In the recent judgment of the Supreme Court of Appeal (SCA) in South African Reserve Bank and Another v Johnine Winsome Elisie Maddocks N O and Another (2023) (the Maddocks case), Judge Zondi clarified the implications of blocking and forfeiture orders by the South African Reserve Bank (SARB) in the context of liquidation proceedings.

The facts were as follows:

• Two South African companies were finally wound up by the High Court in March 2017.
• Prior to March 2017, SARB had issued so-called “blocking-orders” in terms of Regulation 22A and/or Regulation 22C of the Exchange Control Regulations (the Regulations), promulgated in terms of section 9 of the Currency and Exchange Act, No 9 of 1933. In terms of the Regulations, SARB has the right to block the withdrawal of any funds from a bank account if it reasonably suspects that the account holder acted in contravention of the Regulations (by, for example, exporting large sums of monies without the permission of the National Treasury).
• Subsequent to March 2017, and on the basis of the blocking-orders, SARB issued three forfeiture orders under Regulation 22B, causing the monies to be forfeited to the State and accordingly deposited in the National Revenue Fund.

The liquidators of the two companies, upon their appointment, demanded that the forfeited monies be paid to them to be administered in terms of insolvency laws. They alleged that, after the commencement of the winding up of the companies, there was no legal basis for SARB to exercise its powers under Regulation 22B in respect of forfeitures, that SARB was a creditor of the companies by virtue of the blocking orders issued prior to the liquidation orders, and that they, in their capacity as liquidators, have a statutory obligation to take possession of these monies. The liquidators approached the High Court for relief, which it granted when it found that the forfeiture orders were rendered unlawful by the intervention of the winding-up of the companies.

The SCA however overturned this decision on appeal. Adopting a purposive approach to the Regulations, the SCA noted its commentary in the case of South African Bank v Leathern N O and Others (2021):

“… the purpose of the regulations is three-fold. First, it is to prevent loss of foreign currency resources through the transfer abroad of financial capital assets held in South Africa. Secondly, to ensure effective control of the movement of financial and real assets into and out of South Africa; and thirdly, to avoid interference with the efficient operations of the commercial, industrial and financial system of the country.” [emphasis added]

The SCA emphasised that the “mischief” which the Regulations seek to address is “the prevention of illicit flow and influx of foreign capital from the country”, in line with section 224 of the Constitution of the Republic of South Africa, 1996. It concluded that the legislature could not have intended that the sanction imposed to address this “mischief” be rendered inoperable in the context of insolvency.

Accordingly, the SCA determined that, in terms of the Regulations, a blocking order trumps a winding-up order, that no creditor-debtor relationship arose between SARB and the companies, and that SARB could legally jump the so-called “creditor queue”.

Margot Basson