The South African Supreme Court of Appeal (“SCA”) recently delivered judgment in the matter of FirstRand Bank Limited v The Spar Group Limited. The SCA held that:
- A customer with no entitlement to money deposited into its account and who knows that it enjoys no such entitlement, may not pay out money against the credit to the account. Doing so amounts to theft.
- A third party whose money is deposited into the customer’s account will have a claim against the customer’s bank for the amount credited, if the bank is aware that the money belongs to the third party; and
- A bank that knows that its customer has no entitlement to funds deposited into the customer’s account, but still allows the customer to pay out those funds, renders itself a joint wrongdoer. In these circumstances, the bank owes the third party whose funds were wrongly paid into the customer’s account, a legal duty and the third party can claim any loss suffered as a result of the bank permitting the withdrawal of the funds wrongly paid into the customer’s account.
The SCA, in the context of this matter, further held that where a deposit, to the knowledge of the bank, is paid into the bank account of a customer who has no entitlement to those funds, the bank cannot set off the customer’s indebtedness to the bank against the credit to the customer’s account that derived from such a deposit.
The question then arises: when can a credit transfer be reversed from an account?
The general principle regarding the reversal of credit transfers is that a bank may not reverse a credit from a customer’s account without that customer’s authority. This principle emanates from the judgment of Take and Save Trading CC and other v Standard Bank of SA Limited. In this judgment, the SCA held that when a valid transfer is effected by a party into the recipient’s account, the credit belongs to the recipient and the credit can only be reversed with the recipient’s consent.
In Nissan South Africa (Pty) Limited v Marnitz NO and others, the court was required to decide whether a bank can unilaterally reverse a credit without the consent of the recipient. In answering this question, the SCA held that payment is a bilateral act and requires the meeting of two minds. In circumstances where Nissan did not intend transferring ZAR12.7-million into the recipient’s account, there was no meeting of minds and consequently no valid transfer of funds. In these circumstances, the recipient’s conduct in using the funds for its own purposes amounts to appropriation and fraud.
In Nedbank v Pestana, the SCA held that the bank intended to make an unconditional payment on behalf of its customer and intended to receive payment unconditionally on behalf of the recipient. In these circumstances, Nedbank was not entitled to reverse the transfer from the recipient’s account despite receiving a section 99 order from the South African Revenue Services earlier on the day of payment. The court however commented, albeit obiter, that payments may be validly reversed when:
- A credit into an account is treated as provisional and is subjected to a hold in terms of standard banking practice;
- The recipient received the credit by way of fraud or theft; or
- Where an account was erroneously credited.
In Ixocure (Pty) Limited v FirstRand Bank Limited, the court took account of the fact that the bank’s witness gave evidence to the effect that the credit entry into the recipient’s account was provisional and the entry was not finalised before the hold was placed on the recipient’s account, on the basis that the transfer into its account was reported as fraudulent. The court ultimately held that the bank was entitled to reverse the credit transfer.
In summary, where a credit emanates from a “valid” instruction, the recipient’s consent is required before the reversal of the transfer. On the other hand, where the transfer is “invalid”, it can be argued that the reversal of that credit can be effected without the recipient’s consent. The circumstances of each matter will dictate whether the credit can be reversed and whether such reversal requires the recipient’s consent.