Can banks be held liable to a third-party creditor of an account holder for allowing funds held by them to be misappropriated by the account holder?

September 1st, 2022
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Is your money or money to which you have legal claim to safe in cases where you have warehoused it in another bank account that does not belong to you? The short answer is yes, provided that the bank knows that you have acquired a legal right to those funds. In 2021, two interrelated questions were finally put to bed by the Supreme Court of Appeal in the case of FirstRand Bank Limited v Spar Group Limited [2021] 2 All SA 680 (SCA). These questions relate to the current position in South African law as it concerns third party security, specifically what a bank’s liability is when a bank knows that a third party has a claim to funds located in its customers account and does nothing to protect the funds from the account holder making withdrawals. The second question relates to what specific claim the third party has against the bank if they conducted themselves as aforementioned?

In the ordinary course, once funds are deposited into a bank account it is common cause that the money credited becomes the bank’s property. On receipt of the credit a legal duty is incurred by the bank to pay an amount equal to the credits received to either a third party of the depositor’s choosing or to the bank account of the depositor directly. However, a third party who acquires a legal right and/or claim to the money in the bank account in question will take over the rights of the depositor to receive payment of the funds.

The courts have held that in instances where the bank has knowledge that its customer no longer has legal rights to the money credited in its account and continues to offset the customer’s debts and allow the customer to appropriate those funds for their own interest, resulting in the customer being unduly enriched, the bank will be held to be joint wrong doers to the misappropriation committed by the customer.

In the FirstRand Bank case, Spar was engaged in an ongoing dispute with one of its Spar retailers, Umtshingo Trading 30 (Pty) Ltd (Umtshingo). Umtshingo owned and operated a KwikSpar and two Tops liquor vendors. Umtshingo kept a bank account for each outlet with FirstRand Bank (the bank) controlled by its director (Mr Paolo).

Through a notarial bond concluded with Umtshingo as security for the fulfilment of Umtshingo’s obligations to it, Spar acquired a legal right in a provisional court order to take over the operations of Umtshingo’s stores and receive the benefit of all revenues generated from the stores, which it enforced. However, speed point credit card payment devices used in the stores erroneously continued to allow revenues generated from the stores to be deposited directly into Umtshingo’s designated accounts. In this period, Mr Paolo remained in control over two of these accounts and subsequently made significant payments to himself from them. In addition, the bank appropriated R 1 343 422,92 from the deposits in the accounts to settle another debt that Mr Paolo had with the bank. Spar sued the bank and Mr Paolo to recover the relevant amounts.

Before the court, Spar asserted that the bank should not have allowed Mr Paolo to disburse funds belonging to Umtshingo, since Mr Paolo had no claim to the funds. Spar also argued that the bank was not permitted to offset Umtshingo’s debts that Spar had a preferential claim to through its rights flowing from the conclusion of the notarial bond.

The court held in favour of Spar, noting instances in which a bank has knowledge that a ‘customer is not entitled to the funds which are credited to that customer’s account where such funds legitimately belong to a third party who is not the account holder. Such third party is entitled to claim payment from the bank of the credit balance in the account’ (see Jonathan Shafir ‘Can a bank offset your debts with money that actually belongs to someone else?’ (www.bizcommunity.com, accessed 5-8-2022)). Regarding the latter claim, the court held that a bank/client relationship is that of a debtor and creditor, in which case the bank is entitled to offset funds in a client’s account against the client’s debt to the bank. Spar was a third party to this relationship. There existed no relationship between the third party and the bank and accordingly third parties generally fall outside of this scope.

In the event that customers do not have any entitlement to money deposited into their account, and know that they do not, they may not make disbursements from the account in respect of credits derived from these funds. Such actions constitute theft. Banks that know that their customers do not enjoy such rights and permit them to make disbursements in these circumstances are jointly liable and will owe a legal duty to compensate the third party who was entitled to the deposited funds and who suffers loss due to the account holder’s unlawful disbursements.

Wandile Mbabane LLB (UNISA) is a candidate legal practitioner at Legator Mckenna Inc in Durban.

This article was first published in De Rebus in 2022 (September) DR 10.

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