QS Study

In order to cover a loan in default, a bank has a legal right to seize funds of a guarantor or the debtor. A settlement of mutual debt between a creditor and a debtor through offsetting transaction claims is also known as a setoff. Through this settlement, a creditor can collect a greater amount than they usually could under bankruptcy proceedings. When a setoff clause is entered into, the bank can seize the customer’s current deposit. A set-off is generally in the form of a cross-claim for a liquidated amount and it can be pleaded only in respect for a liquidated claim. When a banker combines two accounts in the name of the same customer and adjusts the debit balance in one account with the credit balance in other accounts, it is called the right of set-off.

A bank exercising a right of setoff must fulfill the following conditions:

a) the account from which the firm transfers funds must be held by the customer owning the firm money;

b) the account from which the firm transfers the money and the account from which the money would otherwise have come, must be held with the same firm;

c) both accounts must both be held in the same capacity by the customer; and,

d) The debt must be due and payable.

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