Legal consequences of a forfeiture order issued in terms of Regulation 22B after the winding-up of a company.

Feb 10, 2023 | News

Decidedly, the Supreme Court of Appeal (SCA) in South African Reserve Bank and Another v Maddocks N O and Another [2023] ZASCA 04 (23 January 2023), has cleared the confusion regarding the legal consequences of a forfeiture order issued in terms of Regulation 22B of the Exchange Control Regulations (Regulations). The Regulations are ancillary to section 9 of the Currency and Exchanges Act 9 of 1933 (Act). Significantly, the SCA has made it clear that, subsequent liquidation of a company does not nullify a prior blocking order in respect of company’s assets issued in terms of Regulation 22A and/or 22C.  Moreover, the issuance of the blocking order and forfeiture order does not render the South African Reserve Bank (Reserve Bank) a creditor of the insolvent company.

This case concerns the legal consequences of three forfeiture orders issued by the Reserve Bank, wherein it declared forfeited to the State monies standing to the credit of Sun Candle Products (Pty) Limited and Xinming Mountain Textile (Pty) Limited in various South African banks. The Reserve Bank ordered that the monies be paid into the National Revenue Fund. The forfeiture orders were made before the liquidation of these two companies. The accounts were blocked on reasonable suspicion that the companies had in contravention of the Regulations, exported from South Africa large sums of monies without the permission of the National Treasury, and made payments for imported goods without submitting proof of importation of goods to the authorised dealer.

The liquidators of the companies demanded that the forfeited monies be paid to them so that they can be administered in terms of the insolvency laws. The focal point of the liquidator’s case was that, soon after the commencement of the winding-up, the Reserve Bank was debarred from exercising its power under Regulation 22B to order forfeiture of the assets in question. The premise for this contention was that the Reserve Bank, after issuing the blocking orders in respect of the monies standing to the credit of the companies, became their creditor. As such, it was required to participate in the concurus creditorum.

The Reserve Bank refused to accede to the demand contending that the forfeiture orders were validly made pursuant to blocking orders made prior to the liquidation of the companies. The liquidators then approached the High Court for an order declaring the forfeiture orders null and void and directing the National Revenue Fund to pay the forfeited monies into the liquidator’s bank account. The liquidators were successful in the High Court.

The SCA overturned the decision of the High Court. The court remarked that the purpose of the Regulations is three-fold.

  1. Firstly, 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.
  • Thirdly, to avoid interference with the efficient operations of the commercial, industrial, and financial system of the country.

In addition, the court remarked that, the context within which the purpose of the Regulations must be considered is the mischief at which the Regulations are aimed at, namely, the prevention of illicit flow and influx of foreign capital from the country.

Ultimately, the SCA held that, “If a forfeiture order is terminated by the grant of a subsequent winding-up order, the forfeiture of the assets used in the contravention of the Regulations might never be realized, and the effect would be that the assets which legitimately ought to be forfeited to the State in terms of the Regulations, would vest in the insolvent estate and be subject to distribution by the liquidators. Therefore, it would defeat the entire purpose of a blocking order if a forfeiture order made pursuant to the blocking order, fell away upon the winding-up of the companies.”

The SCA has made it clear that, the winding up of a company, cannot retrospectively thwart the legal effect of blocking orders. The judgement is significant in the sense that it ensures that the legal consequences of a duly issued forfeiture order cannot be circumvented. If the SCA had accepted the preposition that the forfeited funds should vest into the insolvent estate, and thus be subject to distribution by liquidators, it would have opened a door for the abuse of winding-up process by certain companies, with intent to outmanoeuvre the legal consequences of forfeiture orders. In the sense that, some companies could simply commence winding-up proceedings to defeat the purpose of the forfeiture orders. The judgement maintains the sanctity of forfeiture orders as a sanction which is directed at protecting the currency and the economy. As such, it cannot be lost by operation of the law of insolvency.

Article by Sive Dukada, Candidate Attorney, Fairbridges Wertheim Becker