Reviewing the available options for Structuring Transactions
In commercial practice, structuring transactions to achieve a specific legal or tax outcome is not only commonplace but often necessary. This is especially true when parties wish to avoid the regulatory burdens of certain legislation such as the National Credit Act 34 of 2005 (NCA). In doing so it is vital to ensure that the form of the transaction aligns with its purpose, while remaining lawful. A recent Supreme Court of Appeal (SCA) decision in Uys NO and others v National Credit Regulator and another sheds light on how certain arrangements can be lawfully structured to avoid being classified as credit agreements, without constituting void credit agreements under the NCA.
Simulated Agreements: Loans disguised as sales?
In this matter, Loans Acceptable Funding (Pty) Ltd (LAF) received complaints from individuals who had sought cash loans using their immoveable property as security. When LAF declined the loans, it referred the individuals to the Cornelis Family Trust (the Trust). The Trust did not provide them with cash loans but instead entered into agreements in terms of which it purchased the individuals’ properties at values equivalent to the desired loan amounts. At the same time, the Trust leased the properties back to the former owners, granting them an option to repurchase within one year on the condition that rent was paid timeously.
The National Credit Regulator (NCR) argued that these were simulated agreements amounting to disguised credit agreements in terms of the NCA, and thus void, since the Trust was not a registered credit provider. However, despite the NCR’s contentions, the SCA ultimately overturned the lower court’s findings and found in favour of the Trust, emphasising that “there is nothing impermissible about arranging one’s affairs so as to evade the provisions of the NCA”.
The court clarified that if the transactions were simulated, both parties to the transaction must have agreed to and intended two things:
- • That the true nature of the transaction is a loan; and
- • That they would deliberately structure or present it as a sale and leaseback to conceal its actual character.
Structuring a Loan Transaction with a Trust
A standard loan transaction, where a party borrows money and repays it with interest over time, falls squarely within the definition of a “credit agreement” under section 8(4)(f) of the NCA. If the lender is not registered as a credit provider, such an agreement is void and unenforceable.
If the Trust had simply advanced money to the complainants with an agreement that the loan would be repaid (secured by the immoveable property), it would clearly have constituted a credit agreement. Without being a registered credit provider, the Trust would have contravened the NCA. Such structuring would be legally risky and susceptible to challenge.
Structuring a Sale and Leaseback with Option to Purchase
What the Trust did instead was to structure the transaction differently. The Trust purchased the properties outright. Simultaneously, the Trust leased the properties back to the complainants at a monthly rental and provided an option for them to repurchase the property after one year, subject to conditions.
This sale-and-leaseback structure, with an embedded option to repurchase, is a mechanism to achieve the same economic effect as a loan, without falling within the legal definition of a credit agreement. Critically, section 8(2)(b) of the NCA excludes leases of immoveable property from being classified as credit agreements, irrespective of form.
The SCA confirmed that there is nothing unlawful in structuring transactions to avoid the application of the NCA, and that a transaction is not a simulated one merely because it is arranged to avoid regulatory consequences. The court emphasised that a simulated agreement arises only where both parties intend the transaction to appear as one thing while concealing its true nature.
In this case, the evidence showed that the Trust and the complainants did not share a common intention to disguise a loan as a sale. The Trust genuinely intended to purchase the properties and lease them back, and the complainants consented to the sale by signing the required documents. As such, the arrangement was not a void credit agreement but in fact a method to avoid a credit agreement – a distinction of critical legal significance.
Consensus
The Uys case serves as an important reminder.
It illustrates that structuring transactions to avoid provisions of the NCA is not automatically illegal or simulated. The court must be satisfied that the parties to the agreement had the intention of disguising the agreement for an agreement to be classified as a simulated agreement. It is well understood that an option to purchase is substantially different from the obligation to repay a loan, however both can be used to achieve the same economic effect.
Accordingly, one may intelligently structure and transact to one’s benefit. However, where the line between intelligently structuring or transacting and a disguised transaction is crossed, the consequences may include void agreements. Proper legal advice, insight, and careful drafting remain essential.
