Vendor financiers risk right to claim purchase price in the event of a default on payment

This does raise the question as to whether the agreement concluded between these parties would have to comply with the National Credit Act, No 34 of 2005 (NCA) and whether the seller would be obliged to register as a credit provider in terms of the NCA. If indeed the case, the agreement (including any security held by the seller for payment of the outstanding purchase price, for example a pledge of the shares) would constitute a credit agreement, and should it not comply with the NCA and/or the seller fails to register as a credit provider, the agreement (including the security) will be void and the seller may not be able to rely on the provisions of the agreement to claim the outstanding purchase price and realise the security.

The applicability of the NCA to a transaction such as this is not necessarily an obvious consideration in relation to a once-off sale transaction between persons who do not participate in the credit industry. The question was, however, recently considered in the judgment handed down in the Supreme Court of Appeal by Nicholls AJA on 28 September 2018 in Du Bruyn NO & others v Karsten (929/2017) [2018] ZASCA 143.

In this case, Mr and Mrs Du Bruyn, in their capacities as trustees of a trust, purchased shares from Mr Karsten, on the basis of an instalment sale, whereafter, the Du Bruyns defaulted on paying the outstanding purchase price. Mr Karsten instituted legal action against them in a High Court and was successful in his claim.

The Du Bruyns, however, appealed the decision on the basis that Mr Karsten registered as a credit provider after the conclusion of the sale agreement, rendering such agreement (including the security registered in favour of Mr Karsten for the purchase price) null and void due to non-compliance with the NCA.

Mr Karsten, in defence, submitted that the requirement to register as a credit provider was directed at participants in the credit market and not for single transactions where credit was provided. The Supreme Court of Appeal set aside the order of the High Court, finding that s40 of the NCA was clear and unambiguous in that it makes it obligatory for a person to register as a credit provider if the total debt advanced exceeds the prescribed threshold.

It is therefore critical to appreciate that a sale of shares transaction, between certain persons where the payment of the purchase price is deferred subject to payment of interest on the outstanding amount, is generally considered a “credit agreement” in terms of the NCA. This requires the transaction documentation to be drafted in a NCA compliant manner and the seller to register as a credit provider prior to the conclusion of the transaction documentation.

There are, however, various other factors to consider when determining whether the NCA is indeed applicable to such transaction. For example, the purchaser must constitute a consumer for purposes of the NCA.

Natural persons automatically constitute consumers under the NCA including a trust which has two or less trustees (who are natural persons). Persons who are not natural persons (including, amongst others, companies, partnerships (“juristic persons”) and trusts with more than two trustees or where a trustee is itself a juristic person) are also deemed consumers if they fall below certain asset-value or annual-turnover thresholds.

Furthermore, the requirement for a person extending credit (ie the seller in this case) to register as a credit provider depends on the quantum of the amount deferred, in that the NCA prescribes a minimum threshold that must be exceeded before a person is required to register as such. This threshold is, however, rendered redundant on the basis that it is currently R0.00, as prescribed by the Minister in terms of the NCA.  

Registration as a credit provider involves an application by the seller to the National Credit Regulator, which application must be accompanied by various documents as well as certain administrative payments and may take up to eight weeks to be approved. Once the seller registers as a credit provider, it will be required to renew such registration on an annual basis for as long as the credit agreement is in force and effect if it intends to continue charging interest on the outstanding purchase price.

The administrative burden of registering as a credit provider, and the additional cost that may need to be incurred to ensure that the transaction documentation complies with the NCA, may very well discourage parties from concluding transactions on this basis.

Since commercial practicalities often demand this type of arrangement (which does not only apply to the sale of shares but to goods and services in general), “out of the box” alternatives may be worth exploring, for example the seller may opt to forego the payment of interest, given that the extension of credit where no interest is charged does not constitute a credit transaction which requires compliance with the NCA.