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Set – Off & Suretyships in the spotlight

  • South Africa
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FirstRand Bank Limited v The Spar Group Limited (1334/2019) [2021] ZASCA 20 (18 March 2021)

The issue before the court was whether a bank can set off the customer’s debts to the bank against amounts standing to the credit of a customer if the bank is aware that there is a third party that has a claim to those amounts and whether the bank owes a legal duty to the third party.

The respondent had a dispute with one of its franchisees who held two accounts with the appellant. The franchisee defaulted on terms of the franchise agreement and the respondent obtained a provisional order to perfect its security over the notarial bond it held over the franchisee’s assets, though the provisional order had not been made final. In terms of the notarial bond, the respondent was permitted to take over the business of the franchisee and run it for its own account. However the owner of the franchisee refused to delink the speed point credit card devices from its business accounts, and as a result the franchisee continued to get revenue. The respondent failed to get the appellant to redirect the revenue to its business account. The franchisee had an overdraft facility with the appellant, and the appellant bank applied set-off against the revenue in the franchisee’s bank accounts, which was revenue that was due to the respondent.

The respondent argued that the appellant was not entitled to set-off against the revenue in the accounts because the respondent had a claim to such revenue, and the franchisee had no entitlement to the funds paid into its account. The franchisee was liquidated on 6 August 2012.

The court held that there was an agreement between the respondent and the franchisee that the business of the franchisee would be run by the respondent and the proceeds therefrom would be for the benefit of the respondent. The appellant was also made aware of this fact. As a result, the franchisee had no rights to the credit amounts in its bank account and therefore the appellant could not apply set-off. The appellant acted wrongful when it allowed the owner of the franchisee to operate the bank accounts when it was well aware that the funds were that of the respondent.

Further, it was held that the bank cannot apply set-off against funds in the customer’s bank account if the bank is aware that the customer has no entitlement to those funds. The third party whose money was deposited into the customer’s bank account enjoys a claim against the bank for the amounts credited. The customer may also not make disbursements from their account if they are not entitled to the credits in such account as this would amount to theft. The bank would be a joint wrongdoer if it is aware that its customer is not entitled to the credits in its accounts but nevertheless permits the customer to make disbursements from the account. The bank owes a legal duty to the third party who was entitled to the moneys deposited and suffers loss as a result of the customer’s disbursements.

Therefore, the appellant was found to have wrongfully misappropriated funds from the accounts and wrongfully allowed the owner of the franchisee to misappropriate funds from the accounts and was ordered to pay the respondent the amounts pleaded.

The full judgment can be accessed on this link.

Nedbank Limited v Soodho N.O and Others (2115/2016) [2021] ZAKZDHC 7 (12 March 2021)

The plaintiff sued the first three defendants in their capacities as the trustees of the R Soodhoo Family Trust and the fourth and fifth defendants in their personal capacities. The plaintiff had granted loans to Hourglass Trading 51 CC (“Hourglass”) for the purchase of immovable property and the defendants had executed suretyships guaranteeing performance by Hourglass. Hourglass was wound-up and the plaintiff sought payment of the loan amounts from the defendants.

The defendants raised a defense to the plaintiff’s claim and argued that the suretyships were not validly signed as the fifth defendant had not signed the suretyship in accordance with the Matrimonial Property Act No. 88 of 1984 of by virtue of her marriage to the fourth defendant. The fifth defendant’s signature was forged, and she contended that she is not the one who had signed the suretyships.

The court found that the suretyships were signed by the fourth defendant within the ordinary course and scope of his business, therefore the fifth defendant’s signature was not required. It was further stated that the bank could not have known that the suretyships were signed without the requisite consent of the fifth defendant.

The defendants contended that there was a common mistake on the part of the plaintiff, Hourglass and the fourth defendant on the value of the immovable property and the court rejected this contention. The court also rejected that the plaintiff’s representatives misrepresented the value of the immovable property because it engaged the services of a sworn valuer. The court granted judgment in favour of the plaintiff against the defendants.

The full judgment can be accessed on this link.