What does set-off mean?
Set-off allows for the termination of mutual obligations between parties without an exchange of performance. This is a well-established principle of South African common law dating back to Roman Law. However, the National Credit Act, 2005 and recent case law have changed the legal landscape.
An example of this principle is, Andy owes Bob R100,00 and Bob owes Andy R150,00. Andy and Bob can set-off their debts, extinguishing Andy’s debt and reducing the amount Bob owes Andy to R50,00.
More commonly: Amber has a credit card facility and a savings account with Bozo Bank. Her credit card is overdue and her savings account has a positive balance. Bozo Bank would then use its common law right to set-off to use the balance in Amber’s savings account, to reduce the debt owed on her credit card.
What are the common law requirements?
The debts must:
(a) exist between the same parties in the same capacities (Bozo Bank cannot use Amber’s personal savings account balance to set-off the loan she took in her capacity as a director of her company);
(b) be of the same kind (in our example it is money, but the same principle can apply when trading in grain or anything else);
(c) be due and payable; and
(d) be liquidated (capable of speedy and easy proof).
If these requirements are met and there is no agreement between the parties that excludes set-off, then either party will be entitled to exercise their common law right to set-off.
What are the implications of the National Credit Act, 2005 (“the NCA”) and recent case law?
Our courts have recently held that where a credit agreement is subject to the NCA the credit provider cannot set-off a debt without meeting the requirements of the NCA.
In our example this means that Bozo Bank can no longer set-off Amber’s credit card debt with the balance in her savings account unless:
Amber has given authorisation that specifies:
- The account which is to be debited (her savings account);
- The obligation which is to be satisfied (her credit card debt);
- The amount of the set-off; and
- The date on which the set-off is to take place;
- The authorisation must either be given in writing or recorded electromagnetically and then reduced to writing;
- Before making any charges Bozo Bank must send Amber a written notice setting out the information listed above.
Our set-off tips:
- If you are a credit receiver (consumer), know your rights. The bank (or other credit providers subject to the NCA) cannot automatically apply set-off without meeting the requirements mentioned above.
- If you are the provider of a service in a transaction that is not subject to the NCA, ensure that your underlying agreement and/or your terms and conditions deal with set-off in a manner that is acceptable to you.
- If in doubt, contact us for legal advice.
Visit our website for more information.