Right of set off is a unique concept in the sense that it is not defined by any act, this right is typically available to the bankers, according to this right a banker can combine two accounts having debit as well as credit balance so as to recover the dues of the bank from the account holder, for the purpose of set off all branches of the bank are considered as one and not separate. It can be better understood with the help of a simple example, suppose there are three friends now friend A has given $1000 to friend B and friend B has given $1000 to friend C than if friend B is not able to give money to friend A than friend A asks friend C to give $1000 outstanding amount of friend B than it is nothing but an example of set off. Given below are some of the important right to set off rules which should be kept in mind by the banker before exercising this right–
Right of Set Off Rules
1st Rule
The first and foremost rule is that both accounts should be in the same right as well as same capacity, hence for example if there is a debit balance in the name of account A and A is having an account which is having a credit balance in the same name bank than the bank can adjust the debit balance with a credit balance.
2nd Rule
Another important rule is that the bank should give reasonable notice to the depositor before exercising set off as the bank cannot do it without giving notice to the depositor.
3rd Rule
If a loan is in the name of an individual then set off can be exercised on the individual account as well as sole proprietorship account, however, it cannot be exercised on deposit accounts which are held jointly with other individuals or in case of partnership accounts or trust account in which the borrower is the trustee or in case of client account which is maintained by the solicitor.
4TH Rule
Another important rule is that debt or amount which is to be written off should be one which is due and not becoming due in the near future. Hence, for example, suppose a loan installment is becoming due on 31st January 2020 than the bank cannot exercise its right of setoff before 31st January 2020 as the installment of the loan will become due after 31st January 2020.
5th Rule
If loan or debt is in the name of two persons than the bank can exercise it’s right on the credit balance of the joint account as well as credit balance of individual accounts, the same thing applies to partnership firm also hence if a partnership is having a loan account than this right can be exercised in the credit balance of partnership firm or credit balance of partners individual accounts.
As one can see from the above that the right to set off has some unique rules and that is the reason why bankers should be careful in exercising this right and should keep the above rules in mind.