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Transactions to “avoid” legal impact
The application of the National Credit Act 34 of 2005 (the NCA) can have onerous consequences for money lenders. It requires strict compliance with its provisions relating to registration of credit providers, reckless lending and notice.
This has resulted in a number of money-lenders dressing up their transactions as something other than credit agreements, in order to circumvent the provisions of the NCA. Although it is trite that a court will have regard to the substance of an agreement, rather than its form, it is not always easy to determine when an agreement is such a simulated transaction.

The legal position

The test to determine simulation is two-fold. As stated by Lewis JA in Commissioner for the South African Revenue Service v NWK Ltd 2011 (2) SA 67 (SCA) at para 55:

‘In my view the test to determine simulation cannot simply be whether there is an intention to give effect to a contract in accordance with its terms. Invariably where parties structure a transaction to achieve an objective other than the one ostensibly achieved they will intend to give effect to the transaction on the terms agreed. The test should thus go further, and require an examination of the commercial sense of the transaction: Of its real substance and purpose. If the purpose of the transaction is only to achieve an object that allows the evasion of tax, or of a peremptory law, then it will be regarded as simulated. And the mere fact that parties do perform in terms of the contract does not show that it is not simulated: The charade of performance is generally meant to give credence to their simulation.’
There are two forms of simulated transactions. Firstly, if parties make an agreement as a sham or pretence (eg, to mislead the fiscus), then they do not intend to create obligations and their simulated agreement is invalid (see Long Oak Ltd v Edworks (Pty) Ltd 1994 (3) SA 370 (SE) at 375-379). If the simulated agreement is a disguise for some other type of transaction, the court will strip off the form of the simulated agreement and reveal its true nature, so that the law may operate.

Secondly, where parties enter into an agreement and act in accordance with the agreement but for a different purpose than that which the agreement contends for.

If a transaction or agreement is genuine a court would give effect to it and, if not, the court would give effect to the underlying transaction that it concealed (see Zandberg v Van Zyl 1910 AD 302, Vasco Dry Cleaners v Twycross 1979 (1) SA 603 (A) and Michau v Maize Board 2003 (6) SA 459 (SCA)).
Whether an agreement is genuine depends on a consideration of all the facts and circumstances surrounding the transaction. A court will examine the transaction as a whole, including all surrounding circumstances, any unusual features of the transaction and the manner in which the parties intended to implement it, before determining in any particular case whether the agreement was simulated (see Roshcon (Pty) Ltd v Anchor Auto Body Builders CC and Others 2014 (4) SA 319 (SCA) at paras 27, 32 and 37).

In the matter of Hippo Quarries (Tvl) (Pty) Ltd v Eardley 1992 (1) SA 867 (A) the court looked at the form of a transaction and concluded that the parties genuinely intended to give effect to that which they had apparently agreed. In Commissioner for Inland Revenue v Conhage (Pty) Ltd (Formerly Tycon (Pty) Ltd 1999 (4) SA 1149 (SCA) Hefer JA found that sale and leaseback agreements, which had unusual terms but which made good business sense, were honestly intended to have the effect contended for by the parties.

In the Hippo Quarries case, the court drew a distinction between motive and purpose, on the one hand, and intention on the other, in trying to determine the genuineness of a contract, and of the underlying intention to transfer a right, where the transfer was not an end in itself. Nienaber JA said:
‘Motive and purpose differ from intention. If the purpose of the parties is unlawful, immoral or against public policy, the transaction will be ineffectual even if the intention to cede is genuine. That is a principle of law. Conversely, if their intention to cede is not genuine because the real purpose of the parties is something other than cession, their ostensible transaction will likewise be ineffectual. That is because the law disregards simulation. But where, as here, the purpose is legitimate and the intention is genuine, such intention, all other things being equal, will be implemented.’

In S v H Friedman Motors (Pty) Ltd and Another 1972 (3) SA 421 (A) the contracts in question were designed to avoid legislation regulating moneylending transactions. In order to obtain funds to acquire a motorcar, an individual would sell his car to a bank. The bank would immediately resell the car to the individual for a higher price, but would reserve ownership in the car until the full purchase price was paid – a hire-purchase contract. The individual would pay a cash deposit and monthly instalments and on payment of the full purchase price ownership of the car would revert to him. The same object would usually be achieved through a loan of the price by the bank to the individual, repayable with interest. Colman J, in S v Friedman Motors (Pty) Ltd and Another 1972 (1) SA 76 (T), considered that the transactions might be loans, disguised as sales, or genuine sales, depending on the parties’ intention. He said at 80 G – H:

‘If two people, instead of making a contract for a loan of money by one of them to the other, genuinely agree to achieve a similar result through the sale and repurchase of a chattel, there is no room for an application of the maxim plus valet quod agitur quam quod simulate concipitur. The transaction is intended to be one of sale and repurchase, and that, at common law, is what it is.’

In the Friedman and Conhage cases, where the courts held that the parties intended their contracts to be performed in accordance with their tenor, there were sound reasons for structuring the transactions as they did. The purchaser of the car in the Friedman case was required to give security in return for the funds advanced by the bank. A pledge would have deprived him of the car and its use. Hence the sale and resale: It allowed the purchaser to keep and use the car. In the Conhage case the sale and leaseback of manufacturing equipment permitted the manufacturer to retain possession of the equipment. There was a commercial reason or purpose for the transactions to be structured as they were. In both instances there was a genuine transfer of ownership. Had the purchaser failed to pay the seller he would have lost the right to become the owner in due course.

Although it may not always be easy to determine whether an agreement is simulated or not, the authorities quoted above provide some useful guidelines in determining this question. Whether an agreement is genuine depends on a consideration of all the facts and circumstances surrounding the transaction. A court will examine the transaction as a whole, including all surrounding circumstances, any unusual features of the transaction and the manner in which the parties intended to implement it, before determining in any particular case whether the agreement was simulated.

Chantelle Humphries LLB (UJ) is an advocate at Bridge Group in Johannesburg. Don Mahon LLB (UP) is an advocate at Maisels Group in Johannesburg.
This article was first published in De Rebus in 2017 (Nov) DR 20.

Twin Peaks and Credit Providers
1. There have been questions to what extent the Financial Sector Regulation Bill (Bill), or Twin Peaks as it is commonly referred to, will affect the Credit Industry, if at all. The answer in my view is not easy. The Bill is complex and has a lot of policy and principles in it. It is clearly aimed at closing regulatory gaps and arbitrage.

2. The main object of the Bill is to achieve a financial system that works in the interests of financial customers, and supports balanced and sustainable economic growth in the Republic, by establishing, in conjunction with the other financial sector laws, a regulatory and supervisory framework that promotes:

● financial stability;
● the safety and soundness of financial institutions;
● the fair treatment and protection of financial customers;
● the efficiency and integrity of the financial system;
● the prevention of financial crime;
● financial inclusion; and
● confidence in the financial system.

3. To achieve the objects of the Bill two new financial sector regulators will be established. One is the Prudential Authority and the other the Financial Sector Conduct Authority (FSCA).

4. The National Credit Act and Regulator (NCA and NCR respectively) is not part of the Twin Peaks model but is mentioned in and catered for in the Bill. Clearly the NCR remains the sole regulator of the credit agreement itself and the features around the product. The NCR therefore regulates credit providers as provided for within the NCA.

5. There is however credit that falls outside the scope of the NCA and the FSCA will regulate this type of credit.

6. Both the NCR and the FSCA will regulate credit providers for their conduct but it will be done in different ways and with a different focus. The FSCA can regulate credit providers on a risk basis.

7. The FSCA can set standards for financial services provided in relation to credit agreements to provide for a system-wide approach to conduct provided that the standards support regulatory requirements set by the NCR under the NCA.

8. The SARB and the Prudential Authority also has an overlap with the NCR. They will regulate credit providers for stability, safety and soundness and very much on a risk-based approach. When it comes to systemic risk the Governor of the Reserve Bank may issue Directives the credit industry.

9. The Bill is rife with references to the NCR and the NCA. Lots of emphasis is placed on cooperation, collaboration and communication among the various entities and relevant Government Departments.

10. These are early days for the Twin Peaks. The Bill has been passed by the National Assembly and has been discussed in February 2017 in the National Council of Provinces. The first stage is to establish the regulators and to set up a uniform system and standards. The second stage will streamline the current activity based legislation such as banking, insurance, credit, pensions etc. into consolidated legislation.

11. In my view as the present Bill does not take away from the NCR and the NCA, but it does add on to it. I believe it would be naïve to think that the Twin Peaks will not affect the way that the NCR and Credit Providers go about their business. Credit Providers should become aware of the other Financial Sector Regulators in the credit arena and increased regulatory oversight and scrutiny.

Article written by Adv Jan Augustyn - 21 February 2017

Do we want South Africa to Work?
A question to which the answer one naturally assumes would be yes, but —
are we really willing to do what it takes – each industry sector, each individual business, each Government department, each Regulator, each and every person?

Let’s consider some mind-boggling statistics – according to Unisa’ s Bureau of Market Research the unemployment statistic in the age group 24 to 32 years of age is 66,2%! This is also the biggest segment of the South African population. The population count for children under 4 years of age is around 5,5 million, with the parents likely falling into the age category of the most unemployed sector in the country. These statistics are staggering in their implications.

Factors in the financial sector do not present a much different view – industry and regulatory events and measurements such as levels of indebtedness, payment performance, industry and regulatory issues and legal cases all point to turbulence and challenge. Whole business sectors are under severe challenge, ethics in Government, Business and those displayed by many consumers is worrying.

The big question is - what needs to be considered and done to create an environment where the economy is vibrant and affords sufficient business opportunity and growth in employment or entrepreneurial undertakings to ensure a positive and sustainable situation in the country?
Does ripping the ring out of a market for short term gain or having dubious business practices (which might be legal but are unethical), or regulating a market to a state of practical inoperability offer salvation?

We need markets functioning effectively and vibrantly and given the country’s history and current state of the population we need innovation, co-operation, focus and concerted effort to address challenges to create the much-needed opportunities for legal and ethical growth, sustainability and hopefully through that stability.

Singular, but not myopic focus is called for - collectively we need to relook how we conduct business, what impact and effect new laws and regulations are having and what more is needed and from whom. We need clear intent and both the Business and Government/Regulatory sectors need to have specific knowledge about how things work and stand in their counterparts’ respective spheres in order to engage effectively and to perform their roles in a manner conducive to delivery of a sound SA economy and a reasonable life for the folk living in the country.

And perhaps that’s where the nub of the problem lies - we don’t have a clear and common vision – we all have our particular views and agendas, based on which sector we operate in and what our short-term goals are. We are more likely responding to squeaky wheels than to real opportunities.
This situation needs to be changed rapidly and not to give no consequence to the individual needs and objectives of Government and Business role-players, but rather to now focus on delivery of a state of play that will foster the delivery of the individual goals – be they profit and growth or compliance and taxes!

The truth is without a common, shared vision and without sufficient cognisance of each other’s perspectives, experiences and expertise, Policymakers/Regulators and Business collectively cannot succeed or improve matters.

Also, stuck right in the middle between Policymakers/Regulators and Business is the SA Consumer, already rather pushed and desperate and yet the one true reflection of how well or poorly the enterprises and interventions of both Government and Business are faring!

So, knowing how to correct the whole situation cannot be easily answered, but a sound platform for a start on this would be for the following to be addressed:
Each sector (Government, Policymakers, Regulators, Business) to engage with a mind to understand each other – from intent to content to challenge and issue, and importantly to vision;
For a proper, empirical assessment to be done on the nation – individuals and businesses. The disparity in statistics is alarming – each information source has a different count for factors such as unemployment, indebtedness levels, performance levels etc. Making plans off disparate information is extremely dangerous - and yet empirical sources do exist - e.g. credit consumption and performance data, population register, SARS records, banking information and so forth. The challenge is to procure access, analyse and interpret properly – for clearly defined intent, and finally knowing how to use the information to inform planning and policy to drive change.
A thorough review of the business sector is most needed – across the range from survivalist enterprises to large multi-national businesses with spatial perspectives overlaid with industry footprints for accurately locating and assessing economic hubs and issues. From this, various scenarios could be explored for purposes of assessing the effectiveness, or lack, of legislation and also that of business and enterprise. For example, overlaying industry footprints with the day/night population with that of the infrastructure within the locality, together with the extent of credit consumption and payment performance, could provide unique insights into behaviours which might need to be either fostered or changed in either the supply or the demand sides. This, provided that the information used for such analyses is properly understood in the first instance, in terms of collation methodology, statistical relevance, confidence levels and analysis techniques.
From the information referred to, a stratification of the market – both demand and supply sides, could be done and made available in a fashion which supports the actions of comprehension and planning.
  • The information that could be sought and analysed could provide truly useful insights into various challenges that currently abound, these include but are not limited to:
    • Business-to-business realities,
    • Consumer market realities,
    • SMMEs and their challenges – access to finance and expertise, market access, production capacity and sophistication, basic business knowledge etc.
    • Access to finance – going beyond mere access to the effective and selective use of financial services that are accessed;
    • Business rescue – and interventions before business rescue is needed!
    • Delivery of real BBBEE - beyond the top end of the market
    • Impacts of regulation on business operations and the related cost of compliance
    • Cost of compliance implications for the cost of goods and services available to consumers across the whole service/product delivery chain.

In considering all of this – its seems too huge to do and too much to resolve – but let’s remember we humans can and have put a robot on Mars – and that is a pretty awesome accomplishment!

We can succeed - let’s talk, analyse and plan together towards this common goal – it’s the way we are more likely to succeed in making SA work! In the words of a wise Regulator – let’s put our egos aside, adopt sound ethical practices and let’s do the work!

Article written by Darrell Beghin - CEO - SACRRA - 7 February 2017