Capitec faces a serious threat

Capitec is embroiled in a legal battle regarding the unlawful procurement of emolument attachment orders (EAOs), or garnishee orders, which seriously threaten the bank.

An AmaBhungane investigation revealed how South African microlenders used garnishee orders to recover debts from defaulting borrowers’ salaries.

Microlenders and their debt collectors have been accused of “forum shopping” to procure garnishee orders from distant magistrates’ courts.

They used parts of the Magistrates’ Court Act which permits garnishee orders to be issued without the authorisation of the court.

This practice helped these microlenders to impose unaffordable debt repayment terms on low-income earners.

There have also been instances of outright fraud, including forged signatures and fictitious witnesses.

Simply put, they used predatory lending practices, and unscrupulous debt recovery methods have trapped financially vulnerable individuals in cycles of debt.

In 2016, the Constitutional Court ruled that magistrates’ court clerks’ routine issuance of garnishee orders was unconstitutional.

The ruling means a garnishee order can only be granted by a judge or a magistrate and must be granted in the debtor’s jurisdiction.

It added that the debtor must be warned via registered letter that they have 10 days to pay the debt if they want to avoid its granting.

However, it did not make the ruling retrospective. Justice Edwin Cameron said a retrospective order in these circumstances was “one of considerable complexity”.

This means that garnishee orders issued before the Constitutional Court ruling remained in force unless individually challenged.

However, although the practice of underhanded garnishee orders ended eight years ago, the sector is still facing legal challenges.

Microlenders like Bayport Financial Services and Capitec and debt collectors like Flemix & Associates are in the firing line of a company called GORR.

“GORR appoints attorneys to take the cases to court and then also helps the client clear their credit record,” AmaBhungane reported.

In a current court battle, GORR brought a restitution claim against Capitec regarding an unlawful garnishee order. It wants to recover repayments linked to this order.

If Capitec loses this case, it could lead to numerous claims and substantial financial liabilities for unlawfully collected debts, fees, and interest.

The bank argues that GORR and the attorneys are motivated by financial gain. It claims to be targeted because it has deep pockets.

It further argues that the affected parties must pursue the original debt collectors and not the microlenders behind the loans.

AmaBhungane reported that the Capitec case involves Dipholony Phefo, a former yard foreman at PRASA Metrorail. He lived in Dobsonville, Soweto.

In 2011, he defaulted on two separate Capitec loans. It resulted in concurrent garnishee deductions from his salary of R900 and R1,200. The interest was 15.5%.

These garnishee orders were procured using the typical underhanded tricks, including using a fraudulent consent form.

Claims by Capitec’s attorneys show how an outstanding amount of R17,219 was transformed into a garnishee order for R32,238.

“Legal fees of R4 292 were added. These fees are regulated and, according to Phefo’s lawyers, should have been capped at R241,” AmaBhungane reported.

Phefo’s lawyers called the twenty-times higher than expected legal fees “grossly excessive and unlawful.”

Capitec hit back, saying Phefo is not entitled to the relief. They said he did not object to the deductions in 2014 and never disputed his indebtedness to Capitec.

“There is nothing equitable in what the applicant seeks to achieve through restitution,” Capitec said.

This is more so since the applicant seeks this relief more than a decade after he has fully settled his indebtedness to Capitec,” it said.

Capitec added that the debt collectors it employed should be targeted by the legal battle instead of the bank.

It also bemoaned the motivation of GORR and Phefo’s attorneys. “They seek to generate fees en masse based upon Capitec’s settled debtor’s book,” it said.

Capitec responds

Capitec told Daily Investor that it is aware of media comments on historical industry practices regarding the use of emolument attachment orders (EAOs).

“During 2013, the use of EAOs was a general and accepted legal practice within the industry,” Capitec said.

“While Capitec did not directly use EAOs, we acknowledge that debt collection agencies acting on our behalf did.”

Since 2014, Capitec has shifted its collection strategy to soft collections, aiming to find amicable repayment solutions with our clients.

“Legal processes against clients were only taken as a last resort,” Capitec told Daily Investor.

It said according to prevailing laws, there is no automatic provision for retrospective restitution.

Individual cases should be considered on their own merits, and a competent court may still grant EAOs if it is satisfied that doing so is just and equitable.

“Capitec remains dedicated to acting in the best interests of our clients, upholding the highest standards of ethical practice and compliance in all our operations,” it said.