Suretyship Issue 9

The various ways of discharging sureties (Continue)

Conduct prejudicial to the Surety

The Surety is released if he or she is prejudiced by the creditor.

Therefore the surety is discharged if the creditor makes his or her liability more arduous, for example, by being too lenient towards the principal debtor, or be neglecting to take reasonable steps to protect his or her rights against the principal debtor.

The surety is also released if the creditor, without the surety’s consent, agrees to a material version of the principal obligation, or departs (or permits a departure) from its terms in a material respect.

The test of materiality in this context is whether the alteration or departure is prejudicial to the interest of the surety and whether the surety would have agreed to become a surety in the absence of the affected provisions.

Mere delay by the creditor in enforcing his or her rights against the principal debtor does not release the surety.

But if the creditor grants an extension of time for payment before the due date, and time is ‘of the essence’, the extension will constitute a material variation which releases the surety.

If a co-surety is released by the creditor, the surety is discharged to the extent that he or she is precluded from recovering a contribution from the co-surety.

The National Credit Act 34 of 2005

With regards to the Pre-agreement phase of intermediate and large credit agreements, there are certain disclosures that the Credit Provider must make in the form a quotation.  Form 20.1 must be used, or the information therein must at least be available to the consumer.  The quote is valid for 5 days.  If the consumer accepts the Terms and conditions of the quotation within the 5 days, a contract between the credit provider and the consumer can be concluded.  But if the interest and costs of credit is MORE than what was initially stated in the quotation, the interest and costs of credit may not exceed the amount in the quotation with more than the “respective prevailing bank rates on the date of the quote and the date on which the agreement was entered into”.  This is on Page 37 of the guide.

What exactly does it mean?

Is “prevailing bank rates” the RR?

Advocate Clark’s Comment

Liezl I think you have quoted that specific paragraph incorrectly.

Let me quote the specific paragraph and explain from there-on.

“If the interest and costs are higher that those stated in the quote, they should not exceed by a margin greater ‘than the difference between the respective prevailing bank rates on the date of the quote and the date the agreement is entered into.’”

I must admit that the grammar in this paragraph is lacking, which could have resulted in you misunderstanding the paragraph’s intention.

Lets start at the beginning:

Repo Rate       -           the repo rate is the interest rate at which the Reserve Bank lends

money to private banks. The governor of the Reserve Bank varies this rate to influence, among other things, inflation.

Prevailing Bank Rates            -           this is usually in the economic sector your normal

Banks we all bank with in terms of the interest rate charged on their overdraft facilities.         

To answer your question, no they are thus not the same and if you phone any bank they will give you both percentages, individually.

Next stage:

Now if you look at the paragraph again you will observe that it is confronting you with a mathematical equation – ‘difference between’, thus a minus (-) calculation should follow to resolve your dilemma.

Let me explain:

Quote interest                                                 -                       2%

Date agreement entered into                          -                       3%

Prevailing interest as on quote date               -                       2.5%

Prevailing interest as on agreement date       -                       3.5%

The first mathematical equation would be the first two which deals with the private contracting parties and the interest they decided upon:

3% - 2% = 1%

The second mathematical equation would be the second two, which deals with bank interests on those specific dates:

3.5% - 2.5% = 1%

So in this example what would the answer be?

You will observe that when the agreement has to be signed the interest between the contracting parties have increased with 1%, which according to the paragraph may not be higher than the difference as set out in the second calculation as instructed by the paragraph also.  The second calculation also comes to 1%, and therefore the first calculation does not exceed the second one.  Therefore it is allowable.  If the first calculation was anything above the 1% of the second calculation then it would have been illegal, for instance 1.5%.  Anything below 1% logically would then be legal and allowable.

Take your time with this, it is indeed confusing!!

Suretyship Issue 8

The various ways of discharging sureties

Termination of the suretyship obligation

The suretyship obligation may be discharged in the same way as obligations generally (for example, by payment of the principle debt, merger, or expiry of an agreed time limit).

In the case of a continuing suretyship, the surety may, unless otherwise provided in the contract, terminate his or her future liability by giving reasonable notice to the creditor.

Termination of the principle obligation

It follows from the accessory nature of a contract of suretyship that it is automatically terminated when the principal obligation is terminated.

If the liability of the principal debtor is, for instance, terminated by novation or absolution, the surety is accordingly absolved from liability.

If only a part of the principal obligation is discharged, the surety is only released to that extent.

The National Credit Act 34 of 2005

An overdraft facility is NOT a credit agreement.  What is it?

Advocate Clark’s Comment

Liezl this is not totally correct.

An overdraft is a credit agreement, but cannot be a large credit agreement.

Let me begin to explain the terminology of ‘credit agreement’ for the purposes of the NCA.

The umbrella term in the Act is “credit agreement”.  An agreement constitutes a ‘credit agreement’ if it is:

·         A credit facility; or

·         A credit transaction; or

·         A credit guarantee; or

·         Any combination of the above three transactions.

Then further we find that in the above first three forms will have sub-categories on each one of them.

The one we are interested in, in order to answer your question would be the ‘credit facility’.

A credit facility is an agreement in terms whereof the credit provider supplies goods or services, or pays an amount to the consumer, or on his behalf or at his direction.

The consumer’s obligation to pay the prize or to repay the amount is deferred or else he is billed periodically.

The consumer pays a charge, fee or interest in respect of the amount deferred (to a dealer in goods or services, or to a bank on a overdrawn cheque account), or in respect of an amount billed which is not paid within the time agreed upon between the parties.

Let me explain it again:

A credit facility is broadly defined in the Act. Section 8(3) as:

·         An agreement in which a credit provider

undertakes to provide services, money or

goods to a consumer, or at the direction of a

consumer, from time to time and

o   Defers the obligation to pay any part of

the cost of the service provided, or the

money given or the goods supplied, or

o   Bills the consumer periodically for the

service, goods, or money, and

·         Charges a fee or interest for any amount

deferred or any amount not paid within a

stipulated time.

Credit facilities would typically include revolving credit facilities like credit cards, store cards and overdraft facilities.

But you will most probably wonder what this has to do with your question.  You see we first had to embark on a journey to precisely determine what an overdraft is in terms of the NCA.  Now we know, a credit facility.

Next step in the legalistic enquiry is to go and observe the categories in which all of these credit agreements under the NCA are operative.

There are three categories:

Small agreements include the following (Section 9(2) of

the Act):

·         Pawn transactions,

·         A credit facility where the limit under the facility

is R15,000.00 or less,

·         Any other credit transaction, excluding a

mortgage agreement and a credit guarantee,

where the principal amount of the agreement

does not exceed R15,000.00.

Intermediate agreements include the following (Section

9(3) of the Act):

·         A credit facility where the limit under the facility

is more than R15,000

·         Any other credit transaction, excluding a pawn

agreement, mortgage agreement or credit

guarantee, where the principal amount of the

agreement is more than R15,000.00, but less

than R250,000.00.

Large agreements include the following (Section 9(4) of

the Act):

·         A mortgage agreement

·         Any other credit transaction excluding a pawn

agreement where the principal amount of the

agreement exceeds R250,000.00.

Now we have to start with the process of elimination. 

We know that an overdraft is a credit facility.

Let’s go to small agreements and see if we can find credit facilities there!  Yes we do, bur restricted only to under R 15 000.00.  So any overdraft under R 15 000.00 will fall within the Act as a credit agreement under credit facilities within the category of small agreements.

Let’s go to intermediate agreements and see if we can find credit facilities there!  Yes we do, bur restricted to only more than R 15 000.00.  So any overdraft over R 15 000.00 will fall within the Act as a credit agreement under credit facilities within the category of intermediate agreements.

Let’s go to large agreements and see if we can find credit facilities there!  No, not at all and therefore a credit facility via an overdraft will never be able to fall under large agreements.

So to answer your question:

A overdraft is indeed a credit agreement in the form of a credit facility than can only be found in the categories of small and intermediate agreements and never under large agreements regardless of its amount.

Suretyship Issue 7

The Surety’s right to reciprocal counter-performance

The creditor may be contractually bound to render a counter-performance to the principle debtor against performance by the debtor of the principle obligation.

On discharging the principle obligation, the surety becomes entitled to claim the reciprocal counter-performance, and to set it of against his or her claim against the principle debtor.

Discharge of the Surety

Any variation of the terms of a contract of surety has to be in writing. 

A contract of surety may, however, be terminated orally, except if the contract requires cancellation to be writing.

There are various circumstances under which a surety may discharged and they will be discussed in the final issue on sureties which also will be the next issue.

The National Credit Act 34 of 2005

Adv Clark,

I have a quick question: 

Let's suppose a consumer is under debt counselling.  It has been established that he is indeed over-indebted and all has been arranged with his credit providers - he pays a reduced amount to each credit provider as they agreed to. 

What will happen if the consumer comes up with X amount of money from somewhere?  Let's call it an external source.  The consumer wants to pay off some of his debt with this extra money.

My question is this:  How will that extra money be distributed?  Will it be evenly distributed as a percentage amongst the creditors, or can the consumer pick one of his creditors at random, with the eye on it to pay off a larger amount and thus pay off that specific creditor in a shorter period?

Please accept my sincere gratitude for your response on my questions and your willingness to help.

Liezl

Advocate Clark’s Comment

Yes Liezl it will have a percentage impact on the down payment of his or her obligations.

In the event where he as a certain amount of money available to contribute to his consolidated debt, as you mentioned, there are two ways of distribution:

·         The one way being to pay off one specific debt.  In such a case you will have to use the % calculations again to re-calculate the remaining debts in terms of what they should receive after such a payment was made.  The amount payable as per court order remains the same and therefore each outstanding debt under such circumstances will be entitled to a monthly payment higher than previously.

·         Or on the existing % calculations that gave rise to the debt restructuring court order you can divide such an amount among the debtors to same %’s initially calculated.

At the end of the day you will have to decide what course of action will be the best in terms of such a person paying of his debts faster.  According to me it will depend on the size of the amount available.

Just for clarity I am reflecting the calculations herein again that must be utilized to address these circumstances:

You will find your answer through the middle of this calculation as reflected within your Debt Councillor’s guide:

Example:

Mr In-trouble has four credit agreements –

Credit Prov.       Type of Acc.    Outstanding Bal  Monthly Pm   Rate                  

Nedbank            Bond                400,000               4,500             14.0%

Standard            Credit Card     10,00                   1,000             20.0%

RCS Loan          Microlender     8,500                   1,500             36.0%

Wesbank            Vehicle            56,500                 3,000             19.0%

He has R6 000 per month available, after PDA and debt counsellor costs, to pay

off his debt.

Calculate how much of the R6000 each credit provider must get:

• Add up the monthly payments: 4,500+1,000+1,500+3,000=10,000

• Divide the credit agreement’s payment by the total and multiply by 100

  to get a percentage:

Nedbank          4,500 ÷ 10,000 X 100 = 45%

Standard          1,000 ÷ 10,000 X 100 = 10%

RCS                 1,500 ÷ 10,000 X 100 = 15%

Wesbank         3,000 ÷ 10,000 X 100 = 30%

• Check that the percentages all add up to 100%:

45% + 10% + 15% + 30% = 100%.

If 100% is not reached then you have made a mistake!

• Multiply the available amount (R6 000) by the percentage for that credit

  agreement:

Nedbank           6 000 X 45%                            = R2 700

Standard           6 000 X 10%                            = R 600

RCS                  6 000 X 15%                            =R 900

Wesbank          6 000 X 30%                            = R1 800

• Add up the amounts calculated for each credit provider and check that

  they add up to the amount he has available.

  If it does not add up then you have made a mistake:

R2 700+R600+R900+R1 800 = R6000

• Now that the monthly payment has been established a repayment

  plan must be tested. The determined payments must be applied to

  the agreements until the agreements are paid off.

If one agreement is paid off then the money used for that agreement must be allocated to the remaining agreements proportionately in the same way that the

original available amount was allocated, but now using the remaining agreements to reach the total, using the recalculated payments.

  Supposing the R900.00 instalment for RCS was sufficient to pay the outstanding balance + interest off over four months. From month five the money would have to be distributed by:

o   Add up the monthly payments: 2,700 + 600 + 1,800 = R5,100

o   Divide the credit agreement’s payment by the total and multiply by 100 to

            get a percentage:

Nedbank          2,700 ÷ 5,100 X 100               = 53

Standard              600÷ 5,100 X 100               = 12

RCS is paid off

Wesbank         1,800 ÷ 5,100 X 100                = 35

• Check that the percentages all add up to 100%:

53% + 12% + 35% = 100%

   If 100% is not reached then you have made a mistake!

• Multiply the available amount (R6 000) by the percentage for that credit

  agreement to get the new instalments payable from month 5

Nedbank          6 000 X 53%                = R3 176

Standard          6 000 X 12%                = R 706

RCS is paid off

Wesbank         6 000 X 35%                = R2 118

• Add up the amounts calculated for each credit provider and check that they

  add up to the amount he has available.

  If it does not then you have made a   mistake.

R3 176 + R706 + R2 118 = R6,000

• If the agreements are solved within the specified time periods and calculations then this is     the plan to submit.

Supposing that this is not the case then:

Credit provider                        Original rate

Nedbank                                   14.0%

Standard Bank Card               20.0%

RCS Personal Loan                36.0%

Wesbank                                  19.0%

Reduce the agreement with the highest rate to be equal to the

agreement with the second highest rate:

Credit provider                        Original rate                New rate

Nedbank                                   14.0%                          14%

Standard Bank Card               20.0%                          20%

RCS Personal Loan                36.0%                          20%

Wesbank                                  19.0%                          19%

• Test to see if the plan works now. If it still does not work, reduce the

   value to the next level:

• If it does not work then reduce the two agreements above to the

  same as the next (third) highest interest rate and test.

  Supposing that prime is 14%, prime + 3 is 14+3 = 17%, so we can only reduce

  to that level for now:

  Credit provider                      Original rate                New rate

  Nedbank                                 14%                             14%

  Standard Bank Card             20%                             19%

  RCS Personal Loan              20%                             19%

  Wesbank                                19%                             19%