Banks have a number of legal mechanisms at their disposal with a view to safeguarding their interests in circumstances where they are owed money by defaulting customers who are unlikely to take steps to settle their outstanding debts. One such device is the so-called right of combination - the focal point of this article - which, for contextual and comparison purposes, and for the sake of terminological clarity, will be considered against the backdrop of certain other available measures, namely rights of appropriation and lien, which may be harnessed by a bank to protect its financial interests.
At the outset, brief mention may thus be made of a bank's right of appropriation which would ordinarily merit further detailed analysis, but will be afforded relatively limited coverage in this text. In the present context, it would suffice to say that, in the absence of specific instructions on the part of a customer, a bank is at liberty to appropriate (i.e. apply) payments which are to be deposited into his account, in such manner as it sees fit. Accordingly, where a customer operates two or more accounts with the same banking institution, and incoming funds are earmarked for payment to the customer concerned, the bank may thereby elect to appropriate same to one of the accounts in question. In a similar vein, and in circumstances where the customer operates one account where there are inward and outward payments, the bank may, in the absence of the account holder's intentions, and should it choose to do so, designate which specific inward payment will pertain to any given outward payment. In the latter case, should the bank omit to appropriate in this manner, the matter will be governed by the operation of the so-called rule in Clayton's Case, whereby a first payment into a current account shall be correlated with a first payment out. In effect, when such account is debited, this will be offset against the earliest available credit which appears in the account in question (Devaynes v Noble  I Mer 529).
Prior to addressing the principles governing a bank's right of combination, it would be prudent to briefly consider a further device that a bank may resort to, in order to safeguard its position - the bankers' lien - a possessory security which is often terminologically confused with the right to combine. In essence, in exercising its right of lien, a bank may retain a customer's property which is already in its possession, pending settlement of any claim it may have for any outstanding debt on his part. In a broader sense, this may be classified as a so-called "general" lien which is wide in scope and is applicable in respect of all moneys owed by the debtor (as opposed to a "particular" lien which affords the creditor a narrower right to retain possession to secure payment of an amount due, only in relation to the specific property over which the lien is exercised). As is evident from the foregoing, a lien therefore differs from a mortgage or pledge in the sense that it arises by operation of law, rather than by express agreement between borrower and lender. However, by virtue of the fact that it carries a power of sale, in contrast to other types of lien, it is somewhat loosely regarded as being akin to an implied pledge (although, strictly speaking, this conflicts with the notion of a conventional pledge which connotes the existence of a consensual arrangement between contracting parties). The scope of a banker's lien is such that, subject to an express or implied agreement to the contrary, it may encapsulate all paper securities deposited with a bank during the course of normal banking business (Brandao v Barnett (1846) 3 CB 519).
As such, it has been held that, for this purpose, "securities" may, inter alia, comprise share certificates, insurance policies, (assuming these documents are not held under existing security arrangements), money transfer orders, shipping documents and bills of exchange, although there is some doubt as to whether a lien would embrace title deeds to immovable property (which, in any case, would more than likely be furnished as collateral under a conventional mortgage arrangement). A key determining factor as to which securities may be harnessed by a lien, is whether the documentary subject matter is considered to have been held by the bank under a separate agreement, in which case anything held in safe custody would necessarily be excluded, as would other documents such as life policies and share certificates which, by mutual consent of lender and borrower, have been duly lodged with the bank for security purposes. Other limitations on the operation of a lien would come into play in respect of securities which are held in trust by a customer, where there is an express or implied agreement to the contrary, and in circumstances where there is a prior legal interest.
A bank may resort to exercising its right of combination (otherwise also referred to as consolidation), which is described as the process of "setting one account off against another, of the same customer, in order to determine the total state of indebtedness between customer and bank" (per Otton J in Re K  2 All ER 562 AT 566). For the sake of legal clarity, it would be prudent that a distinction be made between such right and that of lien, despite the fact that these concepts have often been judicially and otherwise regarded as being synonymous ( Nikolaos Antoniou through his proxy Giannoulas Papadopoulos v Cyprus Popular Bank  1 AA∆ 720, reference was made to a general bankers' lien to reflect a banker's right to combine or set off a customer's debit and credit balances with a view to discharging a debt owed to the bank). In this regard, one is reminded of what Buckley LJ had to say in Halesowen Presswork & Assemblies Ltd v Westminster Bank  1QB 1, when he characterised a lien as being a form of security which "postulates property of the debtor in the possession of or under the control of the creditor", an explanation which cannot be said to harmonise or equate with the legal features and mechanics of combination.
The argument against referring to combination as a right of lien, stems from the classic case of Foley v Hill (1848) 2 HL Cas 28, which perceived the relationship between bank and customer as being that of debtor and creditor, whereby "the bank borrows the proceeds and undertakes to repay them" (per Atkins LJ in Joachimson v Swiss Bank Corporation  3KB 110). On this basis, it thus stood to reason that a bank would be precluded from exercising a right of lien over funds under its full ownership - a position which was expressed in the simplest of terms by Buckley LJ who stated that "no man can have a lien on his own property" (Halesowen). In essence, the bank's indebtedness to its customer, represented by a credit balance standing to the credit of the customer's account, is regarded as a "chose in action" (as opposed to a "chose in possession" - a key constituent element of the right of lien), which connotes a position that property is theoretically owed by the bank, to the account holder, by virtue of the customer's personal legal right to sue. In this context, it is pertinent to mention that, whilst case authority suggests that it is now feasible for a bank to secure a charge over funds in a customer's account, such a development does not alter the fact that, in the absence of the bank's ability to retain possession of a debt, it would thereby be inappropriate to regard this as a right of lien (Re Bank of Credit and Commerce International SA (No 8)  4 All ER 568).
In addition to the terminological flaw which identifies it as a lien, combination is often erroneously perceived or referred to as a right of set-off. In a strict legal sense, the latter would ordinarily only be exercisable in circumstances where there is a pre-existing claim - a factor which is not a pre-requisite for the right to combine. To elaborate on this point, the term "set-off" would technically be appropriate to describe circumstances in which a claim is instituted by party A against party B, which is subsequently countered by a separate unrelated claim by party B against party A (with a view to diminishing or extinguishing the amount initially claimed by party A against party B). In essence, this does not, strictly speaking, accord with the notion of a right to combine, as the latter does not entail a separate claim by the bank, but simply constitutes a method of establishing the net amount due between bank and customer.
The right to combine may be exercised in circumstances where a customer refrains from paying an overdraft in respect of one account, whilst another of his accounts, held with the same bank, reflects a credit balance. Consolidation may also be effected to safeguard a customer's interests, as where the drawer of a cheque has insufficient funds in his account to meet the payment. In such a case, and in order to ensure that the cheque is honoured, the paying bank may take steps to cater for the shortfall by combining funds from another of the customer's accounts which has a credit balance.
The process of combination may be undertaken in circumstances where the bank simply manifests an intention to do so (Halesowen). By virtue of the fact that a bank's right to combine arises by implication of law, prior notice of such intention need not be given to a customer, although for purely practical purposes, and with a view to preserving a congenial banker/customer relationship, it may, in certain circumstances, be courteous or prudent to do so (Garnett v McKewan (1872) LR 8 Exch 10). The issue of dispensing with notice, from a legal standpoint, would appear to be attributed to the fact that a customer is deemed to be familiar with the balance status of each of his accounts at any given time, so that technically there would be no need to forewarn him of any contemplated set-off by his bankers. Furthermore, from a purely practical perspective, if a customer were to receive prior notification, he may be inclined to withdraw available funds, deplete the credit balance, and thereby prevent the bank from pursuing its right to combine. Needless to say, the denial of notice may conceivably have negative implications for customers who might have previously drawn cheques which stand to be dishonoured due to the non-availability of funds that were utilised for combination purposes.
Whilst a bank ordinarily has a right to combine, this may nevertheless be superseded by an express or implied agreement to the contrary. Accordingly, in Buckingham v London and Midland Bank Ltd (1895) 12 TLR 70, the court declared that such agreement arose by implication in circumstances where the customer had a current account with a credit balance, as well as a loan account secured against his property. The bank was denied the right to combine, as the position was such that it constituted an implied agreement to keep the accounts in question separate. However, even if there is such agreement not to combine, this may nevertheless be terminated by notice, or where subsequent developments in the banker-customer relationship so dictate. The latter aspect was evident in Halesowen where the customer's liquidation had rendered ineffective the bank's agreement not to combine which was motivated by its intention to support and maintain the continuation of its customer's business with a view to facilitating its subsequent sale as a going concern. A point worth noting is that in delivering its judgment, the court drew attention to the fact that, irrespective of its decision, the bank would, in any event, have been obliged to combine accounts by virtue of applicable mandatory statutory rules of set-off, which were not capable of being circumvented by prior agreement between bank and customer - a position which is equally applicable in Cyprus and will be addressed elsewhere in this text.
There are specific instances in which a bank will not be permitted to combine accounts, as where it is aware that credit balances are not held in the customer's own right, but are such that they are subject to a 3rd party's proprietary claim, as was the case where a customer's debit balance could not be offset against trust funds (Re Gross, ex p. Kingston (1871) LR 6 Ch App 632), or moneys deposited for a specific purpose (Barclays Bank v Quistclose Investments Ltd AC 567 HL). By the same token, a bank, as constructive trustee for the payer, will be precluded from combining funds which, to its knowledge, have been deposited into an account by mistake of fact (Westdeutsche Landesbank Girozentrale v Islington LBC  2 WLR 802 HL 1140). A like approach has been adopted by the courts where a bank, being aware of the circumstances, could not combine a balance representing the proceeds of a debt assigned to a third party (Re Marwal Ltd BCC 32).
In addition to the above, a bank would be denied the right to combine in the following circumstances:
- Where there is a debit balance on a joint account there can be no combination with a credit balance on a sole account where the latter is in the name of one of the parties to the joint account (Re Willis, Percival & Co, ex p Morier (1879) 12 Ch D 491).
- A bank would be precluded from combining a partner's private account with the relevant partnership account, unless the operative mandate stipulates that the partner concerned shall be jointly and severally liable for any borrowing.
- Subject to what was stated in the preceding paragraph, combination may only be exercised in circumstances where it concerns the same parties. This calls for caution by a bank when accounts are opened in the name of nominees, whereupon, as a prerequisite to combining accounts, nothing short of definite proof, or "clear and undisputable" evidence, must be presented to verify that such accounts are being held by nominees of the same person (Bhogal v Punjab National Bank  2 All ER 296 CA).
- There is no right of combination in respect of contingent liabilities such as guarantees, performance bonds, indemnities etc. In Jeffryes v Agra & Masterman's Bank Ltd (1866 LR 2 Eq 674, the court expressed this aspect in terms of the fact that "you cannot retain a sum of money which is actually due against a sum of money which is only to become due at a future time".
Combination of accounts is obligatory in the event of the event of the customer's bankruptcy or insolvency, as the case may be. In this regard, a bank would be constrained to comply with the mandatory provisions of S35 Cyprus Bankruptcy Law CAP 5, or S299 Cyprus Companies Law CAP113 respectively, the statutory requirements of which cannot be contracted out of. The former section provides as follows:
"Where there have been mutual credits, mutual debits or other mutual dealings between a debtor against whom a receiving shall be made under this Law, and any other person proving or claiming to prove a debt under a receiving order, an account shall be taken of what is due from one party to the other in respect of such mutual dealings and the sum due from one party shall be set off against any sum due from the other party and the balance of the account, and no more, shall be claimed or paid on either side respectively..."
Whilst the above-mentioned bankruptcy rules specifically refer to individuals S299 Cyprus Companies Law CAP113 expressly provides that the provisions in question shall, as indicated hereunder, be applicable in a like manner to the winding-up of insolvent companies:
"In the winding-up of an insolvent company, the same rules shall prevail and be observed with regard to the respective rights of secured and unsecured creditor sand to debts provable ..., as are in force for the time being under the law of bankruptcy".
The matters addressed in this text reflect the need for individual and corporate customers to be acutely aware of the various legal mechanisms available to banks when dealing with or administering their accounts, and to appreciate the extent to which the applicability of legal banking concepts may impact upon specific situations which may or may not have far-reaching implications. In essence, clarity should be sought when dealing with such issues and, where circumstances so require, appropriate expert advice should be obtained, so as to sustain a harmonious banker-customer relationship and pre-empt or alleviate unnecessary stumbling blocks which might otherwise arise.
Originally Published by Erotocritou, January 2021
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.