The Supreme Court of Appeal (SCA) recently overturned a decision by the Gauteng Division of the High Court in the case of Allied Steelrode (Pty) Ltd v Dreyer. The central issue was whether an acknowledgment of debt (AOD) arising from an informal loan between friends should be subject to the National Credit Act (NCA) and especially section 89(2) that prescribes the instances in which a credit agreement is unlawful. The respondents argued that the AOD was unlawful and therefore void because Allied Steelrode was an unregistered credit provider.
The dispute revolved around an informal loan agreement between Allied Steelrode (the appellant) and the respondents, who shared a close personal bond. The initial loan, sealed with a handshake and without interest, was later formalized in an AOD. The AOD included terms such as a six-month grace period before interest would accrue. The appellant sought repayment of R15 million based on the AOD.
High Court Decision:
The High Court concluded that the loan and the AOD were subject to the NCA. It rejected the appellant’s argument that a distinction could be drawn between the loan and the AOD. The court found that the AOD fell within the NCA’s ambit, citing interest terms and deferred payments as evidence of an arm’s length relationship, making it subject to the NCA. The court concluded that the AOD was thus unlawful and unenforceable under section 89 of the NCA.
Supreme Court of Appeal’s Findings:
The SCA, on appeal, disagreed with the High Court’s decision. It emphasized the informal nature of the loan, rooted in a friendship outside business realms, with no interest charged. The court determined that the parties were not dealing at arm’s length, as required by the NCA. The SCA highlighted that interest was only payable in case of default, which deviated from typical arm’s length transactions where interest is insisted upon.
The court referred to a Constitutional Court case (Paulsen and Another v Slip Knot Investments 777) stating that loans provided solely to friends need not be registered under the NCA. Despite the AOD not falling under the NCA, the SCA concluded it still qualified as a credit agreement. The trial court’s decision that the agreement was void under section 89 of the NCA was deemed a misdirection. The SCA ruled that neither the loan nor the AOD fell under the NCA, overturning the trial court’s order.
In summary, the SCA held that an informal loan agreement between friends, even when formalized in an AOD, may not necessarily fall under the jurisdiction of the NCA. The key factors considered were the absence of interest, the familial relationship between the parties, and the non-arm’s length nature of the transaction. This case underscores the importance of assessing the specific circumstances surrounding informal loans to determine their applicability under the NCA.