As standard practice, a judgement creditor will approach a court with their claim against a debtor, once a court grants judgement, the judgement debtor must pay the capital as well as taxed legal fees together with “collection costs” incurred by the creditor.

Until recently, it has proved to be quite a contentious issue between stakeholders purporting to advance the interests of legal practitioners handling debt collection matters on one hand, and on the other, those who claim to advance and protect the interests of the debtors.

 The laws setting the scene for the contention being the National Credit Act 34 of 2005 (the Act). This act regulates the procedure relating to the credit given to debtors, how it should be recovered and under what terms and circumstances.

As a given, the Act details how interest must be calculated and when it should be capped, it also provides categories of credit and how much should be charged in debt recovery for every class of credit.

This article will consider the recent judgement of the Supreme Court of Appeal in a matter of Bayport Securitization Limited and Another v University of Stellenbosch Law Clinic and Others (Case no 507/2020) [2021] ZASCA 156.

FACTS OF THE CASE

A law clinic, a credit providing company and others initially approached a High Court where they requested the court to declare that, when debt collection is pursued against  creditor, “collection costs” described by section 103(5) read with section 101(1)(g) of the Act included all legal fees incurred by the credit provider in order to enforce the monetary obligation of the consumer under a credit agreement charged before, during and after litigation. Secondly, that 103(5) of the Act applies for as long as the consumer remains in default of his/her credit obligations, from the date of default to the date of collection of the final payment owing, in order to purge his default.

The High Court agreed with such interpretation. This meant that in terms of s 101(1)(g) collection costs included all legal fees incurred by the credit provider to enforce the monetary obligations of the consumer. Those included the costs incurred: (a) prior to the commencement of litigation; (b) post the commencement of litigation, but pre-judgment (c) post-judgment. It was thus construed to include all legal fees incurred through the employment of attorneys and advocates, as well as the execution of the judgment. An argument was advanced that such interpretation serves to protect the consumer from collection costs far exceeding the amount that was initially borrowed.

It is apparent that, in debt collections, some debtors are evasive and that results with more incurred debt recovery costs, the interpretation would undoubtedly be opened to abuse, although protective to earnest debtors. Thus, the matter came before the Supreme Court of appeal. The appellants, although through different approach, essentially appealed against the whole decision of the High Court.

THE DECISION: THE LAW

The SCA reiterated that South African courts have recognized the distinction between collection costs and litigation costs. To this extent, the courts have recognized that a legal practitioner (attorney) who executes the recovery mandate through a legal process, is remunerated through costs awarded by the court, which costs are subject to maximum tariffs prescribed under law. The costs are awarded to successful litigants and it provides them some indemnification for having incurred the legal costs in pursuing legal action.

The SCA illustrated that if the legal fees cannot exceed the unpaid balance of the consumer’s principal debt, it would severely limit a court’s discretion to make appropriate cost orders, including punitive cost orders in the event of frivolous litigation that may deserve reprimand.

The SCA through a gentle judicial balancing exercise confirmed the well-established distinction between collection and litigation costs. This in turn recognize the need for credit providers to approach the courts for appropriate relief, including, when successful, cost orders that are subject to maximum tariffs prescribed by law.

CONCLUSION

In terms of the National Credit Act, a creditor is entitled to debt recovery/ “collection costs as prescribed. On top of that, if such creditor engages services of an attorney who implores civil litigation to recover those costs successfully, the debtor will be liable to pay both, the collection costs by the creditor and in addition, taxed litigation costs awarded to the attorney.

This judgement on clarifying the legal possession regarding costs of debt recovery sounds an alarming caution to the debtors– It may prove wise not to be evasive when a debtor knows of their debts, rather, a civil and engaged approach always proves useful in keeping the costs and interest as minute as possible. Further, it may be wise that when a debtor is unclear about the calculation of their debt and collection costs, they may want to approach seasoned debt collection attorneys to advise them and help ventilate issues with the creditor.

Reference List:

• National Credit Act 34 of 2005.
• Bayport Securitization Limited and Another v University of Stellenbosch Law Clinic and Others (Case no 507/2020) [2021] ZASCA 156
• Law Society of south Africa. Law Society welcomes SCA judgement. Accessed on 01 December 2021. <https://www.lssa.org.za/news/law-society-welcomes-sca-judgement/>.