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Selling Shareholders Beware: How the NCA affects Vendor Financed Transactions

Caveat Legal

The National Credit Act 34 of 2005 (“NCA”) requires that, if you are selling your shares or assets in a company to a purchaser, and you have structured the sale such that:

  1. The full purchase price, or a portion thereof, will be paid at a later stage either in installments or one bullet payment; and
  2. You are charging interest on the outstanding balance; and
  3. The purchaser is either a natural person or a company with a turnover or asset value of less than R1m;

you must be licensed as a credit provider in terms of the NCA.  A failure to register as a credit provider and hold a license in terms of the NCA will deem the transaction, including any security you may have, as void and unenforceable and you will not be able to recover the outstanding balance from the purchaser.

This is a requirement whether you as the seller (who by virtue of the transaction becomes a Lender) are merely a once-off seller (for example the seller of shares in your company) or a seasoned lender.  A failure to hold a license at the time a loan is advanced (i.e. at the time the sale agreement is entered into on the deferred payment terms) will render the loan (or the sale agreement) and all security, void and unenforceable.  This was the outcome in the Supreme Court of Appeal judgement held on the 28th of  September 2018 in Du Bruyn NO & others v Karsten (929/2017) [2018] ZASCA 143.

It is indeed common for sale transactions to be structured on a deferred vendor payment model where a person buys shares or assets in a company from a selling shareholder on loan terms.  Sellers of shares must take noteof section 40 of the NCA and should always obtain advice as to whether they are required to register as a credit provider prior to concluding the transaction. A failure to register as a credit provider could be detrimental to the seller, who will not be able to enforce their security or the terms of repayment against the purchaser.

Robyn Bandey

Robyn has a BA LLB (Cum Laude) and was admitted as an attorney in 2011 after having completed her articles at ENS. She advanced to senior associate level in ENS’ corporate department before moving to Deloitte and then Coast to Coast Capital. Robyn joined Caveat in 2020 and specialises in M&A and banking and finance work.

* For Robyn’s insights on deferred payment sales (including those where interest is not charged to the purchaser), read her article here.

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