LAW OF BANKING CAT 1

LLB YEAR 3 SEMESTER 1

BY BIKU BRENDA

ID 0761-61

The Doctrine if Combination of accounts & Set off

This is an accounting situation where a banker might treat two or more accounts
between him and his customer as though they are one single account entirely under
his control. The consequence or intention is that the banker may remove assets from
one account to meet deficits on another .According to Halsbury’s Law of England vol
3[1][4th Ed] paragraph 198 “ unless precluded by an agreement or implied , from
the course of business , the banker is entitled to combine accounts kept by the
customer in his own right, even though at different branches of the same and treat
the balance if any as the only amount really sanding to his credit , but the banker
may nit arbitrarily combine a current account with a loan account.”

The relationship between a banker and a customer involves mutual obligation. The
duties and obligations are largely implied from an unwritten contract between the
banker and the customer and the special contract include the contract of a debtor and a
creditor, a contract of bailor and bailee, trustee and beneficiary.1

Two conditions warrant a combination of account,

 Where the customer is unable to pay or is unwilling to re pay an overdraft
incurred , even though the account is in credit
 When the customer draws a cheque for an amount receding the balance of
the credit of the account in the question , but the deficiency can be met
out of the funds deposited in another account.
A bank is under duty to pay on demand a cheque drawn by a customer, provided
that they are in all respects genuine and complete, provided sufficient fund s of over
1
G.P Tumwine, Essays in African Banking and Practice, [second edition, 2009 Cavendish university library.]
draft facilities are available on the customer’s accounts a general rule, a bank may
combine two or more accounts of a customer in order to pay a cheque.. And this
Amounts to a set-off.

A set off is a legal right according to which a debtor will take into account debt owing
to him by a creditor when he is required to settle the debt. In the case of obed
Tashobya V DFCU Bank ltd,2 court defined set off offset in this sense is to be
understood as the right to debit the plaintiff’s account by reason of money had been
received and not the agreement of set- off dated 27th August 2004 which is of no
legal value. Courts also stated that “basic rule is that bank may combine two current
accounts at anytime within notice to the customer even though the accounts are
indifferent branches.”

A current account is operable by cheque while a savings account is utilized in a

different way. The parties to the contractual relationship affected in respect of each
account are the customer and the bank. It therefore follows that debts accrued to the
customer are due from the bank and not from an individual branch. Equally, debts due
from the customer are recoverable by the bank and not by its branches. This is the
basis for a set-off.

This Doctrine of combination of accounts was reaffirmed in the case of National

Westminster Bank Ltd v. Halesowen Presswork and Assemblies Ltd [1972], 3 AC 785
(HL) Halesowen Assembly & Presswork’s Ltd was a small company based
in Halesowen, West Midlands. They had an account with National Westminster
Bank which in February 1968 was overdraw by £11,339. The bank was concerned,
and a meeting was held. An agreement was reached whereby the bank account (which
was to be called the "No. 1 account") would be frozen, and a new account (the "No. 2
account") would be opened. All of the company's business would go through the No.
2 account, which needed to keep in credit. The bank agreed that that arrangement
should continue for four months "in the absence of materially changed circumstances
in the meantime." On 20 May 1968 the company gave the bank notice of a meeting of
creditors to be held. The bank did not rely on that notice as constituting a material
change of circumstances within the terms of their agreement. On 12 June the company
paid into the No. 2 account a cheque for £8,611. Later that day, a resolution was
passed at the creditors' meeting for the voluntary winding up of the company.
The cheque was credited to the No. 2 account on 13 June and cleared on 14 June. In
the liquidation, the bank claimed to be entitled to set off the £8,611 against the
company's indebtedness on the No. 1 account. The liquidator did not accept that the
bank was entitled to set-off in this manner, and the liquidator (through the company)
brought an action against the bank.

2
[2007] UGCommC 45
3
[1972] AC 785
In relation to the nature of the banker's right to combine accounts, the judgments all
confirmed that this was in the nature of set-off, and not a part of the law relating to
a banker's lien. A party could not have a lien over their own property. A bank could
agree not to exercise the right to combine accounts and that agreement would be
binding upon the bank. However, that agreement was subject to termination if there
was a change of circumstances. In this case the company's creditors voting to put the
company into winding-up were such a change of circumstances.
The House of Lord held on the facts, that the defendant bank had the right to combine
the accounts both in view of the nature of the April arrangements

In application to uganda section 9 of the insolvency Act,4 state where there have
been mutual credits, mutual debts or other mutual dealings between a company or an
individual and a person who, but for the operation of this section, would seek to have
a claim admitted ,
 an account shall be taken of what is due from the one party to the other in
respect of those credits, debts or dealings,
 An amount due from one party shall be set off against any amount due from
the other party.
 Only the balance of the account may be claimed in liquidation or bankruptcy
or is payable to the company or the bankrupt’s estate.

In the case of Obed Tashobya v DFCU Bank Ltd, 5 The plaintiff brought this action
against the defendant bank seeking a declaration that he is not indebted to the
defendant and that the mortgage purportedly created over his property by the
defendant is null and void and should be removed. The plaintiff also seeks an order
that the defendant unblocks the plaintiffs account No.02L602066700 (hereinafter
referred to as “the suit account”) and refunds the plaintiff’s money drawn from his
accounts without his authority. One of the issue was Whether the defendant correctly
exercised the right of set-off of the plaintiff’s accounts; court held “unless precluded
by agreement, express or implied, from the course of business, the banker is entitled
to combine accounts kept by the customer in his own right, even though at different
branches of the same.

It is arguable that the bank should have a analogous right over a balance standing in
its books to the credit of a particular customer, provided it relied on this balance when
it granted the customer an overdraft on another account or some special business loan
therefore a bank’s right to combine the balances of all the accounts of a single
customer is best regarded as a right of set-off however An agreement not to combine
ceases to be effective as soon as the relationship of banker and customer comes to an
end according to Paget’s Law of Banking at P. 602, Para 29.16,6

4
Insolvency Act 14 of 2011.
5
(HCT-00-CC-CS 742 of 2004) [2007] UGCommC 45 (08 May 2007)
6
All Malek QC $ JOHN O, Paget’s Law of Banking, [14TH EDITION South Asian Reprint, 2015 Lexis Nexus]
The most common situation in which a bank seeks to exercise its right of set-off is
where an individual customer is adjudicated bankrupt or a corporate customer is being
wound up. In such cases, the bank’s set off is sanctioned not only by common law
principles, but also by section 9 of the Uganda Insolvency Act, 2011. Where there
have been mutual credits, mutual debts or other mutual dealings between a company
or an individual and a person who, but for the operation of this section, would seek to
have a claim admitted.
 An account shall be taken of what is due from the one party to the other in
respect of those credits, debts or dealings.
 an amount due from one party shall be set off against any amount due from the
other party;
 Only the balance of the account may be claimed in liquidation or bankruptcy
or is payable to the company or the bankrupt’s estate.
This section provides for a set-off between amounts due to the creditor from an
individual bankrupt and vice versa, provided ‘there have been mutual credits, mutual
debts or other mutual dealings’ between the two parties.

The requirement of mutuality means that the claim and cross-claim must be between
the same parties in the same right. National Westminster Bank Ltd v Halesowen
Presswork and Assemblies Ltd [1972] AC 785 (HL], Lord Simon defined the
meaning of ‘mutual’ as follows: ‘Money is paid for a special (or specific) purpose so
as to exclude mutuality of dealing within section 31 (sec. 9 Uganda Insolvency Act) if
the money is paid in such circumstances that it would be a misappropriation to use it
for any other purpose than that for which it is paid.’ In Halesowen, the dealings were
mutual, as the agreement not to combine the accounts was made for a limited period
and only in so far as the customer’s circumstances remained materially unchanged
bank, and to treat the balance, if any, as the only amount really standing to his credit,
but the banker may not arbitrarily combine a current account with a loan account.

Combination of accounts in customer’s interest, This arises where the customer in

question draws a cheque for a sum that exceeds the particular account balance against
which it is drawn, but that is less than the total amount deposited by that customer
with the bank. The bank cannot be called upon to combine accounts maintained by the
customer at different branches in order to meet a cheque that is uncovered at the
branch on which it is drawn. Bramwell B however, observed in Garnett v.
M’Kewan,7 that in practice branch managers usually has a clear picture of their
customers’ dealings with the bank as a whole and were normally aware of accounts
maintained by them with other branches

Thus, the bank is under no obligation to combine accounts in the customer’s interests
but may have the right to do so if a customer draws an excessive cheque, he may be
taken to be requesting that the amount of it be paid out of any funds deposited with

7
(1872)LR 8 Ex. 10
the bank. By effecting a set-off between the balances of the different accounts, the
bank obeys the spirit of this instruction.
Although the bank is not under a duty to effect a set-off in its customer’s interest, it
may have to do so, in the event of his bankruptcy, for the benefit of the general
creditors Court in Mutton v. Peat,8 held that A bank’s customer has a right in general
to call on the bank to combine his accounts.

A bank can combine the current accounts of a customer even though they are
maintained with different branches. Garnett v. M’Kewan [supra], the Court of
Exchequer held that, although there might be many accounts opened in a customer’s
name, there was only one contract between him and the bank. The bank was entitled
to combine these accounts for its own purposes, unless there was an agreement to
keep them separate.

There instances where the right to combine accounts cannot be carried out by banks as
illustrated In Greenwood Teale v. William, Williams, Brown & Co,9 the Senior
Partner of a firm of Solicitors opened three accounts: an office account, a deposit
account, and a private account. The bank was initially told that clients’ money would
be paid to the credit of the deposit account. This account was subsequently closed,
and thereafter both the firm’s money and clients’ funds were credited to the office
account. As the private account was overdrawn for an amount far exceeding the credit
balance of the office account, the bank resolved to combine the two accounts.
Holding that the bank had acted properly, Wright J said, that a bank had the right to
combine a customer’s separate accounts subject to three exceptions:
 The right to combine could be abrogated by a special agreement;
 The right to combine would be inapplicable where a special item of property
was remitted to the bank and appropriated for a given purpose;
 A bank could not combine a customer’s private account with one known to the
bank to be a trust account or one utilized for operations conducted by the
customer as trustee.

In an Agreement with the Bank

Where the bank has agreed to keep the accounts apart, the Bank will not exercise the
right to combine Accounts. The Privy Council in British Guiana Bank v. OR,10
suggests that an agreement that the bank keep two accounts separate is usually
determined if there are changed circumstances, such as the customer’s insolvency. As
the accounts are no longer ‘current’ the bank is entitled to revert to its original
position.
In National Westminster Bank Ltd v. Halesowen Presswork and Assemblies Ltd
[1972] AC 785 (HL), it was held that a resolution to wind up the customer constituted
8
[1900]2 Ch. 79).
9
(1894)11 TLR 56
10
(1911)104 LT 754 (PC)
a material change of circumstances, and that the bank’s right to combine revived
forthwith. Their Lordships were unanimous in holding that the words of the
agreement for the opening of the working account in Halesowen made it clear that the
arrangement would come to an end if there were materially altered circumstances. At
Pg. 34 of that case Lord Denning posed a question as to whether a banker has
a right to combine two accounts so that he can set off the debit against the credit and
be liable only for the balance, and gave the following answer, “The answer to this
question is: Yes, the banker has a right to combine the two accounts whenever he
pleases, and to set one against the other, unless he has made some agreement, express
or implied, to keep them separate…” hence in an express Agreement not to combine
banks cannot combine accounts

As to whether banker can exercise the right of set-off where the accounts are
maintained in different currencies, Paget (at P. 608) [supra] states that, this is
an aspect of the right which, if disputed, would require to be proved by evidence of
usage; that otherwise, the existence of accounts in different currencies may be
evidence of an implied agreement not to combine
 
Where there various different accounts forexample a loan account and current
account

Where an account is designated as several accounts with one being a lone account and
another current account, Banks cannot combine the account. In Re E.J. Morel,11
Buckley J stated, there is an important difference between a case where a customer
has several current accounts, a case where a customer has an account which is not a
current account, and one or more current accounts in the bank. In the first case where
all the accounts are current, the banker can combine those accounts in whatever way
he chooses, treating them all as being one account of his relationship with his
customer. In the other case the accounts are of a different character, and the banker is
not free to combine them in that way.

Loan accounts are not to be combined with other current accounts. In Bradford Old
Bank v. Sutcliffe,12 Pickford LJ held that the fact that one of the accounts was
designated a loan account clearly showed ‘that the accounts were to be kept distinct
by arrangement’ between the customer and the bank.

Where the account has been an appropriated for a special or specific purpose

Where a given sum or item has been appropriated for a specific purpose and the bank
knows that, the right of set-off cannot be exercised in respect of it .

11
1934) Ltd [1962] Ch. 21:
12
[1918]2KB 833 (CA),
In Barclays Bank Ltd v. Quist close Investments Ltd ,13 Rolls Razor Ltd owed
£484,000 to Barclays Bank Ltd. It still needed more money to pay a dividend, which it
had declared to its shareholders on 2 July 1964. Quistclose Investments Ltd agreed to
a loan of £209,719 8s 6d on the conditions that the dividend would be paid with it and
the money would be put in a separate account (also with Barclays Bank). The money
was paid into the account, but before the dividend was distributed, Rolls Razor Ltd
went into voluntary liquidation. Quistclose sought to recover the money, contending
that its agreement meant Rolls Razor Ltd held the money on trust. Barclays contended
that the account was part of the general assets of the company and that it was entitled
to exercise a set-off of the money in the account against the debts that Rolls Razor
owed with respect of Barclays….

The House of Lords (with the leading judgment being given by Lord Wilberforce)
unanimously held that the money was held by Rolls Razor on trust for the payment of
the dividends; that purpose having failed, the money was held on trust for Quistclose
Barclays, having notice of the trust, could not retain the money as against Quistclose.
Hence this money in the account was for a specific purpose although the purpose
failed, the money was held on trust for quist close hence Barclay bank could not set it
off with other assets.

When the account is being held on trust for another party.

where the bank knows that the account in credit is a trust account, the bank does not
enjoy the right to combine a customer’s accounts is The bank cannot set off against
the customer’s personal debt an amount that is due – either legally or beneficially – to
a third party, such as the beneficiary of a trust.

In Union Bank of Australia v. Murray-Aynsley [1898]AC 693 (PC), a Corporation

maintained three accounts with its bank: a general account; a stock account; and an
“account no. 3’ used for investments made by the corporation in the administration of
a certain estate. The ledger of the ‘account no.3’, though, made no reference to the
estate’s interest. When the corporation had to be wound up, the bank sought to
combine all three accounts. Dismissing the liquidator’s objection, Lord Watson said
that there was no evidence to show that the bank had been aware of the true nature of
the ‘account no.3’. Unless the bank knew that the account was the subject of a trust, it
retained the right of set-off in respect of the balance standing to its credit.

In Conclusion, under the doctrine of combination of accounts, Banks have the right to
combine an account of a creditor because there is a banker customer contract between
them , firstly in instance to pay debt or an overdraft or a credit the customer is liable
to pay and then secondly when the customer draws a cheque for an amount receding
the balance of the credit of the account how ever in some instances court can’t
exercise third right due to an agreement between the Bank and the customer to not
13
[1970]AC 567 (HL).
combine, a customer holding to different accounts and lastly an account being held on
trust as discussed above.

BIBILIOGRAPHY.

LAWS
Halsbury’s Law of England vol 3[1] [4th Ed] paragraph 198
Insolvency Act 14 of 2011

CASE LAW
Tashobya V DFCU Bank ltd [2007] UGCommC 45
National Westminster Bank Ltd v. Halesowen Presswork and Assemblies Ltd
[1972],14 AC 785
Garnett v. M’Kewan 1872) LR 8 Ex. 10
Mutton v. Peat,15 [1900]2 Ch. 79
Teal v. William, Williams, Brown & 1894)11 TLR 56
British Guiana Bank v. OR (1911)104 LT 754 (PC)
Re E.J. Morel 1934) Ltd [1962] Ch. 21:
Bank v. Sutcliffe [1918]2KB 833 (CA),
Union Bank of Australia v. Murray-Aynsley [1898] AC 693 (PC

SECONDARY SOURCES OF LAW

G.P Tumwine, Essays in African Banking and Practice, second edition, 2009
Cavendish university library
All Malek QC $ JOHN O, Paget’s Law of Banking, [14TH EDITION South Asian
Reprint, 2015 Lexis Nexus

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