The Edcon Ruling: What to take away from it

The Edcon Ruling: What to take away from it

1. BACKGROUND

Credit providers assist customers who cannot afford to make all payments in cash. In turn for the risk they take, they are allowed to charge certain costs and fees.  When credit agreements are within the ambit of the National Credit Act 34 of 2005 (“NCA” or “the Act“), the Act imposes maximum limits on these fees. Irrespective of the type of credit agreement, section 101 of the NCA provides for a closed list of the fees that a credit provider may charge the consumer in relation to a credit agreement. These fees include, amongst others, initiation fees, service fees, interest, credit insurance and/or default administration charges

2. INTRODUCTION

It has become common practice for retailers to make membership clubs available to consumers in exchange for a monthly “membership/club fee”. Typically, when a consumer becomes a club member he or she would earn points or similar consideration for different reasons – such as a percentage of the purchase price being earned in points. Depending on the type of club joined and/or amount of points earned by that club member, he or she would be entitled to convert his or her points into some form of benefit or product (for example, entertainment, travel, spa, gym etc.). For credit providers who want to offer similar “clubs” there is a challenge in that the NCA does not provide for this kind of “club fee”.

3. THE EDCON RULING

More recently, the National Credit Regulator (“NCR“) started to investigate this business practice and focused on a well-known credit provider retailer: Edcon Holdings Limited (“Edcon“). Following the investigation, they initiated action against Edcon by referring the matter to the National Consumer Tribunal (“NCT“) seeking an order declaring that Edcon has, among other things, repeatedly contravened the provisions of the NCA relating to prohibited charges – by charging a fee not allowed for in the NCA.

The NCT considered the matter from a broader legal perspective, namely whether the NCA allows a credit agreement to contain any fee or charge other than those permitted by the NCA. Edcon argued that the club membership was a stand-alone product, not intended to be part of the credit agreement.

As a starting point, the NCT concluded that the NCA unambiguously prohibits credit providers from charging any fee or charge other than those listed in and provided for in the Act.  The NCT found that Edcon was not allowed to charge its credit customers any fee or charge other than that permitted by the NCA and could therefore not charge the club membership fees. In conclusion, it was held that, by doing so, Edcon had engaged in repeated prohibited conduct in terms of the NCA.

The NCT emphasised that the business practice of charging “membership/club fees” is explicitly prohibited by the NCA and any credit provider who does business in this way may face dire consequences. From perusal of the ruling, the likely consequences that Edcon faces may include being directed to refund consumers charged club and membership fees from 2007 to date and/or an administrative fine on Edcon. According to media reports, Edcon has indicated that they will appeal the ruling.

4. CONCLUSION

The above ruling raises a red flag to many credit providers or credit retailers who may be involved in similar business practices. Retailers should take the following away from this ruling:

  • irrespective of whether customers voluntarily choose to purchase this type of (club) product, a membership/club fee may be seen as a cost of credit if it is inseparably linked to a credit agreement; and
  • review your credit agreements to ensure you do not include any provisions or charges not allowed in terms of the NCA.

Please note that not all club memberships will fall within the ambit of this ruling and club structures will need to be considered on a case to case basis. Please do not hesitate to contact us should you have any queries.

Website terms – purpose, importance and consequences

Website terms – purpose, importance and consequences

Nowadays, websites almost always contain policies and terms that govern your use of the site. Sometimes these policies will appear as banners on the site (which you have to “agree” to in order to make them disappear), links in the page footer (like we have on our website) or as a statement along with a tick box saying that you have “read and agree with” the terms (usually when transacting online).

The questions on peoples’ minds are firstly, why do I need all these different sets of terms and, secondly, are these policies binding.

Why do we need all of these terms?

The website terms which we feel are important are browser terms, privacy policies and commercial/transactional terms. Each one of these deals with specific aspects of the website’s use, including, for example, the collection of personal information, social media integration, payment methods and your rights as a user of the website. Below we discuss each policy and its importance. These policies also protect your rights and interests in your website and can allow for you to have a claim in law against people who infringe your rights.

Browser terms

Although browser terms are not a legal requirement, they are useful to ensure that the “web surfer” understands and agrees to certain key points. Browser terms should be used to inform the surfer that:

  1. you, as the website owner, owe them no responsibilities;
  2. they get no rights to any services or IP merely by browsing;
  3. they are required to respect your website and the content thereof; and
  4. you comply with all necessary legal disclosure requirements.

Browser terms are “agreed” to through the surfer continuing to browse the website. These types of agreements are called “web-wrap” agreements. More on this below.

Privacy policies

Privacy policies are essential whenever the website collects or makes use of personal information. Personal information is often collected through cookies as well as when browsers become users of a website by creating an account or by integrating their social media accounts with the website.

The Protection of Personal Information Act 4 of 2013 (“POPI”) sets conditions for the lawful processing of personal information. Included in POPI’s ambit will be the mere storage of personal information when it is collected by cookies. POPI also requires that companies make certain information available to users when they collect their personal information. This can be achieved through a privacy policy. Privacy policies therefore also assist the website owner to comply with legal requirements

Privacy policies usually include the following important aspects:

  1. the use of cookies to collect certain information;
  2. the purposes for the processing of the personal information;
  3. the sharing of personal information by the website owner with certain select third parties;
  4. the storage of personal information, including the security measures taken and whether cross-border storage will occur; and
  5. the user’s rights in relation to his/her personal information and the recourse that he/she has.

Privacy policies are, like browser terms, usually agreed to by browsing, however, a recent trend has been to display the fact that cookies are used as a banner on a website requiring a “click-wrap” agreement to be entered into in order to remove the banner.

Commercial/transactional terms

As the name suggests, the commercial terms become applicable where the website enables users to transact with the website owner through the website. These terms serve as the terms of the contract which you conclude with the user when the user becomes a customer. The important aspects that this policy should govern includes:

  1. a general explanation of the service or product being offered by the website;
  2. the fees that are payable, which may be a once off purchase price or a subscription fee, as well as the fees relating to delivery costs, insurance and VAT;
  3. the terms applicable to returns;
  4. limitation of liability, which will be subject to the Consumer Protection Act 68 of 2008 (if it applies);
  5. the applicability of promotional codes and vouchers; and
  6. acceptable use policies, however, this is more applicable where the website offers a service and not a product.

The Electronic Communications and Transactions Act 25 of 2002 (“ECTA“) requires certain disclosures in terms of section 43 by the website owner when goods or services are offered for sale or hire through an electronic transaction. Some of the disclosures required include:

  1. company name, registration number and contact number;
  2. addresses, including physical, website and e-mail;
  3. a description of the main characteristics of the goods/services offered (which fulfils the requirement of informed consent;
  4. the full price of the goods, including transport costs, taxes and any other and all costs;
  5. the manners of payment accepted, such as EFT, cash on delivery or credit card, as well as alternative manners of payment such as loyalty points;
  6. the time within which delivery will take place;
  7. any terms of agreement, including guarantees, that will apply to the transaction and how those terms may be accessed, stored and reproduced electronically by consumers;
  8. all security procedures and privacy policy in respect of payment, payment information and personal information; and
  9. the rights of the consumer in terms of section 44 of ECTA.

ECTA also requires that the customer must have an opportunity to review the transaction, correct any mistakes and withdraw from the transaction without penalty before finally concluding the transaction. ECTA non-compliance gives the consumer the opportunity to cancel the order and demand a full refund.

Additional requirements are placed on suppliers transacting online regarding payment systems. The payment system used must be sufficiently secure in terms of current accepted technological standards. Failure to comply with these security standards can render the website owner liable for any damages suffered due to the payment system not being adequately secure.

Are these policies binding?

Essentially, yes, website terms will be binding based on the principles of contract law. Website users must be made aware of the terms that apply to their use of the website and you should always ensure that you include wording to the effect that by anyone continuing to use the website they agree to the terms.

To this effect, web-wrap and click-wrap agreements come into play.

Web-wrap agreements

Web-wrap agreements (also referred to as browse-wrap agreements) are used to acknowledge the terms of use of a website by continuing to use the website. The user indicates acceptance of the terms by using the website and does not expressly indicate acceptance of the terms. Such agreements are usually used in browser terms and privacy policies.

Click-wrap agreements

Click-wrap agreements require the user of a website to indicate their agreement with the terms through positive action – usually by clicking “I accept” before proceeding with their activity on the website. These agreements are usually used for more important agreements, such as when installing new software on your computer or when entering into online transactions.

Conclusion

Even though all of these policies may seem excessive, they are worth having. Yes, copying and pasting clauses from other policies will get the job done, but you may leave yourself vulnerable to certain consequences that you haven’t thought about. These consequences may be even worse when it comes to commercial terms. Contact us for a free quote and ensure that your online business is fully protected!

Companies Act, 71 of 2008 Series Part 7:  Distributions – a few important points to consider

Companies Act, 71 of 2008 Series Part 7: Distributions – a few important points to consider

When considering distributions by a company, we most often think of cash dividends, being one form of return on investment for investors. This is something most start-up clients consider being a future event in their life cycle and don’t often give much thought to upfront. We’ve set out a few important points to take into account when considering whether or not a company should declare a distribution.

What is a distribution?

Firstly, it is important to bear in mind that the shareholders of a company only have an expectation (and not a right) to share in that company’s profits during its existence. There is therefore no obligation on a company to declare distributions to its shareholders.

The Companies Act, 71 of 2008, as amended, (“the Act”) provides a very wide definition of a “distribution”, which goes much further than just cash dividends. This definition can be broken up into three categories, namely, the direct or indirect: (i) transfer by the company of money or other property (other than its own shares) to or for the benefit of one or more of its shareholders; (ii) incurrence of a debt or other obligation by the company for the benefit of one or more of its shareholders; and (iii) forgiveness or waiver by the company of a debt or other obligation owed to the company by one or more of its shareholders.

The definition is further extended to include any of the above actions taken in relation to another company in the same group of companies, but specifically excludes any of the above actions taken upon the final liquidation of a company.

The first category in the definition of a “distribution” includes cash dividends, payments by a company to its shareholders instead of capitalisation shares, share buy-backs and any other transfer by a company of money or other property to or for the benefit of one or more of its shareholders, which is otherwise in respect of any of the company’s shares. This last sub-category is intended as a “catch all” provision, making the definition that much wider.

Who can make a distribution and in what circumstances?

Section 46 of the Act sets out the requirements that a company must meet before making a distribution. A company must not make any proposed distribution to its shareholders unless the distribution: (i) has been authorised by the board of directors by way of adopting a resolution (unless such distribution is pursuant to an existing obligation of the company or a court order); (ii) it reasonably appears that the company will satisfy the solvency and liquidity test immediately after completing the proposed distribution; and (iii) the board of the company acknowledges, by way of a resolution, that it has applied the solvency and liquidity test and reasonably concluded that the company will satisfy same immediately after completing the proposed distribution.

For purposes of the solvency and liquidity test, two considerations must be taken into account. Firstly, whether the assets of the company, fairly valued, are equal to or exceed the liabilities of the company, fairly valued (this is often referred to as commercial solvency). Secondly, whether the company will be able to pay its debts as they become due in the ordinary course of business for a period of twelve months after the test is considered, or in the case of a distribution contemplated in the first category of the definition, twelve months following that distribution (this is often termed factual solvency). While the Act attempts to specify what financial information must be taken into account when considering the solvency and liquidity test, the provisions are not that clear, apart from requiring the board to consider accounting records and financial statements satisfying the requirements of the Act and that the board must consider a fair valuation of the company’s assets and liabilities. This leaves a lot of room for interpretation as to what can and should be taken into account when considering the solvency and liquidity test.

An important point to note here is that it is the board of directors of the company that must declare a distribution, and not the shareholders. The company’s Memorandum of Incorporation and/or shareholders’ agreement can place further requirements on the company in relation to declaring distributions, for example, a distribution must also be approved by a special resolution of the shareholders. This does not, however, change the fact that the distribution must first be proposed by the board of directors and ultimately be declared by the board of directors.

What happens if a distribution is authorised by the board but not fully implemented?

When the board of the company has adopted a resolution, acknowledging that it has applied the solvency and liquidity test and reasonably concluded that the company will satisfy the solvency and liquidity test immediately after completing the proposed distribution, then that distribution must be fully carried out. If the distribution has not been completed within 120 business days after the board adopts such resolution, the board must reconsider the solvency and liquidity test with respect to the remaining distribution to be made. Furthermore, the Act states that the company may not proceed with such distribution unless the board adopts a further resolution to that effect.

Directors liability for unlawful distributions

If a director does not follow the requirements for making a distribution and resolves to make such distribution (either at a meeting or by round robin resolution) despite knowing that the requirements have not been met, then that director can be held personally liable for any loss, damages or costs sustained by the company as a direct or indirect consequence of the director failing to vote against the making of that distribution.

There are, however, limitations placed on a director’s potential liability, in that such liability only arises if: (i) immediately after making all of the distribution (no liability can arise for partial implementation), the company does not satisfy the solvency and liquidity test; and (ii) it was unreasonable at the time of the resolution to come to the conclusion that the company would satisfy the solvency and liquidity test after making the relevant distribution.

A director who has reason to think that a claim may be brought against him (other than for wilful misconduct or wilful breach of trust), may apply to court for relief. The court may grant relief to the director if he has acted honestly and reasonably or, having regard to the circumstances, it would be fair to excuse the director.

There is a limit on the amount that a director can be held liable for in relation to not meeting the requirements of a distribution – section 77(4)(b) provides that such amount will not exceed, in aggregate, the difference between the amount by which the value of the distribution exceeded the amount that could have been distributed without causing the company to fail to satisfy the solvency and liquidity test and the amount (if any) recovered by the company from persons to whom the distribution was made.

Conclusion

Distributions by a company of its assets to its shareholders, whether in the form of cash or otherwise, are carefully regulated by the Act. This is clearly to protect the interests of creditors and minority shareholders of the company. You will also have noticed that the Act does not deal separately with the different types of distributions and includes a wide variety of transactions which will be regarded as a distribution under the Act. We trust that the issues highlighted above will give you some insight and guidance on this topic. If you would like to discuss any of these topics in more detail, please feel free to contact our commercial department and we will gladly assist.

If you would like to discuss any of these topics in more detail, please feel free to contact our commercial department and we will gladly assist.