Court slaps Ithala for ignoring warnings, upholds repayment administrator’s authority

Ithala was handed its hat in the High Court this week, receiving a sharp rebuke for ignoring warnings it had known about for years.

In a 15 August ruling, the High Court in Pietermaritzburg upheld an appeal by the South African Reserve Bank, the Prudential Authority (PA), and Repayment Administrator (RA) Johannes Kruger, setting aside the May execution order for Ithala SOC Limited.

Deputy Judge President Zaba Nkosi, Judge Garth Harrison, and Judge David Saks ruled that the order could not stand, because it risked enabling unlawful deposit-taking and undermined Kruger’s statutory duties under the Banks Act.

The May order allowed Ithala to continue normal operations, excluding deposit-taking, while limiting the RA’s powers. It barred Kruger from interfering with Ithala’s day-to-day operations, including human resources, finance, treasury, marketing, or removing authorised bank signatories. The board retained full management control, except where the RA needed to protect the company’s assets under the Banks Act.

The order also ensured that Absa Bank could not block Ithala’s payments, including salaries, pensions, medical scheme, insurance, and other operational expenses, and had to follow instructions from the company’s authorised signatories. Kruger was also prevented from issuing instructions that could stop banks or service providers from performing normal business functions or prevent debtors from making payments.

Read: Restarting Ithala: inside the legal tug-of-war over SA’s ‘state bank’

However, importantly, the May order also granted Kruger leave to appeal against a 13 November 2024 ruling that had already clarified that his authority is limited strictly to safeguarding deposit-related assets.

The November order dismissed the RA’s application with costs and confirmed that Ithala’s board retains full management powers under the Companies Act and Public Finance Management Act, while the RA’s role is confined to protecting deposits under section 84 of the Banks Act.

The appeal concerning the November 2024 order is still pending in the Supreme Court of Appeal (SCA).

In the meantime, the High Court ruled this week that Ithala may continue its ordinary business, but all deposit-taking must be strictly controlled by the RA and conducted under an approved repayment plan.

The court also called for co-operation between Ithala and Kruger until the SCA rules on the main appeal.

Ithala, the KwaZulu-Natal MEC for Economic Development, Tourism and Environmental Affairs, and the provincial premier were ordered to pay the legal costs of the two counsels representing the SARB and the PA, and Kruger.

Ithala’s contested position

Ithala, often referred to as a bank, has never held a formal banking licence. It was permitted to take deposits under a series of exemption notices from the PA, but these exemptions expired on 15 December 2023. After that date, deposit-taking became illegal, yet Ithala continued accepting deposits despite a PA directive in October 2023 requiring it to stop and repay existing funds within 14 business days.

On 18 December 2023, the PA appointed Kruger as RA to recover unlawfully collected deposits and protect depositors. The Gauteng High Court later confirmed and expanded his authority, banning Ithala from further deposit-taking without oversight.

Following a PA application for Ithala’s liquidation on 16 January, roughly 257 000 depositor accounts were frozen to prevent a bank run.

Kruger also ordered Absa to freeze Ithala’s accounts, restricting access to funds needed for salaries, operational payments, and income collection.

Read: Ithala hits back: sharp criticism of Reserve Bank’s liquidation move

No date has been set for the liquidation hearing, but the opposing parties have repeatedly returned to court to fight over the scope of the RA’s powers.

The November 2024 court order limited the RA’s powers strictly to deposit-taking activities while allowing Ithala to continue its regular operations. The May order extended this relief, permitting the company to operate pending the outcome of the RA and PA’s appeal.

Read: Ithala warns court ruling could shut bank before liquidation appeal

The appeal against the May order, which was heard in court in July, focused on two key questions: whether there were exceptional circumstances to allow Ithala to continue operating during an ongoing appeal, and whether the company would suffer irreparable harm if the previous November 2024 order was not enforced immediately – without harming the RA’s mandate.

Court weighs rule of law

Judge Nkosi, who wrote the judgment, said the order went “beyond normal practice” by limiting the authority of the RA and directing banks and service providers in ways that could contravene the Banks Act. The court emphasised that exceptional circumstances cannot justify actions that permit illegal conduct, and the rule of law must prevail, even if the company faces financial difficulties.

Judge Nkosi said a major problem with the May order is that it effectively allows Ithala to keep running as if it were a deposit-taking bank – even though that is illegal.

“Ithala is not insulated from the operations of the Banks Act, simply because it is a government entity regulated by its laws.”

He noted that Ithala has not taken any deposits since January, when the RA froze its accounts. That freeze stayed in place because both the RA and the PA have been granted permission to appeal the November 2024 “main order” to the SCA, and they automatically appealed the May order under section 18(4) of the Act. Those appeals suspended the operation of both orders.

Judge Nkosi warned that if the appeal fails, Ithala would be allowed to operate under the May order – which does not actually prohibit it from taking deposits. The November 2024 main order says the RA generally may not interfere with Ithala’s operations except for deposit-taking, but it never explicitly forbids Ithala from accepting deposits.

The judge noted that the May order also “emasculates the RA” by limiting his ability to deal with deposits – both existing ones and any new ones.

As Judge Nkosi put it, the order “countenances and facilitates Ithala’s deposit-taking activities” despite the expiry of its legal exemption under the Banks Act. According to the judgment, in practice, it reduces the RA to a powerless overseer, unable to fulfil his statutory duties to control and safeguard deposits.

Court slams Ithala board for years of warnings ignored

The court rejected Ithala’s claims that immediate enforcement of the previous order was needed to protect employees, service providers, and customers, noting that the public interest in preventing unlawful banking activity outweighed these concerns. It highlighted that Ithala had years to prepare for the end of its exemptions but failed to do so.

Judge Nkosi said that if there are concerns about the financial impact of allowing the appeal, several points must be considered:

• The Banks Act (section 84(1A)(b)(ii)) stops any legal action from being taken for now.
• The provincial government promised it would meet Ithala’s obligations.
• Ithala could have worked with the RA to arrange for deposits to be moved to another bank, so the money wouldn’t get mixed with other funds.
• Ithala knew this situation was coming after it received the Final Exemption Notice, which “made it abundantly clear” that its deposit-taking would end on 15 December 2023 and that it needed to plan for this.

The judge added that Ithala “adopted a supine approach” – meaning it didn’t take proactive steps – and is now using the results of that inaction as its reason for claiming there is exceptional and irreparable harm.

Judge Nkosi also had some harsh words for the Ithala board.

The judge pointed out that Ithala’s current problems should not come as a surprise to its board. The evidence presented by Ithala suggests that the situation was the result of actions taken by the RA appointed by the PA.

However, the judge said the “inflammatory language used is misdirected” because Ithala’s board has known for about 20 years that the SARB – through the Registrar of Banks and later the PA – wanted Ithala to “ring-fence the deposit-taking portion of its business” and to create a separate, independent company that could be registered as a bank.

Despite this advice, the board – “either through its arrogance or hubris” – ignored the instructions from the SARB and the PA and kept running as a deposit-taking institution.

“The board knew that the exemptions were going to end and could be under no illusion as to the finality (and the insistence by the PA) that the exemptions would end. The exemption granted in July 2022 clearly set out that this was to be the final exemption and that after December 2023 there would be no further exemptions.”

Ithala ‘not meant to die’ before appeal ends

Judge Nkosi emphasised that the appeal’s outcome “should not sound a death knell to Ithala”, and the institution “is not supposed to die and should not be left to die” while the SCA case is still pending. He acknowledged Ithala’s important role in KwaZulu-Natal.

The judge said the situation that existed before the November 2024 order – known as the status quo ante – could be restored without breaking the law, even though Ithala’s final exemption expired on 15 December 2023.

He gave several reasons:

• Under the existing consent order (paragraph 2.2), Ithala cannot take new deposits or deal with existing ones “otherwise than under the direction of a repayment administrator appointed by the Prudential Authority and any repayment plan put in place”.
• Paragraph 2.3 makes it clear the RA can only recover and take possession of deposits – not control all of Ithala’s assets – limiting his powers to safeguarding deposits.
• Paragraph 3.2 requires Ithala and the RA to work together to create a plan for repaying deposits to depositors.
• Paragraph 3.3 requires the RA to repay deposits according to that plan.

Judge Nkosi said that if this order is genuinely put into operation, Ithala should be able to continue operating its normal business with the RA in control of the deposits taken by Ithala with the necessary co-operation at delineation of the accounts co-mingled.

“Perhaps the migration of deposits to another bank would help Ithala’s cause.”

In short, the judge said Ithala has to work with the RA until the outcome of the SCA appeal.

Click here to download the judgment.