Court ruling curbs creditors’ power

In what is likely to be a precedent-setting ruling by a full bench of the Western Cape High Court the ability of creditors, and particularly banks, to ride rough-shod over debt re-arrangement applications in front of magistrate's courts has been dealt a considerable blow in favour of debt-ridden consumers.

Under this ruling banks and other institutions can no longer proceed with collection procedures against debtors before they have attempted to assist debt counsellors and magistrate's courts in the debt re-arrangement applications.

The ruling will prevent creditors from instituting legal action against debtors whose debt counsellors have lodged a debt re-arrangement application with a magistrate’s court within 60 days if receiving such an application.

The court ruled that motor vehicle finance company WesBank, which is owned by First Rand, could not unilaterally terminate a customer’s debt review, since his debt counsellor had lodged an application for debt review with a magistrate’s court and he was making regular payments as set out in his debt repayment plan.

All courts in the Western Cape will have to follow the judgement, but Jan Augustyn of the National Credit Regulator (NCR) said the “judgments was so well written and clear” that he was sure it will have a significant influence on similar cases in other provinces.

The implication of the judgment is that if a consumer continues to make payments in line with his or her restructured debt plan, and debt counsellors fulfill their duties by submitting an application for debt review to the magistrate’s court within 60 days of receiving it, the credit provider cannot unilaterally terminate the debt review process.

In the relevant case the consumer, Deon Papier, applied to a debt counsellor for a debt review in September 2009. His creditors, including WesBank, were informed in October of his application and a copy of his proposed debt re-arrangement plan sent to them.

Papier entered into a lease agreement with WesBank in March 2007 in term of which he would pay an initial R13 157.89 followed by 53 monthly payments of R2 772.90 of which the final payment would have been made in September 2011.

There was no response from WesBank on the re-arrangement plan or subsequent notices by the debt cousellor, while Papier’s application for a debt counseling order was scheduled for June 11 last year.

On June 4 Papier received notice from Wesbank that it was terminating the debt review process, informed him that he was R40 982.78 in arrears, and that legal action would follow unless he either paid the full amount or returned the car to WesBank.

On June  11  his application for a debt couselling order was granted by the magistrate’s court, but on June 29 WesBank proceeded with their legal action against him.

The High Court has now turned down WesBank’s application for judgment against Papier and ruled that his debt review should continue according to the repayment plan drawn up by the debt counsellor.

Before last week’s judgment, the NCR had applied to the Johannesburg High Court for a declaratory order that would make it clear that consumers cannot be subjected to legal action once they have applied for debt counselling.

The judgment, among others, states that “to allow a credit provider to unilaterally terminate the consumer’s protection at the precise moment when he or she may need it the most can only be construed as absurd. It would be like providing the consumer with an umbrella and then snatching it back the moment it starts raining.”

In a statement after delivery of the judgment, the debt cousellor described it as a watershed, which will turn the whole sector on its head. “Power will be given back to the magistrate's courts. The fact that credit providers have the money to start legal actions at will,  no longer be a factor.

“Banks now have to work with debt counsellors and the magistrate’s to successfully complete cases,” the statement said.