The High Court in Bloemfontein has clarified when the National Credit Act (NCA) applies to suretyship agreements, particularly in the context of motor vehicle instalment sales.
The case involved a dispute between BMW Financial Services and Ignite Services, a close corporation that purchased a BMW X6 M50i, with Sifiso Ndiya Mbombi acting as surety for the debt.
In September 2021, Ignite Services entered an instalment sale agreement with BMW Financial Services to purchase a BMW X6 M50i, with a principal debt of R2 155 400.56. Mbombi signed a suretyship agreement on the same day, pledging to cover Ignite Services’ obligations if they failed to pay.
Ignite Services defaulted on its payments, leading BMW Financial Services to cancel the agreement and secure a default judgment in November 2023 for repossession of the vehicle.
Mbombi and Ignite Services filed an application to rescind the default judgment. Their arguments were twofold:
- They claimed the transaction fell within the scope of the NCA and BMW Financial Services failed to send a section 129 notice under the NCA, which requires creditors to notify debtors of a default and provides them with an opportunity to remedy the default before taking legal action.
- Ignite Services admitted to initial defaults but argued that subsequent payments had cleared the arrears by the time of the default judgment, making it invalid.
The application had two parts: an urgent request to stop the vehicle’s repossession (granted temporarily) and a main request to overturn the default judgment, which was the focus of the court’s decision.
The court tackled two key issues: whether the NCA applied to the agreements and whether the cancellation was lawful.
Does the NCA apply?
In its judgment delivered in March, the court ruled the NCA did not cover either the instalment sale agreement or the suretyship, based on these principles:
- Under section 4(1)(a) of the NCA, the Act does not apply to credit agreements with juristic persons whose assets or turnover exceed R1 million at the time of the deal.
- Section 4(1)(b) excludes “large” credit agreements – those with a principal debt of R250 000 or more.
- Sections 4(2)(c) and 8(5) state that a suretyship (a credit guarantee) falls under the NCA only if the underlying credit agreement does.
The court also referenced the case of Firstrand Bank Ltd v Carl Beck Estates. In that case, it was held that even if a principal debtor’s asset value or turnover is below the R1m threshold, the NCA does not apply to a credit agreement if the principal debt qualifies as a large agreement (equal to or more than R250 000) under section 4(1)(b).
Furthermore, Carl Beck Estates clarified that a suretyship does not fall under the NCA if the underlying credit transaction is exempt from the Act. Specifically, the court in that case found that a suretyship, although theoretically a credit guarantee under the NCA’s definition, does not invoke the Act’s protections if the principal debt arises from a transaction not covered by the NCA. This interpretation hinges on section 8(5), which limits the NCA’s applicability to credit guarantees tied to NCA-regulated transactions.
The court rejected the applicants’ contention that the NCA applied to the agreement. It clarified that the instalment sale agreement, with a principal debt of R2.1 million, qualified as a large agreement under section 7(1)(b) of the NCA because it exceeded the R250 000 threshold.
The applicants argued that the NCA applied because Mbombi is a natural person. The court dismissed this, citing section 4(2)(c) of the NCA, which provides that the Act applies to a credit guarantee only to the extent that the Act applies to a credit facility or credit transaction in respect of which the credit guarantee is granted.
Further, section 8(5) specifies that a credit guarantee constitutes an NCA credit agreement only if it pertains to a credit facility or a credit transaction to which the Act applies. Since the principal debt arose from a large agreement exempt from the NCA, the court concluded that “the Act does not apply to a suretyship if the principal debt does not arise from a credit agreement which falls within the scope of the Act”. Thus, the suretyship executed by Mbombi was not subject to the NCA, and BMW Financial Services was not obliged to issue section 129 notices.
Was the cancellation lawful?
BMW Financial Services issued a summons on 22 May 2023, cancelling the agreement due to non-payment. The court confirmed this was valid:
- The court was satisfied that the summons was properly served at the applicants’ chosen domicilium citandi et executandi addresses.
- Despite a R100 000 payment on 18 May 2023, the account remained in arrears by R114 657.14 at the time of the summons.
- The applicants made additional payments after the summons, but the court ruled these could not revive a cancelled agreement or undo the default judgment.
The default judgment, including repossession, was upheld as lawful.
Implications
The judgment underscores that the NCA’s protections – designed to shield consumers from unfair credit practices – do not extend to large transactions or businesses above certain financial thresholds. Sureties cannot rely on the Act if the main debt falls outside its scope, leaving them vulnerable to legal action.
For companies and individuals entering high-value credit deals, the case highlights the need to understand the NCA’s limits and the risks of guaranteeing such debts.