Judgment was delivered on 6 March 2013 in the North Gauteng High Court in the matter between Kirsten and Thomson CC t/a Nashua East London v The Commissioner of the South African Revenue Service.

Fabricius J wrote an eloquent judgment dealing with the plaintiff's claim based on unjust enrichment against the South African Revenue Service (SARS). The case is interesting as it illustrates how making payment to SARS by cheque can go wrong, and how suing the wrong party can double up on your problems. The judgment also has a detailed exposition of the law on payments of cheques and unjust enrichment.

The plaintiff delivered a cheque to its bankers, being First National Bank (FNB) East London. The cheque was post-dated 25 April 2007, crossed, marked 'Not Transferable' and payable to SARS in the amount of R432,000. The cheque was hand delivered on behalf of the plaintiff and received by a SARS receptionist who signed as 'Nox' but whose full and further particulars are unknown. The cheque had been issued to discharge the plaintiff's liability to pay Value-added Tax (VAT) for February and March 2007. The plaintiff was therefore under the impression that it had discharged its obligations to SARS for the payment of said VAT.

In May 2007 the plaintiff, in the bona fide and reasonable belief that it was obliged to do so, made out a second cheque to SARS in the amount of R432,000, which cheque was paid to SARS. The plaintiff subsequently alleged that this second payment constituted a duplication of the first payment for which it was not liable in law. It thus sought to recover the first amount of R432,000 on the basis that it had been impoverished and that SARS had been unjustly enriched.

SARS denied that delivery of the first cheque discharged the plaintiff's obligation to pay the relevant VAT. SARS pleaded that the first cheque had not been collected by the ostensible collecting bank, namely Absa, that it had not been paid by FNB and that SARS had not received the proceeds of the first cheque. Accordingly SARS had not been paid in fact and in law. It did admit that the plaintiff had paid the outstanding VAT by means of the second cheque. It was clear that there was proper cause for this payment as it discharged the plaintiff's indebtedness to SARS in respect of the VAT. SARS pleaded that there had been no first payment as alleged by the plaintiff, and that there was no second payment, because there was only one payment – the payment by means of the second cheque on 18 May 2007. Accordingly SARS had not been enriched at all, and furthermore pleaded that the plaintiff had not been impoverished inasmuch as FNB had no right to debit the plaintiff's account with the amount of the first cheque.

The plaintiff sought to rely on s79 of the Bills of Exchange Act, No 34 of 1964, and argued that payment by cheque is prima facie regarded as immediate payment subject to a condition. The question was whether the cheque had been honoured on presentation, and not on the process by which this had occurred. The plaintiff's argument was that the unjustified enrichment of SARS arose on the payment of the second cheque. The plaintiff called a witness, a Mr Ries, from FNB. He conceded that there was a discrepancy between the date of the cheque and the date of the stamp appearing thereon. Accordingly they argued that in the absence of any evidence suggesting the payment in these circumstances would have constituted negligence on the part of the drawee bank (FNB) the plaintiff had established its entitlement to rely on the provisions of s79.

SARS's argument was that the plaintiff had tried to rely on s79 and utilise it in two ways – to use the section to prove its own impoverishment. It had accordingly contended that FNB had debited its account with the amount of the first cheque in circumstances covered by the section. In the second place it had used the section as proof of a deemed enrichment on the part of SARS. SARS's counsel argued that the primary role of s79 is to regulate the contractual relationship between the drawer and the drawee bank where a crossed cheque is lost or stolen and collected by another bank. If a cheque is collected by a bank other than the drawee, the drawee bank has no means of establishing for whom the cheque was collected. The consequence of this is that the errant collection of a cheque (for someone other than the named payee) is a matter for which only the collecting bank can be answerable. Secondly, the drawee bank must nevertheless remain vigilant. SARS's counsel, Mr Louw SC, argued that the plaintiff was trying to transport the principles of delict applying to a collecting bank acting negligently into the realm of enrichment liability.

When the court analysed the question of the first cheque, the case became more complex. The original cheque had not been deposited by SARS and had probably been stolen by a person unknown to the plaintiff or to SARS. It appeared that a cloned cheque had been submitted and that the payee's name had been changed from SARS to Bihlongwa Construction CC. The plaintiff's authorised signatures were on the original cheque, with the name of the payee possibly the only difference between the original and the cloned cheque.

From the evidence given by an Absa teller in the matter, the probabilities were overwhelming that a cloned cheque had been created with Bihlongwa Construction CC as payee but with all of the other information on the original cheque remaining the same. Mr Louw informed the court that an amount of some R85 million had been involved in this scam. It appeared that the cheque had been deposited at Absa's Atteridgeville branch on 30 April 2007 crediting Bihlongwa Construction CC. In Mr Ries' testimony, it appears that Absa would have forwarded the cloned cheque to FNB for presentment and payment through the interbank collection process. However before the cloned cheque could reach FNB, it was probably removed from the cheque collection process and the original cheque substituted. The judge asked how else the original cheque would have come into the possession of the plaintiff and that the genuine cheque was then physically received by FNB on 30 April 2007. The genuine cheque was consequently paid, from FNB’s point of view.

Mr Louw submitted that the probabilities were overwhelming that the teller at the Atteridgeville branch who took in the deposit slip with the cloned cheque did not act negligently. It thus did not matter who the true owner of the cheque was - the plaintiff or SARS - as neither would have had a viable delictual claim against Absa as the collecting bank. Absa simply did not deal with the lost or stolen first original cheque.

Mr Louw subsequently put it to the plaintiff that he should have taken action against FNB as the incongruent dates on the cheque should have raised queries. That is the cheque was dated 25 April 2007, the collecting bank's stamp was 20 April 2007 and that it had been presented for payment on 30 April 2007. Counsel for SARS argued that FNB was not entitled to the protection of s79, and so was not entitled to debit the plaintiff's account, in which case the plaintiff had not suffered any loss or prejudice. This went to the key element that the plaintiff had not been impoverished for the purposes of enrichment liability. As FNB was not joined in the matter, it was not for the judge to make a finding on this point. The judge did however find that on the objective evidence that Absa had collected payment of one document and FNB had paid another document did not constitute payment in our law.

The Court quoted the case of McCarthy Ltd v Absa Bank 2010 (2) SA 321 at paragraph 20 where it was held that the collection and payment functions of a cheque are the two sides of the same coin. There cannot be payment unless there is collection. Where there are two documents, a fraudulent document and a genuine cheque, what is paid is not what is collected. The Bills of Exchange Act did not contemplate a situation where a cheque is cloned so that there were two documents in the same context.

On behalf of SARS, Mr Louw concluded that there was no payment in due course of the original cheque. This meant that the tax debt owing by the plaintiff to SARS had not been discharged. FNB did not pay the instrument which was collected by Absa and as a result the precondition for FNB to debit the account of the plaintiff with the amount of the cheque was not present. Accordingly when the judge looked at the question of liability under the principles of unjust enrichment, impoverishment had not been established on the facts of the case. With regard to enrichment, SARS had not received payment of the first cheque and accordingly it could not have cleared the plaintiff's VAT liability. The plaintiff had to either prove that SARS had received the payment of the first cheque or that it had an undefeatable claim against Absa for the value of this original cheque.

When the court looked at the question of the cause for paying, SARS clearly had a reason to retain payment of the second cheque. If it did not do so it would violate its statutory obligation to collect the VAT. Accordingly the second payment clearly had a proper cause. The plaintiff testified that he had made the second payment because he did not wish to incur penalties and because he required a tax clearance certificate for the purposes of his business. He alleged that SARS had exerted duress on him. The court found that the plaintiff could not have made the second payment in error when it was actually due as a matter of fact and law. The payment was made as a deliberate act for sound business reasons, and because of the law, it was done without duress. Accordingly, the plaintiff’s claim was dismissed.

It is important for taxpayers to realise that payment by cheque is inherently risky. If a taxpayer pays SARS by cheque, and SARS loses the cheque (or someone at SARS steals the cheque), the taxpayer's tax liability may very well not be discharged, despite the fact that the cheque is cloned and presented for payment at a bank by a fraudster. To recover any monies lost in respect of such fraud, it is essential to carefully analyse the facts and the law and institute a claim against the correct party and on the correct basis.

Written by Alastair Morphet, Director, Tax, Cliffe Dekker Hofmeyr