INDUSTRY OBSERVATION

The National Credit Act – is it ideal?

The mandate of this month’s column is to specifically refer to developments in the commercial vehicle insurance industry and I start with the National Credit Act (NCA) and what, I assume, are unintended consequences. 

Promulgated in March 2005, the NCA gave rise to the National Credit Regulator. The implications of the NCA - and specifically the regulator - cannot be ignored by either the insurance industry or the commercial vehicle market. I will use the following case study to explain what I mean...

Haulier X received finance for three trucks. For our example, let us assume that two of these trucks are subsequently paid up, i.e. unencumbered. (Please note this detail for future reference). Let us further assume that over time, Haulier X earns and creates a lifestyle which allows him to enjoy the “good times.” 

In turn, Haulier X assumes that these good times will last and he has a perpetual cash flow to feed his lifestyle. Haulier X ratchets up his lifestyle assets with cars, credit cards, accounts at retail stores, fancy holidays and so on. 

Now, as we all know, the good times never last in perpetuity. Haulier X’s transport business hits a wobbly and cash flow is, at best, highly erratic. There is insufficient cash to cover the transport operating costs of Haulier X, never mind what we can call his lifestyle debt commitments. 

Haulier X realises that he is in dire straits. The cash shortfall means that the accounts (the combined debt commitments) all fall into arrears. All of a sudden the phone calls turn from a cheery “come and collect a ‘free’ credit card” to “where are the instalments?” The arrears are insurmountable, at least until the good times return. 

So Haulier X now refers his problems to the National Credit Regulator (NCR). The methodology, Act and principles are completely sound. I sincerely state and endorse this. Let’s, however, look at the machinations of sections 84, 85, 86, 87 and 88 of the Act. It is here that we find those unintended consequences. 

The NCR acts as follows. In terms of the Act, effectively a moratorium is called upon the debtor’s (in this case Haulier X’s) creditors. As in a liquidation, the NCR requests all creditors to submit their claims, i.e. Haulier X’s liabilities. 

Correct me if I am wrong, but the procedure is as follows:

1. The counsellor, on behalf of the NCR, reviews the liabilities and then recommends a solution to the magistrate. This is an arrangement by which the creditors would have the benefit of ratifying or rejecting. The court can, however, make it an order where the creditors are bound to honour the agreement. My understanding is that the creditors are not in a position to negotiate anything such as demanding better terms. In other words, it is a “take it or leave it” ratification. 

2. Once the order is made, the creditors receive “proportional” settlement over an extended time frame.

This system might not be completely accurate but it is the workings in principle I wish you to understand. As an aside, may I remind you this column is for debate and is not critical of the NCA. 

The questions I have are as follows:

1. What benefit does an asset creditor have by ensuring an asset, i.e. a truck, is financed? What is the point of having security in a credit agreement such as an instalment sale? 

2. Furthermore, with such little security coupled to the fact that the creditor has no access to the asset, why would financial institutions want to finance commercial vehicles? 

3. Now getting back to the two unencumbered trucks. If the client had other unencumbered assets, why is the debtor - in our case Haulier X - not required to liquidate the unencumbered assets to pay the debts? Why is the debtor entitled to continue supporting a lifestyle where effectively the revenue from the unencumbered assets is not used to first pay secured creditors? 

4. How is the NCR going to ensure a delinquent debtor does not incur further credit through additional credit cards or, accounts? 

5. Who is going to manage the debtor’s commitments? 

6. What happens if the debtor “recovers” more quickly than the commitments? Is the debtor then required to increase or re-invoke the debt commitments back to “normal” as it were? 

Comment:

There has been much written about the financiers of capital equipment “tightening up.” The situation at present is that unless businesses are “fairly substantial,” finance for operators is extremely hard to come by. 

Personally, what I have depicted above in terms of the workings of the NCA must be one of the issues that would cause any potential financiers to “make a run for it.” The security of the asset, whether intentionally or unintentionally, has been diluted so financiers who fall under the NCR will, in my opinion, certainly rethink the offering. In a country crying to create employment, entrepreneurial opportunities and openings for SMEs, this is certainly not a positive step. 

I would greatly look forward to debating this topic or similar items. If I have misunderstood the rules and the workings of the NCR, please set the record straight. 

Let’s now look at the effects of the NCR on the Insurance industry: 

• Assuming a debtor’s relief proposal is ratified, who is responsible for the insurance premiums on the encumbered assets? 

• Are operating expenses of the trucks deducted first? By this I mean does the NCR counsellor have the ability to understand the commitments to maintain all the encumbered assets under this scheme? 

• What happens if the assets deteriorate? Surely this is creating a “liability.” If, for example an unroadworthy vehicle is involved in an accident, is the NCR counsellor liable for negligence? This presumption is not as far-fetched as you think - if it was obvious that the operator couldn’t maintain his vehicles in terms of the Road Traffic Act. 

Let us assume one of the vehicles - that is already the subject of a moratorium order - is written off in an accident and is subject to an insurance claim. Does the financial institution’s right to be paid first still hold? Or is the Insurance Company required to pay the NCR “pool” as it were? 

In summary, I would like to reiterate the issues raised here are for debate. Please treat this as a “forum” to either set my thoughts straight or allay my concerns.