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Important SCA Ruling

Due to the introduction of the National Credit Act in 2007 the legal landscape has shifted. This means that an age old legal practice, that previously allowed banks to sell of properties from defaulters without going to court, has now become illegal.

Appealing to the Supreme Court

The South African Supreme Court of Appeal case Absa Bank Limited v Johan Serfontein and Another deals with an acknowledgement of debt which also included a power of attorney and whether the arrangements made were legal or not in line with the National Credit Act (NCA).

The heart of the case revolved around whether an Acknowledgment of Debt (also called a AOD) and the Power of Attorney (POA) between the Bank and the Serfonteins (the people who owed the bank money) was valid under the NCA, or whether it contained unlawful provisions.

In this matter the case had already gone to High Court and it had said that the AOD & POA was a supplementary agreement with unlawful provisions, contravening sections of the NCA.

The Bank then took the matter to the Supreme Court hoping to get the ruling over turned.

Here's What Happened

Mr. Serfontein had an overdraft facility with ABSA. The facility was secured by mortgage bonds and Mr. Serfontein senior acting as surety. After Mr. Serfontein defaulted, ABSA initiated negotiations, resulting in the AOD & POA.

The AOD & POA, which the Serfonteins felt was signed under duress, granted ABSA the power to sell the Serfonteins’ property.

The AOD & POA included a pretty standard acknowledgement of debt but also came with a power of attorney for ABSA to sell the property, and very specifically a clause stating that the NCA did not apply to this agreement.

Since the Serfonteins were not making the agreed payments on their debt, ABSA tried to auction the property and later concluded a deed of sale to recover their funds.

The Serfonteins then legally challenged the AOD&POA, arguing that it was what is known as a prohibited supplementary agreement under the NCA. The Matter went to High Court and it ruled for the Serfonteins saying that the AOD & POA was void, since it contravened the NCA.

The Supreme Court of Appeal

If you are unhappy with a ruling from the High Court and feel serious mistakes were made in the ruling, for one reason or another, it is possible to appeal the matter to a higher court, namely the Supreme Court of Appeal (only one step down from the Constitutional Court).

The SCA then had a few things to consider when looking at the ruling from the High Court.

    • Was the AOD & POA actually a supplementary agreement?
    • Did it contain provisions unlawful under the NCA?
    • Were the Serfonteins induced or required to sign it?
    • If unlawful, was the High Court correct in declaring the entire AOD&POA void?

The Supreme Court of Appeal Ruling

In February 2025 the SCA ruled in favour of the consumers and told the bank they had made some serious mistakes based on old practices that were no longer valid.

A lot of that had to do with the National Credit Act and the protections offered to consumers since 2007.

A Supplementary Agreement: The court determined the AOD & POA was a supplementary agreement because it dealt with the same subject matter as the original agreement, namely the regulation of this particular credit and its repayment.

Unlawful Provisions: The SCA found that the AOD & POA contained provisions that tried to exclude the application of the NCA and allowed ABSA to execute against the immovable property without a court order. That’s not legal.

Parate Executie

Attorneys know all the legal terms but most of us don’t so you might wonder what is ‘Parate Executie’?

 

No, its not being executed by pirates (even though it seriously sounds like it, or perhaps death by parrots?)

It is an old common legal term that refers to a clause in a mortgage agreement that used to allow the mortgagee (typically a Bank) to

(1) take possession of and then

(2) sell mortgaged property without needing to go to court.

There has actually been serious debate about this topic in court cases in South Africa for hundreds of years. Most of the time the banks won those cases.

The court addressed ABSA’s reliance on common law principles of parate executie (the right of a mortgagee to take possession and sell mortgaged property without judicial intervention). It found that in 2007 the NCA changed the legal landscape, requiring compliance with its provisions, including judicial oversight.

This SCA ruling reinforces other recent rulings that a clause in a mortgage bond that allows the bondholder to execute without involving the mortgagor or the court by taking possession of the property and selling it is simple no longer valid or legal anymore.

After a default, a mortgagor can however voluntarily work with the bondholder to sell the property. But even then, it is important to obtain the court’s approval to perfect the security. If parties agree that the creditor can proceed to realize the bonded property, the creditor does so based on the new agreement after the default, not the original power. It is a fresh agreement.

The National Credit Act Exists and Can’t be Ignored

ABSA argued that the AOD & POA fell within the scope of the parate executie proviso because the provisions were agreed upon after the Serfonteins defaulted.

The court noted that the cases ABSA relied in their arguments were decided before the NCA came into effect in 2007. The NCA has since changed the legal landscape of creditor and consumer relationships. The lawfulness of the provisions must be determined under the NCA once an agreement falls within its ambit (e.g. if it involves credit agreements).

The SCA found that allowing a bank to execute against the property immediately and without a court order defeated the NCA’s central purposes and was unlawful. After all, the NCA aims to protect consumers and promote equity in the credit market.

Don’t Forget Rules 46 and 46A

All the courts in South Africa have rules and laws that apply to how things are done.

The introduction of Rules 46 and 46A into the Uniform Rules of Court requires judicial supervision in all matters involving execution against a debtor’s immovable property, and only when judgment has been granted by a court.

Don’t Forget The Constitution

Changes to South Africa’s Constitution also matter. To protect all South Africans, procedural constraints are placed on mortgagees’ powers to execute against property to protect against arbitrary deprivation of property and eviction, as outlined in the Constitution.

Eviction without a court order is now prohibited, and deprivation of property without court sanction is considered ‘arbitrary’.

Parate Exectuie Walks the Plank

 

When you add all these different factors together it makes a significant argument against letting people agree to ignore the NCA and Constitution and go ahead with a sale using parate executie any more.

The introduction of these court rules, the provisions of the Constitution and the introduction of the National Credit Act in 2007 effectively curtails the practice of parate executie. This ruling on parate executie lines up with other recent rulings by the Supreme Court of Appeal on the topic.

 

We know it’s got nothing to do with pirates but the image of this old practice being executed is just too funny to ignore.

A Win For All Consumers

The court found the Serfonteins were induced to sign the AOD & POA under threat of litigation. They did not feel they had any other choices.

The SCA upheld the High Court’s decision, finding that the unlawful provisions permeated the entire AOD & POA, making it impossible to apply one part of the agreement without taking the other unlawful provisions into account. They were so mixed together it is impossible. Therefore, they said that declaring the AOD & POA void ab initio (from the beginning) was the only real choice.

Hendrik Uys of VDL Attorneys says: “This judgment is an important reminder that judicial oversight is crucial when any person’s immovable property is at risk of being declared executable to settle outstanding debts. The provisions of the National Credit Act provide protection for both consumers and credit providers and simply cannot be ignored.” 

The ruling gives added clarity to the old parate executie practice and it reminds all banks to ensure the courts are involved in any attempt to sell off a client’s home, even if they have signed forms acknowledging the debt. As Hendrik says above, the NCA cannot just be ignored.

 

Thanks to VDL Attorneys for their insights on this case. To learn more about VDL Attorneys head over to: www.vdlattorneys.co.za