Lending to a Friend or Relative – When Must You Register as a Credit Provider?

“In life, we never lose friends, we only learn who the true ones are” (Unknown)

Lending money to a friend or family member in need sounds like a natural and informal sort of thing to do. But beware – if relations sour and your friend/relative can’t or won’t repay you, you may not be able to reclaim your money.

The danger is that, if you should have registered as a credit provider in terms of the NCA (National Credit Act) but didn’t, the loan would be an unlawful credit agreement and would therefore be void and unenforceable. You could even face penalties for non-compliance with the requirement to register.

Only “arm’s length” loans fall under the NCA

A recent Supreme Court of Appeal (SCA) case turned on the question of whether or not such a loan was conducted “at arm's length”.

That’s critical, because only a loan given “at arm's length” falls under the NCA. The question of what is and isn’t at arm's length is a complex one, but the factors taken into account by the SCA in reaching its decision provide a good example of what will weigh with a court.

At stake – R15m, loaned informally to a friend on a handshake

• A R15m loan made by one businessman to another was “informal in nature which was sealed with a handshake, with no interest charged.” Later on, the debtor signed an AOD (Acknowledgment of Debt) for the R15m, granting a grace period of six months before interest would accrue on default. The lender had never registered as a credit provider.
  
  
• The High Court found both the loan agreement and the AOD were subject to the NCA and therefore unlawful.
  
  
• Fortunately for the lender, the SCA overturned this decision on appeal. On the facts, it held that the loan was not “at arm’s length” and therefore not subject to the NCA. Key factors it considered in reaching this decision were –
  
  
  • The loan agreement was oral and informal,
    
    
  • The parties had become friends and had “… formed a close bond in personal matters outside the realms of business. The loan was offered as a gesture of friendship”,
    
    
  • The lender did not normally lend money, and this was a one-time occurrence,
    
    
  • No interest was levied on the loan except on default and the lender had not “sought to obtain the utmost advantage from the transaction”.
    
    
• Bottom line – the lender can breathe a sigh of relief, the loan agreement and AOD are not void in terms of the NCA, and it can pursue the debtor for its R15m.

But – don’t take unnecessary chances!

Concluding an informal loan agreement with a handshake is all very well, but this could well have turned out badly for the lender, and R15m is a lot of money to lose for want of checking for lawfulness upfront.