“I have two accounts with the same bank. I am in arrears on my home loan payments but will be receiving money into my savings account. It’s not my money, but money from my sister that I must use to help arrange for her wedding and expenses. I’m just worried that the bank will see the money and then take it to settle my arrears on my home loan. Can they do this?”

Our common law rule of “set-off” is a well-known practice where one debt is used to extinguish another. Essentially, it entails an arrangement where two parties that are mutually indebted to each other cancel the debts (being liquidated and fully due) in so far that the monetary value of the respective debts reduces the other. Consequently, the debts will no longer exist without the parties ever making payment. “Set-off” is an automatic application and diminishes the debts owed between mutual parties. 

Of importance however is that this common law rule only applies where it is not excluded by statute. On such example is our National Credit Act 34 of 2005 (“NCA”) which redefines the rules of “set-off” application in the credit market. 

Section 90(2)(n) of the NCA prevents the automatic set-off of reciprocal debts by subjecting the set-off to section 124 of the NCA, which determines that any provision in a credit agreement concluded in terms of the NCA and which purports to automatically allow set-off is unlawful and unenforceable. The only way in which a credit provider may lawfully apply set-off in a credit agreement is to comply with section 124 of the NCA. This section does recognise “set-off” provided the consumer expressly authorises the arrangement and confirms the account from which funds may be withdrawn, the debt which is to be settled, the amount of funds which may be transferred and the date the transfer may be effected.

Notwithstanding such authorisations to be obtained from the consumer, credit providers must also still notify consumers of any set-off payments that are to be made prior to the collection thereof.

From the above it is clear that the NCA imposes strict compliance regulations on credit providers when invoking the “set-off” rules. This has also been confirmed in the important case of the National Credit Regulator v Standard Bank of South Africa. 

In this case, the High Court held that banks, as credit providers, are not allowed to transfer funds from one bank account to another, without your permission, confirming that even banks have to obtain prior authorisation from the consumer and cannot arbitrarily transfer funds to satisfy debts.  

Your bank therefore is not allowed to transfer funds from your positive balance account to an arrear account without your permission.