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Home News & Articles Seperating the Baby and the bathwater - Garnishee Orders
Monday, 22 January 2018
Seperating the Baby and the bathwater - Garnishee Orders

The original version of Brett Bentley cover article appearing in the March 2013 De Rebus, the official SA Attorneys journal.

Background

The term "garnishee order" is commonly but mistakenly applied to an emoluments attachment order ("EAO").

An EAO is granted in terms of Section 65J of the Magistrates' Courts Act ("MCA"), ordering an employer (referred to as a garnishee, hence the confusion) to make deductions from a debtor's salary or wages and pay this across to the creditor or it's attorneys. A Garnishee order is in terms of Section 72 of the MCA, and authorises a creditor to attach any debt owed, or which will become due, to the debtor.

On 1 November 2012 a joint statement was released by the Minister of Finance and the Banking Association of South Africa's (BASA's) chairperson, which stated that as a result of, amongst other things, "Abuse of debt and garnishee orders, and of direct pay roll deductions" the parties had agreed to (amongst other things) :

"- BASA members commit not to use garnishee orders against credit defaulters, as they believe the use of such orders for credit is inappropriate.

- BASA and the National Treasury will promote and support enforcement initiatives against credit providers that issue pre-signed garnishee orders. The National Treasury will also engage with the Department of Justice about the abuse of garnishee orders and suggest that their use be restricted to maintenance orders."

(The full statement is at http://www.treasury.gov.za/comm_media/press/2012/2012110101.pdf)

Obviously the statement means to refer to EAOs, but it is concerning that the Treasury is proposing the virtual abolition of a lawful debt collection process without apparently so much as having read the relevant provisions of the MCA or sought legal advice on the issue and the implications of the proposal.

Notwithstanding this, the concerns surrounding the abuses in the debt collection process, particularly relating to unsecured loans, are real and need to be addressed.

The background tothe Treasury statement includes:

  • The July 2008 report by the University of Pretoria's Law Clinic, "The incidence of and the undesirable practices relating to garnishee orders in South Africa" ("UP Law Clinic 2008 Report") (http://www.ncr.org.za/publications/GARNISHEE-ORDERS-STUDY-REPORT.pdf )
  • The forensic audit by law firm ENS of 45 000 employees of a multinational company, including a number with EAOs effected against their salaries - finding that approximately 59% of orders served on the employer were not authenticated, ie they were irregular and/or missing vital information. Further, 39% of the orders were stopped or cancelled once enquiries were inititated.
  • Of the 19.69 million credit active consumers in September 2012, 47% had impaired credit records (http://www.ncr.org.za/pdfs/publications/CBM%20September%202012-%20Final.pdf ). This, coupled with the rapid growth in the unsecured lending industry in South Africa, prompted an investigation by the Treasury into financial stability risks.
  • The failure of debt counselling procedures in the National Credit Act No 34 of 2005 ("the NCA") to give over-indebted consumers proper relief (August 2012 De Rebus "Debt counselling: Challenge and proposed solution" by B. Bentley)

On 30th November 2012 at an independent debt collection industry summit on "garnishee orders" the keynote speaker Ingrid Goodspeed, Chief Director: Financial Sector Development, at the National Treasury Department , adopted the apparent position that the Treasury was still of the view that "Garnishee orders" should be abolished but that they were open to considering alternatives.

A common reaction to this recommendation is "they are throwing the baby out with the bath water." The focus should be on properly dealing with bad elements and malpractices, rather than compromising ethical and law-abiding credit providers' chances of recovery because of those bad elements and malpractices (the ENS study has been questioned as being a true reflection of the full South African picture).

It is respectfully submitted that a number of the abuses complained of by Ms Goodspeed do not have a direct relationship to EAOs but rather other aspects of the unsecured lending process, particularly the NCA and its implementation.

It is submitted that "baby and bathwater" can be separated, and, with the introduction of changes, some of which are proposed in this article, ethical and law-abiding credit providers can still use the EAO process without abuse of the process taking place.

The Abuse Issues

The issues raised can be separated into four categories:

A. Credit Granting Process

This includes illegal lending by registered and unregistered credit providers involving usurious lending rates and other practices prohibited by the NCA, and reckless credit granting as envisaged in the NCA, with consumers being extended credit, particularly with high interest rates, which they cannot afford to repay.

While EAOs give reckless credit providers a means of securing repayment, it is not the root problem. This lies in the poorly drafted provisions of the NCA relating to reckless credit granting and the failure of the National Credit Regulator ("the NCR"), consumers and debt counsellors to take action against these abuses - be this a result of the vagueness of the NCA, inability or incapability. This is reflected in the dearth of reported judgements relating to reckless credit granting and the lack of NCR reports of significant action against such parties.

B. Interest rates and Capping of Interest

The complaint is excessive interest collected on debts by means of EAO. Again the issue is not really EAOs but rather the NCA and the policing of it.

If the issue is that:

  • the interest being charged is illegal in terms of the NCA, then appropriate action has to be taken by the NCR and other relevant parties to stop such practices.
  • the permitted interest rates being charged are too high, then the provisions of Regulation 42 of the NCA need to be amended.
  • the total interest charged over a period of time is too high, as most legal collections cover an extended period, then the problem is the vagueness of the provisions relating to the capping of interest in terms of Section 101 to Section 105 of the NCA (statutory in duplum), which despite the efforts of the Supreme Court of Appeal to give guidance in Nedbank Ltd and Others v The National Credit Regulator and Another 2011 (3) SA 581 SCA (28 March 2011), remains a bone of interpretative contention. The solution here lies in amending the NCA to clarify the position or seeking another court declaratory order on the interpretation of these provisions and taking action against those that exceed the limit.

C. Debt Collection Costs Abuses

The complaint is against attorneys or debt collectors charges being excessive. In a number of instances the legal costs exceed the capital debt.

D. Legal Collection Process Abuses

Here the complaints include:

  • Abuse of jurisdiction

Judgments and EAOs are authorised out of courts in which the debtor neither resides nor works, creating problems for debtors to oppose or rescind such orders.

  • Fraudulent and illegal Consent to Judgment and Consent to EAOs

Signatures on the Section 58 Consents to Judgment have been forged. Another illegal practice is the premature signing of Consents to Judgment before the debt is due and payable.

  • Fraudulent court orders

Fraudulent orders are made and sent to employers to obtain payment.

  • Amount Granted for Monthly deduction Excessive

Where courts allow direct Section 65(J) (2) (a) applications, the amounts are arbitrary and in certain instances excessive.

Legal Position

A brief overview of the debt collection methods in terms of the MCA is important in order to assess the viability of the alternative collections methods.

The 4 main methods are:

  • Warrants of Execution
  • Section 65A - financial enquiries
  • Section 65J - EAOs
  • Section 72 - Garnishee applications

It should be noted that the vast majority of debtors, even when personally served by a sheriff with court documents directing them, fail to appear at court.

A watershed case for debt collection was Coetzee v Government of the Republic of South Africa and Others, Matiso v Commanding Officer Port Elizabeth Prison and Others 1995 (4) SA 631 (22 September 1995), in which the Constitutional Court struck out certain provisions in the MCA that provided imprisonment of judgment debtors. The court held, inter alia, that certain words in S 65(A)(1) were invalid as they permitted imprisonment of a debtor.This decision thus removed the fear of or actual imprisonment as the real collection mechanism of Section 65A.

The case resulted in the amendment of Section 65,which now provides a warrant of arrest as the sanction for failing to appear at court. In terms of this process,the sheriffis authorised to arrest the debtor and take himto appear before of a magistrate to conduct a financial enquiry, but as creditor's attorney will most likely not be present at such time to conduct the enquiry, the usual practice is for the magistrate to warn the debtor to appear at court at a future date and the sheriff advises the creditor's attorney of such date. Although the new provision does allow for imprisonment for contempt of court for failure to appear, this is a last resort and theprocess of calling a debtor to courtcan be repeated on a number of occassions before this now drastic step is taken. The result is lengthy delays and mounting legal costs which have to be footed by the creditor (and ultimately the debtor) with no real certainty of a successful collection.

Warrants of Execution against the property of consumer debtors also present problems, including:

  • attached goods being subject to instalment sale agreements or other forms of third party ownership prohibiting their sale
  • interpleader proceedings with false claims of ownership of the debtor's goods and the onus on the creditor to show debtor ownership
  • sales in execution realising little, with costs being high, leaving the debtor without household goods and a large portion of the debt still outstanding to the frustration of both debtor and creditor.

Section 72 Garnishee applications can only be used in limited instances where the creditor knows of a specific debt owed to the debtor.

Therefore EAOs have proved to be the most effective means of legal debt collection. In terms of the MCA the 2 main methods of obtaining an EAO are:

a. Where the debtor has consented to the order - Section 65(J)(2)(a)

b. Court application in terms of Section 65(J)(2)(b)

In practice most EAOs are obtained through the debtor signing a Section 57 or 58 Consent to Judgment incorporating a consent to an EAO to pay the debt in specified instalments. Judge Du Plessis in African Bank Limited v Additional Magistrate Myambo NO and Others 2010 (6) SA 298 (GNP) (9 July 2010) stated:

"The section 58-procedure is a particularly cost-effective and speedy one. The advantages of cost effective and speedy debt collection are self-evident. Provided that the provisions of section 58 and those of the NCA are applied properly and with due regard to the parties' rights, it is in the interests of credit providers, of consumers and of justice that the procedure be utilised."

Court applications in terms of Section 65(J)(2)(b) have proved problematic as to the correct interpretation of the procedure to be followed. Currently some magistrates follow the route of allowing direct applications for an EAO where the onus to oppose the application in toto or the amount of the monthly emolument deduction lies with the debtor, based on the authority of University Of Natal, Pmb v Ziqubu 1999 (2) SA 128 (N). Other magistrates follow Minter NO v Baker and Another 2001 (3) SA 175 (W) which held that the correct procedure for a court application for an EAO, is to start with Section 65A, conduct a financial enquiry and then make an application in terms of Section 65(J)(2)(b) for an EAO. It is submitted that while the judgment in Minter is to be preferred as it is better reasoned and was given after the amendments to the provisions of Section 65, from a practical perspective it results in a large number of unsatisfied debts as the granting of EAOs are a rare occurrence because of the failure of the majority of debtors to appear at court.

Proposed Changes

It is submitted that the following changes would go a long way to addressing the abuses referred to, particularly C and D, but also B in some degree.

1. Interest Charged and Capping

Creditors wanting the benefit of an EAO must accept simple interest at the maximum rate permissible in terms of the Prescribed Rate of Interest Act from the date of the EAO, since they are achieving a greater degree of security with the EAO, and the debtor will most likely pay the debt off over an extended period - something the NCA did not envisage when prescribing some of the higher maximum interest rates.

This will also discourage those credit providers charging high interest rates from granting reckless credit premised on the probability that they can secure their debt and high interest return by their aggressive use of EAOs.

2. Legislative Changes to the Section 65(J) Process

2.1 EAOs by Written Consent

While the lack of judicial oversight could be resolved by amending Section 65J(2)(a) to provide for this, due consideration must be given as to whether civil magistrates will cope with this massive administrative work-load increase, or if the Department of Justice has the budget to increase the number of magistrates. Recent new laws and legislative changes in South Africa have given scant regard as to whether the supporting infrastructure could cope with the new duties imposed, resulting in inability to properly deal with some of them.

Should magistrates be unable to cope with this amendment, it is submitted that continuing to allow EAOs to be dealt with by the clerks of court would suffice, on the basis that the other safeguards suggested here would protect against abuses.

2.2 EAOs by Court Order

It is submitted that the court application route set out in Section 65J(2)(b) is vague, and, if interpreted as per the Minter Judgment, subject to the uncertain, cumbersome and expensive Section 65A process as detailed above.

It is proposed that the provisions of Section 65(J)(2)(b) be amended to provide for:

2.2.1 a direct application without having to first utilise Section 65(A) on the proviso that:

2.2.1.1 there is personal service of the application on the debtor, as well as service on the employer - with the right to oppose the application;

2.2.1.2 the creditor provide all information on the debtor's financial position that it has in its possession, and the employer is obliged to provide the court or creditor with the debtor's salary advice;

2.2.1.3 the amount of the proposed monthly deduction is subject to a maximum to be specified in terms of Rule 46;

2.2.1.3 the court be given discretion to grant an order lower than that provided in 2.2.1.3 and that the magistrate should have due regard to the National Register of EAOs (see below) and the statutory cap (also below).

2.3 Statutory cap on percentage of Remuneration Garnisheed

The UP Law Clinic 2008 Report states:

"Statutory cap on amount to be attached while regulation 23.3.6 in terms of the Public Finance Management Act 1 of 1999 caps the emoluments attachment to 40% ofthe state employee's salary, no such cap exists for debtors employed in the private sector. In most European jurisdictions, caps are applicable. The same applies to the United States of America." (Page 9)

It is proposed a total cumulative cap of 40% of a debtor's salary be incorporated into Section 65(J).

2.4 Capping of Legal Costs

Collection costs in terms of Section 65(J) recovery to be capped at an acceptable fixed amount dependant on the size of the debt plus collection commission at 10%per instalment up to a set capped amount per instalment, and the collection of attorney and client costs to be prohibited.

2.5 Court Authorised Schedule of Costs and Interest

Rule 46 to be amended to provide that no EAO is authorised by the clerk of the court without a full schedule of costs and interests properly calculated on the reducing balance.

Should the creditor's costs increase they would have to apply to court, on notice to both the judgment debtor and the employer, to vary the amount and to have a new repayment schedule authorised by the court and served on the debtor and the employer.

2.6 Provide that all EAOs are to be properly recorded on the proposed National Register of EAOs (see 4 below).

2.7 No employer is entitled to deduct an emolument attachment amount unless:

2.7.1 The EAO is served by a sheriff together with the costs schedule

2.7.2 Implementing such an order does not result in the statutory cap of 40% of the debtor's salary being exceeded

2.7.3 The order appears in the National Register of EAOs

2.8 If an employer fails to make payment of an EAO, the creditor's attorney would not be allowed to issue a warrant of execution against the employer in terms of Section 65(J)(5), but that sub-section would be amended to provide that such warrant can only be authorised by the court on application, notice of which is to be served on the employer, who can oppose on the basis of non-compliance with 2.7 or that the debtor is no longer in its employ.

3. Amending Section 57 / 58 and Section 65J to deal with Jurisdiction

Sections 28 and 45 limit the granting of Section 57/58 default judgments to the court in which the debtor resides or works, although there are apparently unreported High Court judgments which suggest otherwise (see p.42 of the UP Law Clinic 2008 Report). In addition Section 65(J)(1)(a) refers to "...the court of which the employer of the judgment debtor resides, carries on business or is employed..." This means that a debtor who works at Pick'n'Pay in Durban would have to attend a Section 65(J) application in Cape Town as that is where the head office of the employer is, which is unfair on such a debtor. These Sections need to be amended to provide for the only courts to have jurisdiction in such matters being the courts in which the debtor works or resides.

4. Proposed Creation of a Credit Bureaux Based Register of EAOs

This would record all court-authorised EAOs and could be administered by a company such as CourtWorks, which administers the recording of civil judgments for the majority of the credit bureaux (they have also introduced a process whereby attorneys can directly submit judgments to avoid potential court oversights).

All magistrates and clerks would have access to the register, enabling them to enforce the statutory cap of the maximum percentage of remuneration that can be subject to EAOs.

In addition employers that do not already have access to credit bureaux, could be given access to their employees' details on the Register through use of a tax number or some other form of unique code.

The register would also serve to assist credit providers in avoiding the granting of reckless credit in terms of the NCA.

In addition the Department of Justice must provide training to magistrates and clerks on the provisions relating to the NCA, EAOs, interest and costs. Furthermore, external audits should be conducted on magistrates' courts to ensure proper practices are being followed and to eliminate abuses.

5. Law Society Action to Stop Abuses by Attorneys

It has been alleged that attorneys have taken part in collection practices which are illegal or unethical. In doing so the image of the attorneys' profession has been tarnished and the public perception is that the Law Society has done little to act against such behaviour.

It is proposed that:

5.1 The SA Law Society and all provincial law societies appoint standing committees to investigate complaints by members of the public on alleged debt collection abuses;

5.2 National Rulings be passed relating to attorney debt collection to tie up with any legislative changes which may occur;

5.2. A national call centre be established to facilitate the lodging of complaints;

5.3 A national advertising campaign be undertaken to advertise the call centre and investigation service;

5.4 Appropriate steps are taken against members found guilty of debt collection abuses.

In conclusion it is hoped that this article highlights the vital role played by EAOs in consumer debt collection, accepted the challenges that are being posed to it's lawful and ethical use and proposes changes that will result in these abuses being curbed and even eliminated.

 

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