Introduction: Legal Framework for Cancelling Credit Agreements
When a creditor cancels a credit agreement due to the consumer’s failure to meet payment obligations, it must follow the proper legal process. In South Africa, the National Credit Act 34 of 2005 (NCA) sets out the procedure creditors must follow to enforce credit agreements, such as giving the consumer written notice before legal action is taken (under section 129). However, the NCA doesn’t apply to all credit agreements. For example, it excludes certain agreements involving juristic persons (companies or close corporations) with an annual turnover or assets over R1 million and “large agreements” where the principal debt is over R250,000.
The recent case of Mbombi and Another v BMW Financial Services SA (Pty) Ltd (Free State High Court) addressed whether BMW had complied with the law when it cancelled a vehicle instalment sale agreement and whether the NCA applied to the transaction and related suretyship.
Background to the Case
BMW Financial Services SA entered into an instalment sale agreement with a close corporation, Ignite Services CC, for the sale of a BMW X6 vehicle. The purchase price exceeded R2.1 million, with repayments spread over 71 months plus a final lump sum payment. On the same day, Mr Sifiso Mbombi signed a suretyship agreement, making himself personally liable for the debt as co-principal debtor.
Ignite Services defaulted on the agreement. BMW served summons to cancel the agreement and claim the vehicle. The defendants did not respond, and the court granted default judgment, allowing BMW to repossess the vehicle.
After judgment, the applicants (Ignite and Mr Mbombi) tried to set aside (rescind) the judgment, claiming that BMW did not serve a section 129 notice, which is a formal warning required under the NCA before legal action can be taken. They also argued that by the time judgment was granted, they had caught up on some payments and were no longer in arrears.
Analysis of the Legal Issues
The applicants argued that because the NCA applied, BMW should have sent a section 129 notice. However, the court examined Section 4(1)(b) of the NCA, which says the Act does not apply to large agreements where the principal debt exceeds R250,000. The court held that since the vehicle loan exceeded R2.1 million, the agreement was a “large agreement” and therefore exempt from the NCA.
The NCA generally protects consumers by extending its rules to suretyship agreements, but only if the main credit agreement is subject to the NCA. Because the vehicle instalment sale agreement was not governed by the NCA (as it was a large agreement), the suretyship also fell outside the Act.
The court accepted that BMW had lawfully cancelled the agreement by serving summons to the applicants at their domicilium citandi et executandi (their chosen legal addresses). According to South African contract law, serving summons at this address is sufficient for cancellation if the agreement permits it.
The applicants’ later payments were considered irrelevant because, in law, once an agreement is cancelled, it cannot be revived unless both parties agree. Therefore, even if they paid some instalments after receiving the summons, those payments did not undo the legal cancellation.
The Court’s Decision
The court considered the application to rescind the default judgment under Rule 42(1)(a) of the Uniform Rules of Court, which allows a judgment to be set aside if it was “erroneously granted”. To succeed, the applicants had to prove that the court made an error when granting the judgment — such as missing a key fact.
The court found no such error. The NCA did not apply to the agreement, the cancellation was legally sound, and the subsequent payments were of no consequence. As a result, the application for rescission was dismissed, and BMW retained the right to repossess the vehicle and claim damages.
Conclusion
This case confirms the principle that not all credit agreements fall under the NCA. If a credit agreement qualifies as a “large agreement” (i.e. over R250,000), creditors like BMW do not need to send a section 129 notice before taking legal action. It also highlights that cancellation is final once done lawfully, and late payments won’t undo the cancellation unless agreed upon by both parties.
This decision provides important guidance to creditors and consumers alike on how and when the NCA applies, and what is required for the lawful cancellation of credit