“I recently had the situation where a third party accidentally paid a sum of money into our business account. Our banker saw the amount and asked whether it could be used to settle some of our company’s debt with the bank. When informed that it was not our money, the re-transfer to the third party was arranged. However, I was wondering what would have happened if we had used the money or the bank had taken it to settle our debt with it.”

As a rule of thumb, when money is deposited into a bank account, it becomes the property of the bank, irrespective of who deposits the money, and the bank acquires a real right of ownership to the money deposited. The bank however owes the client a personal obligation to make payment of the credit balance with interest if agreed between the bank and the client.

The bank may discharge this personal obligation, owed to the client, by making payment to the client or by making payment to other persons designated by the client, or the bank can set-off a debt owed by the client to the bank. Set-off occurs when two parties are mutually indebted to each other and both parties’ debts are due and payable. Set-off operates automatically and once set-off is established, the debts are regarded as having been extinguished.

Accordingly, if a bank being entitled thereto, applies set-off against the credit reflected in a client’s bank account of a debt owing to the bank by the client, the bank is not regarded as having made a payment from the credit reflected in the client’s bank account. Rather it is seen that through the application of set-off the debt was extinguished reciprocally. 

However, it may happen that a client has no entitlement to money deposited into its account for example where money is deposited in error or stolen money is paid into the bank account of the client, or the client, a third party and the bank enter into an agreement in terms of which the bank is obliged to make payment of the credit in the client’s bank account to third party and not the client.

In these instances, the person to whom the money in fact belongs retains a claim against the bank for payment of the credit reflected as a result of the deposit made. The client into whose bank account the money was paid and appropriates such funds knowing he has no claim thereto, commits theft. 

Where an agreement exists between the bank, client and third party in terms of which the bank is obliged to make payment of funds in the client’s account to the third party, the bank can be held liable if it allowed its client to appropriate funds knowing that the client had no claim to such funds. The bank also has a duty to take steps to prevent harm to the third party through misappropriation of such funds by its client. Our courts have also confirmed that a bank cannot itself appropriate funds in a client’s bank account intended for a third party by way of set-off to discharge the client’s debt towards the bank.

You and your bank accordingly acted correctly in respect of the incorrectly paid funds.