Ithala's provisional liquidation may result in the closure of 257 000 depositors’ accounts while legal proceedings are under way. (Photo: Ithala)
The high court in Pietermartizburg has ordered payment administrator Johannes Kruger to return control of Ithala SOC LImited’s non-banking assets and operations, arguing that he had overstepped his mandate in earlier taking control of them.
The court ruled that Kruger’s mandate from the South African Reserve Bank’s Prudential Authority, which appointed him to oversee the repayment of deposits Ithala had received after its exemption from the Banks Act expired, applied only to these deposits, and not to Ithala’s broader operations or its assets.
The order by Judge Muzi Ncube is a significant victory for Ithala in its battle for survival, triggered last year by the refusal of the Prudential Authority to extend its exemption from the Act, which allowed it to perform certain banking functions.
Its board now has full control over its assets and operations and can now make payments to suppliers and other creditors and conduct the rest of its business as usual.
It was the second order issued by a court to effectively prevent Kruger from overstepping his mandate with regards to Ithala, whose assets he has twice attempted to take control of by urgent applications brought in Pretoria and Pietermaritzburg.
It comes on the heels of an announcement by President Cyril Ramaphosa — in response to questions from a member of the public at a recent imbizo in Umgababa, KwaZulu-Natal — that he had instructed the finance ministry and the province to put together a comprehensive package of interventions to determine Ithala’s future.
Ithala is a subsidiary of the province’s Ithala Development Finance Corporation, which falls under the economic development and tourism ministry and which has been providing development finance to small and medium enterprises for more than 30 years.
It provides banking, insurance and other services to thousands of residents of rural KwaZulu-Natal, school feeding cooperatives and stokvels in small towns in which the commercial banks do not operate.
Its demise would be a major blow to both the rural economy of KwaZulu-Natal and to the thousands of small businesses that make use of its services in the major urban centres and would also set back the province’s developmental agenda.
In his judgment, Ncube dismissed an application that Kruger had brought against Ithala to confirm his control of all of its assets and operations and to force the bank to hand them over to it for disposal.
Instead, he granted a counter application brought by Ithala, declaring that the appointment of Kruger as a repayment administrator by the Prudential Authority “does not affect the normal operations of Ithala SOC Limited which do not constitute deposit taking”.
Ncube declared that Kruger had no operational or management control of Ithala’s day-to-day non-banking activities.
He also had “no authority to take over the human resource, treasury, marketing, finance and any other operational functions of Ithala SOC Limited, including the removal of Ithala’s authorised signatories to bank accounts used for these purposes”.
“It is declared that notwithstanding the applicant as the repayment administrator, the board of Ithala SOC Limited is not divested of its management powers and responsibilities,’ Ncube said in his judgment.
The order also states that Kruger “may not interfere” in the board’s management functions, save to ensure that assets are not dissipated to prevent him from performing his role as repayment administrator.
Kruger was ordered to pay the costs of the application, including three senior counsel for Ithala.
Ncube said that although the Banks Act did allow a repayment administrator to control assets, the relevant sections under which he was appointed applied only to money that had been obtained illegally by Ithala taking deposits after 15 December last year.
Further, Kruger’s letter of appointment applied only to deposit taking activities, and not the rest of Ithala’s operations, and that this had been made clear by the Prudential Authority at the time.
An affidavit by the Prudential Authority’s Kerwin Martin stating that Ithala’s “other business activities that do not involve deposit taking remain unaffected” further reinforced this understanding that Kruger did not have the right to control Ithala’s other functions, operations and activities.
Ncube said it was important to note that Ithala’s situation was vastly different to the pyramid schemes in which Kruger had acted as a repayment administrator and had to be treated differently.
“Ithala is not a pyramid scheme. Ithala is an institution which was, up until 15 December 2023, authorised to perform deposit taking activities,” Ncube wrote. “To allow the payment administrator to take control of all Ithala’s assets might affect other business operations of Ithala, which in the words of Mr Martin, must remain unaffected as they do not involve deposit-taking activities and do not amount to the business of a bank.”
Ncube said Ithala had no authority to conduct business as a bank and that any relief it had sought in this regard could not be granted. It could also not collect insurance premiums as these were regarded as deposits in terms of the Act.