Understanding Arm's Length Transactions and Credit Agreements under the NCA
If you are planning to enter into a loan agreement with a friend or family member, it is essential to understand the definition of "arm's length" transactions and "credit agreements" under the National Credit Act (NCA). The recent ruling of the Supreme Court of Appeal (SCA) in a case involving an appeal on the issue of whether a loan and an acknowledgement of debt (AOD) were subject to the NCA provides valuable insights into these concepts.
The SCA identified two issues to be addressed in the case - whether the order granted by the trial court was appealable and whether the transaction constituted a credit agreement under the NCA. The SCA found that the loan and the AOD were not subject to the NCA as the parties were not dealing at arm's length and no interest was levied on the loan, except in case of mora. The loan was offered as a gesture of friendship, and thus the agreement lacked the character of a credit agreement.
The NCA defines a credit agreement as an agreement where a credit provider agrees to provide credit to a consumer, and the consumer agrees to pay interest, fees, and charges in return. A credit agreement is also deemed to exist if it defers payment, and any charge, fee, or interest is payable to the credit provider. In the case before the SCA, the loan was a one-time occurrence, and no interest was levied on it, indicating that it was not a credit agreement under the NCA.
The concept of arm's length transactions refers to a transaction between two parties who are independent, unrelated, and have no personal relationship. In such transactions, the parties negotiate on equal terms, and the transaction is conducted in a fair and transparent manner. The NCA requires credit agreements to be conducted at arm's length, which means that the parties should be dealing with each other on commercial terms, and there should be no personal relationship between them. In the case before the SCA, the loan was offered as a gesture of friendship, indicating that the parties were not dealing at arm's length.
The ruling of the SCA highlights the importance of understanding the concepts of arm's length transactions and credit agreements under the NCA. If you are planning to enter into a loan agreement with a friend or family member, it is crucial to ensure that the transaction is conducted at arm's length, and the agreement is not deemed to be a credit agreement under the NCA. This will help avoid any legal complications and ensure that the transaction is conducted in a fair and transparent manner.
​​If you have any questions about debt you currently have, please feel free to reach out to a member of the Libertine Consultants team. We are here to provide you with judgement-free support and advice.
