The bad news is that Time is limited.
However, the good news is that you have total control
on the use of Time available.
Ask yourself as often as possible.
Is , what I am doing now the best use of my Time, at this Time?
Carry a book with you and when you have spare Time
Read it to expand your learning.
Time is finite!
Avoid waste.
Time Management makes the difference between SUCCESS and FAILURE.

General Banking Operations
The following topics are discussed in this Handout:
i. Appropriations.
ii. Rule in Clayton’s Case, 1816.
iii. Banker’s duty of secrecy.
iv. Banker’s right of set off.
v. Banker’s right of lien.

1O.1.Appropriations.
(Appropriation= Allocation of a sum of money for some particular purpose.)
When a customer pays in money or when money is received from a third party for credit, the customer has the right to appropriate the money, i.e. to stipulate (Stipulate= to state clearly and firmly that sth must be done, or how it must be done) that the funds are to be placed to a specified account or applied in payment of a particular debt, or applied specifically to meet certain cheques or bills.

Such appropriation can be made by the customer at the time of deposit or later before the banker has appropriated the funds to any other use. Moreover, the customer can withdraw or vary his appropriations so long as the banker has not irrevocably disposed of the funds, according to the customer’s original appropriation. The banker is bound to act on the customer’s instructions whatever the state of accounts between them. Thus he cannot apply a credit paid by a customer in reduction of the customer’s overdraft if the customer directs that the credit is to meet cheques drawn by him.

In the absence of any appropriation by the customer, the banker can apply payment received to lessen or wipe off any debt owing to him by the customer, including even a debt which is statute-barred (i.e. time barred). The appropriation by the banker need not be made immediately. It may be made at any time before it is communicated to the customer; but once made and communicated to the customer, it cannot be varied or revoked by the banker, and is binding both on him and the customer.( What is time barred? When somebody lends money and the borrower does not return the debt within a reasonable time the lender has a right to file a recovery suit in a court of law. Law has defined a finite time period after the amount becomes due for payment within which a legal suit can be filed. Once this date has passed the court will not entertain the suit.)
The person paying in the money has the primary right to say as to what account it shall be appropriated. The creditor, if the debtor makes no appropriation, has the right to appropriate. If neither exercises the right of appropriation and if there is nothing more than a current account or a particular account kept by the creditor, and he credits money to a particular account then the court concludes that the appropriation has been made, and having been so made it is final and neither the creditor nor the debtor can seek to vary that appropriation.

10.2. Rule in Clayton’s Case 1816
When there is a running or current account between the parties and provided that there has been no appropriation by the debtor or the creditor, then the law appropriates the payment and, according to law, it is the first item on the debit side that is discharged or reduced by the first item on the credit side. The appropriation of successive payments in, is deemed to have been made in accordance with the Rule in Clayton’s Case (Deveynes v. Noble, 1816) viz, “the money first paid in is deemed to have been the first drawn out”, i.e. ‘the credits in order of entry in the account are deemed to have discharged debits in the order in which they appear’.
The effect of the Rule can be seen from the following example.

You know that if a guarantor dies, the estate of the dead person will be responsible for the debt outstanding on the date of death, but the estate will not be responsible for the debts incurred after the death of the guarantor.
Suppose a guarantor of an overdraft facility dies at the time when the person whose account he has guaranteed owes the bank Rs. 10,000/-. If the account is continued unbroken after the guarantor’s death, all future payments-in will go to reduce the debit balance of Rs. 10,000/- existing at the time of the guarantor’s death and all payments out will constitute a new debt not covered by the guarantee. Thus, if the customer pays into the unbroken account Rs. 10,000/- after the guarantor’s death and draws out Rs. 5,000/-, the effect of the Rule will be that the debt covered by the guarantee will be wiped out, and the customer will owe the bank Rs. 5,000/- and this Rs, 5000/- debt will not be covered by the deceased’s guarantee. If a banker or his customer wished to make an appropriation otherwise than in accordance with this Rule, he should indicate his intention clearly and unmistakably to the other party.

This principle is of importance in its effects on the rights of a banker in respect of an overdraft in current account in circumstances such as:-

(a) When a customer dies
(b) When a partner of a Partnership dies
(c) The constitution of a partnership is changed, or
(d) When a guarantee is terminated by death or bankruptcy of the guarantor.

To prevent the operation of the rule (which, it should be noted, applies only to a current or running account), the banker must stop/break the account i.e. discontinue all operations thereon, and open a new account, if possible, getting the consent of the parties concerned to the action taken.

Thus in Royal Bank of Scotland V. Christie, 1840, where a banker on the death of a partner in a partnership firm, allowed the surviving partners to continue operations on the account, it was held that the deceased partner’s estate was discharged as from the date when the payments made in after the partner’s death the debt due from the firm at the time of his death stands adjusted.

10.3. Banker’s Duty of Secrecy.
A banker must not disclose the state of his customer’s account or any information concerning the customer or his affairs, “except upon reasonable and proper occasion” (Hardy V. Veasey, 1868) and a customer who can show that his credit or reputation has suffered in consequence of an unjustifiable disclosure of his affairs by his banker may be awarded damages for breach of contract.

The obligation to observe secrecy does not end even with the closing of the customer’s account.

There is a leading case on the duty of secrecy on banks; Tournier vs. National Provincial and Union Bank of England (1924). The plaintiff had taken a loan from the defendant bank and on nonpayment of an installment, the branch manager during conversation with the employer company of the plaintiff had disclosed the status of the account (overdrawn), that promises of repayment were not being carried out and that the plaintiff was involved in betting. Based on such information the employer company of the plaintiff did not renew his employment contract. Tournier brought an action against the bank for damages for ‘slander’ and for ‘breach of implied term of the contract between him and the bank’ that the bank would not disclose to third parties the state of his account or any transaction relating to it. The court held that the duty of banker as to secrecy is not absolute but qualified and under the following circumstances the bank may divulge information about the customer:

i. Where disclosure is under compulsion of law;

ii. Where there is a duty to public to disclose;

iii. Where the interest of bank requires and

iv. Where the disclosure is made by the express or implied consent of the customer.

In Pakistan we have specific laws governing secrecy. These are briefly given below:

1. BCO Section 82F. Power to call for information. — The Banking Mohtasib shall have the power for purposes of disposing a case, to require a bank to disclose to him any information subject to certain conditions which include that the Banking Mohtasib shall make every endeavour to ensure that banking confidentiality is maintained as required by banking law and procedure and shall take no action which is violative thereof. The Banking Mohtasib may call for any or all such documents that are relevant or pertinent for purposes of deciding a complaint: Provided that he shall not be entitled to call for unrelated documents or documents which may compromise the bank’s position in relation to other customers, provided further that in cases where the Banking Mohtasib is investigating case of corruption, he shall have greater latitude in relation to the inspection of documents. However in the event of a bank refusing to furnish information, or copies of relevant documents, the Banking Mohtasib shall not be authorized to compel the bank to comply with his order but he may draw an adverse inference and comment on the same in his findings.

2. BCO Section 93 - Exchange of information - Banking companies may exchange on confidential basis amongst themselves, either directly or through the Pakistan Banking Council, information about their respective clients.

3. Bankers Books Evidence Act 1891.. s. 6 Inspection of books by order of Court or Judge. On the application of any party to a legal proceeding, the court or a judge may order that such party be at liberty to inspect and take copies of any entries in a bankers book for any of the purposes of such proceedings, or may order the bank to prepare and produce, within a time to be specified in the order, certified copies of all such entries, accompanied by a further certificate that no other entries are to be found in the books of the bank relevant to the matters in issue in such proceeding and such further certificate shall be dated and subscribed in the manner herein before directed in reference to certified copies
.
4. Supply of information to Income Tax Office. - Section 176 of Income Tax Ordinance 2001 the Commissioner Income Tax may, by notice in writing, require any person to furnish to the Commissioner or an authorized officer any information relevant to any tax under this Ordinance as specified in the notice. The Commissioner may impound
{meanings (of the police, courts of law, etc.) to take sth away from sb, so that they cannot use it}
any accounts or documents produced as above and retain them for so long as may be necessary for examination or for the purposes of prosecution.

5. Section 19 of the National Accountability Bureau Ordinance, 1999 (NAB) - All banks and financial institutions are legally bound to disclose information to NAB upon request, during an ongoing investigation. The Chairman NAB or any authorized officer may, during the course of an inquiry in connection with contravention of the provision of this Ordinance require any bank or financial institution, notwithstanding anything contained in any other law for the time being in force, to provide any information relating to any person whosoever, including copies of entries made in a bank’s or financial institution’s books such as ledgers, day books, cash books and all other books including record of information and transactions saved in electronic or digital form, and the keepers of such records are under an obligation to certify the copies in accordance with law.

10.4. Banker’s Opinions.
The practice of bankers giving “Confidential opinions” to one another and to the so-called “trade protection agencies” concerning the credit and standing of customers, is so well established that, provided the information is honest and fair and has been given in the usual way and in the ordinary course of business, it is unlikely that a customer could successfully object to it. Unless a customer expressly instructs his banker not to give such opinions, he must be regarded as having given his implied consent to this recognized practice when he opens his account.

In Szek v. Lloyds Bank 1908, the giving of a “Confidential Opinion” by a banker to a representative of a recognized trade protection society was not questioned.

A confidential opinion should be essentially of a general nature, embodying the banker’s considered and truthful opinion as to the general reputation and financial position of his customer, but the bank should omit specific details which might infringe upon the customer’s right to secrecy concerning his account.

It is a sound rule to answer as generally as possible and to say as little as possible. Provided the banker gives a truthful opinion that is warranted by the information at his disposal, he is quite safe, even though his opinion turns out to be misleading.

In no circumstances should the banker give actual figures relating to the account or disclose the customer’s balance. But if he is asked whether he considers his customer “Good for trade credit of Rs. 50,000/-” he is entitled to say “Yes” or “No” though, if he has to give a negative opinion, he should make his answer as guarded as possible.

A banker who makes an unauthorized disclosure concerning his customer’s affairs is liable to the customer for damages arising out of breach of contract, and these damages are likely to be assessed on a heavier scale if the opinion contains unwarranted or unjustified remarks detrimental to the credit of the customer.

If the banker makes an unauthorized disclosure, e.g. to another banker, and by mistake says something untrue about his customer, it is doubtful whether he would be liable to his customer on the grounds of libel, as has been sometime suggested, because, such a communication in the ordinary course of business would probably be regarded as privileged, so long as the banker had acted without malice. But a bank manager who maliciously (malice= a feeling of hatred for sb that causes a desire to harm them) gives an unfavorable opinion about a customer may render himself personally liable for libel (or slander if the opinion is given orally) and it is probable that the bank also would be liable.

Summary of conditions under which the banker may divulge the information of an Account.
i) UNDER COMPULSION OF LAW: When a banker is called upon by court of Law or by Income Tax Commissioner he can disclose the actual state of affairs i.e. actual balance, but for this a notice must be received from the competent authority. Bankers Books Evidence Act, 1891 permits banks to produce copies of entries in bank’s books to a court of law instead of actual books. This provision avoids attendance in court with actual books of account.

ii) IN THE NATIONAL INTEREST: Bank is duly bound to inform the appropriate authorities when its customer dealings are not in the national interest like using the account for money laundering and financing illegal activities.

iii) COMMON COURTESY TO OTHER BANKS: It is a generally established practice among bankers to give confidential opinion about their customers to fellow bankers when asked to do so. It is not breach of secrecy, and a customer cannot object to it. In other words we can say that it is an implied condition of the agreement entered into at the time of opening account. The Banker giving opinion must not disclose the actual figure standing in the account of his customer, he should only give opinion in code words such as good, fair, satisfactory and unsatisfactory etc. which are meant for this purpose. The information must be carefully worded and it must be mentioned in the confidential opinion that neither the bank nor its officials are responsible for this information. It should be sent to bank concerned in sealed envelope along with covering letter, but this confidential opinion should not be signed by banker. A covering letter, enclosing the confidential opinion may be signed by a bank officer.

iv) IN BANKS INTEREST: In case of stuck up advances or other disputes banks have to resort to legal proceedings. In all such situations banks have to disclose all the detailed information to the courts of law to get the legal remedy.

v) EXPRESSED OR IMPLIED CONSENT OF CUSTOMER; Customers authorise the banks to give some information about their accounts to their lawyers, accountants and income tax advisors etc. for doing the needful. When such information is sought bankers provide it to the authorised persons.

vi) TRADE PROTECTION ASSOCIATIONS: Bankers some times give general information to Trade Protection Associations such as Chamber of Commerce and Industry etc. which are working for the promotion of commerce and industry of the country. Such information must be general and actual position of customer must not be disclosed.

10.5. Banker’s Right of set-Off.
If a customer has two or more accounts at the same bank, one or more in credit and the other or others in debit, the banker, in the absence of any contrary agreement, or earmarking, has the right, on giving notice to the customer, to set-off the credit balance against the debit balance. In certain cases where combination of two accounts is immediately necessary to ascertain the true (net) state of account between the banker and his customer (e.g. on the death or bankruptcy of the customer; or on service of garnishee order), the right of set-off may be exercised without notice.

In case of ordinary trade debts, the rule is that a creditor may, without notice to his debtor, set off a credit balance due to the debtor against the debt due by him. But the debt owing by a banker to his customer on current account is not the same as an ordinary debt. It involves an obligation on the banker’s part to honor cheques drawn by the customer against the balance outstanding, and because the banker renders himself liable if the customer suffers damages through the wrongful dishonor of any cheques so drawn. This exercise of right of set off against balance in current account should, therefore, be done only after due notice to the customer.

Hence, if the exercise of the right of set-off would involve the return of a customer’s cheques drawn against a credit balance, the banker must not exercise the right without giving reasonable notice to his customer. Moreover, the keeping for two accounts in the name of the same customer involves an implied agreement on the part of the banker to keep the accounts distinct, and, that being so, reasonable notice of his intention to combine them must be given to the customer. In the case of Buckingham v. London & Midland Bank, 1895, the bank had, without notice to the customer, combined a loan account and a current account in the same name, and had dishonored cheques drawn upon the latter. It was held that, owing to the bank’s failure to give notice, the customer was entitled to damages.

Again on the happening of any event that determines (In law the word “determine” means “to end; to terminate”) the banker’s duty to pay a customer’s cheques, e.g. on the death or bankruptcy of the customer, or on service of a garnishee order attaching the customer’s credit balance, the banker is entitled without notice to set-off the balance on separate accounts in order to ascertain the net amount owing to him.
Moreover, if the customer prejudices {to prejudice = to injure or harm, as by some judgment or action} the banker’s right in respect of a security, e.g. by giving a second charge over the property, the banker can exercise his right of set-off without giving notice to the customer.
The Following Is A Summary Of The Conditions Relating To The Application Of The Right Of Set Off.

:
THE RIGHT OF SET OFF WILL APPLY;-
(i) When account is running: In this case notice from banker is a must, otherwise if a cheque which is drawn properly is dishonoured; the bank’s position may become very embarrassing.

(ii) When operation on account is stopped: As in the case of death, bankruptcy, the right accrues automatically. When a deceased customer had two accounts, one is running in debit and other in credit balance, the banker can adjust debit balance from an account having credit balance before paying the amount to legal heirs of deceased.

ACCOUNTS WHICH ARE SUBJECT TO SET OFF:
1. Debit balance of trust account can be set off against credit balance of trustee's private account as the trustee is personally liable. ,
2. If a customer has more than one account and garnishee order is served on the bank attaching credit balance. In such case debit balance of an account can be transferred to an account having credit balance.
3. A deposit account against overdraft accounts.
4. A Joint credit Account against individual overdraft account when all the joint account holders individually guarantee the overdraft.

ACCOUNTS WHICH ARE NOT SUBJECT TO SET OFF:
1. Debit balance of a trustee or executor against credit balance of the trust.
2. Credit balance of the executor against the debit balance of the deceased.
3. The debit balance of the executor against credit balance of the deceased.
4. Partner's debit balance against partnership credit balance.
5. If O/D is granted to Local Authority in respect of one undertaking it cannot be adjusted by appropriation from the Local Authority's other credit balance.
6. Where banker has knowledge of Trust fund.
7. Where there is an agreement that right of set off will not be exercised.


10.6. Banker’s Right of Lien
A lien is the right of one person to retain property in his hands belonging to another, until certain legal demands against the owner of the property by the person in possession are satisfied. Thus a creditor who has in his possession goods of his debtor may have a lien over the goods in respect of the money due by the debtor. Lien does not as a general rule give the person exercising the lien any power to sell the goods or security retained by him.

Lien may be particular or general. A particular lien is so called because it confers a right to retain the goods in connection with which a particular debt arose, whereas a general lien confers a right to retain goods, not only in respect of the debt incurred with them, but also in respect of the general balance due by the owner of goods to the person exercising the right of lien. In other words, a particular lien applies only to one transaction, or certain transactions, whereas a general lien extends to all transactions between the parties. Certain persons who act as agents on behalf of others e.g. solicitors, bankers, stock brokers, produce brokers and factors {factor = a person who carries on business transactions for another; commission merchant; agent for the sale of goods entrusted to his possession; an agent, as a banking or finance company, engaged in financing the operations of certain companies, or in financing wholesale and retail sales, through the purchase of accounts receivable}
have a right of general lien over all goods and securities of their clients or customers that come into their hands as agents in the ordinary way of business.

No special arrangement or agreement is necessary to create the right of lien; it arises out of the course of dealings between the parties. Nevertheless the right of lien may be expressly conferred by agreement, or it may be definitely excluded either by arrangement between parties or by the existence of a contract or of circumstances inconsistent with the exercise of the right of lien.

Banker’s lien is a “general lien”. However, it cannot be regarded as extending to every type of “security” that comes into a banker’s hands. The term “security” is intended to mean “such securities as promissory notes, bills of exchange, coupons, bonds of foreign governments, etc.” Nevertheless, in a number of cases banker’s lien has been held to cover non-negotiable securities.

In Re-Bowes 1886, the assumption seems to have been that banker’s lien would attach to a policy of insurance; in United Services Company, 1871, banker’s lien was held to attach to share certificate, and in Jeffreyes v. Agra and Mastermans’s Bank, 1886, a form of deposit receipt was held to be subject to banker’s lien.

All securities that come to the banker’s hands in the ordinary course of business as a banker will be subject to his lien, provided there is no express or implied contract to the contrary. But it is not always easy to decide when securities do come into the hands of the banker in the ordinary course of business as a banker. He unquestionably has a lien on bills of exchange, promissory notes, cheques, coupons and dividend warrants, handed to him for collection, and probably also over a certificate for shares purchased by him on behalf of a customer. But where articles are handed to a banker solely for safe custody, the banker is acting merely as a bailee and as such has no lien over the articles.

A general lien cannot arise in respect of securities deposited for a special purpose only, although circumstances may be such as to create a particular lien in respect of the securities. Thus a banker cannot have a general lien in respect of property of customer pledged as security for a particular debt. For example, if A has two overdrafts at a bank, and has pledged securities for repayment of one overdraft specifically the bank can only use the security to adjust that overdraft and only the surplus, if any, can be used to pay off or reduce the other overdraft.

No lien arises in respect of property which comes to the banker’s hands by mistake, or which is placed in his hands to cover an advance that is not yet granted. Banker’s right of sale of securities placed under lien should be distinctly understood. Banker’s lien has come to be regarded as an “implied pledge” and a pledge gives the pledgee a right of sale. But a banker’s right of sale is generally considered as extending only to fully negotiable securities such as, bearer bonds, coupons and share warrants payable to bearer. In respect of such securities the right of sale may be exercised by the banker without the consent of the customer if the latter cannot pay or refuses to pay what he owes, although reasonable notice of the intention to sell should be given to the customer.

It is not however clear whether the banker’s right of sale extends to securities which are not fully negotiable. Most cases concerning lien have applied to negotiable instruments and in the absence of legal decision on the matter, it seems advisable to regard a banker’s lien on non-negotiable securities as conferring only a right to retain them until his demands have been satisfied. To release such property, the banker would probably have to apply to the court.

The following is a summary of the conditions relating to a lien by bank.
SPECIAL LIEN:
A special or particular lien is right to retain goods in respect of which the debt was incurred e.g. Railways Authorities have lien on goods which were entrusted to them for transport pending payment of carriage.

GENERAL LIEN:
It is a right to retain not only for which a debt is incurred on particular goods but for the general balance due. The bankers, solicitors and stock-holders have general lien. A banker's lien is a special type of general lien. It includes a right of sale after reasonable notice. A banker has a general lien on all securities deposited with him as banker by a customer, unless there is contract to the contrary.
The following conditions must be present in order to exercise this right:

i That the property of customer must come into the hands of banker as a banker of
customer.
ii. There should not be any entrustment for special purpose.
iii. Banker should obtain possession lawfully.
iv. There should be no agreement inconsistent with the lien.

WHICH ARE SUBJECT TO LIEN:
1. Bills, cheques and documents for collection. (This is bank’s ordinary business).
2. Bearer bonds and coupons which are left for collection.
3. Coupon only where the bond is in safe-custody.
4. Promissory Note, Bill of Exchange, Treasury Bills, Coupon Bonds of foreign countries, deposited with bank.
5. Securities left after adjustment.
6. Dividend, Interest warrant or stocks and debenture certificates issued in the name of bank for the account of the customer.
7. Shares certificates purchased by the bank for customer.

WHICH ARE NOT SUBJECT TO LIEN:
1. When it is not the property of the customer. If the banker is unaware the lien not affected.
2. Securities deposited for particular purpose.
3. Credit balances in respect of contingent liability of bills not yet due (Bill Purchased).
4. Bonds when customer himself cuts the coupons thereon for collection, presumption being that bonds are left for safe custody.
5. Articles left for safe custody.
6. Securities given for sale.
7. Documents and valuables inadvertently left with the bank.
8. Balances not due.
9. Trust accounts.

__________________
“Whenever you find yourself on the side of the majority, it is time to pause and reflect.” -Mark Twain