Blog Post

Another step in the right direction in the protection of vulnerable consumers against unscrupulous lenders

There has for some time been a problematic and worrying trend of unscrupulous lenders preying on the uneducated and financially unsophisticated consumers. In such situations consumers are lured into borrowing money or entering into purchase plans on terms which anyone with financial literacy would never agree to.

These schemes are generally not within the affordability range of the borrowers/purchasers and the debtor almost inevitably defaults on the payment along the line. What follows is often an emolument attachment order and a cycle of debt from which there is little, if any, hope of escape. Our law has slowly been combating this trend first with the introduction of the National Credit Act in 2005, which prohibits reckless lending, and now a ground breaking judgment has been granted regarding emolument attachment orders.

On Wednesday 8 July 2015, Desai J handed down an order in the Cape Town High Court in the matter of The University of Stellenbosch and Fifteen Others v The Department of Justice and Correctional Services and Eighteen Others (hereinafter referred to as Stellenbosch v DOJ) declaring that the emolument attachment orders held over the Second to Sixteenth Applicants’ salaries are unlawful.

The two main aspects which were challenged in terms of their constitutional validity was the lack of judicial oversight where the Judgment Debtor consents to a emolument attachment order and the lawfulness of a Judgment Debtor consenting to the jurisdiction of a court outside of the Judgment Debtor’s district.

As our law currently stands and in terms of Section 65J of the Magistrate’s Court Act a Judgement Creditor may have a emolument attachment order granted against a Judgment Debtor if either the Judgment Debtor consents thereto or the court on application authorises the issuing thereof.

Furthermore under Section 45 of the Magistrate’s Court Act, a Defendant/Respondent may consent to the jurisdiction of a court outside of the Defendant/Respondent’s district if such consent is given just before proceedings are initiated or just after they have been initiated. In other words you may not consent to a court’s jurisdiction outside of your district in the original contract giving rise to the legal proceedings in question.

In Stellenbosch v DOJ all of the challenged emolument attachment orders were issued by a clerk of the court on the basis that the Applicant’s had consented thereto. The result of this is that there was no judicial oversight and accordingly no enquiry as to whether the order would be “just and equitable”. One of the Applicant’s to this matter had an order granted for the attachment of more than half his salary and another for almost her entire salary. To quote Desai J:

“The suggestion that a debtor would willingly agree to an EAO in terms of which almost half his salary is deducted monthly, is far-fetched and simply incapable of fair minded support.”

Which indicates either a lack of understanding of what they were signing, some element of coercion or fraud on the part of the debt collector.

The difficult position that vulnerable Debtors, who have signed such a consent to judgment (which includes a consent to an emolument attachment order) is further compounded by the fact that the consent to judgment also contained a clause consenting to the jurisdiction of a court outside of their district which meant that they were unable to attend court to defend themselves.

“The Flemix respondents are obtaining judgments and EAOs against the applicants in courts far removed from their homes and places of work and in places which they could not hope to reach, the right to approach the courts was seriously jeopardised, if not effectively denied. This violation of the rights of debtors to access courts and enjoy the protection of the law was the product of the Flemix respondents’ forum shopping for courts which would entertain their applications for judgments and the issuing of EAOs. As Katz SC contended, quite correctly in my view, this is the most disturbing feature of the debt collecting processes employed by the micro-lenders.

The applicants reside in Stellenbosch but the judgments were granted and EAOs issued in Kimberley, Wynberg and elsewhere. Their employers are also in Stellenbosch…”

Desai J found in favour of the Applicants and declared that the emolument attachment order issued against the Second to Sixteenth Applicants in favour of the Fourth to Sixteenth Respondents are unlawful, invalid and of no force and effect.

That the sections allowing for an emolument attachment order to be issued by consent is inconstant with the constitution and invalid to the extent that they fail to provide for judicial oversight over the issuing of an emolument attachment order against a Judgment Debtor.

And furthermore that in proceedings brought by a creditor for the enforcement of any credit agreement to which the National Credit Act applies, Section 45 of the Magistrate’s Court Act does not permit a debtor to consent in writing to the jurisdiction of a Magistrate’s court other than that in which the debtor resides or is employed.

He also urged for the relevant organisations, government bodies and institutions to take whatever steps necessary as to advise consumers of their rights in terms of this judgment.

It is worrying to note further from the judgment that in many of the individual cases of the applicants the National Credit Act was either merely given lip service in the form of a financial inquiry form, barely filled out or not taken head of at all. It seems that through the “forum shopping” referred to above the Judgement Creditors where able to push through their applications for default judgment and have judgments granted in their favour in spite of the highly irregular way in which the Debtors were granted the loans in the first place. Accordingly Judge Desai’s findings are highly welcome as they will hopefully further curb the abusive practises of unscrupulous lenders going forward.

For the full judgment please click on the following link: