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Wednesday, October 1, 2008
Legal catch

Deneys Reitz on insurance case law: Pestana v Nedbank Limited 2008

This recently reported case highlights the difficulties a bank faces if it unilaterally reverses a transfer that it ought not to have made, notes Aslam Moosajee of Deneys Reitz. Please note the case involves Pestana (hereinafter termed ‘the plaintiff’) and a third party, a Joseph Michael Pestana (hereinafter called ‘Joseph’) to avoid confusion.
By agreement the following facts were placed before the court:
• The Plaintiff had since 1969 conducted a current account at Nedbank’s Carltonville branch.
• On 4th February 2004 Joseph, another customer at Nedbank’s Carltonville branch, had a credit balance of R496 546,40 in his current account.
• At approximately 08h30 on 4th February 2004 Nedbank’s head office received an instruction from SARS in terms of Section 99 of the Income Tax Act. The effect of this instruction was that Nedbank was appointed as an agent of Joseph to pay taxes due by him from his funds with the bank.
• Later on that day Joseph approached Nedbank and instructed it to transfer R480 000 from his account to that of the plaintiff. Oblivious to the instruction that SARS had sent to its head office, the branch gave effect to this instruction and transferred the sum of R480 000 to the plaintiff’s account.
• Later on the very same day, Nedbank’s Carltonville branch was notified by its head office that SARS had appointed it as the agent of Joseph, so the branch reversed the transfer and the plaintiff’s account was duly debited with the sum of R480 000. “Presumably the bank took this action because it was concerned about the provisions of Section 97 of the Income Tax Act. This makes an agent personally liable for any tax payable by another person if the agent disposes of any money that is in its possession after being appointed as the agent of that person and the tax remains unpaid by such person.”
• A little while later Nedbank paid an amount of R496 000 to SARS. It made the payment by debiting Joseph’s account. Nedbank did not request the authority of the plaintiff to reverse the transfer of R480 000 to the plaintiff’s account and the plaintiff did not authorise this reversal.

The court had to decide whether Nedbank was entitled to reverse the transfer of R480 000 without the plaintiff’s authority. It had to make this decision with due regard to Nedbank’s appointment in terms of Section 99 of the Income Tax Act.
The court concluded that on 4th February 2004 Nedbank only had one intention: to pay the plaintiff unconditionally on behalf of Joseph and it intended to receive payment on behalf of the plaintiff. Since the payment was unconditional, Nedbank could not unilaterally reverse the payment. The court pointed out that even though the payment to the plaintiff had been effected by mistake (in Nedbank having failed to act immediately on the Section 99 notice), such a mistake was a unilateral one that could not affect the completed act of payment.
Consequently the appeal court ordered Nedbank to credit the plaintiff’s account with the amount of R480 000, and Nedbank was ordered to pay the plaintiff’s costs.
Comments Moosajee, “On the agreed facts there was nothing to suggest that the plaintiff knew or should have known that Nedbank laboured under a mistaken belief when it effected the transfer of R480 000. If the plaintiff knew or should have known that Nedbank was appointed the agent of Joseph and was therefore crediting his account by virtue of a mistake, the appeal court’s finding would have been different and Nedbank would have been allowed to persist with the reversal of the credit to the plaintiff’s account.
“The clear message for the rest of us is to react immediately to a Section 99 notice from SARS,” he says.
Incidentally, there is no follow up on what Nedbank did next as it is ‘case closed’. However, Moosajee speculates that the bank is probably stuck with a problem because Joseph will say he did not want to borrow funds and gave no authority for it to give him a loan. On the other hand, could the bank claim that Joseph was unduly enriched by the error, and get its money back? Perhaps. 

Copyright © Insurance Times and Investments® Vol:21.9 1st October, 2008
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