Reckless Credit is any credit granted to a consumer in terms of a credit agreement where the credit provider (e.g., a bank, or a retail store), at the time the credit agreement is to be concluded, has not conducted a proper assessment.
What is the credit assessment?
When a consumer applies to credit, the credit provider must conduct a proper assessment of the consumer. As part of this assessment, the credit provider must take reasonable steps to evaluate the prospective consumer’s (i) understanding and appreciation of the proposed credit agreement (the risks, and costs to be incurred, as well as the consumer’s rights, under the credit agreement) and (ii) the prospective consumer’s ability to meet his or her obligations timeously (e.g., the ability to pay instalments in full and on time).
The credit provider is also obliged to assess the debt repayment history (credit rating) of the consumer under other credit agreements, the consumer’s existing financial means, income and expenditure and the prospects of success of any commercial purpose, if this is the reason for application for credit.
The prospective consumer, during the assessment, must fully and truthfully answer any requests for information made by the credit provider.
When is a credit agreement reckless?
A credit agreement may be reckless if:
If the credit assessment is not done at all
Where a credit assessment is conducted, but it is apparent to the credit provider that the consumer does not fully understand and appreciate the implications, costs, risks and obligations of entering the credit agreement
Where, even if the assessment were properly conducted, and even if the consumer did fully understand and appreciate the implications of the credit agreement, by entering into the credit agreement, the consumer would become over-indebted.
When can a credit provider defend an allegation that a credit agreement is reckless?
If the credit provider shows that a consumer did not fully and truthfully answer any requests for information made by the credit provider when doing its assessment, and that such failure had a material impact on the credit provider’s ability to make a proper assessment, then this is a complete defense to an allegation of reckless credit. This means that a court would not set aside or suspend a credit agreement and the consumer will be bound by it.
What happens if the credit is reckless?
The consequences are drastic. The credit agreement may be set aside, which means that the credit provider cannot claim payment of any amounts due by the consumer, nor for the return of any goods bought on credit. The credit agreement may be suspended, which means the consumer’s obligations to perform (e.g. to make payment), and the credit provider’s right to enforce its rights (e.g. to enforce payment) are suspended for a time, where after they revive. During suspension, no interest or charges may be levied by the credit provider.
https://www.brevitylaw.co.za/wp-content/uploads/2021/02/NCA.jpeg389500Office Adminhttps://www.brevitylaw.co.za/wp-content/uploads/2017/08/brevity-logo-1-300x138.pngOffice Admin2021-02-24 08:11:552021-02-24 08:11:59WHAT DOES THE NATIONAL CREDIT ACT SAY ABOUT RECKLESS LENDING?
The National Credit Act, 2005 (“National Credit Act“) has widely been criticized as being one of the most confusing pieces of legislation in our law. In fact, in Absa Technology Finance Solutions (Pty) Ltd v Michael’s Bid A House CC and Another 2013 (3) SA 426 (SCA), in referring to the decision made by the court of first instance, Lewis JA stated “the [H]igh [C]ourt … held that the particular lease was not a lease. This may sound like a fragment of Alice in Wonderland. If that is so, it is because the [National Credit] Act itself could have been written by Lewis Carroll, so peculiar are some of its provisions“. So what is it about the way the National Credit Act deals with leases that is so peculiar?
What is a lease?
Most would agree that a lease can accurately be described as an agreement in terms of which one person (the lessor) gives another person (the lessee) temporary possession of property in exchange for the payment of rent. The word “temporary” assumes that the property must be returned by the lessee to the lessor at the end of the agreement.
The National Credit Act’s definition of a lease
The National Credit Act also defines a lease as an agreement in terms of which “temporary possession” of movable property is given to a lessee. However, the definition then goes on to specify that at the end of the agreement, ownership of the property in question passes to the lessee (rather than requiring possession to be returned by the lessee to the lessor).
This definition is clearly problematic. Not only does it run counter to the essential elements of a lease, but the reference to “temporary possession”, followed by the requirement for ownership of the property to pass to the lessee at the end of the lease, is illogical.
While the National Credit Act is commendable in its aim to protect consumers by promoting fair and responsible lending practices, it can be an intimidating piece of legislation, rife with obscurity. If you are in the business of leasing moveable property, be sure to investigate whether the National Credit Act applies to you.
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Essentially, Exchange Controls are limitations and rules imposed by governments on currency transactions.
The intention is that these controls will create a way to stabilize economies by limiting and controlling how money flows in and out of a country, which left unchecked, would (this is the logic) detrimentally affect currency stability, and would create an unacceptable level of currency volatility.
How does exchange controls affect foreign investment
Unfortunately, while the intention to protect the currency may be good, the fall out is that Exchange Control regulations can be problematic for potential investors into South Africa, who may not be aware of them, or who underestimate the consequences of not having the correct approvals and structures in place, when investing.
If not dealt with at the time of investment, this can lead to a potential nightmare for the foreign investor down the line when wanting to disinvest, when wanting to repay loans or when wanting to reap the benefits of any investment upside, such as dividends.
If you are looking to invest into South Africa, for example, by way of equity investment, or by way of lending money, you must consider the Exchange Control implications upfront and ensure that your proposed investment is properly structured and approved in terms of the applicable Exchange Control regulations.
What steps should an investor take?
When making an investment into South Africa it is crucial that you consider whether you need to obtain the approval of the South African Reserve Bank (SARB)through an Authorised Dealer. Approval is generally required for most movement of capital/funds in and out of South Africa.
Whilst SARB has relaxed exchange controls over the last few years with the intention of decreasing the administrative burden for businesses, where foreign investors subscribe for shares in a South African company, it is a requirement for the share certificates to be endorsed ‘nonresident’ by an Authorised Dealer (generally one of the large commercial banks in South Africa). This allows for any dividends declared in such shares to be freely repatriated from South Africa. Where the foreign investor advances a loan to a South African company, it is necessary to obtain exchange control approval for the loan. Once approval has been obtained, any interest or capital repayments on the loan may be freely remitted from South Africa.
Without these approvals in place, it would be extremely difficult to repatriate any investment.
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The Exchange Control Regulations of 1961 (“Regulations”) were promulgated in terms of the Currencies and Exchanges Act, 9 of 1933. This is to regulate the flow of funds into South Africa from external or foreign sources. As well as the outflow of funds from South African residents in South Africa to non-South African residents. In terms of the Regulations, natural and juristic persons acquiring ownership of shares in South African companies must obtain a ‘non-resident’ endorsement on their share certificates.
Submission for non-resident endorsement
The Regulations provide that within 30 days of a natural or juristic person purchasing or subscribing for shares in a South African company. Their share certificates must be submitted to an authorised dealer, along with the following information:
the name and country of residence of the foreign acquirer, together with a declaration of non-residency;
the name of the South African company in which the shares are being acquired;
the total number of shares being acquired; and
the name and residential address of the person in possession of the shares.
Once the authorised dealer has satisfied itself with its assessment of the submission, it will affix a ‘non-resident’ stamp to the relevant share certificate.
Consequences of non-compliance
The ‘non-resident’ endorsement is more of a formality than an ‘application’. However, failure to obtain this endorsement will mean that the non-resident shareholder will not be entitled to repatriate any sale proceeds or dividends (or other distributions) is in respect of the South African company until it has successfully been granted condonation from the South African Reserve Bank.
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For years, many of our South African clients raising capital have struggled to attract investment from offshore. It is a familiar story. Investors are willing to bet on South African companies. However, they would prefer to do it via an offshore holding company. This would typically be in an investment friendly jurisdiction with which they are familiar. Importantly, the jurisdiction of choice typically has a more favorable regulatory and tax regime than South Africa. For example, R&D tax credits. However, these structures have not been allowed thanks to the South African Reserve Bank’s infamous loop structure prohibition.
What is a Loop Structure?
A loop structure can be summarized as a structure where a South African has an interest in a foreign structure, and that foreign structure in turn (directly or indirectly) owns assets in South Africa.
Since 2018, South African exchange control has only permitted South Africans to hold no more than 40 per cent equity in a foreign structure which in turn has investments in South Africa. Previously, the permitted equity percentage threshold was even lower.
There is an exception to the loop structure restrictions. Unlisted South African technology, media, telecommunications, exploration and other R&D companies are allowed to establish an offshore company to raise foreign funding. Crucially, however, the established offshore company still has to be a tax resident of South Africa. The tax implications meant that this exception had little to no effect practically speaking. Our clients continue to implement complex, clunky (and expensive) alternative structures in order to establish an offshore presence, without falling foul of the Exchange Control Regulations.
Removal of Loop Structures
However, in October 2020, there was good news. The October medium term budget speech announced the “removal” of loop structure restrictions.
National Treasury stated that:
“the full ‘loop structure’ restriction has been lifted to encourage inward investments into South Africa, subject to reporting to Financial Surveillance Department of the South African Reserve Bank (FinSurv) as and when the transaction is finalized. This reform will be effective from 1 January 2021, provided that the entity is a tax resident in South Africa.”
Tax residency is accordingly still a requirement for any company wishing to set up a loop structure. Once again, we cannot realistically see any of our clients embracing this new exemption with any gusto.
No circulars have yet been issued amending our Exchange Control Manuals to make this “removal” of loop structure prohibitions effective. As at the date of writing, the loop structure restrictions are alive and well in the existing manuals. Hopefully publication of these amendments is imminent.
However, with the tax residency disclaimer in place, this “liberalization” may turn out to be a damp squib.
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Congratulations to our founder, Shelley Mackay-Davidson, for selection by her peers for inclusion in the 10th Edition of The Best Lawyers in South Africa, for her work in Corporate Law and Real Estate Law (for 4 years running!). Only the best at Brevity Law! https://www.bestlawyers.com/current-edition/south-africa
On Tuesday 23 October 2018, the National Assembly elected to pass the South African Competition Amendment Bill 2018 (the “Bill“). The next step is its referral to the National Counsel of Provinces (“NCOP”) and a further opportunity for stakeholder submissions.
The Bill’s objective is to introduce provisions that clarify and improve the determination of prohibited practices relating to restrictive practices, abuse of dominance and price discrimination while strengthening the penalty regime.
The notable proposed amendments to obtain the Bill’s objective are:
the provision of greater flexibility in the granting of exemptions that promote transformation and growth, while strengthening the role of market inquiries and merger processes in the promotion of competition and economic transformation through addressing the structures and de-concentration of markets;
amending the process by which market inquiries are initiated and promoted, for the purpose of allowing intervention by the National Executive in relation to mergers that affect the national security interests of South Africa;
the provision of the powers to the Competition Commission to conduct impact studies on prior decisions, to promote its administrative efficiency; and
strengthening the penalty regime.
The Portfolio Committee on Economic Development’s revisions are as follows:
where an excessive price was charged by a dominant firm, the dominant will be required to show “reasonableness” in its justification for the excessive price;
more protection for small or medium sized firms owned by historically disadvantaged persons; and
easier prosecution of dominant firms relating to the margin squeeze offense.
Google will be arguing in court today over the European Union’s (“EU”) privacy laws being applied worldwide, specifically with regard to the “right to be forgotten”.
The saga began in 2015 when France’s Privacy Regulator held that Google was required to meet the EU’s data laws for its domains, globally. As a result of the ruling, internet users can now request that search engines remove certain information, including personal information, from queries. Google’s argument is that having to comply with the right to “right to be forgotten” requirement worldwide has the potential to infringe on rights held by internet users outside of the EU, for example, freedom of speech protections in the U.S. Furthermore, there is an argument that the global enforcement is an infringement of sovereignty and of non-EU countries’ right to enforce their own data laws.
While Google will argue its case before the EU court today, a ruling is only expected later this year.
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Freedom Day, on the 27th of April is an annual celebration of South Africa’s first non-racial democratic elections after Apartheid in 1994. The first elections brought with it a new government, representative of the people of South Africa.
But do you know how South Africa’s electoral system works?
South Africa follows a closed-list proportional representation electoral system. This means that voters do not vote for a particular individual but rather for a particular political party. Each political party decides on a list of members who it wants in the legislature. The fact these lists are closed and cannot be changed by the citizens is where “closed-list” is derived.
The proportionate number of votes each party receives is translated into that party’s proportion of the seats in Parliament. The more votes a party receives, the more seats it receives and the more party members it can seat in Parliament.
After all the seats have been filled, all the members of Parliament vote for one of their fellow members to be the President of the Republic of South Africa. It goes without saying, that the political party with the majority of seats in Parliament will have the most power to elect one of its own members as President. Therefore, South Africa citizens don’t actually vote for the President.
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If you have read the back label of a bottle of wine you would have noticed that just about all of them carry the warning “contains sulphites.” With consumers becoming more and more health conscious over the last couple of years, certain ingredients in the food industry have come under serious scrutiny. In the wine industry, it is the presence of sulphites that has become an increasingly contentious issue.
What are sulphites? The term “sulphites” is a comprehensive term for sulphur dioxide (SO2) in all of its free and bound forms. It can make its way into wine in two ways, as a by-product of yeast metabolism during the fermentation process, or by being administered by the winemaker. A naturally occurring by-product of fermentation, no wine will, without zero intervention, contain zero sulphites. The handful of zero sulphite wines on the market have been altered chemically post-fermentation. In addition to the naturally occurring sulphites in wine, sulphites may be administered to wine in small amounts during different stages of the winemaking process. It is used by winemakers everywhere for its antioxidant and antibacterial properties.
Sulphites have been blamed for everything from headaches to blocked sinuses, and even that diabolical hangover. This has led to consumers avoiding it like the plague. The United States Food and Drug Administration reports that less than 1% of the US population actually suffers from a sulphite intolerance. While some people correctly avoid the controversial ingredient, the amount of people who legitimately suffer from the negative effects of sulphites are in the minority.
Busting Myths about Wine’s Sulphites, Alcohol aside, there are many other naturally occurring compounds in wine which you are likely to be more sensitive to. These include tannins and biogenic amines (mainly histamine and tyramine). Tannins are compounds that exist in the skins, stems and seeds of grapes. They are the main contributors to your wine’s texture and complexity, and since red wines are fermented on their skins and seeds, and sometimes even stems, they contain far higher concentrations.
Biogenic amines are small organic compounds that can be formed during fermentation or maturation. Red wines, again, contain far higher concentrations of biogenic amines, due to the fact that white wines hardly ever go through the process of malolactic fermentation, and consumers generally do not store white wines for as long. By using starter cultures (of yeast and bacteria) that have been selected for their ability to not produce these biogenic amines, winemakers can limit the concentration of these compounds in their wine. This is, however, a tricky one, as starter cultures are expensive. They are also not used in the production of most of your “natural wines” which the general public believe to be way better for your health. Another tool in the winemaker’s arsenal that can greatly reduce these concentrations is – surprise, surprise – good old sulphur dioxide, as high levels of biogenic amines correlate with other wine spoilage components that sulphites prevent, by acting as a preservative.
Just some food for thought as you open that bottle of vino this evening.
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