What if the banks froze you out?

Earlier this month, African Global Operations, formerly known as Bosasa, confirmed that it had entered voluntary liquidation after it learnt that its bank accounts would be closed.

Read: Bosasa to cease trading as banks close accounts

This was the second major case in the past few years of banks effectively shutting down company operations by refusing to provide banking facilities. Businesses linked to the Gupta family were forced into business rescue or liquidation when local banks began to close their accounts in December 2015.

In both instances, the news was met with general approval. Bosasa and the Guptas have been so heavily implicated in corruption that shutting their businesses down seems perfectly reasonable.

But is it?

Should banks have the power to effectively and unilaterally close companies by denying them banking facilities? There is, after all, no legal process involved, and no case has been aired.

There may be few complaints when it’s Bosasa and the Guptas, but what if it were your business? Could banks just decide they no longer want to serve you?

The history

It’s worth noting that this has not just become a contentious issue in the last few years. In 2010 Standard Bank closed accounts linked to John Bredenkamp, who had been listed as a ‘specially designated national’ by the US Department of Treasury’s Office of Foreign Asset Control due to his links to former Zimbabwean president Robert Mugabe.

Bredenkamp wanted to compel the bank to keep his accounts open and argued the matter to the Supreme Court of Appeal (SCA). However the courts ruled against him.

One of the most significant parts of the SCA judgement was this:

“The fact that the appellants as business entities are entitled to banking facilities may be a commercial consideration, but it is difficult to see how someone can insist on opening a banking account with a particular bank and, if there is an account, to insist that the relationship should endure against the will, bona-fide formed, of the bank.”

In essence, while closing bank accounts may have a significant impact on a business, the relationship between a bank and any of its clients remains a contractual one. No bank is under any obligation to provide services to anybody.

It’s the same principle that applies if you ask a bank for a home loan. They don’t have to offer you one.

A contract requires consensus

Closing a bank account is therefore, in legal terms, simply the termination of a contract.

“Both parties must consent to being part of the bank-customer relationship,” explains Professor Heinrich Schulze, an expert on banking law at Unisa. “No contract can exist perpetually.”

The summary of the SCA’s decision in the Bredenkamp case was this:

“The bank had a contract, which is valid, that gave it the right to cancel. It perceived that the listing created reputational and business risks. It assessed those risks at a senior level. It came to a conclusion. It exercised its right to termination in a bona fide manner. It gave the appellants a reasonable time to take their business elsewhere. The termination did not offend any identifiable constitutional value and was not contrary to any other public policy consideration.”

These principles have applied in the subsequent cases too. It is also significant that when the Gupta-related Oakbay Investments approached not only the courts, but the Reserve Bank and the minister of finance for relief, the courts ruled that no official or body can force a bank to retain a client against its will.

Banks gone rogue

However, that does not mean that banks can close any account at any time.

“In a number of earlier court decisions dealing with the unilateral closing of bank accounts, starting with the Bredenkamp case, the courts made it clear that a bank has to provide reasons for its decisions to close an account, and that these reasons must be valid and reasonable,” says Schulze. “’Reasonable’ is a highly technical legal concept, and principles of public policy as well as constitutional rights and principles are considered.”

That means that while a bank may unilaterally close your account, it must be able to defend its decision if you take the matter to the banking ombudsman (if you are an individual or small business), or the courts (if you are someone with deep pockets, or a larger company). When the courts are approached, they have often interdicted the bank from actually closing the account until the matter is heard.

“So, yes, a bank may unilaterally close a customer’s account, but it must do so within the confines of the law,” Schulze says. “Among other things, the bank must give the customer reasonable notice of its decision, and also reasonable time to move its bank accounts elsewhere.”

Which leads to a second important consideration as to whether banks are being granted too much power: they are operating in a competitive environment. If one bank closes your account unfairly, you can go elsewhere.

“As long as South Africa has an independent banking system with banks that operate in competition with each other, market forces will prevent companies and individuals from becoming ‘unbanked’, and, as a result, forced to close,” Schulze argues. “In a market-driven environment, as is the case in most democratic societies, no bank will take the decision to close a customer’s account without first giving it its careful consideration.”

Story originally appeared on Moneyweb.