When a customer keeps two or more
accounts at the bank, some of which are over drawn and some in credit, the bank
has the right to combine such accounts and pay the resultant balance. When
certain securities e.g. shares, debentures etc. are in the hands of a banker,
he has a right of lien and not set-off.
A banker can exercise right of set-off
provided the following conditions are satisfied:
•The amount of the debt must be
certain
•The debt must be due and payable
•The
accounts must be between the same parties and in the same right
•The
debt due must be immediate and not a future debt
•Liability
should not be contingent
•There
should be no agreement to the contrary
•The
banker may exercise this right at his discretion
•The
banker has right to exercise this right before a garnishee order is made effective
The right to set-off all accounts
arises immediately in the following instances:
•On
the death, mental incapacity or insolvency of a customer
•On
the insolvency of a firm, or on the liquidation of the company
•On
receiving a garnishee order
•On
receiving notice if assignment of a customer’s credit balance
•On
receiving notice of a second mortgage over security charged to the bank 