COMBINING ACCOUNTS

Presented by:
Ayebare John Vianny
David Baryehuki Mwesigye

Overview:
- Introduction
- Legal meaning of combining accounts
- When accounts could be combined
- Combining accounts and insolvency
- Combination of accounts in customers’ interests.
Introduction
The relationship between the banker and customer involves mutual
obligations and duties. The duties and obligations are largely implied
from unwritten contract between the parties. The contractual relationship
was summarized by Paget in his book, Paget’s law of Banking, 8th Edn
and in Sudan Commercial Bank v El Sadiq Mohammed El Sadiq,
1967(1) A.L.R.Com 35, Woods v Martins Bank Ltd (1959) 1 Q.B.
55…..(p124). It is a contract which is undefined and unwritten by the
parties. It is only implied. In other words it is a quasi-contract. The
contents of the contract cannot be stated with certainty and may contain
elements which may not be in the contemplation of the customer
according to Paget (supra). But he doubted whether the reverse applied
because the banker must be presumed to be aware of obligations
imposed on it in its own business. Can it be said then, that one of the
terms of this unwritten contract, which may not be in the contemplation
of the customer, is that the banker has an automatic right to combine or
consolidate its customers’ accounts? Is there an obligation on the
banker to keep its customers’ accounts separate?
Lord Denning has given an emphatic positive answer to the first
question and therefore by implication a negative one to the second
question, in Halesowen Presswork and Assemblies Ltd v Westminster
Bank Ltd (1970) 3 W.L.R. 625.

Brief Facts:
The Plaintiff company had an account with the defendant bank which was
overdrawn. The Bank informed the company that such an account was
unacceptable. So the company agreed with the bank to open account
number two which would be kept in credit balance such that the company is
sold as a going concern. However, the company letter invited the meeting
of the creditors who consequently resolved to wind up the company. But
before the winding up, the bank received a cheque which was paid to the
second account of the company. The liquidator brought a suit contending
that the company was not in any better position than other creditors, and
thus could not use the credit on the second account to cover part of the
overdraft.
Held: Lord Denning said that suppose a customer has one account in
credit and another in debt, does the banker have the right to combine
accounts so that he can set-off the debt against the credit and be liable
only for the balance? The answer to this question is, yes. The banker has
a right to combine the two accounts whenever it pleases and to set-off
one against the other unless it has made some agreement, express or
implied, to keep them separate.
However, Swift J. in Greenhalgh v Union Bank of Manchester (1924)
2 K.B. 153,
Brief facts:
The Plaintiffs who were cotton brokers sold to Winson and Company, who
were cotton merchants in Manchester, cotton to be in turn sold to certain
firms of spinners, and received bills from them in payment. Winson and
Company then paid the bills into the defendant bank. The plaintiff alleged
that the bills had been specifically appropriated to meet their own bills
which Winson and Company had accepted from them. The bank denied
that such communication had been made and that indeed, on maturity, the
proceeds were paid to Winsons Account and were swallowed by an
existing overdraft.
Held:
Swift J. took the opposite view stating that if a banker agrees with its
customer to open two or more accounts, it has not, without the assent of
customer, any right to move either assets or liabilities from the one to the
other, the very basis of its agreement with its customer is that the
account shall be kept separate.
According to the Halsbury’s Laws of England, 3rd Edn, Vol 2; Under
the heading –Combining different Accounts-the authors state that
unless precluded by agreement express or implied from the course of
business the banker is entitled to combine different accounts kept by the
customer in his own right, even though at different branches of the same
bank and to treat the balance as the only amount really standing to his
or her, if any, credit. Under the heading Set-off or lien on Deposit and
Current Accounts, the authors say that unless precluded by agreement or
course of business, a banker is entitled to combine all accounts kept in
the same right by the customer whether at the same branch or different
branches and to exercises its lien or set or set-off for the resulting
balances.

Legal meaning of Combining Accounts

Combining accounts was defined Backley L.J., in Halesowen Presswork
and Assemblies Ltd v Westminster Bank Ltd “It is an accounting
situation in which the existence and amount of one party’s liability to
another can be ascertained by discovering the ultimate balance on their
mutual dealings”. The use of the phrase ‘mutual dealings’ which
belongs to the law of bankruptcy, might cause confusion by equating
combining accounts with set-off, therefore, combining or consolidating
accounts ought to be limited to an accounting situation whereby a
banker might treat two or more accounts opened between its customer
and itself as though which it might remove assets from one account to
meet deficiencies in the other.
It must be emphasized, however, that the general contract between a
banker and customer is implied. It follows that its terms are also largely
from trade usage or custom if they have not been expressly or impliedly
excluded by a written contract. A trade usage, in this case bank custom,
is a particular course of dealing between parties who are in a business
relationship. That course of dealing has to be so generally known to all
persons who intend to adopt that course of dealing and to have
incorporated into their contractual relationship unless by agreement it is
expressly or impliedly excluded.
Therefore, before one can say that the bank has a right to combine
accounts, it must be proved that the customer or banker recognizes such
custom unless expressly or impliedly excluded. It is submitted that the
same results would be achieved if it could prove that the bankers custom
placed no obligation or duty on the banker to keep its customer’s
accounts separate.
Lord Chorley is of the view that prima facie, the bank has a right to
combine according to Halsbury’s Laws of England p.172 para 322.
He says that in the absence of express or implied agreement to the
contrary the banker is entitled to combine different accounts kept by the
customer. Sheldon in Sheldon’s Practice and Law of Banking, says
that a banker apart from an express or implied agreement to the contrary,
may combine accounts and as it might be difficult to prove that there
was no implied agreement to keep the accounts separate, it is advisable
for the banker to take an agreement authorizing him or her to combine
any time without notice. However, Paget leaves the question open and
he says that whether there is an agreement or obligation to keep the
account separate is a matter of evidence. In the absence of evidence to
the contrary, the right to combine without notice should be insisted upon
for the necessity for combining derives from some act or omission on
the part of the customer. He further states that a customer may insist on
his account being kept separate and can hardly complain if he or she
fails to exercise the right and the banker combines because the matter is
essentially within the customer’s control.
Lord Cross, in Westminster Bank Limited v Halesowen Presswork
and Assemblies Ltd p 467-8 said that if the banker permits its customer
to have two accounts one sometimes called the loan account which
records the indebtedness of the customer to the banker in respect of
advances made to him or her and the other a current account which the
customer keeps in credit and uses for the purposes of his or her trade or
business or ordinary expenses then unless the bank makes it clear to the
customer that it is retaining the right any moment to apply the credit on
current account in reduction of the debt on the loan account, it will be an
implied term of the arrangement that the bank will not as long as it lasts
consolidate the two accounts. However Lord Denning’s statement in
Halesowen Presswork and Assemblies Ltd v Westminster Bank Ltd
at page 635 that there must be an agreement to keep the accounts
separate and that the mere opening of the accounts does not do it, is
widely stated.

When Accounts could be combined

Two situations in which the bank may wish to treat all the accounts
maintained by a given customer as if they were one:
 1. Where a customer has taken an overdraft on one account and the
other account is in credit but is unable or unwilling to pay the
overdraft, this includes cases arising out of a customer’s
insolvency.
2. Where the customer draws a cheque in an amount exceeding the
balance standing to the credit of the account in question but the
deficiency can be made out of funds deposited on another account
In the case of Garnett v McKawan (1872) it was held that a customer
with two or more accounts in the same bank, the bank has a right to
combine those accounts into one account as there was no agreement or
usage obliging the banker to keep the accounts separate.
Re K (1990), the court held that the bank could combine the accounts as
it is merely carrying out an accounting procedure so as to ascertain the
existence and amount of one party’s liability to the other.
In Halesowen Presswork and Assemblies Ltd v Westminster Bank
Ltd, Lord Kilbrandon expressed the view that when a customer
maintained two current accounts, the bank was entitled to treat the two
accounts as one single account and could exercise its right of set-off
against the two accounts without prior notice to the customer.

Combining Accounts and Insolvency

The most common situation in which a bank seeks to exercise its right to
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.
The section provides for a set-off between amounts due to the creditor
from an individual bankrupt and vice versa, provided there has been
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 (Re West End Networks Ltd [2004] 2 ALL ER 1042)
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 insofar as the customer’s
circumstances remained materially unchanged.
Insolvent act 2011, section 9 provides for Mutual credit and set-off as
follows:
(1)Subject to section 17, 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—
(a)an account shall be taken of what is due from the one party to
the other in respect of those credits, debts or dealings;(b)an
amount due from one party shall be set off against any amount due
from the other party; and(c)only the balance of the account may be
claimed in liquidation or bankruptcy or is payable to
the company or the bankrupt’s estate.
(2)A person shall not be entitled, under this section, to claim the
benefit of any set-off against the property of a debtor in any case
where the person is reasonably expected to have foreseen that the
debtor would be likely to be unable to pay his or her debts at the
time of giving credit to the debtor.

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.
Two issues arise:
• Whether the bank has a duty to combine the accounts in order to meet
the cheque;
• Whether, if the bank is not under such a duty, whether it does at the
very least have the right to effect the necessary set-off.
• 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 (See Lord Denning in
National Westminster Bank Ltd v. Halesowen Presswork and
Assemblies Ltd [1972] AC 785 (HL)).
• Bramwell B has, however, observed in Garnett v. M’Kewan
(1872)LR 8 Ex. 10, that in practice branch managers usually have 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
be paid out of any funds deposited with 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 (Mutton v. Peat [1900]2 Ch. 79).