A widespread past practice of procuring unlawful emoluments attachment orders (EAOs –  better known as garnishee orders) to recover debts directly from defaulting debtors’ salaries may soon result in significant restitution claims against major microlenders.

A garnishee is a third party (such as an employer) who is instructed, by way of a legal notice known as a ‘garnishee order’, to surrender money in order to settle a debt.

In particular, Capitec faces a watershed case that might open the floodgates – or snuff out the light at the end of the tunnel – for thousands of victims of this practice.

A number of successful applications have already been made to rescind fraudulent or illegitimate garnishee orders dating back a decade or more.

These have flown below the radar but have, significantly, sometimes been accompanied by successful claims for repayment of all debts, fees and interest that had been collected, even when accounts were settled years ago.

Often, the basis for rescinding garnishee payments is that microlenders or their debt collecting agencies historically went ‘forum shopping’ – using seemingly arbitrary magistrates’ courts to procure orders to recover what are now seen as extortionate amounts in plainly unaffordable instalments.

Other times, outright fraud has been alleged, including the forging of signatures and the use of fictitious witnesses to debtors’ alleged consent.

In 2013, these practices contributed to a now largely forgotten strike wave in the Cape winelands, which was at the time referred to as an “uprising” and which eventually led to a historic Constitutional Court case clamping down on some of the sector’s abuses.

The Court found that the routine process allowing magistrates’ court clerks to issue garnishee orders was unconstitutional.

However, because of fears about the potential “systemic risk” impact on the lending industry, the Court did not make this ruling retrospective.

This meant, the Court noted, “that the grievous effect of this is that past emoluments attachment orders, unscrupulously procured or issued, will continue to be operative, unless individually challenged”.

Further complicating matters for individual victims of such abuses, the microlending industry has teemed with small fly-by-night entities. Many implicated companies no longer exist or were sold and restructured, making it unclear who is actually liable.

Now, years down the line, the sector may get its comeuppance.

Major established players like Bayport Financial Services and Capitec, as well as debt collector firms like Flemix & Associates, are squarely in the crosshairs of the legal stratagem being pioneered by GORR, a small law firm aiming to make restitution cases its bread and butter.

GORR is buying up claims against lenders and launching recision applications. Essentially, it buys debtors’ claims and carries the legal costs.

If the recision is successful, GORR claims costs, as well as half of the prize of restitution if achieved, making it possible for debtors to win back some of what they paid via garnishee orders. These are meaningful sums for low-wage debtors who paid lenders significant portions of their earnings for years.

A potentially make-or-break case is currently before the court, with Capitec mounting what would likely be the high water mark of possible defences against such claims. Should it fail, it could be open season on the sector.

The bank has warned, however, that if it loses, it will pursue a scorched earth defence and carry on the fight against “unfair enrichment” claims, threatening to saddle successful debtors with costly legal battles and the potential for unaffordable damages.

READ | Credit Ombud recovers R3.4m in disputes, but warns consumers to pay their bills or pay the price

The victory and the escape

Back in 2014 the University of Stellenbosch Legal Aid Clinic dragged no less than 13 microlenders, as well as one of the sector’s leading debt collectors and the ministers of justice and correctional services and trade and industry, alongside the National Credit Regulator, to the Western Cape High Court.

The Clinic was acting on behalf of 15 people who had been the victims of unlawful garnishees. These were farmworkers, cleaners and security guards from Stellenbosch and surrounding areas earning salaries of between R1 200 and R8 000 per month. They had all taken loans through an originator called SA Multi Loan.

The facts of the case were jaw-dropping. Poor and financially illiterate people caught in debt traps had practically become a cash crop with garnishee orders being, so to speak, the combine harvester.

The predatory nature of some of the lending is illustrated by instances where the officials at SA Multi Loan filled in loan applications claiming that borrowers only spent between R0 and R100 per month on food, meaning they could supposedly afford the loan repayments.

Many of the applicants allegedly gave “informed consent” to instalments of over half their wages.

While the debtors did, in fact, default on their debts, the problem was ultimately the debt collection techniques.

To discourage abuses, the law made provision for a garnishee order to be applied only after a magistrates’ court has weighed up its fairness and affordability.

Yet somehow, people were consenting to ruinous interest rates and dodgy legal fees, ultimately getting half or even all of their salaries deducted with nothing more than a stamp from a clerk of the court.

And the orders were frequently being issued by a small set of pliant magistrates’ courts, typically located on the other side of the country from the debtors, making any representations by the debtor practically impossible.

In an even more cynical twist, garnishee order consent forms allegedly signed by debtors were seemingly routinely “witnessed” by no one at all, or by people who weren’t actually present.

The whole enterprise was fuelled by debt collectors who effectively work on commission and are perversely incentivised to churn out as many garnishee orders as possible, sometimes employing harassment and intimidation to achieve this end.

In a searing landmark ruling, judge Siraj Desai summarised the issue:

The major respondent in the case was Flemix & Associates, a mammoth debt collector with a book of 150 000 garnishee orders worth R1.6 billion.

According to the judge, it was “safe to assume that thousands, if not tens of thousands of cases involving ordinary working people in debt, are having significant portions of their salaries or wages deducted based on unlawfully obtained EAOs”.

The order Desai made was ultimately technical: declaring parts of the Magistrate Courts Act unlawful and other parts unconstitutional.

The Desai judgement was appealed to the Constitutional Court where it was, unfortunately for the debt collectors, substantially confirmed, leading to amendments of the Magistrates Act in 2018 to make it unambiguous that real judicial oversight is required to procure a garnishee order. Amendments also capped garnishee deductions at 25% of a debtor’s salary.

However, a key concession was that the declaration of constitutional invalidity would be “prospective”. It would, in other words, not affect past or even current garnishee orders issued without judicial oversight – only restrict new ones going forward.

It would be left to victims to individually challenge orders against them – technically called recision applications – and these would have to be made at the same magistrates’ court that issued the original garnishee order.

And this is where a slew of recent recision cases come in.

The battle line

To rescind a garnishee order, you need to argue that the order was issued unlawfully.

In many cases, this doesn’t need to go much further than showing that the wrong jurisdiction was used.

This is because the High Court declared that the National Credit Act of 2005 barred a judgment debtor from giving consent to jurisdiction of a court outside of the area where that debtor lives or works.

Previously, credit providers or their attorneys had relied on a so-called “Section 45 consent” in order to obtain judgments and EAOs against debtors via distant courts that did not have jurisdiction over the debtors.

Effectively, the High Court said that the National Credit Act meant debtors could not sign their jurisdictional rights away.

In the Constitutional Court, Flemix and the other microlenders and debt recovery agents sought to appeal this High Court ruling on the illegality of Section 45 consents. Their appeal was dismissed.

Importantly, according to our law that unlawfulness is retrospective, as is the unlawfulness of any order obtained through fraud, such as by forging a debtor’s signature.

It is this retrospectivity that GORR is relying on in order to approach the courts to undo unlawfully granted garnishee orders and to seek restitution.

The Magistrates’ Court Act grants the power to “rescind or vary any judgment granted by it which was void aborigini or was obtained by fraud or mistake common to the parties…”

If the order is deemed void, then the parties are restored to the position they were in prior to the unlawful order.

This implies paying back whatever had been deducted from the debtor’s salary over the lifespan of the garnishee order.

However, it also implies that the debt that was owed when the order was granted is resurrected. This is where the true battle seems to lie.

GORR is arguing that the “resurrected” debts are invariably older than the three years it takes for a debt to prescribe and get written off.

This means, they argue, that lenders like Capitec must pay back the money, but the original liability of the debtor is prescribed and extinguished.

This is where Capitec is threatening to take the fight should it lose: if the court agrees that it should pay back debts settled by unlawful means and then be unable to legally pursue them again, it will instead nail the debtors with “enrichment” claims.

Essentially, it will argue that the payback-plus-prescription outcome is a ploy to ransack the bank years after the debts had been settled and everyone had moved on.

And if it wins, the bank suggests it may pursue punitive legal costs as a further disincentive.

Capitec’s legal papers raise questions. Legal adviser in the bank’s head office, Lizanne Morais, told the court that the Constitutional Court had made no ruling about the unlawfulness of any claimed Section 45 consent.

However, the Court dismissed the appeals against the High Court’s declaration that, “in proceedings brought by a creditor for the enforcement of any credit agreement to which the National Credit Act 34 of 2005… section 45 of the Magistrates’ Courts Act does not permit a debtor to consent in writing to the jurisdiction of a magistrates’ court other than that in which that debtor resides or is employed.” 

In dismissing that appeal, the Constitutional Court confirmed the High Court ruling.

Mr Phefo’s case

In the Capitec case, the debtor, Dipholony Phefo, was a yard foreman at PRASA Metrorail in the Johannesburg neighbourhood of Braamfontein, who resided in Dobsonville, Soweto.

He defaulted on two separate Capitec loans in 2011 which saddled him with concurrent garnishee deductions from his salary of R900 and R1 200 – in each case with interest of 15.5%.

The orders were allegedly procured using both of the most common methods employed by the sector: they were procured at the Kempton Park magistrate’s court rather than one that Phefo’s home or job fell under and they were allegedly procured using a fraudulent consent form, formally known as a Section 58 consent in terms of the Magistrates Act.

Phefo alleges:

Included in the court papers is one of the orders against Phefo that demonstrates how unsuspecting debtors were allegedly bludgeoned by lenders.

The instruction sent to Metrorail by Capitec’s attorneys to instate the deductions for one of these loans sets out how the original outstanding amount of R17 219 was instantly transformed into a garnishee order for R32 238.

Among other things, legal fees of R4 292 – 25% of the debt – were added. These fees are regulated and according to Phefo’s lawyers should have been capped at R241, or a twentieth of what was charged. They call it “grossly excessive and unlawful”.

According to the court papers, Capitec denies that Phefo is entitled to the relief as 12 years have passed since the judgment was passed, he did not object to the deduction of the payments and the debt was settled on 24 January 2014, meaning that it has been settled for 10 years. He furthermore never disputed his indebtedness to Capitec.

Capitec argues that “there is absolutely nothing equitable in what the applicant [Phefo] seeks to achieve through restitution. This is the more so since the applicant seeks this relief more than a decade after he has fully settled his indebtedness to Capitec – an indebtedness which he expressly admits.

“The motivation of GORR and/or the Applicant’s attorneys is self-evidently financial: they seek to generate fees en masse based upon Capitec’s settled debtor’s book.”

What is more, Capitec complains that it is the bank, rather than the debt collectors it employed, that is being targeted, “undoubtedly because they seek to recover their fees from the party that they consider having the deepest pockets and seek to leave Capitec to carry the can and pursue its debt collectors.”

If this is in fact the plan, then GORR is mistaken, says Capitec. Instead of pursuing the debt collectors, the bank is threatening to pursue the debtor.

“Capitec would remain entitled to proceed against them based on unjustified enrichment. In doing so, each and every debtor would become exposed to even more legal costs – with GORR and the Applicant’s attorneys no doubt disappearing at that point, having milked each matter for their fees.”

The Capitec case went to court late last month but was postponed to August after the magistrate pointed out anomalies in the court order used by Capitec’s lawyers against Phefo all those years ago. Attorneys were ordered to find the original file, which led to a postponement to a new court date in August.

The balance of fairness may well be found in the power given to magistrates to “vary” the original order, but what a fair settlement might look like is not clear given that, while each case needs to be judged on its merits, the microlending industry needs to be discouraged from pursuing predatory lending and unscrupulous recoveries.  

Precedents

While Capitec is a high-profile target with deep pockets, GORR has already pursued a number of recision cases. In some of these, the lenders or debt collectors have simply rolled over, while in others there have been legal contests.

GORR could point us toward 115 cases that it has either concluded or has pending before magistrates’ courts. It has won 80 recisions but, thus far, only 11 restitutions.

A major target has been Bayport Securitisation, a company that houses the unsecured loans of Bayport Financial Services. It has a net loan book of nearly R3 billion and buys in loans made by other companies, all of which it bundles together as investment products traded on the JSE.

Since 2018, the company has received 60 recision applications, most of these from GORR and about half of them successful.

One such application was made by GORR on behalf of Phineas Muleba, a welder employed by Metrorail. Bayport collected part of his salary in terms of a garnishee order starting in 2013.

The allegation in this case is outright fraud – Muleba, among other things, claims that his “consent” to the garnishee was forged in Johannesburg on a Sunday while he was at church in Krugersdorp.

His debt at the time was just over R24 000, but after the garnishee was instituted, this actually continued to grow due to a 32% interest rate and recurring fees.

Ultimately, he paid R52 000 via the garnishee. The recision was granted, and this sum was paid back as restitution.

In response to questions, Bayport told us that it had extracted itself from the unsecured lending business and the attendant use of garnishee orders seven years ago. Now it is focused on what it calls a debt rehabilitation solution.

This “is executed in partnership with like-minded employers, through consolidation of existing debt on better terms than the customer would be able to obtain in the open market”.

“Through this solution, it creates the opportunity for employees at selected employers to immediately increase their monthly take home pay, reduce their overall debt burden and, over time, improve their credit profile.”

More on the sector’s newfangled business models later.

Rinse and repeat

Cases against lenders Bridge Debt (formerly known as Experato) and Izwe Loans follow a similar pattern: the debtors claim they never signed the purported Section 58 consent forms used to install garnishee orders against them, while the magistrates’ court issuing the order was consistently located far from their homes or jobs.

In particular, the magistrate courts in Randburg, Randfontein, Wellington, Ermelo, Verulam, Kimberley, Kempton Park, Temba, Hennenman, and East London were regularly utilised by microlenders.

The case – or rather cases – of Johannesburg policeman Percy Mothibi is illustrative of not only the alleged abuse of garnishee orders, but also the seemingly complete lack of affordability assessments in the microlending sector.

Mothibi had two garnishee orders against him from Bayport, obtained a month apart in 2010. Both garnishee orders were obtained in Verulam, KwaZulu Natal, while he resides and works in Johannesburg, Gauteng.

He denies ever being served with a letter of demand and also denies ever seeing the debt collector and witnesses who signed his supposed consent to the garnishee.

In a desperate attempt for financial stability, Mothibi entered into separate loan agreements with Izwe Loans (twice) and Experato Pty Ltd, now Bridge Debt Pty Ltd. He defaulted on payments and garnishee orders obtained from Kimberley, Hennenman, and Kempton Park magistrate courts were imposed on him in 2011 and 2012.

Before long Mothibi found himself with five concurrent garnishee orders from all over the country, consuming R3 875.35 a month – just shy of half of his R8 000 salary at the time. As in the Capitec case described above, large legal fees were baked into the debts.

In four separate recision applications at various courts, Mothibi took on Bayport, Izwe and Experato/Bridge Debt – and won.

Importantly, the case against Bridge Debt drew in that lender’s debt collector, Flemix & Associates, which, it was revealed in the Constitutional Court, at one point collected on 150 000 garnishees. In this case, the court, in May last year, ordered restitution against Flemix’s opposition.

Flemix was, incidentally, found guilty and fined for forum shopping by the Legal Practice Council in 2020.

Going, going, gone