However, in certain circumstances the NCA is applicable, and failure to comply with it could result in the agreement being void. The unreported case of Nel & Others v Cilliers (197/2023) [2024] ZASCA 57 (19 April 2024) shines a spotlight on the consequences of charging interest on a deferred purchase price in a share sale agreement and raises a caveat regarding purchase price adjustments in share sale agreements.  

Facts

Mr JJG Nel (the first appellant), a businessman, and Mr PPJ Cilliers, an attorney and businessman (the respondent) concluded a sale of shares agreement in terms of which the respondent sold 5% of Legend Golf and Safari (Pty) Ltd (the development company) to the appellant for R8 million to facilitate an investment by the first appellant in the upmarket golf estate that the respondent was developing through the development company. Shortly after the conclusion of the sale of shares agreement, the development company was restructured in light of new investors. As the first appellant did not approve of the new investors, he subsequently chose to opt out of the development. However, as the respondent advised him against withdrawing from the development and offered to purchase the first appellant’s shares for R30 million after three years, the appellant chose to remain invested for a further three years as he believed that the development would yield good returns.

The first contract

Consequently, on 18 February 2008, the first appellant and respondent concluded a sale of shares agreement (D1) which provided, inter alia, that the respondent would purchase the first appellant’s 5% share in the development company for R30 million, payable on or before the end of February 2011, “interest free and tax friendly”.

The D1 contract further provided that certain companies, which the first appellant was the controlling mind behind (the companies), would each purchase an erf in the development that would be financed by the first appellant through an Absa mortgage bond. The respondent would market two of the erven and the profit on such erven would finance the other five erven. The respondent subsequently made a payment of R6 million to the first appellant, but defaulted on his obligations thereafter. Therefore, the parties concluded a second agreement (D2) to accommodate the respondent, in terms of which the share price would be reduced from R30 million to R12 million.

The second contract

The D2 contract provided that the R6 million which the respondent had already paid, was regarded as an initial payment. The respondent agreed to pay the remaining R6 million in three annual cash instalments of R2 million each, subject to interest at the agreed rate. One further payment of R1 million was made by the respondent to the first appellant on 31 July 2012, whereafter all payments stopped. Litigation ensued in which (i) the appellants (being the first appellant and the companies) sought specific performance based on the terms of D2 which included that the respondent should be ordered to design, construct and complete four fully furnished hotel suites on each of the aforementioned erven and (ii) alternatively, the appellants sought conditional relief based on D1 for the payment of the balance of the purchase consideration under the sale of shares agreement.

The application of the NCA

Neither of the parties was registered as a credit provider under the NCA. Furthermore, in the pre-trial phase a concession was made that D2 fell within the ambit of section 8 of the NCA.

Section 8(1)(b) of the NCA provides that, subject to subsection 2, an agreement constitutes a “credit agreement” for the purposes of the NCA if it is a credit transaction, as described in subsection 4.

In terms of section 8(4)(f) of the NCA, an agreement, irrespective of its form but not including an agreement contemplated in subsection 2, constitutes a credit transaction if it is:

“[A]ny other agreement, other than a credit facility or credit guarantee, in terms of which payment of an amount owed by one person to another is deferred, and any charge, fee or interest is payable to the credit provider in respect of (a) the agreement; or (b) the amount that has been deferred.”

Section 40(1) of the NCA provides that a person must apply to be registered as a credit provider if the total principal debt owed to that credit provider under the credit agreement exceeds R500,000. Section 40(4) of the NCA provides further that a credit agreement entered into by a credit provider who is required to be registered in terms of subsection 1 but who is not so registered is an unlawful agreement and void. (In this regard, a few years back the Supreme Court of Appeal threw a spanner in the works in Du Bruyn N O and Others v Karsten [2019] (1) SA 403 (SCA) by holding that, contrary to a very widely held belief, registration as a credit provider is not limited to instances where it is one’s ordinary or regular business to extend credit – even once-off credit triggers the requirement.)

As a result of the concession, the D2 contract fell away. The remaining question was whether the original contract, D1, was lawful and enforceable or whether it, too, was affected by the NCA.

The court considered whether D1 fell within the ambit of section 8(4)(f) of the NCA. The court concluded that as there was no “charge, fee or interest” payable on the purchase price for the shares, D1 was not a “credit agreement” in terms of the NCA. Additionally, the court held that the first appellant’s aim to remain invested in the development company for a further three years in anticipation of his interest in the development company appreciating in accordance with the respondent’s predictions, did not amount to deferring the payment of the purchase price. Accordingly, D1 was a valid contract.

Final thoughts

While D1 did not constitute a credit agreement due to the specific facts of the case, the Nel case does get one thinking about scenarios in share sale agreements where the purchase price is settled upon completion but is also subject to a potential future adjustment. Although “interest” in the literal sense is not levied on the purchase price, the future adjustment to such purchase price effectively achieves a similar result as if interest had been charged. Caution should be employed as mechanisms such as this could be construed as meeting the requirement of charging interest, which, subject to the thresholds and other criteria of a credit agreement being met, may bring certain share sale transactions within the ambit of the NCA. Therefore, when drafting a share sale agreement, the requirements of the NCA should be kept in mind, noting that in certain instances, the charging of interest on any deferred portion of the purchase price may bring the agreement within the ambit of a “credit agreement” for purposes of the NCA.

It should also be highlighted that adjustments to the purchase price and deferred payments may have tax consequences, depending on the specific facts and circumstances. Where one is dealing with interest or interest-like payments, one should also specifically consider the application of section 24J of the Income Tax Act 58 of 1962 which deals with the incurral and accrual of interest and interest-like payments.