South African Reserve Bank v Leathern N O and Others

On 15 June 2017, the South African Reserve Bank (SARB) issued a blocking order against two bank accounts of Mr Ahmed Dawood Bhorat trading as R & R Traders and Brokers, held with Grobank Limited. The accounts contained funds totaling approximately R15 million. The blocking order was issued under Regulations 22A and/or 22C of the Exchange Control Regulations on suspicion that Mr Bhorat had used the accounts to contravene the regulations, as part of illicit financial flows totaling over R700 million. Five days later, on 20 June 2017, Mr Bhorat's estate was provisionally sequestrated by SARS for unpaid tax liability exceeding R40 million. The final sequestration order was granted on 5 March 2018. The trustees of the insolvent estate demanded that the funds be paid over to them, asserting that the funds vested in the insolvent estate under section 20(2)(a) of the Insolvency Act. SARB declined, contending the funds did not belong to Mr Bhorat as he was merely a collection agent. The trustees applied to the Gauteng Division of the High Court for a declaratory order that the funds vested in them, and for the lifting of the blocking order. The high court granted the relief sought, finding that SARB lacked reasonable grounds for the blocking order and that the funds vested in the insolvent estate. SARB appealed.

• Whether the Reserve Bank had reasonable grounds to suspect contraventions of the Exchange Control Regulations justifying the blocking order
• Whether the high court correctly set aside the blocking order
• Whether the funds standing to the credit of Mr Bhorat's bank accounts 'belonged' to him and thus vested in his insolvent estate
• Whether a sequestration order invalidates a blocking order by operation of law
• Whether the trustees could claim the blocked funds during the investigation period
• The proper interpretation of the Exchange Control Regulations in the context of insolvency proceedings

1. The appellant's application to adduce further evidence dismissed with costs including costs of two counsel. 2. The appeal upheld with costs including costs of two counsel. 3. The high court order set aside and replaced with: 'The application is dismissed with costs including the costs of two counsel.'

The binding legal principles established are: (1) The test for a blocking order under Regulations 22A and 22C of the Exchange Control Regulations requires only reasonable suspicion based on objective assessment, not proof of contraventions. Suspicion is "a state of conjecture or surmise where proof is lacking" arising at or near the starting point of an investigation. (2) A blocking order under the Exchange Control Regulations can only be set aside under Regulation 22D read with section 9(2)(d)(i) of the Currency and Exchanges Act on limited grounds, including that the person who made the decision did not have reasonable grounds to do so, or that such grounds no longer exist. (3) The right to claim funds in a bank account depends on the agreement governing the operation of the account, not merely the name of the account holder. Where there is an understanding or agreement that an account holder has restricted rights to deal with funds only as directed by depositors, the account holder may have no claim to those funds. (4) During the currency of a valid blocking order and for the duration of the Reserve Bank's investigation (up to 36 months), it cannot be determined whether funds in a blocked account vest in the trustees of an insolvent estate. This can only be finally determined if a forfeiture order is sought and determined. (5) A sequestration order does not invalidate or terminate a blocking order by operation of law. The Exchange Control Regulations must be interpreted purposively and contextually to give effect to the Reserve Bank's constitutional mandate under section 224 of the Constitution to protect the value of the currency in the interest of balanced and sustainable economic growth. To hold otherwise would create an absurdity where assets legitimately subject to forfeiture would vest in an insolvent estate and be distributed to creditors, thereby defeating the public law remedy of forfeiture designed to protect the currency and economy. (6) A blocking order functions to temporarily delay a determination of whether funds in a blocked account vest in trustees of an insolvent estate, and trustees are not entitled to demand payment of such funds during the investigation period.

The Court made several non-binding observations: (1) It noted that if the Reserve Bank's suspicions are ultimately unfounded and the blocking order lapses, Mr Bhorat may press a claim to the funds, which may well be contested (para 30). (2) The Court indicated that Mr Bhorat may ultimately be found to have no claim against Grobank if the accounts were simply being used as conduits, but expressly made no finding on this score (para 30). (3) The Court observed that the high court's conclusion that Mr Bhorat enjoyed a personal right to the funds could not be made on the evidence before it and on the basis of the law now governing these matters (para 30). (4) The Court noted that whether the funds are subject to concursus creditorum and vest in trustees can only be determined once either the blocking order lapses or a forfeiture order is made (para 31). (5) The Court expressly declined to determine the legal consequences of a forfeiture order after sequestration, stating this issue need not be determined in the appeal (para 39). (6) Regarding the application to adduce further evidence containing Mr Bhorat's alleged "confession" to Mr Malherbe, the Court observed that while the trustees' alleged failure to disclose this information might be relevant to their professional conduct, it was totally irrelevant to the issue in dispute (para 42). (7) The Court noted that to call an account holder a "custodian" of funds, as the court below did in distinguishing Muller, "adds nothing to the issue" where the funds are not trust funds and there is no evidence the bank agreed to hold funds as agent for third parties (citing Muller para 13).

This case establishes important principles at the intersection of insolvency law, exchange control law, and banking law in South Africa. It clarifies that: (1) A blocking order under the Exchange Control Regulations requires only reasonable suspicion, not proof of contraventions. (2) Funds in a blocked bank account do not automatically vest in an insolvent estate upon sequestration where there is reasonable suspicion of Exchange Control contraventions. (3) The ownership of funds in a bank account depends on the agreement governing the account operation, not merely the name of the account holder. (4) Where an account holder acts as a conduit or agent with restricted control over funds, and this is known to the relevant parties, the account holder may have no personal right to claim those funds. (5) A sequestration order does not invalidate a blocking order by operation of law – the blocking order takes precedence during the investigation period. (6) The absence of an express exclusionary provision in the Exchange Control Regulations does not mean blocked funds automatically vest in an insolvent estate; such an interpretation would undermine the Reserve Bank's constitutional mandate under section 224 of the Constitution. The judgment reinforces the primacy of currency protection and economic stability as constitutional imperatives that cannot be defeated by the operation of insolvency law. It also demonstrates the application of purposive and contextual statutory interpretation as required by Cool Ideas 1186 CC v Hubbard.