying the credit provider of the intention to terminate, they will not have the election to withdraw termination and retake possession of the goods. As stipulated above, should they wish to retake possession of the goods, they will have to pay the outstanding amount which may prove to be burdensome on an already defaulting consumer.
Where the consumer is not satisfied with the proceeds of the sale, the consumer is encouraged to resolve the dispute with the credit provider or through alternative dispute resolution. Should neither of these be successful, the consumer may approach the Tribunal to scrutinize the sale.
In conclusion, the NCA has made it possible for consumers who are facing or foresee that they will face financial hardship, to terminate their instalment agreements without having to follow the lengthy route of repossession through the courts and to elect the much easier and less expensive route of voluntary surrender of goods which they can no longer afford.
