While the right of lien is the right of a creditor in possession of goods or securities owned by a debtor to retain them until a debt due from the latter is paid, the right of set-off is the right of a debtor to the total or partial merging of a claim of a creditor against him in his counter-claim against the latter.
It is, in effect, the combining of accounts between a debtor and a creditor so as to arrive at the net balance payable to one or the other. Set-off may be available between parties as a statutory right; or by an agreement between parties, express or implied from a course of dealings.
The right of set-off enables a banker to adjust wholly or partially, as circumstances permit, a debit balance in a customer’s account with any balance lying at his credit. Both these claim must, however, be for known amounts in the same right and due immediately.
In practice, the banker would not exercise the right arbitrarily and without notice unless there is a specific agreement with the customer to set-off the accounts.
There are four essential features of set-off, namely:
1. Mutual debts must be for sums certain
One person must be creditor of another person and vice-versa for accounts which are known and certain. The claim and counter-claim should be both for liquidated amounted amounts.
A person who, having a credit balance of Tk. 25,000/- in his current account, has guaranteed an advance for Tk. 30,000/-. The banker will have no right of set-off in this case until the customer’s exact liability as a guarantor is determined.
If a customer keeps a number of accounts in his own name for the sake of his convenience, it is the balance of the combined accounts which forms the real debt or credit.
Similarly, if a customer maintains accounts in his own name in different branches, the balances in the accounts at all the branches can be combined. All branches of a bank are considered as one entity for the purpose of right of set-off.
The bank is also entitled to appropriate monies due form a firm from funds of another firm lying with it if the two firms have the same set of partners.
2. Debts must be due immediately
Only those debts which are due and recoverable on the date of set-off can be the subject to set-off. A debt accruing due cannot be set-off against a debt already due.
To illustrate, a banker cannot set-off a debt due to him from a customer upon a loan account repayable on demand or at a specified date, against a credit balance in current account because until demand is made or due date arrives, the loan is not due for repayment.
Similarly, a credit balance in a current account cannot be set-off against a contingent liability on a bill discounted.
The same principle will apply if a fixed deposit receipt, against which the depositor has already borrowed, is not due on the date the bank goes into liquidation. In case liquidator makes a demand of the loan, the depositor cannot claim a right of set-off.
3. Debts in same right
The parties must be mutually indebted in the same right. If a customer maintains two accounts, one for his own money and the other of trust money, the bank cannot set-off a credit balance in the trust account against a debit balance in his personal account or vice-versa.
Similarly, a solicitior’s personal account cannot be combined with an account in his own name with the addition of the name of his client. The bank has no right of set-off in this case as both the accounts are in two distinct capacities.
4. No agreement to the contrary
The right of set-off cannot be exercised if there is any express or implied agreement to the contrary.
If there be any arrangement between the banker and the customer to the contrary, then this right cannot be exercised.
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