No punches were pulled in court this week as attorneys for the Prudential Authority (PA) and Johann Kruger, the PA-appointed repayment administrator (RA), accused Ithala of operating unlawfully, comparing it to a Ponzi or pyramid scheme. Ithala’s lawyers hit back, claiming the freezing of depositors’ accounts was a calculated move to collapse the entity.
The hearing, which began on 17 March, was meant to focus on Kruger’s appeal against a November ruling by Judge Muzikawukhelwana Ncube that limited his powers. But much of the argument centred on the PA’s pending liquidation bid against Ithala.
The PA filed for Ithala’s liquidation on 16 January, leading to the freezing of about 257 000 depositors’ accounts, ostensibly to prevent a bank run. The application, initially set to be heard on 30 January, has been postponed with no new date yet set.
In court papers, the PA claims Ithala is technically and legally insolvent under section 83(3)(b) of the Banks Act because of its failure to comply with directives to repay deposits. Ithala, backed by the KwaZulu-Natal provincial government, denies being insolvent.
Read: PA report contradicts Ithala and KZN Treasury’s solvency claims
Despite being widely regarded as a bank, Ithala has never held a banking licence. It relied on a temporary exemption from the Banks Act, which lapsed in December 2023, stripping it of the legal right to accept deposits. Nonetheless, Ithala continued business as usual, ignoring an October 2024 directive from the PA to stop taking deposits and repay existing ones within 14 business days.
On 16 January, the PA filed a liquidation application against Ithala. At the same time, the RA froze all Ithala’s bank accounts held at Absa, blocking Ithala’s depositors from accessing their funds. The freeze also prevented Ithala from paying its employees’ salaries and service providers, receiving payments from its debtors, or accessing grant funding.
In the court case heard on 17 March – in addition to Kruger requesting the court to overturn Judge Ncube’s November ruling and Ithala urging the court to uphold it – the court was asked to consider the interdictory relief sought by Ithala in its application filed on 22 January 2025. Ithala seeks permission to continue operating as usual while the PA’s provisional liquidation application is pending, effectively requesting that the freeze on its accounts is lifted until the liquidation application is heard.
Judgment in this matter has been reserved.
The powers of the RA
Judge Ncube’s ruling on 13 November 2024 did not dispute Kruger’s authority as RA to “recover and take possession of all deposits”, because Ithala no longer had the legal right to conduct banking activities, including accepting deposits.
The real point of contention was Kruger’s bid to expand his powers. In his amended Notice of Motion, Kruger sought court approval to seize all Ithala’s assets, not just deposits, and to compel Ithala to disclose the whereabouts of these assets under oath.
Judge Ncube dismissed this broader claim, clarifying that Kruger’s role does not extend to managing Ithala’s day-to-day operations, provided they do not involve deposit-taking.
The judgment underscored that Kruger has no authority over Ithala’s internal functions, including human resources, treasury, marketing, and finance, nor can he remove Ithala’s authorised signatories on accounts related to these functions.
Judge Ncube also ruled that the appointment of an RA does not strip Ithala’s board of its powers and responsibilities.
However, the ruling does allow Kruger to intervene if necessary to protect Ithala’s assets. He may only interfere with the board’s powers “insofar as it is necessary to ensure that the assets of Ithala are not dissipated to prevent the repayment administrator from performing his functions in terms of section 84 of the Banks Act”.
The ruling remains stayed while judgment on Kruger’s appeal is pending.
Ithala’s argument
In its heads of argument argued in court on 17 March, Ithala asked for Judge Ncube’s November ruling to be enforced, arguing this would allow it to continue operating and engage freely with its employees, customers, service providers, debtors, and creditors “without unlawful interference by the respondents (PA, RA, and Absa)”.
Ithala claims that since Kruger filed his appeal, he has acted contrary to Judge Ncube’s order.
“The RA’s conduct will compromise Ithala’s capacity to litigate and to operate its businesses,” Ithala stated. “The effect of this will be that Ithala’s ability to contest the appeal is compromised and its businesses are destroyed before the appeal is finalised. This will render the order moot.”
Ithala accuses Kruger and PA of working “in perfect sync” to exploit a “loophole” in the ruling by using the liquidation application to justify freezing Ithala’s accounts. Ithala argues this allowed the PA to claim the RA was protecting depositors, despite the PA “creating this possible risk” by filing for liquidation.
On the issue of deposit-taking, Ithala emphasised this question is before the Supreme Court of Appeal and is not part of this application.
“Ithala merely seeks for the continued operation of Ncube J’s order and for it to be enabled to pay its staff and service providers, as allowed for by Ncube J’s order. In this regard, the bank accounts to pay employees and suppliers are unaffected by Ithala’s deposit-taking activities.”
Ithala argues the question of whether it may continue taking deposits is “irrelevant for purposes of this application and any allegations in respect thereof should be ignored”.
The PA’s argument
In the PA’s heads of argument, the Authority contends that Judge Ncube’s order allows the RA to take control of the deposits held by Ithala, “and this includes all bank accounts in which deposits, or any portions thereof, are held”. The PA asserts: “The freeze on deposits is consistent with the judgment and order of Ncube J and is not prohibited by them.”
The PA explained that the RA froze Ithala’s accounts under section 84(1A)(b) of the Banks Act, and this action, implemented by Absa, remains binding and “cannot simply be ignored and/or interdicted,” regardless of Ithala’s views on its legality, unless first reviewed and set aside – a remedy Ithala is not seeking.
The PA insists the freeze is necessary to safeguard depositor funds ahead of the possible appointment of a provisional liquidator.
“The upliftment of the freeze on Ithala’s deposits will allow Ithala and its employees to have carte blanche over deposits and undermine the statutory functions of the RA,” the PA warned. It added that unfreezing accounts could also trigger a run on deposits and allow Ithala’s staff to “cash-out whatever deposits they may have” to the detriment of other depositors.
The PA further argued that Ithala has failed to make a case for the interdictory relief sought, because it has not identified which of the frozen accounts are used for its alleged non-deposit-taking activities. The PA maintains it was Ithala’s responsibility as the applicant to specify which accounts, free of depositors’ funds, are used for paying salaries and service providers or for non-banking activities.
“Having failed to identify the latter, the PA and RA are duty-bound to act in the best interests of depositors.”
The PA dismissed Ithala’s claim that its businesses will collapse, arguing that Ithala should have anticipated this risk when its Final Exemption Notice expired.
“The liquidation of Ithala’s deposit-taking activities was envisaged in the Final Exemption Notice given to Ithala in July 2022, which lapsed on 15 December 2023,” the PA said.
“If such liquidation brings about the demise of Ithala because its other business activities are parasitic to deposit taking, that is the inevitable consequence of the lapse of the Final Exemption Notice. Ithala ought to have envisaged this once the Final Exemption Notice was issued to it and it operated under it.”
Run on the bank: will there be one, or won’t there?
Ithala, in turn, questioned Kruger’s decision to freeze its accounts, citing the risk of a bank run following the liquidation application. Ithala argues that Kruger fails to explain why filing for liquidation would trigger such a risk, especially given National Treasury and Provincial Treasury’s assurances to fully guarantee depositors’ funds.
In January, National Treasury confirmed that Ithala’s depositors would be protected by a government guarantee, “subject to the completion of necessary technical work,” which includes facilitating the transfer of depositor accounts to other banking institutions. National Treasury indicated that details on accessing the guaranteed funds would be made available after the court rules on Ithala’s liquidation.
The PA argues the court cannot rely on the guarantees because “there is no lawful and binding guarantee that has been issued by the MEC in terms of the provisions of the Borrowing Powers of the Provincial Government’s Act, 38 of 1996”.
The PA also asserts that only public statements have been made by the Minister of Finance and the provincial government, with no actual guarantees or proof provided to the court. “The court is invited to rely on public statements with no proof of the existence of actual guarantees and their terms and conditions,” the PA states.
On 4 March, KZN Treasury announced it had requested a R2.4 billion loan from National Treasury to serve as a security guarantee for Ithala’s deposits. The KZN Treasury also confirmed that it is working to secure a banking partner for Ithala’s depositors.
According to KZN Treasury, “the liquidation application becomes moot once the deposits are transferred from Ithala to a licensed bank and secured by a guarantee from the province which will be based on the loan that will have been granted to the province”.
Read: KZN Treasury’s R2.4bn loan request raises more questions than answers
Moonstone contacted National Treasury to clarify whether the loan request constituted additional security beyond the January government guarantee or whether it was part of the same arrangement, as well as to enquire about the typical turnaround time for processing a loan application of this size.
Treasury responded: “National Treasury is considering various legal options in determining the correct approach from a governance perspective to execute on providing a government guarantee.”
KwaZulu-Natal MEC for Finance, Francois Rodgers, who attended the court proceedings on 17 March, confirmed that the province’s loan application is now with National Treasury.
“We’ve drafted all the documents. They’ve gone through to National Treasury. It’s now the DG’s responsibility in National Treasury to facilitate a meeting of the Budget Council so that the terms and conditions of the guarantee or loan can be approved, and we can move forward,” Rodgers said.
He noted that Kruger told the court the PA would “back off” if a guarantee is finalised, but Rodgers expressed doubts.
Rodgers explained that negotiations with commercial banks to take over Ithala’s debtors’ book were halted last year after the RA and PA instructed the banks not to proceed.
“We were well into negotiations when they suddenly just stonewalled us and said the RA had said to them, and the PA had said, they are not to negotiate any deals with taking over Ithala’s book, so I don’t take any comfort out of what the RA said here today.”
This is very disturbing not receiving our money bcoz smone did not do their job..we are in a very difficult situation
How about our insurances and target since we saved money for school registrations and all those things, the state did not care about people from rural areas whom only use ithala as bank, we are very disappointed about the ruling party atleast if we were given option on what to do before they freeze all our hard working earning money.