THE SUPREME COURT OF APPEAL
OF SOUTH AFRICA
Case no: 136/2003
REPORTABLE
In the appeal between:
STANDARD BANK OF SOUTH AFRICA LTD
Appellant
and
P W S PEENS (Senior) First Respondent
P W S PEENS (Junior) Second Respondent
J A PEENS Third Respondent
Before: Harms JA, Cameron JA, Conradie JA, Heher JA
and Comrie AJA
Appeal: Monday 13 September 2004
Judgment: Wednesday 29 September 2004
Bank – Fraudulent ‘cross-firing’ scheme – Bank’s attempt to
dishonour fraudulent cheques outside time allowed by clearing
house rules thwarted by objection from collecting bank – Customer
never countermanding original instructions – Bank entitled to revert
to original pre-dishonour debits
JUDGMENT
_____________________________________________________
2
CAMERON JA:
[1] Cheque ‘kiting’ or ‘cross-firing’ (also known as ‘round-tripping’)
takes place when customers of one or more banks draw
cheques in favour of one a nother on different banks or
branches of the same bank, depos iting them to one another’s
accounts in order to draw aga inst the deposi ts before the
proceeds of the cheques have been collected. The object is to
trap the bank into paying out against the deposit in the
expectation that the cheque will be met. 1 The scheme
generally requires the collusion of two or more account holders.
It constitutes the cr iminal offence of fraud. 2 It exploits two
factors: (a) a current banking account in which drawings can be
made against cheques that have been deposited bu t have not
yet been cleared; and (b) delays that occur in clearing such
cheques that are draw n on other banks or other branches of
the same bank.3
[2] This application for leave to appeal concerns a massive cross-
firing operation perpetrated in 1998 and early 1999 by several
companies within a set called the ‘Weenen group’. Each of the
three respondents, all Peen s family members (‘the
1 Compare the explanation by Williamson J in Volkskas Bpk v Zagnoiev 1958 (2) SA 550 (W)
553A and 553H.
2 S v Judin 1969 (4) SA 425 (A) 430H-435H; S v MacDonald 1982 (3) SA 220 (A) 234E-243C.
3 S v MacDonald 1982 (3) SA 220 (A) 236B per Corbett JA.
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defendants’), was a director of all or some of the Weenen
group companies. They signed surety to the applicant bank
(‘the plaintiff’, as in the court below) for the companies’ debts.
The defendants’ liability to the plaintiff, which is at issue in this
matter, depends on whe ther the companies are indebted to it.
That in turn depends on how the pl aintiff dealt with the cross-
firing operation when it got wind of it.
[3] The Peens companie s’ cheque fraud invo lved also other
banks; but we are concerned only with the scheme as it
exploited the group’s accounts held at the plaintiff, together
with an account held by another compan y in the group, Price
Busters, at ABSA Bank Ltd (‘ABSA’). Cheques in very
considerable amounts were dr awn on the group’s accounts
with the plaintiff, and dep osited with ABSA, and vice versa.
Round and round the fa lse credits went. None of the cheques
could be met. But the ‘round -tripping’ for a while created a
giddy illusion of credit in the companies’ ac counts at both
banks. And while that illusio n lasted, huge am ounts of money
were fraudulently diverted to the companies and those
controlling them.
[4] In early 1999, when the plainti ff realised that it and ABSA and
other banks were being defrau ded on an enormous scale, it
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gave instructions that all cheques drawn on Weenen group
accounts held with it should forthwith be dishonoured. The
instruction took effect on 6 Janu ary. Cheques as far back as
28 December 1998 were retur ned to ABSA unpaid. ABSA, as
the collecting ba nk, had presented the gr eat majority of the
cheques thus dishonoure d. The result of the instruction was
that massive debit entries in We enen group accounts held with
the plaintiff, as the dr awee bank, were ex tinguished, since
cheques drawn on those accoun ts that had been deposited
with ABSA were now dishonoure d. In the case of one of the
companies, a credit balance was even created.
[5] Soon after, ABSA also gave in structions for cheques drawn on
it by Price Busters to be dishonou red. But it was left in much
the worse position, and objected to the plaintiff’s dishonours.
As between it and the plaintiff, it had indisputably good reason
for doing so. This was becaus e the attempted dishonours took
place outside the time limits a llowed by the Agency Agreement
between the South Afri can Clearing Banks (commonly known
as the ‘clearing house rules’). These rules st ipulate that
generally a drawee bank mu st return cheques being
dishonoured ‘on the business day following the physical receipt
of the cheque, but not la ter than the cl osing time of either the
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drawee bank or the co llecting bank, whicheve r is the earlier’
(rule 14.3.1). (There are co ncordant rules for Fridays and
public holidays.)
[6] After the per iod allowed for dishonou r has elapsed, the
collecting bank is entitled to in sist (though it may choose not to
do so) that the cheque be paid. 4 ABSA’s objection was thus
well-founded, and le d to negotiations be tween it and the
plaintiff. On 10 February 1999 the two institutions concluded
an agreement (‘the 10 February ag reement’). Its main effect
was that the cheque s each bank had di shonoured on group
accounts were now allocated as they would have been had
they been honoured at the time of presentation in the ordinary
course of business in terms of the clearing house rules. In
other words, each bank rescinded the purported late
dishonours of cheques drawn on the other in the cross-firing
operation, and ‘honoured’ (or, rather, re-ho noured) all cheques
not dishonoured timeously. This meant that debits arising from
cheques originally honoured , but subsequently dishonoured
late, were reinstated.
[7] The effect, as betwe en the two banks, was that ABSA received
a credit of over R31 million, while the plaintiff received a credit
4 Burg Trailers SA (Pty) Ltd v ABSA Bank Ltd 2004 (1) SA 284 (SCA), para 10, per Harms JA.
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of just over R18 million, plus what the judge in the court below
called ‘some R17.5 million of worthless paper’.
[8] The Peens companies had in th e meanwhile been placed in
liquidation. When the plaintiff instituted action on the
suretyships, the defen dants objected that the 10 February
agreement brought ab out a post-liquidation creation of credits
and debits in the companies’ va rious accounts, the plaintiff’s
mandate to honour the cheq ues having lapsed on liquidation:
section 73 of the Bills of Exchange Act 34 of 1964. 5 The
entries the plaintiff eff ected in pursuance of its agreement with
ABSA were unauthorised, the defence ran: so the sureties
could not be held liable for the amounts entered in the plaintiff’s
books as owing to it after liquidatio n and pursuant to the 10
February 1999 agreement.
[9] When the matter came to trial in the Pretoria high court, the
plaintiff closed its case after calling two witnesses – Papadakis,
a forensic and investigative accountant; and van Sittert, then
an inspector in its internal audit division. The defendants
5 Section 73 of Act 34 of 1964: ‘Revocation of bank's authority
The duty and authority of a bank to pay a cheque drawn on it by its customer are terminated
by receipt of –
(a) countermand of payment;
(b) notice of the customer's death or incapacity;
(c) notice of the customer having been sequestrated or wound-up or placed under judicial
management or declared a prodigal:
Provided such countermand or notice identifies the cheque, in the case of countermand, and
the customer with reasonable particularity and gives the drawee a reasonable opportunity to
act on it.’
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provisionally closed theirs, subject to questions about quantum.
The parties then argued the su reties’ liability in law.
Bertelsmann J upheld the defe nce, granting the defendants
absolution from the instance with costs. He later refused leave
to appeal.
[10] After leave to appeal wa s refused, the pl aintiff obtained
senior counsel’s advice and thereafter del iberated its
implications before l odging a petition for leave to appeal. A
rule-breaching delay of some four months occurred. This court
ordered that the applic ation for leave to appeal and for
condonation of the delays be set down for argume nt, and that
the parties be prepared to deal with the merits of the matter.
[11] Mr Wallis who ap peared for the plainti ff (though not in the
court below) conceded that th e delays are not entirely
satisfactorily explained. But it was common cause that the
lapses were not egregious, that they caused no prejudice, and
that condonation should be granted if the pl aintiff’s appeal was
good on the merits.
[12] The plaintiff, Bertelsmann J found, ha d not established its
cause of action:
‘The debits upon which it relies were not created by consensus between
banker and client but by an agreement between banks attempting to limit
damage inflicted upon them as a result of a blatant fraud which had been
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perpetrated upon them. It is obvious that such debts could not be created
after liquidation, quite apart from the fact that the cheques had been
dishonoured and were unilaterally reinstated and debited to the company
accounts after liquidation.
…
It is also clear that, once the cheques had been dishonoured, regardless
of whether the sureties or the principal debtors were aware of the
dishonour or not …, a banker cannot without either finding his client’s
account in credit or having an express instruction from the client, honour a
cheque which has previously been dishonoured without notice to the
client.’
[13] As can be seen , the learned judge considered that the
adjustments to the group’s various accounts pursuant to the 10
February agreement crea ted new debts. The corollary of his
approach is that the account entries effected when the cheques
were purportedly dishonoured in January were immutable for
purposes of the banker/custom er relationship. The late
dishonours, in other words, had to prevail over the pre-
dishonour position. The subsequent agreement could not undo
their effect.
[14] In my view, this approach was not correct. It wrongly
focuses on the effect of the agre ement between the two banks.
The plaintiff’s claim is not bas ed on any entitlement arising
from that agreement. It is based on the debi ts in the group’s
accounts in January 1999. Thes e were created by the bank
honouring its customers’ mandates to pay – before it attempted
the unavailing dishonours.
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[15] That this is so em erged clearly from th e evidence. What the
plaintiff did when it originally received the fr audulent cheques
was described in van Sittert’s testimony. Counsel for the
defendants put to him that the 10 February agreement entailed
that the plaintiff and ABSA had decided, ‘just let us agree that
we undo [the dishonours] by hono uring the cheque s that were
dishonoured’. To this, van Sittert pointed out:
‘Well, before we sent them back we actually had honoured them.’
The exchange proceeded:
‘On which date were they honoured? -- Well, if you send a cheque back
late, if you return a cheque on 6 January and it has already been through
the client’s account on 28 December, then it is deemed that you have paid
the cheque. There are many cheques that were sent back late which are
then deemed to actually be paid. So in effect all we did was to reinstate
the account[s] to the effect of the fraud that was committed. In actual fact
the uncleared effects [perpetrated through the round-tripping scheme] are
now reflected on the […] bank accounts. … We returned the accounts to
what they would have been had we not sent back cheques late.’
[16] Papadakis’s evidence was to the same effect. Asked what
the effect was of the banks’ agreement, he stated:
‘The effect M’Lord would have been simply to reinstate the debits which
had originally been processed to these accounts ... So the original
cheques that were drawn on these accounts and initially debited, were
simply reinstated.’
[17] This evidence wa s not disputed. In my view it must form the
basis on which the matter is de cided. The fact is that the
plaintiff originally honoured the cheques drawn on accounts the
Peens companies held with it. Later, when it discovered the
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massive fraud, it tried to limi t its losses by purporting to
dishonour those same cheques. But the clearing house rules
that ABSA invoked preclu ded this expedient. It then reverted
to its original stance, whic h was that it had honoured the
fraudulent cheques.
[18] Bertelsmann J, in refusin g leave to appeal , was no doubt
right in observing that as between it and its account-holders the
plaintiff was entitled to dishonour the cheques. Clearly so: they
were fraudulently made and fr audulently deposited; and in any
event the companies’ overdrafts far exceeded the limits the
bank set. But focu sing on the attempted dishonours overlooks
the fact that the account-holders never countermanded
payment of the cheques . This distinguis hes the matter from
those cases debated in argument that concern the effect of the
clearing house rules when a customer countermands payment
before the time for dishonour has expired ( Volkskas Bank Bpk
v Bankorp Bpk (h/a Trust Bank) );6 where a bank gives late
notice of dishonour to the detriment of the payee ( Riedell v
Commercial Bank of Australia Ltd );7 or where t he bank gives
late notice but the payee c an prove no resultant damage
6 1991 (3) SA 605 (A).
7 (1931) VLR 382 (Supreme Court of Victoria).
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(National Slag v Ca nadian Imperial Bank of Commerce );8 or
where, within the time for dishonour, payment is
countermanded and an attachment in execution occurs ( Burg
Trailers SA (Pty) Ltd v ABSA Bank Ltd).9
[19] The present case is concer ned solely with the position
between banker and customer where the banker chooses to
disregard the customer’s fra ud on it and, there being no
countermanding instructions, maintains the original debits
effected in accordanc e with the fraudul ent cheques. In my
view it is clear that the banker is entitl ed to correct the bank
statements by reinstati ng the original debits. 10 The plaintiff’s
ineffective attempt to dishonour the c heques did not create
rights for the customers. On the contrary, its reversion to
‘honouring’ the cheques was an acceptance that it had credited
ABSA according to its customers’ unrevoked instructions to pay
the cheques according to their tenor.
[20] The fact that as be tween itself and its customers the plaintiff
was entitled to dish onour the cheques does not mean that it
was obliged to do so. Confronted with ABSA’s objection, it was
entitled to co rrect the book entries honouring its clients’
8 (1982) 140 DLR (3d) 473 (Ontario High Court).
9 2004 (1) SA 284 (SCA).
10 Standard Bank of South Africa Ltd v Oneanate Investments (Pty) Ltd (in liquidation) 1998
(1) SA 797 (SCA).
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unrevoked instructions to debit thei r accounts. That it chose to
overlook the fraud cannot avail the defendants.
[21] In effect the defe nce the trial judge up held sought to limit the
plaintiff’s options to dishon ouring the cheques because they
were fraudulent. This was not only unfair to the plaintiff; in view
of the clearing ho use rules it was unrealis tic; and it overlooked
the fact that the cu stomers’ instructions to pay the fraudulent
cheques remained standing.
[22] The fact that the 10 February agreement was concluded
after the companies were liquidated is irrelevant to this
conclusion. The fact is that the plaintiff was entitled assert the
debits it originally made to it s customers’ accounts in the
amount of the cheques they drew . It follows that the debts
were not created after the companies’ liquidation.
[23] In argument before us couns el for the defenda nts sought by
detailed reference to the schedules incl uded in Papadakis’s
evidence to contend tha t the plaintiff’s claim included cheques
that were dishonoured timeousl y (and which could not
thereafter have been honoured) , and that the 10 February
agreement therefore covered more than merely late
dishonours. He also sought to establish tha t the plaintiff failed
in implementing its own decision timeously to dishonour certain
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cheques that could have been di shonoured timeously after 6
January in terms of clearing hous e rules. On this basis he
sought to contend that the plainti ff’s cause of action in fact
derived from debit entries cr eated by the agree ment between
the two banks.
[24] But this was not what was at issue in the trial, nor what was
debated with the plaintiff’s witne sses. Papadakis’s evidence
that the cheques in ques tion in issue were all dishonoured late
(and therefore ineff ectively) after 6 January was never
challenged, and indeed t he trial judge record ed it as common
cause – and counsel when pr essed confirmed – that the
cheques in question were all di shonoured late. What is more,
the customers gained no rights from the pl aintiff’s decision to
dishonour cheques after 6 Ja nuary. Any failure on the
plaintiff’s part to give effect to its own decisi on cannot enure to
the customers’ (and therefore the defendants’) benefit.
[25] So counsel’s attempt to fashion a new case for the
defendants cannot be co untenanced. The plaintiff’s argument
must in these circumstances be upheld, and the relief it seeks
be granted.
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ORDER:
1. Condonation is granted for the la te application for leave to
appeal.
2. The application for leave to appeal is granted.
3. The appeal succeeds with cost s, including the costs of
two counsel.
4. The order of the tr ial court granting absolution from the
instance is set aside. In its place is substituted:
‘The application for absoluti on from the instance is
dismissed with costs, including the costs of two counsel.’
5. The case is referred back to the trial court to determine
quantum and to give judgment accordingly.
E CAMERON
J U D G E O F A P P E A L
CONCUR:
HARMS JA
CONRADIE JA
HEHER JA
COMRIE AJA