Ithala court battle rages on

TimesLIVE

4 days ago

Three judges in KwaZulu-Natal on Friday heard arguments which could determine the fate of Ithala SOC and about R2.6bn it holds through 'deposits' it took when it allegedly unlawfully operated as a bank.
Ithala, a financial agency, held an exemption from the SA Reserve Bank prudential authority (PA) which entitled it to take deposits, many of which were South African Social Security Agency (Sassa) pensions.
The exemption expired in December 2023.
The PA has alleged the financial institution continued taking deposits up until January 2025.
The PA appointed a repayment administrator (RA), Johan Kruger, to take control of Ithala and secure the deposits for repayment and redistribution.
What followed was a flurry of litigation over his powers, including an application by the KwaZulu-Natal government seeking to review and set aside Kruger's appointment on the basis it was unlawful and an application by Kruger for the liquidation of the provincial government-owned entity which has been in existence for 40 years.
At the heart of the dispute, which came before the full bench, sitting in the Durban high court on Friday, is an order granted in November last year by Pietermaritzburg high court judge Muzi Ncube, who ruled effectively Kruger had overstepped his powers by freezing all of Ithala's bank accounts, held at Absa Bank, not only those containing the deposits.
He ordered Absa Bank to immediately unfreeze the accounts.
In May this year, Ncube granted the PA and Kruger leave to appeal this ruling to the Supreme Court of Appeal (SCA).
This would ordinarily have the effect of suspending the ruling.
However, Ncube, at Ithala's behest, granted an order in terms of the Superior Courts Act that his ruling remain in force, notwithstanding the pending appeal.
It is this order the PA and Kruger are seeking to set aside. Ithala is opposing the application, arguing if granted it will be the end of the agency.
'Ithala is not some pyramid scheme that will disappear with depositors' money, it is a government-backed business.
'They are asking the court to condone and enable their continued unlawful self help,' it argued in papers.
Ncube ruled Kruger could not involve himself in the normal operations of Ithala, did not have operational and management control over the day-to-day operations and affirmed the board continued to hold management powers.
He said pending the final outcome of the liquidation application, Ithala was entitled to continue conducting its non-deposit taking business, pay salaries and related expenses, rent for properties it was leasing and other bills.
The PA and Kruger believe the order will be overturned by the SCA because Kruger was acting in terms of the Banks Act.
In a written argument, the PA said Ncube, when granting the enforcement order, had failed to consider the 'irreparable harm that would be suffered by depositors, creditors and the public interest' and the probability of a 'run' on deposits.
Such an order could only be granted in exceptional circumstances, they argued.
'The court failed to appreciate it was common cause that Ithala had co-mingled its operational bank accounts relating to employees' payroll, pensions, medical aid, disability insurance and the UIF and other operational expenses, and those accounts that were used for taking deposits.
'The court had also impermissibly relied on a non-existent guarantee issued by the minister of finance and contended it would insulate depositors from a run on deposits.
'The purported guarantee was unlawful as it was not issued in terms of the Public Finance Management Act.'
Any harm to Ithala was due to its own unlawful conduct, the PA said.
Kruger said not only was he entitled to take control of the funds to prevent their dissipation, he was required to by law.
He said in spite of the lapse of the exemption notice, Ithala had repeatedly refused to give an undertaking that it would immediately cease taking deposits and he had been forced to approach the court to enforce this.
'It is patently clear, even on Ithala's own version, that until January 16 2025, it continued to receive deposits unlawfully and paid lip service to the demands made by the PA or the RA.
'It is also clear the reason for this is it would in all probability lead to the demise of Ithala. If they stopped their unlawful conduct, it would be the end of their banking services and the entity itself.'
Kruger, in his written argument, said the PA had directed and demanded Ithala to repay more than R2.4bn within 14 business days.
'The response was the PA and RA were aware it is practically impossible for Ithala to repay the money because Ithala doesn't hold enough cash to pay more than R2.4bn.
'It argued no other bank holds liquid cash equivalents to repay its depositors within 14 days.
'The comparison to other banks is without merit. Ithala is not a bank and has not been authorised to conduct the business of a bank. It was directed in December 2023 to stop taking deposits.
'It is common cause two directives to repay have been issued by the PA, and Ithala has not repaid the deposits and is not in a position to do so.
'This led to the liquidation application. On the common cause facts, the liquidation is a foregone conclusion. It is commercially insolvent on its own version.'
Ithala, in its written argument, said the PA and RA seemed to believe they could act contrary to the constitution, employment and other laws.
'They also believe they can unilaterally decide to halt the operations of a state-owned company and cancel all its contracts with its employees and service providers without a court order when there is pending litigation over the extent of their powers.'
Ithala said the liquidation application had been brought as a matter of urgency with only one day's notice in January 2025.
'More than five months later, it has not been set down and is unlikely to be heard this year. So much for urgency.
'It is designed to destroy Ithala and bears no relation to the protection of depositors.
'They also want the court to disbelieve the minister of finance when he states publicity and repeatedly he will guarantee all deposits. They are driven by their desire to see Ithala fail.'
Ithala said if it was forced to close its doors, its customers, who include poor Sassa grant recipients, will not be able to access their grants.
The KwaZulu-Natal government, which is the sole shareholder of the Ithala Development Finance Corporation, has also entered the fray in support of Ithala.
In its written argument it said Ncube had correctly found 'exceptional facts' to enforce his order because Ithala had been 'placed in limbo through the conduct of Kruger'.