The Supreme Court of Appeal (“SCA”) recently handed down a landmark judgment in Absa Bank Limited v Serfontein, setting aside an acknowledgement of debt agreement (“AOD”) that incorporates a power of attorney (“POA”) (the “agreement”) in favour of Absa Bank Limited (“Absa”). The ruling followed an appeal by Absa against a decision from the Free State High Court, which had found the agreement to violate the National Credit Act 34 of 2005 (“NCA”) and, therefore, void from the outset.
Background facts
Absa provided an overdraft facility to Mr. Johan Serfontein, secured by mortgage bonds over his immovable property. His father, Mr. Jacobus Hendrik Serfontein, signed a deed of suretyship to provide additional security. When Johan Serfontein defaulted on his obligations, Absa insisted on an AOD and POA, signed by both senior and junior Serfontein after they obtained legal advice. The POA granted Absa the irrevocable right to sell the property without needing a court order.
After the agreement was signed, Absa auctioned the property but rejected the initial offer. Eventually, in September 2021, the property was sold for R6 million. However, the Serfonteins challenged the validity of the agreement, arguing that it contained unlawful provisions under the NCA.
The Serfonteins approached the Free State High Court to set aside the agreement and the subsequent sale of the property. They claimed that they had been pressured into signing due to financial distress. They also contended that the agreement constituted supplementary agreements in terms of section 91(2) of the NCA and included unlawful terms. Specifically, they argued that they contravened sections 89 and 90 of the NCA by allowing Absa to execute against the property without first obtaining a court order.
Section 89 of the NCA concerns the illegality of certain credit agreements. It specifies that a credit agreement is unlawful if, among other reasons, it is a supplementary agreement or document prohibited by Section 91. If an agreement is deemed unlawful, the court is mandated to declare it void from the date it was entered into and issue a just and equitable order, which may include requiring the credit provider to refund any money paid by the consumer under the agreement.
Section 90 of the NCA addresses unlawful provisions in credit agreements. It prohibits terms that undermine the NCA's goals or policies, waive common law rights, appoint the credit provider as the consumer's agent for unauthorised purposes as outlined in Section 102, or give the credit provider power of attorney regarding credit matters. Any credit agreement containing these unlawful provisions is void from the effective date. The effective date is the date on which the provision came into operation.
Section 90(4), read with section 89(5) of the NCA, grants the court the authority to assess the legality of provisions in a credit agreement and determine an appropriate remedy. Should the court find specific provisions unlawful, it has a discretion to sever those provisions while allowing the remainder of the agreement to remain in effect, provided it is reasonable.
Absa maintained that the agreement was a valid settlement agreement reached after the default. The bank argued that the agreement did not violate the NCA, as the Serfonteins had willingly consented to its terms. Furthermore, Absa asserted that the property was sold at a fair market price. The High Court ultimately ruled in favour of the Serfonteins, declaring the agreement void from inception. Absa, dissatisfied with the ruling, appealed to the SCA.
In dealing with the provisions of sections 89(5) and 90(4) of the NCA, the court found that the unlawful provisions of the agreement were not isolated or incidental but instead permeated both the AOD and POA, making it impossible to separate the offending clauses without fundamentally altering the overall settlement. Since severance is only permissible if the remaining provisions create a valid and enforceable contract, the court determined that severance was not a reasonable option in this case.
SCA Ruling
The SCA dismissed Absa's appeal, affirming the High Court's decision. The court concluded that the agreement fell within the scope of supplementary agreements under the NCA and contained unlawful provisions. By granting Absa the right to sell the property without judicial oversight, the POA infringed on constitutional protections against arbitrary deprivation of property.
Moreover, the court found that the Serfonteins had signed the agreement under the threat of legal action, which rendered it unenforceable. Given that the unlawful provisions could not be separated from the rest of the agreement, both the AOD and POA were deemed void.
In the result, the court issued several orders. It declared the agreement null and void from the date it was signed and set aside the sale of the property. The Registrar of Deeds was prohibited from transferring the property. The court ordered Absa to pay the costs of the application.
Implications of the Ruling
This ruling reinforces the principle that even when creditors follow formal legal procedures, and despite the debtor obtaining independent legal advice, the agreements concluded between creditors and debtors must still comply with the NCA's consumer protection provisions. Financial institutions must ensure their credit agreements comply with the NCA to avoid legal challenge. This may lead to more stringent internal reviews and adjustments to standard contract terms.
The decision underscores the importance which the courts attach to judicial oversight in execution sales, ensuring that financial institutions cannot bypass legal safeguards to fast-track debt recovery. The judgment serves as a clear warning to creditors: agreements that coerce debtors into relinquishing their legal protections will not withstand scrutiny.
It also clarifies that unlawful provisions in credit agreements cannot be severed to leave the rest of the agreement valid where what remains is inchoate; in that event the entire agreement may be declared void and set aside. That then leaves the creditor without the protection it was seeking to gain.
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