UNIT FIVE
OTHER ASPECTS OF
BANKING SERVICE
LIEN
The
banker has certain rights. One of such rights is the right of lien. Lien is the
right to keep in one’s possession the property belonging to another person till
he repays his dues. The right of lien means the right to retain. The right of
lien itself does not permit the right to sell. The right of lien exists as long
as one has in his possession. Once the possession is not with the person, then
the right of lien cannot be exercised. Lien is available without any specific
agreement and in effect is a statutory right.
Lien
is generally classified into two types: General and Particular. The banker has
a general lien on all the deposits of customers. While the banker has a general
lien on all deposits, if the deposit is given as a security for raising a loan
or discharging an obligation, then the lien on the said deposit, the particular
lien, exists till the debt is cleared or the obligation is fulfilled.
E.g.
A depositor approaches his bank for a loan against his fixed deposit for GH¢
10,000. When the said deposit is taken as security and a loan is granted under
pledge, the bank registers his lien on the deposit receipt and makes a note of
this on the ledger or computer system for that particular deposit. This is
known as particular lien. Here, it is noted for a specific performance, i.e.
repaying the loan on the security of the said deposit. If the depositor repays
the loan, then the particular lien will be lifted / cancelled. Lekshmy & KC Shekhar (2007)
General
lien covers the entire amount due from the debtor. As per Sec. 171 of the
Contract Act, “The bankers, factors, attorneys of High Court and policy brokers
may, in the absence of any contract to the contrary, retain as security for
general balance of account, any goods bailed to them, but no other persons have
a right to retain as a security for such balance of goods bailed to them,
unless there is an express contract to that effect.”
Hence,
the banker has a general lien under the following circumstances:
a)
When
the banker receives goods and securities
b)
He
has received them for a purpose
c)
There
is no contract to the contrary
d)
Lien
covers items which belong to the person who gives it to the banker
e)
When
the debt is not barred by limitation.
The
banker’s lien is an implied pledge. That means that the banker has the right to
retain and if need be, also sell the goods / securities charged to him as the
creditor. In the event of the debt not being cleared he gets the right to sell
those goods which came into his possession as a banker in the ordinary course
of banking business.
The
banker can exercise his right of lien in the following cases:
a)
On
goods / securities pledged to him on which he has a lien. He can sell them to
adjust the liability of the debtor.
b)
Under
Sec. 171, in addition to factors, wharfingers, attorneys of High Court and
policy brokers, bankers can also exercise lien.
c)
On
the goods of the customer only.
d)
For
a joint account of the debtor, right of lien is not applicable unless otherwise
agreed upon by the joint account holders.
SET-OFF
OR ADJUSTMENT
During the course of business, the banker
plays the role of debtor (deposits) and creditor (advances). While he has the right of general
lien on all deposits, the banker is also entitled to use the right of set-off. Set-off means
adjustment.
When the same person (customer) is the
debtor and creditor, then the right to set-off is possible. When a customer has
credit balance in one account and the other account is showing a debit balance,
then the banker can adjust the credit balance for the amount due to the bank
and arrive at the net amount due to the customer. Combining the two accounts
and arriving at the set-off position is
a right available to the banker.
The following are the features related to the
set-off:
a)
The
right to set-off is a statutory right. It is not applicable to contingent
liabilities. The liability has to be certain.
b)
The
liabilities are due and the payment is arrived at.
c)
The
customer has to have the credit and debit balance in the same capacity.
d)
The
banker has to give prior information about his intention to exercise the right
of set-off.
e)
The
set-off is applicable to those debts which have become due and the creditor has
the right to recover the same at the time of using the right of set-off.
f)
For
time-barred debt also, the right of set-off is applicable.
-
.
.
APPROPRIATION
The
banker comes across situations where he has to follow set principles or
practices to safeguard the interest of all concerned. One such principle is
known as the “Clayton’s case”. This deals with the “appropriation of payments”.
When
an individual account holder dies, then the balance in his deposit account is
settled in favour of the nominee (if the account holder has named a nominee). In
the absence of a nominee, the money will be remitted in favour of the legal
heirs. In case there is no nomination and if there is a will, it will be dealt
with according to the contents of the will.
However,
for partnership firm, the same comes to an end (dissolved) on the death,
insolvency, insanity, retirement of a partner(s) or if the provisions of the
partnership permit the account to continue even after the above mentioned
events.
In
case the account has to be closed in view of one of the above events, then the
credit balance lying in the partnership firm has to be paid to the remaining or
existing partners. The amount so paid will serve the purpose of valid payment.
It is advisable to close the old account and open a fresh account, even if the
partnership deed allows for continuance.
If
the partnership account shows a debit balance at the time of death, insanity,
insolvency or retirement of a partner, then further operations in the
partnership firm’s account are to be stopped forthwith. This is required to
preserve the bank’s right to proceed against the estate of the deceased partner
or if the bank fails to stop operations, then the rule in Clayton’s case will
take over.
Application
of Clayton’s case of appropriation of payments is as follows:
1.
A debtor who has a number of debt accounts has the first right to choose to
which account the payment has to be appropriated (credited). He has to clearly
mention his intention at the time of payment; otherwise the right of appropriation
will pass on to the creditor. In fact, the debtor has got the right to indicate
his intention that the amount may be credited even to his deposit accounts. As required by the debtor, the
banker has to carry out the instructions of the debtor.
Example:
Mr. Appiah, a borrower, wished to remit a
sum of GH¢ 10,000 towards his personal loan liability (whereas he has an
overdue liability in his home loan, vehicle loan, besides temporary overdraft in the current account). The banker
has to appropriate the amount ¢10,000 to the personal loan account only and not
otherwise, since Appiah has indicated his intention clearly at the time of the
payment itself.
2.
If the debtor has not indicated his intention at the time of payment, then the
creditor has the right to adjust or appropriate the funds so received.
According to his convenience and the manner in which he feels is appropriate,
he may adjust the payment so received. Once the creditor has informed the
debtor about the appropriation, it is binding on both the parties. The same may
be altered on the option of the creditor only.
3. In
case of running accounts like the current account, the account first paid in
is appropriated (adjusted ) towards the
amount first paid out, i.e. first item of the debit side of the account
that is discharged.
4.
In case of debit balance, the credits in the said account will be appropriated
towards the debit in the chronological order in which they appear in the
account. In order to retain or preserve the right of the bank against the
estate of a deceased person/partner, it is
required that the banker, on receipt of such information or announcement
should stop the operations and rule off the account (when the same shows a
debit balance).Such an action on the part of the banker will save the banker’s interest.
GARNISHEE ORDER
By
approaching a competent court, a creditor may seek prevention of payment to his
debtor. This is the essence of the garnishee order. The banker, in the ordinary
course of business, opens accounts for his depositors. He also lends money to
his borrowers. The banker has to repay the same either on demand
(savings/current, or overdue matured) or on the due date or before the due
dates in respect of term/time deposits. In such cases, the banker is the debtor
and the customer is the creditor. There is a possibility that the said
depositor may be a borrower of some other banker. This depositor may owe money
to that banker. Since the right of set-off between two banks is not possible,
the only way to get the money from the other bank is to seek the intervention of
a competent court. By applying to the court, the creditor banker requests the
court to direct the debtor banker Not to make the payment of the money
deposited with him to his depositor but, instead, to make the payment to him
(as the borrower’s banker). Lekshmy
& KC Shekhar (2007)
This
process is done through a garnishee order. The garnishee order is applicable
for the attachment of debts which are actually due from the garnishee. The
order’s receipt date is important to arrive at the position of the debt as well
as other details. The debt may be payable on the date of the order or may be
due for payment at a future date. However, the date of receipt of order will
determine the amount(s) attachable. The demand deposit balances such as savings
bank account balance or current account balance or the matured term deposits
(overdue) are attachable. Term deposits which mature at a future date are also
attachable.
E.g. Mr. Opoku, a customer of
GCB, has a savings bank A/c no.377 with a balance of GH¢ 22.345 and a fixed
deposit (FDR no. 22/2005) opened on 30/5/05 for GH¢ 45,000 due on 30/5/2007.
Opoku has taken a loan for GH¢ 50,000 from SG-SSB and the liability is GH¢
64,895 with interest. Since the banks are different, the right of set-off is
not applicable.
If SG-SSB (creditor bank)
requests the court to issue a garnishee order on the GCB directing them not to
pay the amount due to Mr. Opoku (judgment debtor) but to remit the same to them
(SG-SSB), the savings bank account balance as well as the balance of fixed
deposit are attached by the garnishee order. Although the fixed deposit amount
is due on 30/5/2007 (since the deposit has been existing on the date of receipt
of the order by the garnishee bank) it is also attachable.
A garnishee order has two
parts. Once the court is satisfied about the claim of the creditor bank, it
will issue a direction to the judgment debtor’s bank calling for the details
about the accounts due from him to the judgment debtor. The first part of the
garnishee order is called order NISI.
The
second and final part is called order Absolute. Through order nisi, the court
directs the judgment debtor’s bank.
1)
To
freeze or stop all the transactions of the debtor.
2)
To
explain why funds in the debtor’s account should not be paid to the judgment
creditor towards the money owed by the judgment debtor to the judgment
creditor.
Once
the order nisi is received, the bank has to stop payment of cheque(s) and send
its explanation to the court. On receipt of the order, the bank has to record
the time and date of receipt of the order, the bank has to record the time and
date of receipt. A copy of the order has to be served on the time of judgment
debtor or the garnishee (bank). If at the time of receipt of such an order
(order NISI), any amount is due to them, the same may be recovered and the
balance amount may be intimated to the court. In case the customer owes some
amount and does not have any deposit, then the garnishee order is not
applicable. This is because the said bank itself is the creditor and not the
debtor.
If
the bank does not furnish sufficient cause or the bank replies to the order
nisi, the court will issue a final order known as order absolute. Through the
absolute order, the court may direct the bank to pay the entire or portion of
the amount in the account. Once the payment is made as per the directions of
the court, the bank may allow further withdrawals. However, the bank which
received the garnishee order nisi should not part with the funds of the
customer until the order is made absolute. Since the garnishee order attaches
the money due and accruing due, it is advisable to open a separate account or
new accounts for further operations. In the event of any cheque received for
payment, the same has to be paid only if there is sufficient balance in the
account after satisfying the court order or remitting the garnishee amount. The
payment so made at the direction of the competent court will serve as a
discharge of his liability to the customer.
This
means that had there not been a garnishee order, in the ordinary course of
business, a banker would be paying to his customer or as per his direction, his
deposit money and thereby it gets the discharge of his liability. In view of
the garnishee order, the banker makes the payment of the customer’s deposit
money to the court, and automatically gets discharged of its liability to his
depositor. Lekshmy & KC Shekhar
(2007)
ATTACHMENT ORDERS
Bankers receive not only
garnishee order, but also attachment orders issued by Government departments
for their dues to be received from the bank’s customers. The bank has to
understand the contents of such attachment order, when received, and act
accordingly. The income tax department based on the rights conferred on them
may send attachment order advising the bank to pay the amount. They can attach
any debt or amount.
a)
due
and payable
b)
due
and not payable
c)
received
subsequently.
If
the attachment order is for the amount lying in a joint account, but on account
of one of the joint account holders then also the attachment order is
applicable. Accordingly, 50% is considered as the money due to one of them (in
the case of 2 persons holing the joint account and the order is received for
one of them). Accordingly, the bank has to effect the order. The request of the
customer(s) not to effect the payment should not be considered nor recognized.
Reference
Anim-Addo SK- Principles of Banking Laws 3rd
ed (2007), Chartered Institute of Bankers, Accra
Lekshmy & KC Shekhar - Banking Theory and
Practice (19th ed.) 2007) VIKAS Publishing House, New Delhi
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