A Bankers Right To Set Off Money
A set-off is generally in the form of a cross claim for a liquidated amount and it can be pleaded only in respect for a liquidated claim.  When the money is held by the bank in one account and the payer in respect of these moneys owes to the Bank on another account, the banker’s lien and the right of the banker to set off the money by way of adjustment of the accounts gives the bank a charge on all the moneys of the payer in its hands, so that they may be transferred to whatever account the bank may choose to set off the debt. This right of the banker to give effect to such a kind of a set off by way of combination of the accounts concerned is based on the principle of equity  . The right is only a procedural right and the party exercising the right to set off cannot exercise this right as a property right  . This process of adjustment of the amounts that is owed by the customer to the bank is popularly referred to as bankers right to set off. For the right to be exercised, it is sufficient that there is a definite and liquidated claim  . The claim that the bank seeks to set off should be should be in the nature of mutual debts that should be due to the same parties and the set –off will be performed by the bank in pursuance of the rights that is available to and against the same parties. In the case of money, the banker's right is often a right of set-off; it arises only in relation to the customer's money and does not apply to money paid in under a mistake of fact. This was held by the National Consumer Disputes Redressal Commission, New Delhi in the case of Branch Manager, Union Bank of India & Anr. - Respondent Vs. Tele Surya Rao  . In case of a customer owing a debt to the bank , it is at such a juncture that the banker is vested with a right to set-off against the particular debt. Under Section 13 of the Insolvent Debtors Relied Act 1728, “A legal set-off is
“where there are mutual debts between the plaintiff and defendant, or if either party sue or be sued as executor or administrator one debt may be set against the other."
The right to set off also takes into consideration other factors, such as a banker has an absolute right to set off in the event of fulfillment of two essential conditions  :
(1) Mutuality in terms of the amount owed to the bank and the account held by the customer is an integral aspect in determining the validity of the right to set-off;
(2) one claim can only be set off if both the claims are within the same periods. Since the banker’s right to set off is a right that is granted to the courts by way of general custom or usage by the banks, therefore the courts should refrain themselves from interfering unnecessarily into the set-offs or the adjustments performed by the banks.
It is further pertinent to note that when the banker is exercising the right to set off, the applicant who is the owner of the money that is kept with the bank, cannot claim that there has been injustice if as the time of opening of the account with the bank the applicant did not ask the bank to exercise the claim in writing  .
II. The Right to Set-off – Defining the Nature and Scope
The Right to set-off the account of the customer when required arises from the fact that banker and the customer enjoys a purely contractual relationship and this contractual relationship actually involve the implied right to set-off  . There need not be any express or written contractual term that is authorizing the bank to exercise the right to set-off. The right to set-off also helps to determine the current and the existing status between the banker and the customer by combining all the debit and the credit balances that is available to the bank  . Hence, in popular parlance, this right is also referred to as the ‘right of combination’.
A. Bankers right to set off – An automatic right
The Right to set off automatically arises from the banker-client relationship. As a result of this, creation or the exercise of this particular right is free from any kind of legal proceedings.
B. The Operation of the Right in Actuality
The operation of the right to set off does not require any kind of prior legal proceedings for its operation. The banker has the right to combine both the debit balance and the credit balance that exists in two different banks. For the actual enforcement of the law, there is no need to obtain and express prior consent of the customer with respect to whose accounts the right to set off is being exercised by the bank. There is also no requirement of sending a formal notice to the concerned parties that the bankers are actually exercising the right to set off by combining the two accounts in the absence of any specific contract with the customer requiring otherwise.
This right is exercised by the bank by way of practice or custom whereby the moment the customer opens an account with the bank, the banker reserves a contractual right to set-off. This right is exercised by means of a specific document, known as the letter of set-off that contains specific clauses to govern the rights and the liabilities between the banker and its customer. The very object of granting the banks a right to set-off is to confer upon the banks a right to set-off against the customer any claim that the bank might incur against the customer. Such a claim may be contingent, unconditional, liquidated, unliquidated, future or existing  . The right to set off is a well recognized legal right. Banks and Financial institutions generally have a exercise their right to set off or the right of adjustment of accounts under documents that give rights of assignment of debts and/or under documents of hypothecation  . However , this bankers right to set off is subject to any kind of statutory provision that might come into existence. When the banker is exercising the right to set off by way of distribution of property, if there is any statute to provide for the manner in which the distribution is to be done, in such a case, even though the banker might have a general right of set off, the statute prescribed right would override the general right to the banker to take away the property except in the manner laid down under the special act.
The bankers have a right to set off against all monies actually due  . The very concept of a set off means adjusting what is due to somebody else against what is payable to you. The right of set off is therefore being exercised by the bank against any property that belongs to someone else. Therefore when the banks are actually exercising the right of set off, in such a case, it can only be on the footing that the “monies" against which such a claim is made belongs to somebody else.
In practical terms, the right to set-off would be conferring upon the banks two kinds of rights: Firstly, the customer will not be able to make any kind of withdrawal from the account maintained with the bank if the customer is liable to the bank for some money. Secondly, it also further enables the banker to debit against the balance accrued any amount that is due to himself.
III. A banker’s right to set-off – Issues and Debates
A. Set-Off and Joint Accounts
It should be noted that in case of Joint Account the bank cannot set off a debt due from A alone against the joint debt. Also, the bank cannot transfer money from the credit balance of a particular joint account in satisfaction of the debit balance of an individual account of one of the holders of the joint account. If such recourse is taken otherwise, then the other holder of the joint account would be placed in the position of a guarantor of the individual debts of the other account holder without actually knowledge of the specificities of the debts of the other account holder. However, this position can be remedied if there is an express contract between both the parties to the effect that one holder of the joint account can stand as a guarantee of the other holder of the account in personal capacity.
In the case of Wolstenholme v. Sheffield Union Banking Co.  , the following observation has been made:
“Prima facie a separate debt cannot be set off against joint debt either at law, in equity or under the mutual credit clauses of the Bankruptcy Act. There is no authority for the bankers having a general lien in such a case as the present."
In Simla Banking and Industrial Co. Ltd. v. Bhagwan Kuar  the bank had issued a fixed deposit receipt in favour of A and his wife B payable to either or survivor. When a suit was filed by B against the bank for the recovery of the deposit, the bank refused to give the money and asserted the lien on the money on the ground that A was severally indebted to the bank. This defence failed and the Court held that the bank could not appropriate the amount of the fixed deposit against the debt severally due from A either in law or in equity.
B. Right of combination of accounts
The bankers have a right to combine one or more accounts of the same customer under their right to set-off. But a banker cannot combine a personal account of the customer with the joint account of the customers  . This is because of the lack of mutuality between the parties in consideration where the money that is kept in the joint account might not beneficially belong to one of the holders of the joint account. Therefore, it would be considered to be a gross injustice if the banker decides to reduce its liability towards only one of the holders of the joint account by avoiding the actual beneficiary of the account, unless otherwise the consent of the beneficiary to that effect is obtained. If on the other hand, the banker enters into a contract with the customer that he will not combine accounts, in such a case also, the banker will not be able to combine the accounts. This contract can however be terminated (provisions of the Contract Act) if an appropriate notice is intimated to the customer of its intention to exercise the right to combine accounts for the purpose of set off.
It is also to be noted that the right to set off cannot be exercised if the bank wants to set off the credit balance of customer against the debit balance of another customer. This reasoning is logical in the sense that the bank does not have blanket power to set off. The right to set off has to be exercised only if the bank owes money from one particular customer.
IV. Banker’s Right to Set-off and Insolvency
The rules relating to an insolvency set-off are mandatory and may not be varied by contract. Any
contractual rights of set-off will, therefore, not survive the liquidation or bankruptcy of either
the creditor or the debtor  . In the event of any bankruptcy or liquidation, one must take into account the mutual dealings between the creditor and the company or the person concerned. The sums that are mutually due should be set-off by way of cancellation of the corresponding claims. However, the insolvent will no longer be liable to pay off any dues if at the time of set-off the other party had notice and cognizance of the fact that there has been a resolution for winding up or a bankruptcy petition have been filed against a certain individual  . But all the claims are required to be brought to account. These claims include future, contingent as well as unliquidated sums. All claims must be brought into account, including future, contingent and unliquidated sums.
A. Pre-Insolvency and Post Insolvency Rights of Set-Off
Under the general English Law, Rights of the banker to set-off can be categorized into two:
rights of set-off before insolvency
rights of set-off after insolvency
Such a categorization of accounts is derived from the fact that in the event of insolvency there are several laws that come into force to determination the financial status of the party to be declared insolvent.
A.1 Pre-insolvency Set-Off
The understanding of pre-insolvency set-off is substantially different from post-insolvency set-off. Pre-insolvency( that is before the customer is declared to be insolvent) rights of set-off incorporates and includes set-off of mutual debts and obligations by exercise of the right of legal set-off and equitable set-off.
A.1.1 Legal Set –Off
Legal set-off refers to the set-off of mutual cross debts which are due and payable under the same rights and they are essentially mutual in nature. This kind of a right has the effect of affecting the substantive rights and obligations of the parties concerned  . Such a right is primarily concerned with the rules of procedure and direct cash flow. This legal right to set-off is also not self-executing, in the sense that in can be invoked only after a defence have been filed in an action and it cannot form a separate cause of action. In the case of Hong Kong v. Sanghai Banking Corporation, the court allowed a set-off between the parties where the bank was liable under a stand-by letter of credit and the amount that was due from the beneficiaries of the bank under the same series if transactions that have given rise to the credit.
A.1.2 Equitable Set-Off
Equitable set-off is a right that is available in the court of equity and not in a court of law. Such equity developed rules of set-off primarily governs relationships in the nature of assignor, assignee and debtor. The principle of equitable set-off was considered by the Court of Appeal in the case of Bhogal v. Punjab National Bank and Uttamchandani v. Central Bank of India  . This kind of set-off is also referred to as the ‘transaction set-off’. It tends to happen when the two claims are so intrinsically linked that it is not possible to allow one to go ahead with one set-off without proceeding with the other kind of set-off  .
A.1.3 Contractual Set-Off
In essence, contractual set-off results in the creation of a set-off together with the creation of new rights and obligations. A contract regulating set-off can therefore ideally involve:
Allow the set-off of unliquidated cross claims arising out of unrelated contracts or connected claims.
Allow the parties the ability and the right to exercise group set-off if the need arises.
B. Right of set-off Post Insolvency
After the commencement of insolvency proceedings, there are several mandatory provisions of law that comes into play to govern set-off proceedings, particularly with respect to the availability of contingent liabilities. The insolvency rules of the country  govern the right to set-off post insolvency  .
A general overview of the mandatory insolvency laws of the various countries have shown the common general rule as follows: After the court has given the order for liquidation of the company on account of the company being declared insolvent, the mutual debts of the company vis-à-vis the bank will be analysed and the amounts shall be set-off accordingly. The bankers right to set-off in case of insolvency and bankruptcy is mandatory in nature. The set-off is self executing and there is no need for any evidence to be lodged for the activation of the set-off rule  .
The Bankers right to set off is however subject to several limitations. Firstly, the right to set off that operates automatically without any contractual obligation between the parties is mostly applicable with respect to current accounts. However, if this right to set off is to be made applicable to accounts other than current accounts, in such a case, the customer who is the holder of the concerned account needs to be intimated. Secondly, it has already been stated that the right to set off is mostly applicable to current accounts, therefore, in the event the bank wishes to combine the loan account or other deposit accounts of the same holder, in such a situation, the operation of the right to set off will be dependant upon the contractual terms that would be existing between the bank and the customer and the extent of the bankers right to set off will be governed by the terms and conditions of the contract. Such a contract was signed between the bank and its customer in the case of Re Euro Travel, Dempsey v Bank of Ireland  . The standard form of contract that contained provisions regarding the exercise of the right of set off is as follows:
“Furthermore you are authorised to set-off and apply any monies or any part thereof from time to time in or towards the satisfaction of such liabilities entirely at your discretion, without further notice to us and we agree that such set-off would be a good and valid discharge of such monies so applied without the necessity of any further endorsement or authorisation from us whatsoever"