EMPLOYERS MUST GUARD AGAINST IMPACT OF NATIONAL CREDIT ACT ON LOANS TO EMPLOYEES
In a business context, the National Credit Act 34 of 2005 is particularly relevant where firms enter into various types of loan transactions with their employees in circumstances where these loans potentially amount to “credit transactions” under the Act.
Section 4(1)(a) provides that the Act applies to every credit agreement between parties dealing at arm’s length and made within, or having effect within, South Africa.
Section 4(2)(b)(iv) provides that parties are not considered to be dealing at arm’s length where the arrangement is one in which each party is not independent of the other and consequently does not necessarily strive to obtain the utmost possible advantage out of the transaction.
Section 8(4)(f) provides that an agreement will become a credit agreement if a payment obligation is deferred and there is a charge, fee or interest payable to the credit provider.
Section 40(1) provides that where a company has at least 100 credit agreements or a total principle debt owed to it – under all outstanding credit agreements – that exceeds the threshold of R500 000, then a company will be obliged to register as a credit provider under the Act.
Most often, loan schemes provide for nominal levels of interest to be paid by an employee on the principle debt over a defined period of time. It is often argued that loans of this kind, which are advanced in the context of an employment relationship, are not loans concluded at “arm’s length” and, as such, cannot constitute a credit agreement in terms of the Act.
However, the National Credit Regulator’s view is that the application of any level of interest (whether nominal or linked to prime) or other fee or charge immediately renders it a credit transaction in terms of the Act. As such, the Regulator has explicitly accorded precedence to the prescripts of Section 8 of the Act.
The most common types of loan transactions that employers provide to their employees include:
the provision of interest-free salary advances to employees to a specified maximum amount repayable within a specified period of time;
the provision of more traditional loans to employees in which there is a maximum amount of time prescribed for repayment and where interest is either charged at a nominal rate or linked to prime; and
the provision of employee share ownership schemes in which an employer makes interest-bearing loans available to its employees in order to enable them to purchase shares in the employer’s holding or subsidiary company.
Our general advice, other than the levying of some form of compensatory interest or charge by a company on the salary advances, is that the transaction falls outside the ambit of the Act – a conclusion supported by the Act’s section 4(2)(b)(iv).
In the instance of an interest-free salary advance, it is apparent that a company will not be striving to obtain the utmost possible advantage out of the transaction. Indeed, the company is unlikely to obtain any form of commercial advantage through this transaction and the transaction accordingly cannot be deemed to be concluded at arm’s length, as is required by the Act.
The regulatory requirements and associated criteria of the Act are, however, likely to apply to a company where the transaction between the company and an employee carries a rate of interest tied to the loan. Where the company links the loan’s rate of interest to that of prime, the loan is likely to carry some level of commercial significance and/or advantage for the company.
Further, the rate of interest levied will contribute to creating the presumption that a company may indeed be striving to obtain some sort of advantage from the transaction. As such, in such instances, the transaction will be one that is concluded at arm’s length even should it be in the course and scope of an employment relationship between the parties.
Where a nominal rate of interest is charged on the transaction, it should not fall under the ambit of the Act as the loan does not benefit the lender. Indeed, in such instances the lender is losing money on the transaction. Even so, the Regulator’s view is that any interest applied to a transaction will render it liable to the effects and protections of the Act.
Should the Act be deemed to apply to a loan transaction, a company will only be required to register as a credit provider where the requirements of section 40(1) (above) are met.
We maintain that the sub-sections of the Act operate independently from each other in triggering the registration requirements. To this extent, where it is found that either section 40(1)(a) applies (where there are at least 100 credit agreements) or section 40(1)(b) applies (all the outstanding credit agreements exceed R500 000), then a company will be required to register as a credit provider.
Upon registration, the credit provider becomes obliged to conduct preliminary assessments of a “consumer” in order to determine his or her credit-worthiness. Failure to do so will be regarded as a reckless credit agreement which a court may ultimately suspend. Failure to register as a credit provider will also result in any agreement concluded in the interim being unlawful and void.
Even should a company provide employee share ownership schemes whereby it makes interest-bearing loans available to its employees to enable them to purchase shares in its holding or subsidiary company, regardless of the intention and purpose for which such loan is advanced, the Regulator is likely to view the transaction as a credit agreement in terms of the Act.
There are, furthermore, no exemptions from the application of the Act when it comes to a company providing employees with capital loans in order to purchase shares.
It is apparent that the Regulator has adopted a formalistic interpretation of the Act and, as such, is likely to deem any loan transaction, bearing even a nominal rate of interest, as falling within the Act’s ambit.
Employers should exercise caution when providing any form of interest-bearing loan to its employees, as such a transaction is generally deemed to be concluded at arm’s length in spite of the employment relationship between the parties.
If an employer suspects that it might be falling afoul of the Act, it should examine the possibility of restructuring its transactions so as to minimise the risk of exposure to the Act.
Lenja Jansen is a candidate attorney in the litigation department of corporate law firm Bowman Gilfillan