040-SLLR-SLLR-2004-V-3-PEOPLES-BANK-v.-MANNUEL-ENTERPRISES-PVT-LTD.pdf
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People’s Bank v Mannuel Enterprises (Pvt) Ltd.
247
PEOPLE’S BANKvMANNUEL ENTERPRISES (PVT) LTD.SUPREME COURTFERNANDO, J.
J.A.N. DE SILVA, J.
JAYASINGHE, J.
SC CHC 19/98HC (CIVIL) WP 138/96 (1)
AUGUST 8, 2003SEPTEMBER 1,2003
Money due on trust receipts – Right of the Bank to set off monies in a currentaccount against a loan account – Prescription Ordinance sections 6, 12 -Could the plea of prescription be defeated by any part payment ofinterest/principal sum by defendant ? Could the creditor appropriate part of thedebt from the customer's account and claim that, it is a payment by the debtorto overcome the limitation rule ?
The appellant People's Bank instituted action against the defendant on sevencauses of action – on specific trust receipt loans. The defendant-respondenttook up the position that the seven causes of action are prescribed. The bankcontended that, the bank had the right to deduct any sum of money from anyaccount other than the account referred to in the agreement for the paymentof monies due on the trust receipt. It was the position of the bank, the Bankerhad an undisputed right to set off unless there is an agreement to the contrary.
The bank also contended that, whatever monies that came to the K accountwas collected into a Margin account by the bank and appropriated periodicallyof all trust receipt loans and in such circumstances, the claim is not barred byprescription.
Held:
A banker has an undisputed right to set off unless there is anagreement to the contrary.
On an examination of all the trust receipt loans – it is clear that there isan express clause whereby parties have agreed that the bank isauthorized to debit only the current account X of the Colombo Branch.
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In view of this express agreement bank had no right to deduct any sumof money from any account other than the account referred to in theagreement for the payment of monies due on the trust receipt.
Therefore any deductions or set off made from the account of thedefendant from the K account was not valid, illegal and arbitrary.
The prescriptive period is 6 years. The trust receipt loans were given fora 90 day period and the cause of action would arise after the expirationof the time limit.
The effect of a part payment in circumstances from which a promise topay the balance may legitimately be inferred, is to take the case out ofthe operation of the statute. The law in the absence of anything to thecontrary implies a promise to pay the balance even if the debtor wasalready prescribed.
The defendant has not done any positive act to effect payment to bringthe claim within the prescriptive period. The creditor cannot appropriatepart of the debt from the customers account and claim that it is paymentby the debtor to overcome this limitation rule.
Per Asoka de Silva, J.
"Next question is can a banker exercise the right of set off in respect ofa debt which is time barred ? The answer is the affirmative. The law ofprescription suppresses the remedy it does not kill the right. Thecreditor can recover it but he cannot file a suit. The creditor canexercise a right of set off if it is available."
APPEAL from the judgment of the Commercial High Court of Colombo.
Cases referred to:
Halisowen Press Assemblies Ltd., v Westminster Bank – 1970 3 WLR625
Garnett v M'kewanp 1872 LX 8 x 10
Buckingham and Company v London and Midland Bank Ltd. -1895 12TLR70
Bradford Old Bank Ltd v Sutcliff -1978 2 KB.
Green Halge and Son v Union Bank of Manchester – 1961 – 1 All ER197
In Re Halisown – 1971 All ER 641 (HL) Overturned the decision of theCourt of Appeal in 1970 3 WLR 625 – 1 above)
Bastian Silva v William Silva – 55 NLR 347 at 348
Moorthipillai v Siva Kaminathan – 14 NLR 30
Arunasalam v Ramasamy – 17 NLR 156
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People's Bank v Mannuel Enterprises (Pvt) Ltd.
(J.A.N. de Silva J.)
249
Rohan Sahabandu for plaintiff-appellant
Nihal Jayamanne PC with Lakshman Perera, Udisa Caldera and Dilhan deSilva for defendant-respondent.
Cur.adv.vult.
December 19, 2003
J.A. N. DE SILVA, J.
This is an appeal by the appellant-plaintiff bank against the 01decision of the Commercial High Court Judge whereby theplaintiff's action was dismissed by the said High Court Judge on theground of prescription. This action was instituted in the DistrictCourt of Colombo, but was subsequently transferred to theCommercial High Court with the establishment of that Court.
The appellant-plaintiff bank (hereinafter referred to as plaintiff)on or about the 20th March 1996 instituted action against thedefendant respondent setting out seven causes of action eachconcerned with the default in payment by the defendant respondent 10of specific Trust Receipt Loans together with interest. These TrustReceipts were marked as P1, P4, P7, P10, P13, P16 and P19 andthe plaintiff Bank claimed the following sums.
Rs. 2,924,456/76 together with interest at the rate of 25%per annum on a sum of rupees 1,119,000/-, from 1st August 1995onwards in respect of 1st, 2nd, 3rd and 4th causes of actions, and
Rs. 2,340,326/03 together with interest at the rate of 26%per annum on a sum of Rs. 925,000 from 1st August 1995 onwardsin respect of 5th, 6th and 7th causes of action.
It was the position of the plaintiff bank as set out in the plaint that 20
The defendant-respondent was a customer of the Bank andmaintained two current accounts one at the bank's Foreign Branchat Fort and the other at the Kurunegala Branch.
All Trust Receipts Loans were granted to the defendantrespondent between 17th July 1987 and 13th November 1987.
The entire capital amounts advanced in respect of the saidTrust Receipt Loans referred to in the 1st cause of action remaineddue and unpaid by the defendant-respondent.
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The defendant-respondent paid monies against the said 7loans from time to time during the period 21st August 1989 to 16th 30September 1995. Such sums had first been paid into a marginaccount and thereafter the bank appropriated the same to deductinterest and BTT that had accrued in respect of the said loans.
Such payments by the defendant-respondent hadaccounted for the settlement in full the interest due up to 1stOctober 1989 on the loans referred to in the 1st, 2nd, 3rd and 4thcauses of action and the interest up to 12th September 1989 on theloans referred to in the 5th, 6th and 7th causes of action.
Such payments by the defendant-respondent also served
to take the said causes of action out of the operation of the law of 40prescription and
The defendant respondent failed and neglected to pay themonies due on the said seven Trust Receipts since 1993 althoughdemanded by the plaintiff bank.
The defendant-respondent in its answer admitted applying andobtaining the said Trust Receipts Loans but took up the positionthat the seven causes of action were prescribed in law. The learnedHigh Court Judge by his judgment dated 17th March 1998dismissed the plaintiff's action by deciding all the issues in favour ofthe defendant including the issue raised on prescription.50
At the hearing of this appeal two main questions came up forconsideration. Firstly whether the bank could set off monies in acurrent account against a loan account and secondly could theprescription period be defeated by any part payment of the loan orinterest by the customer.
Learned counsel for the plaintiff-appellant relied on severalauthorities in support of this proposition that a bank has the right tocombine two accounts whenever it pleases and to set off againstthe other if there was no express or implied agreement to thecontrary. He cited the following passage from the book "Bankers 60remedy of set off" 1993 (Butterworth Sydney Australia) where Prof.Goode has this to say, "the law of set off assumed a largeimbalance in modem finance and commerce. It is in substancethough not in law a form of security by which a creditor is able torestore to self help, setting off the debt due to him against a debtdue from him to the other party."
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People’s Bank v Mannuel Enterprises (Pvt) Ltd.
(J.A.N. de Silva J.)
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It is to be noted that the right to set off is also known as the rightof combination of accounts. A bank has a right to set off a debtowing to a customer against a debt due from him. It is a valuableright and sometimes it is also treated as the right to lien. It is wellsettled law that the monies deposited with the bank becomes itsown money and the only obligation of the bank is to pay theequivalent amount on demand by the customer. In case of money,lien of the bank is not applicable; whenever a bank receives acheque or bill or warrant for collection it has a lien on the specificmovable, but as soon as the bank collects it and credits the processto the customer's account it cannot be said that the banker has alien on the money so credited. Though the bank has no lien yet ithas the right to set off debt in one account of the customer againstthe credit in another account. This right although has been derivedfrom lien is not a lien. Lord Denning in Halesowen Press WorkAssemblies Limited v Westminster Bank Limited (1) observed thus."In order to avoid confusion, I think we should discard the word 'lien'in this context and speak simply of a banker’s right to combineaccounts or right to 'set off one account against the other."
There are several decided cases where the right of a bank to'set of has been recognized and applied. In Garnett v M'kewn acustomer who had two accounts with different branches of a bankdrew cheques against his credit balance at one branch of a bank.At another branch he was indebted to an amount almost as greatas the credit balance at the first and the bank without notice to himcombined the balances and dishonored the cheques. It was heldthat they were entitled to do so. The question whether the customeris entitled to notice was also considered at length in this case.Buckingham and Company v London and Midland Bank Ltd. (3> isanother important case which considered the above question. Thiscase provides an example of one of the principal exceptions to thebanker's right to set off. The plaintiff had a current account and alsoa loan account secured against house and property. The branchmanager had the property re-surveyed and decided that the 1advance was too high. He informed the plaintiff that his accounthad been closed. The plaintiff protested that he had chequesoutstanding but the manager duly combined the accounts anddishonoured the cheques. The plaintiff filed action against the bank
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and the court decided that the customer could draw upon thecurrent account without reference to the loan account and wasentitled to reasonable notice of the ending of this arrangement.
On the same question Scrutton L, J. in Bradford Old BankLimited v Sutcliff (4) stated that "the sum paid into the currentaccount are appropriated to that account and cannot be used by nothe bank in its charge of loan account without the consent of thecustomer." In Green Halge and Son v Union Bank of ManchesterLtd. <5) Swift, J. stated that if a banker agrees with his customer toopen two or more accounts he has not in my opinion without theassent of the customer any right to move either assets or liabilitiesfrom one account to another".
Lord Denning did not agree with this broad dictum but havingexamined a long line of authorities expressed the view that abanker is entitled to combine two accounts unless there is anagreement to keep them separate. "A good instance is where a 120bank opens two accounts for a customer, one of which is a loanaccount… and the other is a current account… In such a case thereis usually an implied agreement that the bank will not combine thetwo accounts or set-off one against the other, without the consentof the customer." In the same case Winn J. too subscribed to thesame view. Halisowen case (6> went up to the House of Lords.Viscound Dilhorn, Lord Simon, Lord Crust, Lord Brunden overturned the decision of the Court of Appeal on the ground that therewas no separate agreement implied or expressed to keep theaccounts separate, but accepted the fact that a banker has an 130undisputed right to set off unless there is an agreement to thecontrary.
The question therefore in the instant case is whether there wasan agreement by the bank to keep the two account separate. On anexamination of all the Trust Receipts marked in this case viz. P1,
P4, P7, P10, P13, P16 and P19 it is clear that there is an expressclause whereby parties have agreed that the bank is authorized todebit only the current Account No 100214 of the Foreign Branch ofthe Peoples Bank. In view of this express agreement bank had noright to deduct any sum of money from any account other than the 140account referred to in the agreement for the payment of monies dueon the trust receipts. Therefore any deductions or set off made from
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People’s Bank v Mannuel Enterprises (Pvt) Ltd.
(J.A.N. de Silva J.)
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the account the defendant had in the Kurunegala Branch was notvalid, illegal and arbitrary.
The second question that has to be considered is could the pleaof prescription be defeated by any part payment of interest orprincipal sum by the defendant ?
It is accepted that the prescriptive period is 6 years (vide section6 of the Prescription Ordinance). The Trust Receipt Loans weregiven for 90 days period and the cause of action would arise after 150the expiration of that time limit. This is evident from the followingtable.
TR Loans Issued OnDue Date
TR 1-17.07.8717.10.87
TR 4-20.07.8720.10.87
TR 7-24.08.8724.10.87
TR 10-17.09.8717.12.87
TR 13-29.09.8728.12.87
TR 16-23.10.8723.01.88
TR 19-13.11.8713.02.88
On an examination of the bank statements it is clear that not acent has been paid back in respect of any loan by the defendantother than TR 1 where he has made a payment on 13.11.87. Fromtime to time the bank has appropriated the monies that come in tothe Kurunegala Branch Account of the defendant. The last of suchappropriation has taken place on 03.03.1995. The letter of demandhas been sent on 12.01.1996 and action had been instituted in
The claim of the plaintiff's bank is that as the paymentshave been made upto 1995 action is well within time and notprescribed. On behalf of the defendant-respondent it has been 170submitted that the margin account statement produced by the bankdoes not indicate that money has been transferred from thedefendant-respondent's Kurunegala account and the bank hasfailed to produce the statements relating to that account.
The legal consequences of payment in reduction of a debt areclear enough, and the application of principles involved is expresslyprovided for in a proviso to Section 12 of the PrescriptionOrdinance. These principles were carefully considered and appliedby Gratiaen, J. in Bastian Silva v William Silva (?) in the following
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terms “the effect of a part payment in circumstances from which a 180promise to pay the balance may legitimately be inferred, is to takethe case out of the operation of the statute – Moorthypillai vSivakaminathanW. As was explained in Arunasalam vRamasamyS9) the law in the absence of anything to the contrary,implies a promise to pay the balance, even if the debt was alreadyprescribed."
"If a claim relates to a single debt which is prima facie statute -barred, the burden is on the creditor relying on the subsequentpayments to show that it was made on account of debt and as apart payment." "If however there are more debts there are, the 190creditor must prove that the part payment was made "a generalaccount" in order to defeat a plea of prescription in respect of all theitems."
The learned counsel for the plaintiff bank contended that asmonies have been paid periodically till 1995 the claim of the bankis alive and not barred by prescription. It is common ground that thedefendant had not paid any money in respect of the Trust Receiptsexcept the payment made on 13.11.87 as stated above. Whateverthe monies that came to the Kurunegala account was collected intoa margin account by the Bank and appropriated periodically in 200respect of all Trust Receipts Loans. Now the question arises as towhether these were payments by the defendant. It is obvious thatthe defendant has not done any positive act to effect payment tobring the claim within the prescriptive period. Can the creditorappropriate part of the debt from the customers account and claimthat it is payment by the debtor and overcome the limitation rule ?Certainly not. Next question is can a banker exercise the right of setoff in respect of a debt which is time barred ? The answer is in theaffirmative. The law of prescription suppresses the remedy, it doesnot kill the right. The creditor can recover it but he cannot file a suit. 210The creditor can exercise a right to set off if it is available and thereis nothing wrong with the same.
In the instant case as I have already held that there is noagreement between the parties to allow the bank to combine theaccounts the prescription starts running from 90 days of issuing theTrust Receipts as the defendant had not paid any monies in respect
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Arjuna Ranatunga v Johnston Fernando
Minister of Youth Affairs and Others
255
of the loan he obtained from the Foreign Branch in Colombo. In thecircumstances the learned High Court Judge is correct in coming tothe conclusion that the plaintiff's action is time barred.
For the above reasons this appeal is dismissed without costs. 220
M.D. H. FERNANDO, J. – I agree.
N.JAYASINGHE, J. – I agree.