CHAPTER 2

THE RIGHTS OF A BANK

Appropriation of Payments

The question of appropriation of payments relates to a situation where a customer has two or
more accounts that are in debit and the bank receives a credit advice for the customer.
Appropriation of payments raises the question as to which debit account a customer wishes to
credit funds into when the customer is paying funds in.

Appropriation of payments may arise in two situations:

1. Where a customer has two or more accounts in debit with the same bank and he or she
pays money in, the money will be appropriated to one of the accounts.
2. Where a customer has one account and he or she pays money into it as well as drawing
cheques upon it appropriation will settle the issue of which payment in relates to which
payment out.

In Simpson V Ingham1 the court held that the general rule is that the party which pays money
has the right to say to which of those debits the payment should be applied.

Where the customer does not make this election, the right of appropriation devolves on the
party who receives the money

The debtor’s intention to appropriate may be shown or implied by the course of dealing or other
circumstances2

Summary of Rules of appropriation – Two or More Accounts

Where there are several debts due from the depositor he has the first right of appropriation

If the debtor does not appropriate, the right devolves on the creditor

The Debtors intention may be shown by course of dealings or other circumstances

However entries in the debtor’s books is not of itself evidence of appropriation by him3

If the right devolves on the bank as a creditor, the bank may appropriate the monies to a statute
barred debt though the debt is not revived4

The creditor cannot appropriate to an illegal debt5

1
(1823) 2 B & C
2
Peters V Anderson (1814) 5 Taunt
3
Manning V Westerne (1707) 2 Vern. 606
4
Friend V Young (1897) 2 Ch. 421
5
Ex Parte Randleson (1833) 2 Deac. & Ch 534
Appropriation need not be made at the time of payment but can be made whilst a legal action
against the debtor is proceeding6

Creditor cannot subsequently vary the appropriation7

Appropriation Benefiting the Bank

The bank or creditor may appropriate funds paid in to a debt that is statute barred though the
debt is not revived by so doing. It may however not appropriate to an illegal debt

Where there are several overdrawn accounts, the bank may prefer to keep a lower overdraft on
one than the other. For example, if a customer has a wages account, under insolvency law, if
this account overdrawn at the time customer enters into liquidation or is declared bankrupt, the
liquidator or trustee in bankruptcy is required to treat this debt as a preferential debt.

Appropriation - Single Account

In WP Greenhalgh & Sons V Union Bank of Manchester8 the court held that money paid into
an account to meet a particular bill or cheque must be applied accordingly.

Money paid to meet a particular cheque must be applied accordingly9

In the absence of the customer’s appropriation, the bank may pay on first come first serve basis.

The Rule in Clayton’s case

The rule in Clayton’s case was established in Devaynes V Noble, (Clayton’s case)10
In the absence of any specific appropriation in the case of a current account, the presumption is
that:

 The first sum paid in is the first sum drawn out

 The first item of the debit side is discharged or reduced by the firs item on the credit
side.

Significance of the Rule

The rule has some significance in cases of joint accounts or partnership accounts where the
banker customer relationship has been determined at a time the account is overdrawn and the
bank allows accounts operations to continue instead of ruling off the account. Any credits into
the account will pay off the debt for which the deceased or contractually incapacitated account
holder would be liable. It is also of importance where the borrowing is on running account and
secured by a guarantee. Also when a bank receives notice of a subsequent mortgage at a time
the account is overdrawn, it determines the whether or not the bank would have priority over the
subsequent mortgagee.
6
Seymour V Pickett (1905) 1 KB 715
7
Deely V Lloyds [1912] AC 756
8
[1824] 2 KB 153
9
Farley V Turner (1857) 26 LJ Ch. 710
10
(1816) 1 Mer. 529; Chorley & Smart’s Leading Cases (5th Ed.) 158
Death, Mental Incapacity and Bankruptcy of a Joint Account Holder or Partner

The estate of a deceased joint account holder is not liable for debts incurred after the decease
of the account holder. For that matter, when the bank receives notice of death of a joint account
holder, subsequent credits into the account would wipe out the outstanding debt at the time of
death of the joint account holder. Any subsequent debts cannot be claimed against the Estate of
the deceased.

In Royal Bank of Scotland V Christie11 failure to stop the account resulted in loss to the bank.
A partnership was borrowing from the bank against the security of a mortgage provided by one
of the partners. When the partner died, the bank continued operating the account and
subsequent credits into the account were sufficient to cover the indebtedness outstanding at the
time the partner died. The House of Lords held that the security executed was no longer
available to the bank by virtue of the rule in Clayton’s case.

Notice of Subsequent Mortgage

In Deeley V Lloyds Ltd.12 a customer borrowed money from Lloyds Bank against a second
mortgage over his business premises and later executed a third mortgage in favour of his sister
Mrs Deeley. She gave notice of the mortgage to the bank which continued operating the
account in breach of its own rules of stopping the account in such a situation. Later the
customer became bankrupt and the bank sold the property as a mortgagee in possession. Mrs.
Deeley received nothing and therefore sued the bank.

The Court held that credits into the account after receipt of notice of the third mortgage had
extinguished the advance outstanding as at that date and that all subsequent debits were fresh
advances over which Mrs Deeley’s mortgage had priority.

Determination of a Guarantee

A guarantor is not liable for any debts incurred by the principal debtor after the guarantee has
been determined (or crystallized). A guarantee may be determined either by the guarantor or by
operation of law. Under operation of law, the death, mental incapacity or bankruptcy of a
guarantor determines the guarantee.

The rule in Clayton’s case will operate where subsequent credits into the account pay off the
amount for which the guarantor was liable.

A clause can be inserted in the guarantee agreement that would prevent the rule in Clayton’s
case from operating, as established in Westminster Bank V Cond13.

Cheques Drawn for Wages

11
(1840) 8 Cl. & Fin. 214
12
n 110 above
13
(1940) Comm. Cas. 60; 5 LDB 263
Amounts owed to each employee up to the official minimum wage per day, who is not a near
relative of the employer, in respect of wages (four months) are categorized as preferential
claims against the assets of a company in the event of liquidation14. In the case of companies,
the limit is GHC 6,000.00 for each employee for the four months preceding the commencement
of the winding up15.

A bank can therefore claim as preferential creditor for wages if it granted credit to a customer for
the payment of four months wages. If a general account was used for both payment of wages
and other operations, a situation could arise where the cheque payment for wages would have
been paid much earlier, so that the current overdrawn balance on the account would be
represented by cheques paid in respect of operations. In such a situation, the bank would not be
able to claim as preferential creditor due to the rule in Clayton’s case.

It is for this reason that banks usually open a separate overdraft account for the payment of
wages.

In Re Primrose (Builders) Ltd16 a company in financial difficulties had an overdraft with

National Provincial Bank. As the difficulties increased, the bank imposed strict restrictions on the
company to the effect that only cheques for the payment of wages would be debited to the
account with the company making good subsequently. Subsequent funds paid in cleared old
debts leaving the current balance being represented by current drawings for the payment of
wages. The bank succeeded in claiming as a preferential creditor for the amounts owed.

Protection of Bank From the Rule

To prevent the rule from operating the bank can stop or rule off the account and pass any new
transactions through another account.

In the case of security, the bank could protect itself by inserting a clause in the security charge
form to the effect that rule in Clayton’s case was not applicable.

Alternatively, a continuing security clause could be inserted into the charge form.

Instances Where Clayton’s case is inapplicable

Trust Funds mixed with Trustee’s Own Funds

The rule in Hallet’s case held that where trust monies are mixed with the trustee’s own funds in
one account, the rule in Clayton’s case will not apply. Equity gives priority to the beneficiaries in
the resultant balance on the basis that it is deemed that the customer took out his money in
preference to trust money17

Where there is a contrary Intention

14
See Section 47 (1) (a), Insolvency Act 2006, Act 708
15
Section 41 (2)(a)(i), B] odies Corporate Official Liquidations Act 1963 Act 180
16
[1950] Ch. 561
17
Knatchbull V Hallet [1880] 13 Ch. D 696
The rule in Clayton’s case may be displaced by a contrary intention as in the case of a security
charge form containing a continuing security clause.

The rule only applies to One Unbroken Account

In Re Sherry18 the Court state that where the running account is broken, the rule ceases to
apply.

Clayton’s Case is not Applicable to Two or More Accounts

Where the customer operates two accounts with the bank, it cannot be presumed that a credit to
one account should be appropriated to a debit in another – Bradford Old Bank V Sutcliffe. The
rule must be applied separately to each account

An exception to this rule occurred in Re EJ Morel (1934) Ltd., where a company maintained a
number 2 account and a wages account. The arrangement was that the credit on the No. 2
account should always be sufficient to cover the debit on the wages account. The court held that
the two accounts were in essence one account and that the bank could not claim as a
preferential creditor.

Instances Where Clayton’s Case Operates in the Bank’s Favour

Creation of a floating charge

Section 90 of the Companies code provides that a floating charge would be invalid if at the time
it was granted, the company was insolvent and the company went into liquidation within 12
months of the granting of the floating charge. It would however only be valid for new advances.

In Re Mortimer Ltd. (1925) where customer was borrowing on overdraft, the court held that the
security was valid by virtue of the rule in Clayton’s case

Borrowing by Minor on Overdraft

A minor generally does not have the capacity to contract and may repudiate any borrowing on
coming into majority. If he does not do so, and continues operating the account, subsequent
credits will cover the amount that was outstanding against him at the time he reached majority
and subsequent debits would be new advances obtained during his majority.

Set Off/Combination of Accounts

The bank’s right of set-off is the right to combine two or more of a customer’s account in order to
establish the overall balance in the dealings between the bank and the customer.

In the absence of specific agreement to the contrary, three fundamental conditions must be
fulfilled before a bank can exercise its rights of set off:

1. The sum must be certain

2. The set off must be between accounts of the same parties

18
(1884) 25 Ch. D 692
3. The account must be held in the same right.

Where there are three accounts, the bank is free to combine whichever it chooses

A bank has common law right to combine accounts even if they are at different branches –
Garnet V Mckewan (1872)

A bank may decide to exercise the right of set off in a number of situations. There are two broad
situations in which this can occur, namely, where an event determines the bank’s duty to pay a
customer’s cheque and where no such event occurs.

Where the Bank’s duty to Pay Cheques Determined

When any such event occurs that determines the bank’s duty to pay a cheque, then as a
general rule, the bank has the right to set off what is due customer on one account with what is
due the bank on the other. Three such events are:

 The customer’s death

 The customer’s mental incapacity
 The customer’s bankruptcy/liquidation

The Customer’s Death

In the event of a customer’s death, the bank will be entitled to set off any credit balance against
a debit balance in the customer’s name and pay off the balance to the deceased’s personal
representatives on the presentation of a death certificate and probate or letter of administration.

The Customer’s Mental Incapacity

The same considerations apply as in the case when a customer dies

The Customer’s Bankruptcy/ Liquidation

Insolvency legislation normally specifies that when a debtor to whom a receiving order has been
made, an account must be taken of mutual dealings with any creditor and the final balance
established. The date of set off is normally the date of the protection order (receiving order in
England) - The Equitable Fire Insurance Co (1930) 2 Ch. 293 @ pp 310

Notwithstanding an agreement not to set off, once liquidation proceedings are set in motion for a
company customer, the bank can exercise its right of set off. The date of set off is the date of
the petition for winding up of the company. However if the bank had notice that the credit
account intended for the set off holds some money held by the customer in trust the bank will
have no right of set off – Barclays bank V Quistclose Investment Ltd. (1970)

Set off following insolvency – Other issues

If either the bank or customer is insolvent:

 At the relevant time there will be a statutory set off under the provisions of
 o England – Section 323 of Insolvency Act 1986 (individuals) and section 490
of Insolvency Rules 1986 (companies)
o Ghana – Section 45 Insolvency Act 2006, Act 708 and Section 39 of the
Bodies Corporate (Official Liquidations Act, 1980, Act 180
 Statutory set off is automatic and inexcludable. Any express or implied agreement not to
set off or combine will become void – Halesowen Presswork and Assemblies Ltd. V
Westminster bank Ltd. (1972)
 Any agreement to extend the right of set off will become void. The Debtor’s assets must
be distributed according to insolvency law – British Eagle International Airlines Ltd.
CIE National Air France (1975)
 Debts not yet due and payable become due and payable on the onset of insolvency and
therefore subject to statutory set off. Contingent liabilities are included – Re Charge
Card Services Ltd (1987)
 Debts or credit subsequent to notice of bankruptcy of individual or petition for winding up
or summoning of creditors meeting of company customer cannot be set off.
 Where there are three accounts, one in credit, the other two debit, the two debits should
be rateably set off – Re Unit 2 Windows (1985)

When Accounts are not stopped

Paying a cheque that will cause the account to be overdrawn

In the ordinary course of business where a customer has two accounts, one debit the other
credit, the bank can combine the two accounts in deciding whether to pay a cheque that would
result in one account being overdrawn – Garnet V Mckewan

Deposit Account Against a Current Account

Where a customer draws a cheque and the balance is not sufficient to meet it, it is usual for the
bank to rely on the right of set off in paying the cheque.

Loan Account And Current Account

In the case of a loan account even where the loan is due, notice must be provided.

Limitations

 Where the debit account is not yet a debit e.g. loan repayable at a future date, or the other
account is a contingent liability – Jeffryes V Agra & Masterman’s Bank (1866) – ‘You
cannot retain a sum of money which is actually due against a sum of money which will be
due in the future’.
 Even where the loan is due, notice is required
o Bradford Old Bank V Sutcliffe (1918)
o Halesowen Presswork & Assemblies Ltd. V Westminster Bank Ltd. (1972)
o Customer has the right to withdraw credit balance as at the date of receipt of notice.
 Any express or implied agreement not to combine may negate the bank’s right –
Buckingham and Co V London and Midland Bank
 The other account is Trust account or an account containing trust funds– Barclays Bank V
Quitclose Investment Ltd. A bank cannot exercise a right of set off of a credit balance that
bears a name indicating that the funds in it belong to other people e.g. Client Account, John
 Arthur, Sole Executer of Robert Winslow.- Re Gross, Ex parte Kingston (1871) Ch App
632

In the event of bankruptcy all debts whether current or contingent must be set off.

Equitable Right of Set off

There may be a situation where the bank suspects that the customer has another account being
held by another customer as nominee for the party whose account is overdrawn. In such a
situation an equitable right of set off arises if the bank has concrete knowledge that the other
account belongs to the customer. The court held in

Bhogal V Punjab national Bank (1988)

Uttamchandrah V Central Bank of India (1989) that

 A bank has a duty to pay within a reasonable time all cheques properly drawn by its
customer
 An equitable set off is available if only there is clear and indisputable evidence of the
nomineeship.

Bankers Lien

Ordinary Lien and Pledge

A lien is a type of security which gives a creditor the right to retain property belonging to
another pending satisfaction of a debt owed by the owner of the property. The goods remain the
property of the owner but the creditor has the right to retain them until the debt is paid.

A pledge is a different type of security which carries the right to retain the property until the debt
is paid. However, if the debt remains unpaid, it carries the right to sell the property to satisfy the
debt.

Bankers Lien as a Special Type of Lien

A bankers lien is a special kind of lien equivalent to an implied pledge – Brandao V Barnett
(1846). The Brandao case held that the bankers lien could apply to securities in the bank’s
possession.

Share certificates – Re United Services Co., Johnston’s claim (1870)

Insurance – Re Bowes, Earl of Strathmore V Vane (1886)

Limitations

 The Lien does not apply to securities deposited with the bank for safe custody – Brandao V
Barnet
 It also does not apply to securities held in trust by customer
 It does not arise where there is an agreement to the contrary