A recent judgment of the Supreme Court of Appeal serves as a reminder, timely in the current economic climate, of the need to protect yourself when you advance funds to a supplier to enable the supplier to purchase goods for you. The power of a bank to appropriate funds deposited into a customer’s overdrawn account can leave you with neither your money nor your goods.
This was the position in before the court in Standard Bank of South Africa Limited v Echo Petroleum CC  ZA SCA. In this case, the Standard Bank successfully appealed a High Court order which ordered it to repay an amount of R710 000 to Echo Petroleum CC (Echo). On appeal, the High Court application was dismissed and as a result Standard Bank not obliged to repay the R710 000 to Echo.
The general rule is that money deposited into a bank account is owned by the bank but that any resulting credit balance as a result of that deposit then belongs to the customer. A bank is only contractually obliged to pay the customer on demand to the extent that the account stands in credit.
This principle becomes essential knowledge if you are depositing money into the account of a supplier from which you are purchasing a commodity and that supplier is then in turn using that money to purchase the commodity you ordered., This purchase can be from the ultimate manufacturer, or the importer, or the supplier of that commodity to the market. What this means is that your supplier is using your funds to pay a third party.
If the supplier into whose bank account you are depositing the purchase price is indebted to its bank, the bank has the right to appropriate the money you deposit and apply it by set-off against your supplier’s debt. And you will have no recourse against the bank for the return or repayment of those funds.
Any set-off applied by the bank will operate automatically by operation of law and will have retrospective effect if the bank so elects. Accordingly, in order to protect your funds you would be wise to approach the supplier’s bank together with the supplier and create a facility or account into which the funds can be deposited and earmarked for a specific purpose.
Only once the bank has knowledge of the agreement between yourself and your supplier, and the material terms of that agreement, and that the funds are earmarked for a specific purpose in an account or facility that allows for earmarking of funds, can the bank be precluded from using and applying the earmarked funds to set-off against the debt due to it by the supplier.
Echo carried on business as a wholesale supplier of fuel, mainly Sasol products. Sasol allowed only authorised contractors to purchase fuel directly from it. Since Echo was an unauthorised contractor it was obliged to purchase fuel from Sky Petroleum Limited (Sky). Sky would purchase the fuel from Sasol and then sell it to Echo at a profit.
Echo would order fuel from Sky on a cash in advance basis and pay the purchase price for the fuel into Sky’s bank account. Only once the money reflected in Sky’s account would Sky place the order with Sasol. Sky would pay Sasol with the funds received from Echo, after which Echo would receive loading documents entitling it to load the fuel at the Sasol depot.
On 1 October 2008, Echo ordered six consignments of fuel from Sky to the value of R710 111 and made payment in full into Sky’s account. By that afternoon, Echo had not received any loading documents despite arranging for trucks to load the fuel at Sasol’s depot.
On the morning of 2 October 2008, Echo contacted Standard Bank to address the uncertainty and Standard Bank confirmed that it had frozen the Sky account. On the same day, Sky told Echo to demand the release and repayment of the funds and to cancel the order. Echo accordingly cancelled the order and demanded repayment.
On the same afternoon, Standard Bank advised Echo that Sky’s account had been frozen and the funds that were deposited into it had been applied to a debt owed by Sky to Standard Bank. Standard Bank disputed that the money deposited into Sky’s bank account by Echo in the ordinary course of business had been earmarked for use to purchase the fuel from Sasol.
It was on this basis that Standard Bank refused to comply with the demand for repayment.
On 3 October 2008, Echo instituted urgent application proceedings in the High Court for the recovery and repayment of the R710 000, claiming that Standard Bank was fully aware of the practice followed by it and Sky in respect of the ordering of fuel, payment for it and the transfer of ownership of the money from Echo to Sky.
Standard Bank responded advising that Sky was indebted to it and that it had demanded that Sky settle its debt, failing which it would withdraw all of the facilities that it had made available to Sky. Sky did not comply with the demand.
On 1 October 2008, Sky had one bank account reflecting a large debit balance and a second bank account which reflected a small credit balance. A Standard Bank employee noticed Echo’s payment into the account with the small credit balance and subsequently caused the account to be frozen in order for its balance to be set-off against the account with the debit balance.
Standard Bank indicated that it had no knowledge of the fact that the money deposited by Echo was earmarked for payment to Sasol for the fuel ordered by Sky as the money was paid into a general account which did not provide for the earmarking of funds. Therefore, the effect of Echo making payment into Sky’s Standard Bank account was a merger of the funds paid by Echo with those of Sky. Echo therefore had no right in law to reclaim the deposit from Standard Bank. The Court concluded that Standard Bank had acted lawfully in applying the funds as it had done.
You should therefore be cautious and investigate to the best of your ability the financial circumstances of parties with which you are contracting and paying money in advance in the kind of circumstances in which Sky and Echo were operating.
If you find yourself in a similar situation, you must approach the supplier’s bank and disclose the nature of the agreement and the business transaction to the bank in order to create a facility and earmark and secure your funds for the purpose for which they are being deposited. In this way, you can not only safeguard the funds which you are depositing for onward transmission to the third party supplier but you are also, in effect, reserving your right, title and ownership in and to the funds that you are paying into a bank account that is not in your name or for your benefit.
David Vlcek is an associate at Norton Rose SA and Kim Edwards is a candidate attorney.
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