A landmark ruling by the Cape Town High Court found against the excessive overcharging of debt collection fees on garnishee orders.
The judgment will not only have a significant impact on the amount lawyers can charge for legal fees on outstanding debt, but could also result in 1 million garnishee orders being removed and about R1 billion in excessive debt collection fees refunded.
In a fight against the abuse of garnishee orders, Summit Financial Partners, the Stellenbosch Law Clinic and 10 of their clients brought the high court application against the excessive overcharging of debt collection fees on emolument attachment orders, commonly known as garnishee orders.
Once a judgment has been granted against a consumer, the cost of that debt can escalate rapidly. In a real-life example, a judgment was brought against an individual who had borrowed R1 500. The final judgment amount, which was to be collected via an emolument attachment order, was R11 689 which was six times the original loan amount.
This final judgment amount was made up of R1 500 interest, R7 411 of attorney fees, a collection commission of R1 140, as well as “expenses” and a “certificate fee”.
Summit estimated that more than R1 billion had been illegally deducted from thousands of distressed debtors by unscrupulous credit providers and collection agents who added collection costs, including legal fees, to debtors’ accounts after judgments that amounted to three or four times – sometimes as much as 10 times – the original debt.
In their application to the high court, Summit argued that section 103(5) of the National Credit Act, which includes collection fees in the calculation of the in duplum rule, should also apply to debts post-judgment. In duplum caps the maximum interest/fees that can be added to a loan at the same value as the principle debt/original loan. In many cases the debt repayments via garnishee orders would already have met the capped amount. Clark Gardner, CEO of Summit Financial Partners, believes this means about 80% of garnishee orders, about 1 million, would be stopped.
It was the view of the National Credit Regulator (NCR), credit providers and attorneys that section 103(5) did not apply to debt post-judgment as it was no longer a credit agreement but a judgment order. This meant that not only could the interest bill double, but additional attorney fees could push the debt well past four times the original loan amount.
Gardner argued that this interpretation of the act, combined with excessive legal fees, meant that the consumer remained forever indebted. In their application, Summit argued that as there appeared to be very little oversight of these fees, some attorneys created ongoing annuity income which they collected from garnishee orders. “Costs are added unabated against a consumer’s account without consideration as to whether the costs were reasonably incurred, whether the costs were reasonable, or whether the costs were actually incurred,” said Gardner.
In his ruling, Acting Judge AJ Hack agreed on all points, including the argument that “while the credit providers are able to recover their debts without limitations on legal costs and procedures, they will continue to extend credit to the vulnerable without the necessary care and caution”.
He said: “I take judicial notice of the notorious fact that consumers are constantly being cajoled and encouraged to apply for credit. This occurs not only by advertising but particularly by the use of mobile phone technology”.
. All collection costs under Section 101(1)(g) and Section 103(5) of the National Credit Act were to include legal fees and should apply to the credit agreement charged before, during and after litigation; and
. Section 103(5) applied for as long as the consumer remained under default irrespective of whether or not judgment was granted. This effectively means that legal and collection fees on emolument attachment orders will be capped under the in duplum rule.
Furthermore, the judge ordered that all legal fees may not be charged to the consumer unless they had been agreed to by the consumer or have been “taxed”, which means audited.
He ordered that an expert chartered accountant be appointed to recalculate the outstanding amounts owing on the emolument attachment orders of the 10 applicants. Any overpayment had to be refunded within seven days of the calculation being finalised. This set a precedent for individuals under garnishee to request a recalculation of the loans they had repaid so far.
“This is going to be a game changer for South African debt-stressed consumers,” said Gardner, adding that employers could limit their potential liability by ensuring that deductions for garnishee orders did not include excessive collection fees over and above the original debt amount. They could facilitate refunds on paid-up garnishee orders. Following the ruling, credit consumers could ask their employers for a breakdown of their garnishee deductions to check if they qualified for a refund.
Commenting on the ruling, NCR company secretary Lesiba Mashapa said: “The NCR has noted the judgment and welcomes the clarity that it provides to the scope of section 103(5)”.