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AAA Investments (Proprietary) Limited v Micro Finance Regulatory Council and Another (CCT51/05) [2006] ZACC 9; 2006 (11) BCLR 1255 (CC) (28 July 2006)

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CONSTITUTIONAL COURT OF SOUTH AFRICA

Case CCT 51/05

AAA INVESTMENTS (PROPRIETARY) LIMITED Applicant

versus

THE MICRO FINANCE REGULATORY COUNCIL First Respondent

THE MINISTER OF TRADE AND INDUSTRY Second Respondent

Heard on : 28 February 2006

Decided on : 28 July 2006

JUDGMENT

1. YACOOB J:

Introduction

1. This application for leave to appeal requires us to consider the status, legality and effect of certain rules (the Rules) that regulate a class of moneylenders who have come to be known as micro-lenders. As the term suggests, micro-lenders make relatively small loans. But this is not the only relevant characteristic of these institutions. They differ from other lending entities in two other material respects. First, they are allowed to lend without being bound by the terms of the Usury Act¹ and, in particular, at finance charges that are much higher than those that all other moneylenders may charge² in terms of that Act. Secondly, and perhaps more importantly, their customers are mostly poor people.

2. The applicant, AAA Investments (Proprietary) Limited (AAA Investments), a micro-lender operating in the Eastern Cape Province, vigorously contests the validity of these Rules. Their genuineness is defended with equal tenacity by the first respondent, the Micro Finance Regulatory Council (the Council) which has become responsible for the regulation of the micro-lending sector. The Council purports to have made the Rules and to administer them in the course of fulfilling this regulatory responsibility.³ The second respondent is the Minister of Trade and Industry (the Minister) who is joined by reason of the interest of that office in the outcome of this case.

3. The dispute between AAA Investments and the Council broadly turns firstly on whether the Constitution⁴ applies to the Rules or whether the scope of the Rules is so private that the Constitution does not apply to them at all. Secondly, and if the Constitution does apply, we must decide whether the Rules are consistent with it.

4. The constitutionality of these Rules has been debated in both the Pretoria High Court (the High Court) and the Supreme Court of Appeal (SCA). These judgments are not in harmony. The High Court⁵ held that the making of the Rules represents an exercise of public power and that the Rules are constitutionally objectionable because the Council improperly exercised unauthorised public legislative power in making them. It accordingly declared the Rules to be inconsistent with the Constitution. The SCA⁶ however concluded that the Rules operated only in the private sphere by reason of a contractual relationship between the Council and those micro-lenders registered with it. That Court found no basis upon which these Rules could be validly impugned, apparently on the basis that the Constitution was not applicable. It accordingly reversed the High Court order. AAA Investments wishes to appeal against this judgment and applies for the necessary leave.

Background

5. It is universally accepted that money lending transactions are susceptible to abuse mainly because borrowers are usually in a much weaker position than lenders. Moneylenders can therefore easily exploit this vulnerability of the borrower, and some have been guilty of serious impropriety so frequently as to give rise to considerable concern. Moneylending transactions are therefore legitimately subject to legislative control in most parts of the world.

6. South Africa is no exception. Here, all contracts that serve as vehicles for advancing money on loan are tightly controlled by the Usury Act.⁷ Some of its important measures are highlighted. The Act extensively regulates three types of transactions aimed at advancing finance, namely, moneylending transactions, credit transactions and leasing transactions.⁸ I will refer to these transactions collectively as loan contracts. The annual finance charge levied in a loan contract may not, on pain of punishment, exceed that prescribed from time to time by the Minister⁹ and must be disclosed.¹⁰ The Act places limits on the sum that may be recovered in various circumstances¹¹ and mandates that reduced amounts are payable if there is advance payment as well as in related circumstances.¹² The Usury Act also ensures that overpayments by the borrower are recoverable,¹³ that those who advance loans provide certain information¹⁴ to recipients¹⁵ and that recipients of loans receive some protection when faced with court actions for recovery.¹⁶ It is also of significance that the Act provides for certain powers of inspection,¹⁷ for certain information to be furnished to a state official by those advancing loans,¹⁸ as well as for certain penalties to be visited upon lenders who do not comply.¹⁹ Finally the Usury Act expressly exempts certain categories of transactions from its provisions.²⁰

7. I have said earlier that this case is about the validity of Rules aimed at the regulation of micro-lenders. Section 15A of the Act makes it possible for categories of moneylenders to be exempted from its provisions by empowering the Minister to determine the categories of institutions that may be exempted as well as the conditions upon which they may be exempted. The section reads:

“The Minister may from time to time by notice in the Gazette exempt the categories of money lending transactions, credit transactions or leasing transactions which he may deem fit, from any of or all the provisions of this Act on such conditions and to such extent as he may deem fit, and may at any time in like manner revoke or amend any such exemption.”

8. Section 15A was first introduced into the Act only in 1988.²¹ The motivation for this appears to have been that potential borrowers, who were poor and could therefore not provide appropriate security for repayment, found it difficult (if not impossible) to obtain loans under the dispensation provided for by the Usury Act before the introduction of section 15A. Lenders were apparently reluctant to give loans to this category of person because, so they said, the risk of non-payment was so high that lending money to them could not be justified. It was suggested by some lenders that it might become commercially viable for them to advance loans to potential borrowers who were high risk if it was made possible for them to charge higher interest rates.

9. The first Notice exempting certain categories of money-lending transactions²² was published four years after section 15A was passed.²³ That Notice exempted a certain category of micro-lenders from all the provisions of the Act subject only to two conditions. The first was that there should be a “cooling off period” of three days within which the transaction could be terminated by the borrower without any adverse consequences.²⁴ Secondly, the lender was obliged to furnish to the borrower particulars of the amounts of the principal loan and the finance charges respectively.²⁵ It is fair to conclude that this Notice made it possible for moneylenders to advance small loans (that would largely be required by poor people) free from almost all of the constraints of the Usury Act and unbounded by any finance charge limit at all!

10. The micro finance industry had been legitimated. It grew exponentially. Many relatively poor people were now able to secure loans from willing lenders; lenders could now make limitless profit, who were subject to very little (if any) control. This brought negative consequences. Unsurprisingly, complaints of abuse arising from micro finance loans were directed by borrowers against lenders with rapidly increasing frequency.

11. The office of the Minister began to consult with role players concerning the best way in which the micro-lending industry could be regulated in order to provide much needed protection for poor borrowers. The result of this consultation was the decision that micro-lenders and other role players should have some say in the regulation of this industry jointly with government. The Minister also concluded that some minimal regulation of the industry had to be made compulsory by law.

12. The upshot of all this was the introduction of a new Exemption Notice (Exemption Notice) in June 1999²⁶ issued pursuant to section 15A of the Act. As will be seen later, the Council purports to have made the disputed Rules pursuant to this Exemption Notice. This Exemption Notice is much more stringent than its predecessor. It exempts any moneylending transaction where the loan does not exceed R10 000 and which is payable within a period of thirty six months from all of the provisions of the Act except for sections 13, 14 and 17(A).²⁷ Moneylenders must comply with two conditions in order to qualify for the exemption. They must:

    1. register with a regulatory institution approved by the Minister;²⁸ and

    2. comply with the Rules contained in Annexure A to the Exemption Notice (the Minister’s Rules).²⁹

The Exemption Notice expressly imposes certain duties on the regulatory institution³⁰ which has to ensure that lenders registered with it comply with the Minister’s Rules as well as accreditation criteria approved by the Minister.³¹

13. It is interesting that as at the date of the publication of this Exemption Notice, the Council had already been formed. The Council was incorporated as a limited liability company not for gain before the Exemption Notice had been promulgated.³² This followed upon sustained interaction between ministerial representatives and various other role players. Indeed, the Council had already made an application to become a regulatory institution before the date of the publication of the Exemption Notice.³³ The original subscribers to the Council were the Association of Micro Lenders, the Banking Council of South Africa, the Consumer Institute of South Africa, the Department of Trade and Industry, the Housing Consumer Protection Trust, Khula Enterprise Finance Ltd, the Legal Resources Centre, the Micro Enterprise Alliance, the National Housing Finance Corporation Ltd and the South African Reserve Bank. AAA Investments was at all relevant times a member of the Association of Micro Lenders. It is noted that the subscribers to the Council comprised representatives of government, moneylending institutions, and community bodies concerned with consumer protection. The Council’s memorandum and articles of association proclaimed the Council as a regulatory institution and authorised it to make rules. After its incorporation the Council did make certain Rules (the first set of Rules).³⁴ These were more extensive than the Minister’s Rules. Thereafter the Minister published a Notice declaring that the Council would be the regulatory institution for purposes of the Exemption Notice.³⁵

14. This meant that all micro-lenders who wished to qualify in terms of the Exemption Notice had to be registered with the Council in order to bring themselves within the terms of the exemption. AAA Investments and many other micro-lenders registered with the Council.³⁶ There were apparently no complaints about the Council or its first set of Rules until the Council began a process of consultation for the adoption of the Rules that are under attack in this case. The applicant opposed the adoption of the Rules by submitting detailed written representations directly to the Council and through the Association of Micro Lenders, a subscriber to the Council of which the applicant was a member. The Council nonetheless adopted the Rules.³⁷

The duties imposed on the Council by the Minister

15. Before these Rules are described, it is appropriate to set out the duties that were imposed upon the Council by the Minister in the Exemption Notice:³⁸

“‘Regulatory institution’ means a legal entity having a Board of Directors which has, amongst other directors, equal and balanced representation between consumers and the money lending industry and which is approved by the Minister in writing and published in the Government Gazette as having the capacity and the mechanisms in place effectively to –

(a) manage its business as a regulatory institution with competent management and staff;

(b) register lenders in accordance with accreditation criteria approved by the Minister;

(c) ensure adequate standards of training of staff members interacting with the general public;

(d) require adherence to and monitor and ensure compliance by lenders with this notice;

(e) fund itself from contributions by lenders or other sources;

(f) ensure that complaints from the general public are responded to objectively;

(g) deal with appeals by lenders and borrowers in respect of any decision of the regulatory institution or any committee, ombudsperson or referee instituted by it;

(h) educate and inform the general public and lenders in relation to their rights and obligations under this notice;

(i) annually publish information regarding the money lending industry, the services provided, security and/or guarantees required, types of charges and the average annual charges levied by each lender in a comparable format;

(j) collect and collate information and statistics on lenders and complaints handled by the regulatory institution, including the -

(i) number of complaints lodged and details of the complainant;

(ii) number of lenders found in breach of this notice and the reasons therefor;

(iii) names of lenders against whom substantiated complaints have been lodged and the number and nature of complaints;

(iv) response time to resolve complaints;

(v) the number of items monitored under each category;

(vi) the number of breaches detected through monitoring;

(vii) the number and nature of sanctions imposed; and

(viii) the number of decisions appealed against and the outcome thereof;

(k) annually furnish the Minister with a detailed report on lenders, its activities and functions and any other information that the Minister may require;

(l) review its own effectiveness and the effectiveness of this notice and to recommend appropriate changes to the Minister”.

The Rules

16. The Rules are wide ranging in their applicability and effect. They describe their own status at the very outset as comprising part of “the agreement between the Council and the lender”.³⁹ The Rules are defined as including the Minister’s Rules.⁴⁰ The accreditation criteria, annexed to the Rules, are in effect pre-conditions for registration.⁴¹ It will be remembered that accreditation criteria must be approved by the Minister.⁴² It is perhaps as well to repeat that lenders qualify for an exemption in terms of section 15A of the Act only if they are registered with the Council. It will be useful to describe the accreditation criteria and the Minister’s Rules before venturing into a short account of the Rules themselves.

17. The criteria which must be approved by the Minister require that the lender must:

    1. conduct business in the category of money lending transaction exempted;⁴³

    2. commit itself to complying with the Exemption Notice and the Rules of the Council;⁴⁴

    3. register with the South African Revenue Services;⁴⁵ and

    4. ensure that those who are in control of its business operations are fit and proper.⁴⁶

18. The Minister’s Rules impose certain obligations on lenders in relation to the conclusion of moneylending transactions. These Rules concern themselves with the relationship between lenders and borrowers and have very little to do with regulatory institutions. Briefly they pertain to:

    1. obliging the lender to keep certain information received from the borrower confidential unless the borrower consents to disclosure;⁴⁷

    2. disclosure of certain information by the lender to the borrower, the use by the lender of standard agreements containing certain information, and the process of the resolution of disputes between the borrower and the lender;⁴⁸

    3. restrictions on the consideration that may be charged by the lender;⁴⁹

    4. a cooling off period within which the loan agreement may be cancelled by the borrower with impunity;⁵⁰ and

    5. the prohibition of inappropriate methods of debt collection.⁵¹

19. Before turning to the Rules, we must remind ourselves of the tasks imposed on the Council by the Exemption Notice. It had to ensure that the terms of the Exemption Notice were complied with. To this end, the Council was obliged to have sufficient mechanisms in place to compel compliance with the Exemption Notice and the Minister’s Rules. Finally the Council had to ensure that all lenders who wish to register with the Council fell within ministerially approved criteria.

20. In broad terms the Rules themselves are concerned with:

    1. the registration of membership of lenders and the rights and obligations of both the members and the Council consequent upon registration;⁵²

    2. compliance standards in relation to lending activities including the prohibition on reckless lending;⁵³

    3. the training, conduct and conditions for the appointment of their employees and agents by lenders;⁵⁴

    4. the obligations of the lender to provide extensive information concerning lending transactions to the National Loans Register and to access information from that Register in the process of the approval of loans;⁵⁵

    5. detailed specifications relating to the accounting and auditing practices of lenders;⁵⁶

    6. the submission by the lender of certain statistical and other information to the Council quarterly and annually;⁵⁷

    7. expansive rules for the conduct of disciplinary proceedings arising out of the conduct of lenders⁵⁸ and appeals by lenders against findings adverse to them;⁵⁹

    8. limits on finance charges and the way these must be calculated including conditions for compounding;⁶⁰ and

    9. certain transitional provisions.⁶¹

The High Court

21. AAA Investments contended in the High Court that the Rules were all invalid because the Council, in making them, unlawfully and unconstitutionally assumed and exercised legislative power. It also attacked some specific Rules, particularly those concerned with the National Loans Register,⁶² as being inconsistent with the Constitution because they offended the right to privacy of both lenders and borrowers. I have already said that the High Court held that in making the Rules, the Council exercised public power. The Constitution therefore applied to this rule-making power and to the Rules themselves. The High Court then set both the Rules and the first set of Rules aside as unconstitutional on the basis that:

    1. the Council exercised legislative power (a power conferred on the national and provincial legislatures as well as the municipal councils by the Constitution);⁶³ and

    2. the power to make the Rules had not been properly delegated to the Council by the Notice.⁶⁴

In the circumstances, the High Court found it unnecessary to adjudicate the privacy attack.

22. It is necessary to focus on the reasoning that led to the conclusion that the Council exercised public power. The High Court observed correctly that private institutions were increasingly being used to perform state functions⁶⁵ and, relying on the definition of an organ of state in the Constitution,⁶⁶ reasoned that the nature of the functionary was of little consequence. On this basis, the crucial inquiry for the High Court was whether the Council exercised public power because, if this was so, the fact that it was authorised by its memorandum and articles of association would make no difference.⁶⁷

23. The High Court concluded that the Council exercised public power for the following reasons: first it emphasised that every person or institution who wished to become part of the micro-lending industry had no choice but to register with the Council, that the rules were binding on both lenders and borrowers and that they affected the public in general.⁶⁸ Secondly, the court placed reliance on the consideration that the sanction for non-compliance with the Rules included the possibility of the cancellation of the registration of a lending business with the Council; this in turn would result in the inability of that entity to carry on its business as a micro-lender.⁶⁹ The third and final basis for the conclusion of the High Court was that the rules were integral to the regulation of the Exemption Notice and are “part of the governmental regulation of micro-loans”.⁷⁰

The SCA

24. The SCA held that the attack on the Rules on the basis that the Council was not authorised to make them was misconceived on the following basis:

    1. the Council is not a “public regulator” that exercises authority unilaterally but is a “private regulator” of lenders who consent to its authority;⁷¹

    2. to the extent that the consent of the lender might be said to be forcibly extracted, the source of that coercion was not the Council’s Rules but the Exemption Notice which obliged micro-lenders to register in order to qualify for the exemption;⁷²

    3. the validity of the Rules are therefore to be determined “with reference to trite principles of company law and in particular, whether it was empowered by its memorandum of association to do so”;⁷³ and

    4. the memorandum did empower the Council to make the Rules.⁷⁴

The SCA too did not consider the privacy attack because, on its reasoning, the Council was not obliged to act consistently with the privacy protection in the Constitution.⁷⁵ An important consequence of the reasoning and conclusion of the SCA is that neither the rule of law and the principle of legality, nor the Bill of Rights had any application to the wide ranging Rules made by the Council to regulate the micro-lending industry; Rules that had a profound effect on the activities of lenders and borrowers alike. The Council is, on the SCA judgment, free to make whatever Rules it chooses consistently with its memorandum and articles of association.

The issues

25. It is apparent that the issues before us are: (a) whether the Constitution, the legality requirement and the privacy protection in particular, applies to the Rules, or to frame the issue in the way in which it apparently came before the High Court and SCA, whether the Council exercised public power or private power in making the Rules; (b) if the Council exercised public power, whether the power exercised was legislative in the sense of the law-making powers exercised by Parliament, the provincial legislatures, and municipal councils; (c) did the Council have the power to make the Rules pursuant to the Exemption Notice; and (d) specific issues about whether certain Rules violate the right to privacy.

The interests of justice

26. This Court will grant leave to appeal only if it is in the interests of justice to do so.⁷⁶ There are significant differences between the judgment of the SCA and that of the High Court. The questions whether the Council exercises public or private power in the circumstances of this case, and more importantly, whether the Constitution governs the Rules and acts as a constraint upon the Council, raise constitutional issues of grave importance to our democracy. Both judgments have significant implications for the future. The judgment of the SCA carries the consequence that binding rules made by a private entity governed by a memorandum and articles of association in the process of regulating a sector of the South African commercial enterprise, in accordance with the terms of a ministerial notice (subordinate legislation), will not be subject to the privacy protection in our Bill of Rights or indeed the protection conferred by any of its provisions. This is a far-reaching result. On the other hand, the High Court judgment would render unconstitutional any rule of a public character made in terms of a ministerial notice even if the rule was fully consistent with the notice. This conclusion, too, has sweeping implications for the way in which the government may regulate in the public interest. There are therefore compelling reasons for the conclusion that it is in the interests of justice for us to hear the appeal in respect of this aspect of the case.

27. We must however bring into the equation the question of mootness in the process of deciding the interests of justice issue. By the time this case was heard by the SCA, the Exemption Notice had been replaced by a new Exemption Notice which in effect set out the Rules that had been determined by the Council and which are under attack in this case, as rules prescribed by the Minister.⁷⁷ The Council’s Rules had become the Minister’s Rules. The Council’s contention in the SCA that this rendered the issue before that court moot was rejected⁷⁸ and not raised again in this Court. However the possibility of the issue in relation to the Rules contested in this Court being moot because they have been overtaken by the new Notice is so strong that this factor must be brought into account in the interests of justice analysis.⁷⁹ The issues may well be moot. Nonetheless, there are two conflicting judgments on these issues and, if we do not consider this aspect of the case, the judgment of the SCA with all its implications for future regulation would remain binding. In all the circumstances, I would hold that these issues are so crucial to important aspects of government as well as the rights contained in the Bill of Rights that it is in the interests of justice to grant leave to appeal. Neither the judgment of the SCA nor that of the High Court can be said to be unassailable. As will appear from what comes later,⁸⁰ different considerations apply in relation to whether we should evaluate the specific rules consequent upon the privacy complaint.

Does the Constitution apply to the Council?

28. AAA Investments challenged the correctness of the reasoning of the SCA. Its counsel supported the reasoning of the High Court and emphasised that any micro-lender has in reality no choice but to register with the Council. Whatever the source of the coercion might be, they submit that the reality is that there is coercion. They point to the concession by the Council before the SCA that it (the Council) was indeed an organ of state⁸¹ and contend that this concession inevitably leads us to the conclusion that the Council exercised public power.

29. The exercise of public power⁸² is always subject to constitutional control and to the rule of law or, to put it more specifically, the legality requirement of our Constitution.⁸³ The Council would therefore be bound by this requirement if it exercised public power. Whether the Constitution is applicable to the Rules cannot be determined solely by asking whether the exercise of power in a particular case is a public power. The Constitution is specific about when the Bill of Rights applies. Section 8(1) of our Constitution expressly provides that “[t]he Bill of Rights applies to all law, and binds the legislature, the executive, the judiciary, and all organs of state.” It is worth remembering that any finding that a rule making entity does not fall within this category may not of itself have the consequence that the Bill of Rights is not applicable to it. Our Constitution also provides that “a provision of the Bill of Rights binds a natural or juristic person if, and to the extent that, it is applicable, taking into account the nature of the right and the nature of any duty imposed by the right.”⁸⁴ It would therefore seem that the SCA may be incorrect in concluding that the privacy attack became irrelevant on the finding that the Council performed a private function in a private sphere. Our Constitution, unlike many others, contemplates that some of the rights in the Bill of Rights may apply horizontally as well as vertically.

30. We know that the Rules were made by the Council. The capacity in which the Council made these Rules is of some significance. It must be accepted for present purposes that the Council does not constitute or represent the legislature or judiciary. At first blush the inter-related questions appear to be whether the Council made the Rules as an extension of the executive or whether it acted as an organ of state in doing so. In either case the rule of law and the privacy protection in the Bill of Rights applies. It appeared to be common cause in argument that the Council was an organ of state. An organ of state is defined in section 239 of the Constitution as:

“(a) any department of state or administration in the national, provincial or local sphere of government; or

(b) any other functionary or institution –

(i) exercising a power or performing a function in terms of the Constitution or

a provincial constitution; or

(ii) exercising a public power or performing a public function in terms of any

legislation,

but does not include a court or a judicial officer.”

The meaning and application of section 8(1) of the Constitution read with this definition should in my view be decided after reference has been made to approaches to relevant questions in South Africa and abroad.

Approaches to public power, governmental power and judicial scrutiny

31. In the pre-constitutional era in South Africa, the nature of institutions and the way in which they exercised their power became relevant in the context of determining whether particular decisions were subject to judicial review. The Court in Dawnlaan⁸⁵ had to consider whether the decisions of the Johannesburg Stock Exchange (JSE) were subject to judicial review. It was necessary there to decide the correctness of the contention that the decisions of the JSE were not subject to judicial review because the JSE was a private body. The High Court placed considerable emphasis on the fact that the legislation in terms of which the JSE had been established⁸⁶ requires a stock exchange (a) to be licensed if it was in the public interest;⁸⁷ (b) to ensure that its rules safeguard and further the public interest;⁸⁸ and (c) to list securities only if that was in the public interest.⁸⁹ The relevant legislation imposed upon the JSE a public duty to adhere to these rules and requirements, the court held, and added that the functions of the JSE affected the public and indeed the whole economy.⁹⁰ The court concluded that to regard the JSE as a private entity would be to ignore commercial reality and the very public interest that the legislature sought to protect.⁹¹ It ultimately held that the decisions of the JSE are subject to judicial review. The Appellate Division⁹² confirmed the correctness of this High Court approach in the Witwatersrand Nigel case.⁹³

32. In England, too, the nature of institutions required investigation for the purpose of deciding whether they were subject to judicial review, or to put it within the terms employed in that country, whether the decision of an institution was amenable to “the supervisory jurisdiction of the courts”. An appropriate description of the approach adopted in that country is described by the House of Lords in the Panel on Take-overs and Mergers case.⁹⁴ The Panel on Take-overs and Mergers though not created by or in terms of any legislation was an extremely powerful body that had determined and enforced a code of conduct to be applicable in relation to take-overs and mergers. It had disciplinary powers and members of the Stock Exchange who broke its rules could be deprived of their membership. In the process of re-stating the relevant factors to be taken into account in considering whether the institution is subject to judicial review the judgment says:

“[p]ossibly the only essential elements are what can be described as a public element, which can take many different forms, and the exclusion from the jurisdiction of bodies whose sole source of power is a consensual submission to its jurisdiction”⁹⁵ (emphasis added).

The House of Lords concluded that the Panel is subject to judicial supervision because (a) it performs an important public duty; (b) its decisions indirectly affect the general public, some members of whom may be said to have assented in a technical sense; (c) it acts judicially at least in some respects and asserts its purpose to do equity among shareholders; and (d) the bottom line of the source of its power was certain statutory powers exercised by a national government department.⁹⁶

33. The ultimate question to be answered in the United States of America in any enquiry similar to that with which we are concerned in this case is whether their Constitution, and in particular the human rights protection aspects of it, apply to the actions and decisions of certain institutions. Institutions are bound by the Constitution in the US if, in the final analysis, they can be said to be “an agency or instrumentality of the United States”.⁹⁷ The approach of the US Supreme Court in Lebron⁹⁸ is useful. That case was a result of a decision by the National Railroad Passenger Corporation (Amtrak) preventing the applicant from publishing on a large billboard at a railway station,⁹⁹ a certain advertisement. The issue was whether the applicant was bound by and Amtrak could benefit from, the freedom of speech protection of the United States Constitution. The majority in the United States Supreme Court¹⁰⁰ held that “[g]overnment-created and -controlled corporations are (for many purposes at least) part of the Government itself”, for “[i]t surely cannot be that government, state or federal, is able to evade the most solemn obligations imposed in the Constitution by simply resorting to the corporate form”.¹⁰¹ It was held that Amtrak, though a private corporation, was bound by the First Amendment on the basis that it was government itself.

34. The nub of the majority reasoning, in my view, is to be found in the statement that Amtrak

“is established and organized under federal law for the very purpose of pursuing federal governmental objectives, under the direction and control of federal governmental appointees”.¹⁰²

It is apparent from this statement that both the nature of the entity and the nature of the function are relevant. As the majority judgment points out the United States Supreme Court has held once¹⁰³ and “said many times” that private action can sometimes be regarded as governmental, but cases in this category have not been consistent.¹⁰⁴

35. We now turn to Canada. The relevant question to be answered there is whether the Canadian Charter¹⁰⁵ applies to the action concerned by reason of the provisions of section 32(1).¹⁰⁶ It is trite in that country that the Canadian Charter applies to provincial and national government action, not to private action.¹⁰⁷ It has been held that two types of Charter breaches may be in issue: Charter rights may be violated either by legislation or by action taken under statutory authority.¹⁰⁸ It is well-established that the Charter applies to all the activities of a government entity whether those activities are described as private and that the Charter may also apply to non-governmental entities when engaged in activities that are governmental in nature.¹⁰⁹ In the former category are cases such as Douglas College,¹¹⁰ in which the college in question was held to be founded in terms of a government statute and under government control. Similarly in Lavigne¹¹¹ it was found that a statutory council was provincial government for the purposes of the Charter because of the degree of provincial government control. In this kind of case the fact that the agency classifies as government is enough. The nature of the function is immaterial.

36. When it is alleged that the action of a private entity violates the Charter it must be established that the entity, in performing the function, is part of government within the meaning of section 32(1).¹¹² For example, the majority in McKinney¹¹³ held that universities, though acting in terms of a statute were private entities and did not perform governmental action when determining the mandatory retirement age of 65 years, and in Stoffman¹¹⁴ that hospitals too were not hit by the Charter and did not perform governmental action when they determined the mandatory retirement age. On the other hand, because Douglas College was regarded as a government entity, its determination of a mandatory retirement age was held to be subject to the Canadian Charter.

37. McKinney and Stoffman were cases in which private entities (a university and a hospital respectively) were held to have performed non-governmental functions. However, the case of Eldridge demonstrates well how a private institution can be engaged in the performance of a public function. Two deaf people alleged that they were victims of Charter violations because a private hospital did not employ sign language communicators. It was held that the hospital, while undoubtedly a private entity, essentially implemented a government program under government subsidy in the provision of the health service. It was held on this basis that the Charter rights had been violated by the private hospital in not providing sign language communication facilities. Finally it must be emphasised that for Canada it is not mere public service or a public function which is subject to the Charter. The action must be governmental.¹¹⁵

38. The following aspects of the approaches to questions of judicial review of the exercise of power are notable:

    1. The public elements of the power exercised or whether the power is exercised in the public interest or performance of a public duty were relevant in the South African pre-constitutional era and are material in England to the conclusion that the action concerned is subject to judicial review.

    2. The performance of a public service or a public function by a private entity is not subject to Charter review in Canada.

    3. In both Canada and the United States, the issue for determination is essentially whether the entity or the function is governmental.

    4. The apparent narrowness of the concept of “governmental” has given rise to much debate in the course of the courts in Canada in particular attempting to ensure that government does not evade its responsibilities through delegation to a private entity. The judgments in Canada in particular are difficult to reconcile.

The approach in South Africa

39. I have already said that the exercise of all public power in South Africa is constrained by the legality principle. It is therefore not necessary for the purpose of determining whether the legality principle applies to decide whether the power is governmental.

40. Section 8(1) of our Constitution renders the Bill of Rights applicable to the judiciary, the executive, the legislature and organs of state. An organ of state is, amongst other things, an entity that performs a public function in terms of national legislation. The applicability of the Bill of Rights to the legislature and to the executive is unconditional as to function; the Bill of Rights is applicable to it regardless of the function it performs.¹¹⁶ Our Constitution ensures, as in Canada and the United States, that government cannot be released from its human rights and rule of law obligations simply because it employs the strategy of delegating its functions to another entity.

41. Our Constitution does not do this, however, by an expanded notion of the concept of government or the executive or by relying on concepts of agency or instrumentality. It does so by a relatively broad definition of an organ of state. This definition renders the legality principle and the Bill of Rights applicable to a wider category of function than the Charter does in Canada. An organ of state is, amongst other things, an entity that performs a public function in terms of national legislation.¹¹⁷ If the Council performs its functions in terms of national legislation, and these functions are public in character, it is subject to the legality principle and the privacy protection. In our constitutional structure, the Council or any other entity does not have to be part of government or the government itself to be bound by the Constitution as a whole.¹¹⁸ The way is now open to an investigation of the nature of the Council and the nature of the function it performs.

42. The nature of the Council as an institution can be disposed of briefly. An organ of state must perform a function in terms of national legislation. The Constitution defines national legislation as including “subordinate legislation made in terms of an Act of Parliament”.¹¹⁹ The Exemption Notice is national legislation and the Council does perform its function in terms of that legislation. The next question to be answered is the nature of its function. Does the Council perform a public function?

43. Section 15A of the Act, in the process of granting the power to the Minister to exempt certain categories of lending transactions from the provisions of the Act, also empowered the Minister to determine the conditions upon which the exemption was to be made. The only purpose of empowering the Minister to determine conditions was to ensure that the activity of moneylending outside the terms of the Act did not go unregulated. The legislative purpose was therefore regulation by government or executive regulation of moneylending transactions that had been exempted from the provisions of the Act. The Minister decided to determine a regime that enabled the Council to regulate this sector of the moneylending industry. The fact that the Minister passed on the regulatory duty means that the function performed must at least be a public function.

44. The extent of the control exercised by the Minister over the functioning of the Council also shows that the function is public rather than private. The Minister must determine how the Council was to be constituted: the Council was to have a “Board of Directors which has, amongst other directors, equal and balanced representation between consumers and the moneylending industry”.¹²⁰ The Minister also in effect decides what the criteria for registration would be. This is because he had to approve these criteria. Lenders who did not comply with these criteria could not be registered. The Minister on behalf of the government determined the tasks of the Council extensively and obliged it to have mechanisms to ensure that each of these tasks was properly performed. Finally the Minister determined certain minimal rules which the Council had to enforce. The Council was obliged to perform the functions necessitated by the ministerial Exemption Notice if it wished to remain a regulator. Any action of the Council inconsistent with the Notice would certainly fall to be declared invalid. The Minister controlled the Council and determined its functions almost exclusively. No function of the Council could fall outside the terms of the Exemption Notice.

45. The SCA relied on the fact that the memorandum of association empowered the Council to adopt its own rules for concluding that the Council was a mere private entity. This conclusion puts form above substance and disregards the nature of the function that the Council must perform. It ignores the reality of almost absolute ministerial control over the Council’s functions. The provisions of the memorandum and articles of association fade into insignificance as an indicator of the nature of the Council in light of the overwhelming evidence of the true nature of the Council’s functions. The fundamental difference between a private company registered in terms of the Companies Act and the Council is that the private company, while it has to comply with the law, is autonomous in the sense that the company itself decides what its objectives and functions are and how it fulfils them. The Council’s composition and mandate show that although its legal form is that of a private company, its functions are essentially regulatory of an industry. These functions are closely circumscribed by the ministerial notice. I strain to find any characteristic of autonomy in the functions of the Council equivalent to that of an enterprise of a private nature. The Council regulates in the public interest and in the performance of a public duty. Its decisions and Rules are subject to constitutional control. The Council is subject to the principle of legality and the privacy protection of our Constitution. The SCA’s decision therefore cannot be upheld.

Did the Council exercise legislative power not delegated to it?

46. The High Court found that the Council exercised legislative power and that the power to make the Rules had not been properly delegated to the Council.¹²¹ Each of these propositions must now be examined.

47. I start with delegation. The High Court held in this regard that while the Minister might have had the power to make rules binding on micro-lenders as a condition upon which the exemption may be granted, the Minister could not in law properly further delegate this power to the Council.¹²² Implicit in this finding is the conclusion that the Exemption Notice is invalid. This was put to counsel for AAA Investments who expressly disavowed any contention to the effect that the Exemption Notice or the Notice by which the Council had been approved as a regulatory institution is invalid. AAA Investments has not and does not ask for an order declaring either of these Notices invalid. No manifest invalidity is apparent. In the circumstances, as counsel for AAA Investments rightly conceded, this application and the correctness of the High Court judgment must be determined on the basis of the validity of both Notices. Of course we are concerned here with the Exemption Notice.

48. If the Exemption Notice is valid, delegation by the Minister in terms of the Exemption Notice must also be taken as valid. It follows that the contention that the Minister had no power to delegate in the Exemption Notice could not have been validly advanced by AAA Investments in the High Court. Nor, absent an attack on the validity of the Exemption Notice, could the High Court have made the finding that the Minister exceeded his power in the Exemption Notice. In the circumstances, the finding that the Minister had no power to delegate cannot stand. This judgment accordingly proceeds on the basis that the delegation achieved by the Exemption Notice is lawful, constitutional and acceptable. Any consideration of whether the Exemption Notice fell squarely within the terms of section 15A is superfluous.

49. Was the High Court correct in holding that the Council exercised legislative power and thereby usurped the power reserved in the Constitution to Parliament, the provincial legislatures and municipal councils?¹²³ The Rules are not and do not purport to be national, provincial or local government legislation. They are binding Rules at what may be described as a secondary level. They derive their validity from the Exemption Notice.¹²⁴ This judgment holds that the Council exercised public power in terms of the Exemption Notice. This is a rule-making power aimed at fulfilling the duties imposed by the Minister. They are legislative. But the Council does not, by making rules, or by exercising legislative power properly delegated to it, usurp national, provincial or municipal legislative power. It makes binding rules authorised by law and with the force of law in the fulfilment of a national legislative purpose as set out in section 15A.

50. Counsel for AAA Investments made one more submission in relation to the validity of the Rules as a whole. They contended that the Exemption Notice did not empower the Council to make the Rules. In support of this proposition AAA Investments urged that the Council was not authorised to make rules beyond the Ministerial Rules. In other words, they contend that the Exemption Notice contemplates that lenders would be bound by the Ministerial Rules alone. The second leg of the contention that the Rules were not authorised by the Exemption Notice was based on the proposition that there were certain conflicts between the Minister’s Rules and the Rules. I do not agree

51. As I have already said, the legislative purpose of empowering the Minister to set the conditions was, in my view, to make it possible for the Minister to ensure that the micro-lending industry is sufficiently controlled and that borrowers are appropriately protected. The Minister chose to exercise control over the industry through a regulatory institution with which all micro-lenders had to register. The Minister also made certain rules binding on lenders and then imposed upon the regulatory institution the duty to enforce the rules, the obligation to compel compliance with the registration criteria, and a number of regulatory tasks which the regulatory institution had to perform. It must be stressed that the Notice read together with the Minister’s Rules did not put in place any mechanism or process that would facilitate the performance of these tasks or that had to be complied with in their performance.

52. Now the Council, after it had been approved as a regulatory institution, became obliged to perform these functions. The obligation was consistent with the purpose of the legislation. But it could do nothing to compel compliance. It had been entrusted with a series of important tasks; tasks which could be performed only if a mechanism or set of rules was put in place to enable it to exercise its regulatory function over moneylenders and to exact compliance by sanction should this prove to be necessary.

53. This may be illustrated by example. The Council must monitor and ensure compliance with the Exemption Notice¹²⁵ which of course includes the Minister’s Rules. One of these Rules restricts the consideration that a lender may charge¹²⁶ while another obliges the lender to allow a cooling off period.¹²⁷ Inspection provisions are essential if the Council is to monitor compliance with these Minister's Rules.¹²⁸ In addition, disciplinary and appeal procedures extensively described in the Rules are necessary if non-compliance is alleged. The Council is obliged by the Exemption Notice to register lenders in accordance with accreditation criteria approved by the Minister. Registration procedures and inspections are again necessary for the proper fulfilment of this obligation. An examination of the Rules in relation to the duties imposed on the Council shows that the duties cannot effectively be carried out without the Rules.

54. The Exemption Notice must be interpreted so as to empower the Council to do everything necessary to fulfil the responsibility imposed on it. The Rules apply to a limited category of lenders and are tightly designed for the task at hand. The micro-lending industry cannot be regulated without them. The Rules are within the authority of the Council. It is true that the authority to make Rules is not expressly conferred on the Council but is conferred by necessary implication.¹²⁹

55. AAA Investments relies upon three alleged conflicts between the Rules and the Minister’s Rules to ground the submission that the latter could not have authorised the former:

1. The first of these, so the submission goes, is between the Minister’s Rule¹³⁰ that requires debtor information not to be disclosed without consent and the Rules¹³¹ to the effect that loans may only be granted to borrowers who consent to the disclosure of certain information concerning the loan. It is said that the Minister’s Rule carries with it the consequence that loans may be granted without disclosure of any information and that the Rules conflict with the Minister’s Rules because they require disclosure. The Minister’s Rule in question has nothing to do with the conditions upon which loans may be granted and cannot carry the implications suggested.

2. The next alleged conflict is between the Minister’s Rule¹³² which provides for a three-day cooling-off period and the Rule that requires the lender to send information about the loan to a broker within two days of it being granted. The inconsistency is said to arise because the relevant Rule prevents the borrower from cancelling the agreement on the basis that he does not wish information about himself to be conveyed to a broker. But, as has already been said, the borrower has to consider the issue and consent to the conveyance of information before the agreement is entered into. There is nothing in the Minister’s Rules to suggest that information about the borrower should not be sent to any other agency before the expiry of the three-day period. Indeed, information concerning the number of borrowers who cancel agreements before the expiry of the cooling-off period could well be very useful in attaining the purposes of the Exemption Notice and the Minister’s Rules.

3. Finally the suggestion is that the Rules conflict with the Minister’s Rule¹³³ that requires the lender to be given at least 28 days notice before any adverse information about her is sent to a credit bureau. The Rules¹³⁴ require certain information about borrowers to be sent to information brokers for the purpose of inclusion in the National Loans Register without the borrower having been given twenty eight days notice. AAA Investments says that one of the information brokers appointed pursuant to the Rules is a credit bureau and the furnishing of information to that entity for inclusion on the National Loans Register without the required notice would be in conflict with the Minister’s Rules. This contention does not begin to hold water because on its own terms AAA Investments does not rely on any conflict between the Rules and the Minister’s Rules but alleges a conflict between the Minister’s Rules and action taken pursuant to the Rules. In any event, as is contended by the Council, the information to be included on the National Loans Register cannot be regarded as adverse. Furthermore, the Minister’s Rules could never have contemplated a prohibition of information being sent to an entity for inclusion on the National Loans Register with the express consent of the borrower without notice to that borrower. The Minister’s Rule was obviously concerned with preventing adverse information from being sent to a credit bureau gratuitously. It had nothing to do with information that had to be sent in the context of the control of micro-lending transactions in the interests of the borrower and in the public interest.

56. There is therefore no basis for upholding the order of the High Court setting aside the whole body of the Rules as being inconsistent with the Constitution. The Court’s order setting aside the first set of Rules can also not be upheld. The argument that the Constitution requires us to interpret the delegation of power narrowly also falls to be rejected because, in my view, the only reasonable construction of the Exemption Notice and the Rules is that all the Rules are authorised. I cannot conceive of an alternative reasonable interpretation that would exclude or limit the authority of the Council to make its Rules.

Privacy

57. The conclusion that the Council did have the power to make the Rules renders it necessary for us to decide whether the privacy argument should be considered. The contention is that certain of the Rules (Rule 6 in particular) offend against the protection of privacy in the Constitution.

58. It is not, in my view, in the interests of justice to consider this specific attack because the current regulatory regime (as of the date of argument) has been replaced. Counsel for the applicant and for the first respondent told us that new legislation, the Credit Act¹³⁵ and a wholly new regulatory regime was to come into operation on 1 April 2006. However a new Credit Act came into force on 1 June 2006.¹³⁶

59. The Rules will soon not be in operation. The transitional provisions¹³⁷ do not provide for a continuation of the Rules either. The regulatory regime postulated by the new legislation differs fundamentally from that contained in the Usury Act. The Credit Act provides for a regulator whose powers and duties are extensively described in the Act itself.¹³⁸ The privacy provisions are very different too. Information about the borrower can be released only if and to the extent required by the Credit Act.¹³⁹ There is no longer a National Credit Regulator but the Minister might require the Regulator to establish a single national credit register.¹⁴⁰ Provision is also made for ensuring that credit bureaus have accurate information,¹⁴¹ for removal of a name from the record of the credit bureaus if the debt is paid,¹⁴² as well as for the borrower to receive appropriate credit information.¹⁴³

60. What was in the Rules is now contained in the Credit Act. The content also differs from the Rules. In those circumstances, the enquiry into the constitutionality of the Credit Act will be materially different from the enquiry into the constitutional validity of the Rules relating to privacy. A finding in relation to this issue will therefore be of little practical significance.¹⁴⁴ Unlike the issue in relation to whether the rule-making by the Council constituted private or public power, there are no conflicting judgments in existence on the privacy issue.

61. In all the circumstances, it is in the interests of justice for this Court not to consider this issue. In that event AAA Investments, any other lender or any borrower will be free to institute proceedings to set aside some of the Rules on the basis that they infringe the privacy right if so advised. This Court would then hear any appeal that might eventuate if this is found to be in the interests of justice.

62. The order of the SCA setting aside the order of the High Court must accordingly be upheld.

Costs

63. Although this appeal must be dismissed, this judgment does not uphold any of the reasoning of the SCA or the order of the High Court in favour of AAA Investments. The High Court costs order in favour of AAA Investments cannot stand. The reasons for the dismissal of the appeal are so at odds with the reasoning of the