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Posted 14 July 2020

Mbuso Dube under the supervision of Marietjie Jacobs

The question on whether credit providers may apply the common law principle of set off was placed on the spotlight recently when the National Credit Regulator approached the High Court for clarity. On the 27th of June 2019, Judge Keightley handed down judgment in the matter of the National Credit Regulator v Standard Bank of South Africa Limited (44415/16) [2019] ZAGPJHC 182 (27 June 2019) regarding the uncertainty caused by Section 90(2)(n) and Section 124 of the National Credit Act and the common law principle of set off.

The issue that the court had to deal with was whether Section 90 (2)(n) and Section 124 of the National Credit Act rendered the common law principle of set off inapplicable in respect of credit agreements. In terms of the principle of set off, a credit provider who is owed money by a consumer is able immediately to debit the consumer’s account when funds are credited to any account held by the consumer without prior authorization or even notice. This gives the credit provider unilateral control of the process without any input from the consumer.

On the other hand, Section 90(2)(n) states that a provision in a credit agreement is unlawful if it purports to authorize a credit provider to satisfy an obligation on the part of the consumer by making a charge against an amount deposited for the benefit of the consumer, unless it is permitted by Section 124. Section 124, in short, permits the credit provider to charge against an amount if explicit authorization is provided by the consumer and on certain other stringent requirements being met.

The departure point was the language used in in Section 90(2)(n) which seems to allow creditor in terms of a credit agreement which does not include a set off provision in its terms to be able to use the common law principle of set off. Section 124 created requirements which it was necessary for credit providers to meet in order to be able to apply set off. The main requirement is that the consumer must authorise set off against his account for a specific debt.

One of the benefits of applying the common law principle would be that the cost of providing credit to consumers would be lower. This is because set off could prevent default, which is a risk factor considered by credit providers, by the consumer and thus avoid being in breach and the acceleration of the debt.

On the other hand, if common law set off is what is intended by the Act, this undermines the purpose of the Act, which is to protect consumers, and it would render Section 124 meaningless, as credit providers would opt not to include provisions dealing with set off in the agreements to avoid applying the Section. It is also important to note that the only way that set off is be permitted in the Act is through the application of the statutory provisions of Section 90(2)(n) and Section 124.

The court ruled that the above Sections were intended to alter the common law position of set off in all credit agreements and that the credit providers could not exclude the application of the Section 90(2)(n) simply by excluding provisions dealing with set off in the agreements. It further held that in terms of Section 124, a deduction from consumer’s account can only be lawful if the consumer authorised it, even in situations where the credit agreement was silent on set off.

This ruling means that the consumer will have to authorize the credit provider to apply set off by way of deduction from his account and that without such authorization, the principle of set off by common law is not applicable under the National Credit Act.

In conclusion, clarity was obtained and it now stands that in light of Section 90(2)(n) and Section 124, the common law right to set off is not applicable in respect of credit agreements that are subject to the National Credit Act.  Should credit providers wish to set off debts against the consumers account, the available method would be in terms of the above statutory provisions.