Legal duties of a bank

In FirstRand Bank Limited v Spar Group Limited [2021] 2 All SA 680 (SCA) the respondent (Spar) fell into a dispute with one of its franchisees (Umtshingo). FNB breached its legal duty as Umtshingo had no rightful claim to the funds, nor to set off Umtshingo’s debts in respect of which Spar had a quasi-vindicatory claim.

By Merilyn Rowena Kader LLB (Unisa), Legal Editor at LexisNexis South Africa.

Banking and finance - Legal duties of bank: In FirstRand Bank Limited v Spar Group Limited [2021] 2 All SA 680 (SCA) the respondent (Spar) fell into a dispute with one of its franchisees (Umtshingo). Umtshingo kept bank accounts with the appellant (FNB) for each of its outlets. Spar held a notarial bond over Umtshingo’s assets. When Umtshingo defaulted on its obligations under the franchise agreement, Spar obtained a provisional order perfecting its security. The terms of the notarial bond permitted Spar to take over the Umtshingo businesses and run them for its own account. Umtshingo’s controlling mind (Mr Paolo) agreed to that arrangement but refused to de-link the speed point credit card devices of the stores from Umtshingo’s bank accounts.

Spar ran the outlets and credited the stock on hand to Umtshingo and brought in new stock. Cash receipts were deposited into a Spar account. However, the speed point credit card devices in use, which facilitated electronic deposits of revenue directly into Umtshingo’s designated accounts, remained in use. That allowed Mr Paolo to retain control over the accounts, and he effected substantial disbursements out of two of the accounts. The debit balances (in respect of Umtshingo’s overdraft liability, its debts to FNB in respect of a loan and a guarantee paid by FNB to Spar) in two of the accounts were purportedly extinguished by FNB applying set off against the credits derived from revenue generated by Spar and deposited into the accounts.

Spar contended that FNB ought not to have allowed disbursements to be made at Mr Paolo’s behest because Umtshingo had no rightful claim to the funds, and that FNB was not entitled to set off Umtshingo’s debts in respect of which Spar had a quasi-vindicatory claim. It sued FNB and Mr Paolo to recover the relevant amounts. The dismissal of the claims led to the present appeal.

In respect of the set-off issue, when the customer of a bank deposits money into their account, the money becomes the property of the bank, which enjoys a real right of ownership. The deposit usually gives rise to a credit balance in the customer’s account and a personal obligation owed by the bank to its customer to pay the credit balance. The personal obligation of the bank to pay the balance standing to the credit of the customer may be discharged by payment to the customer, payment to persons designated by the customer, or set off. Set off comes about when two parties are mutually indebted to one another, and both debts are liquidated, due and payable. Set off extinguishes a debt but does so reciprocally – one debt extinguishes another. Umtshingo had no entitlement to the funds paid into the accounts held with FNB. Those funds were the proceeds of the business conducted by Spar for its own benefit. FNB was aware of that. Umtshingo thus enjoyed no personal right against FNB to the funds credited to its accounts that derived from Spar’s deposits. Consequently, FNB could not contend that Umtshingo’s indebtedness to it was set off against FNB’s indebtedness to Umtshingo because FNB owed no such debt to Umtshingo. FNB’s defence of set off failed.

FNB was also found to have allowed Mr Paolo to wrongly withdraw money from the accounts, knowing that such funds did not belong to Umtshingo. That amounted to breach of a legal duty by the bank. The court held that the bank was a joint wrongdoer owing a legal duty to Spar. The appeal was thus dismissed.

Merilyn Rowena Kader
Legal Editor at LexisNexis