AAA Investments (Pty) Ltd v Micro Finance Regulatory Council and Another

• Jurisdiction: South Africa
• Judge: Langa CJ, Moseneke DCJ, O'Regan J, Ngcobo J, Madala J, Mokgoro J, Nkabinde J, Sachs J, Skweyiya J, Yacoob J, Van Der Westhuizen J
• Judgment Date: 28 July 2006
• Citation: 2007 (1) SA 343 (CC)
• Docket Number: CCT51/05
• Hearing Date: 28 February 2006
• Counsel: G J Marcus SC (with A C Dodson) for the appellant. C D A Loxton SC (with J Cassette) for the respondents.
• Court: Constitutional Court

Yacoob J:

Introduction

[1] This application for leave to appeal requires us to consider the status, legality and effect of certain rules (the rules) that regulate D a class of moneylenders who have come to be known as micro-lenders. As the term suggests, micro-lenders make relatively small loans. But this is not the only relevant characteristic of these institutions. They differ from other lending entities in two other material respects. First, they are allowed to lend without being bound by the terms of the E Usury Act [1] and, in particular, at finance charges that are much higher than those that all other moneylenders may charge [2] in terms of that Act. Secondly, and perhaps more importantly, their customers are mostly poor people.

[2] The applicant, AAA Investments (Pty) Ltd (AAA Investments), a micro-lender operating in the Eastern Cape Province, vigorously F contests the validity of these rules. Their genuineness is defended with equal tenacity by the first respondent, the Micro Finance Regulatory Council (the Council) which has become responsible for the regulation of the micro-lending sector. The Council purports to have made the rules and to administer them in the course of fulfilling this regulatory responsibility. [3] The second G respondent is the Minister of Trade and Industry (the Minister) who is joined by reason of the interest of that office in the outcome of this case.

[3] The dispute between AAA Investments and the Council, broadly, turns, first, on whether the H Constitution [4] applies to the rules or whether the scope of the rules is so private that the Constitution does not apply

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to them at all. Secondly, and if the Constitution does apply, we must A decide whether the rules are consistent with it.

[4] The constitutionality of these rules has been debated in both the Pretoria High Court (the High Court) and the Supreme Court of Appeal (SCA). These judgments are not in harmony. The High Court [5] held that the making of the rules represents an exercise of public power and that the rules are B constitutionally objectionable because the Council improperly exercised unauthorised public legislative power in making them. It, accordingly, declared the rules to be inconsistent with the Constitution. The SCA, [6] however, concluded that the rules operated only in the private sphere by reason of a contractual relationship between the Council and those micro-lenders registered with it. That C Court found no basis upon which these rules could be validly impugned, apparently on the basis that the Constitution was not applicable. It, accordingly, reversed the High Court order. AAA Investments wishes to appeal against this judgment and applies for the necessary leave. D

Background

[5] It is universally accepted that moneylending transactions are susceptible of abuse, mainly because borrowers are usually in a much weaker position than lenders. Moneylenders can therefore easily exploit E this vulnerability of the borrower, and some have been guilty of serious impropriety so frequently as to give rise to considerable concern. Moneylending transactions are therefore legitimately subject to legislative control in most parts of the world.

[6] South Africa is no exception. Here, all contracts that serve as vehicles for advancing money on loan are tightly controlled by the F Usury Act. [7] Some of its important measures are highlighted. The Act extensively regulates three types of transaction aimed at advancing finance, namely, moneylending transactions, credit transactions and leasing transactions. [8] I will refer to these transactions, collectively, as loan contracts. The G annual finance charge levied in a loan contract may not, on pain of punishment, exceed that prescribed, from time to time, by the Minister [9] and must be disclosed. [10] The Act places limits on the sum that may be recovered in various circumstances [11] and mandates that reduced amounts are payable if there is advance payment, as well as in related circumstances. [12] H The Usury Act also ensures that overpayments by the

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borrower are recoverable, [13] that those who advance loans A provide certain information [14] to recipients [15] and that recipients of loans receive some protection when faced with court actions for recovery. [16] It is also of significance that the Act provides for certain powers of inspection, [17] for certain information to be furnished to a State official by those advancing loans, [18] as well as for certain penalties to be visited upon lenders who do not B comply. [19] Finally, the Usury Act expressly exempts certain categories of transaction from its provisions. [20]

[7] I have said earlier that this case is about the validity of rules aimed at the regulation of micro-lenders. Section 15A of the Act makes it possible for categories of moneylender to be exempted from its provisions by empowering the Minister to determine the categories of C institution that may be exempted, as well as the conditions upon which they may be exempted. The section reads:

'The Minister may from time to time by notice in the Gazette exempt the categories of moneylending transactions, credit transactions or leasing transactions which he may deem fit, from D any of or all the provisions of this Act on such conditions and to such extent as he may deem fit, and may at any time in like manner revoke or amend any such exemption.'

[8] Section 15A was first introduced into the Act only in 1988. [21] The motivation for this appears to have been that potential borrowers, who were poor and could, therefore, not E provide appropriate security for repayment, found it difficult (if not impossible) to obtain loans under the dispensation provided for by the Usury Act before the introduction of s 15A. Lenders were apparently reluctant to give loans to this category of person because, so they said, the risk of non-payment was so high that lending money to them could not be justified. It was suggested by some lenders that it might F become commercially viable for them to advance loans to potential borrowers who were high risk if it was made possible for them to charge higher interest rates.

[9] The first notice exempting certain categories of moneylending transactions [22] was published four G years after s 15A was passed. [23] That notice exempted a certain category of micro-lenders from all the

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provisions of the Act subject only to two conditions. The first was that there should A be a 'cooling-off period' of three days, within which the transaction could be terminated by the borrower without any adverse consequences. [24] Secondly, the lender was obliged to furnish to the borrower particulars of the amounts of the principal loan and the finance charges, respectively. [25] It is fair to conclude that this notice made it possible for moneylenders B to advance small loans (that would, largely, be required by poor people) free from almost all of the constraints of the Usury Act and unbounded by any finance-charge limit at all!

[10] The micro-finance industry had been legitimated. It grew exponentially. Many relatively poor people were now able to secure loans from willing lenders; lenders could now make limitless profit, C who were subject to very little (if any) control. This brought negative consequences. Unsurprisingly, complaints of abuse arising from micro-finance loans were directed by borrowers against lenders with rapidly increasing frequency. D

[11] The office of the Minister began to consult with role-players concerning the best way in which the micro-lending industry could be regulated in order to provide much-needed protection for poor borrowers. The result of this consultation was the decision that micro-lenders and other role-players should have some say in the regulation of this industry, jointly with government. The Minister also E concluded that some minimal regulation of the industry had to be made compulsory by law.

[12] The upshot of all this was the introduction of a new exemption notice (exemption notice) in June F 1999, [26] issued pursuant to s 15A of the Act. As will be seen later, the Council purports to have made the disputed rules pursuant to this exemption notice. This exemption notice is much more stringent than its predecessor. It exempts any moneylending transaction where the loan does not exceed R10 000, and which is payable within a period of 36 months, from all of the provisions of the G Act, except for ss 13, 14 and 17A. [27] Moneylenders must comply with two conditions in order to qualify for the exemption. They must:

(a)

register with a regulatory institution approved by the Minister; [28] and

(b)

comply with the rules contained in annexure A to the exemption notice (the Minister's rules). [29] H

The exemption notice expressly imposes certain duties on the regulatory institution [30] which has to ensure that lenders registered with it comply

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with the Minister's rules, as well as accreditation criteria approved by the A Minister. [31]

[13] It is interesting that as at the date of the publication of this exemption notice the Council had already been formed. The Council was incorporated as a limited-liability company not for gain before the B exemption notice had been promulgated. [32] This followed upon sustained interaction between ministerial representatives and various other role-players. Indeed, the Council had already made an application to become a regulatory institution before the date of the publication of the exemption notice. [33] The original subscribers to the Council were the Association of Micro C Lenders, the Banking Council of South Africa, the Consumer Institute of South Africa, the Department of Trade and Industry, the Housing Consumer...