In most cases regarding loan agreements a usual prerequisite would be that interest would accrue over time or that an eventual penalty regarding interest in the alternative will apply, if the loan is not timeously paid, the latter being referred to as an incidental credit agreement.
The National Credit Act 35 of 2005 (hereafter the “NCA”) deals specifically with loan agreements were interest applies, where such an agreement was entered within South Africa and where the parties dealt at arm’s length.
The first two of the aforementioned criteria is self-explanatory and is it the latter that is a grey area that would-be determined on a case by case basis as the NCA does not clearly define the term “at arm’s length”.
In the most recent case of Eden Court (Pty) Ltd v Khan (3918/12) 2012 the Court had to deal with a matter were a loan was afforded by the employer to his employee with the suspensive stipulation of interest that would accrue if the employee elected to leave the said employers employment prior to the loan being repaid.
In this instance, the Court was dealing with a possible incidental credit agreement which were argued also to fall under the ambit of the NCA. The eventual findings of the Court were, considering the relationship between the parties and the construction of the loan agreement, that the employer did not intent to take full advantage of the loan agreement, and accordingly did not intend to maximise his advantage in granting the loan and only in the circumstances were the loan was not repaid would the clause regarding interest become relevant.
The Court found that the agreement was not at arm’s length, and referred to Hicklin v Secretary for Inland revenue 1980 SA in which the Court referred to the term, at arm-length, as one were said penalty clauses in an agreement that was dealing at arm’s length would be seen to gain the utmost advantage and that anything less would amount to an abnormal clause in the agreement in the prevailing circumstances in which it was created.
We have recently dealt with a matter of a loan agreement between an employer and employee which from the outset interest would be charged. In this matter, the interest that was charged was not the statutory rate but much lesser and accordingly the Court found that the credit agreement did not fall under the ambit of the NCA as the employer, as per the previous referred matter, did not strive for maximum advantage from the credit agreement itself.
The NCA has vast requirements that needs to be adhere to when concluding a credit agreement that falls under the ambit of the Act. Accordingly when contemplating a credit agreement same should be structured in such a way, as in the instance of an employer/employee relationship, as to not to extract the utmost advantage from such an agreement as same will be mostly likely be regarding as an agreement at arm’s lengths.