Statutory set-off in terms of the National Credit Act 34 of 2005

Abstract

Set-off is a common law method of debt settlement by which obligations, whether arising contractually or otherwise, can be terminated without requiring the exchange of performance by parties who are mutually (reciprocally) indebted to each other. The common law principle of set-off has been explained as constituting a valuable commercial tool that offers simplification, convenience and efficiency, as well as the avoidance of circuity of payment. Moreover, it also fulfills a security function from the perspective of a creditor and effects a “fair outcome”, provides a defence, facilitates debt collection and prevents default by consumers. One of the more prominent advantages of common law set-off is that it offers the creditor considerable control in that where the creditor is for instance a bank, it can decide to appropriate money from another account (for instance a savings account) held by that consumer with the bank, where the consumer fails to make payment of an instalment in terms of a credit agreement concluded with such bank. Since common law set-off applies by the implied ipso iure operation of the law, the creditor bank will be able to appropriate such monies without prior notification to the consumer and there are no formalities that the bank is required to comply with.

The National Credit Act has seemingly changed the entire set-off landscape for credit providers, and banks in particular, having regard to the provisions of section 90(2)(n) read with section 124. The former subsection deals with unlawful provisions in credit agreements and specifically provides that a credit agreement that allows a charge to be made against an account, amongst other, may not be utilised in a way that is not authorised in terms of section 124. Section 124, in turn, creates quite an elaborate process in terms of which a credit provider who wants to make a charge or a series of charges, for purposes of facilitating repayment of debt by the debtor/consumer, is required to obtain prior authorisation from such consumer.

This contribution examines the extent the enactment of the National Credit Act may have superseded the common law right to set-off to credit agreements regulated by the Act.