Question

“Set off right is applicable in Trust Account.” Comment on the statement. (300-400 Words)

Answer 1

A personal debt cannot be combined with the credit balance in the trust account maintained by the individual. Where a bank has notice that an account contains money held by a customer on trust, the bank will have no right to set - off this money against a debit balance on another account.Another important essential of set - off is that the indebtedness should arise in the same rights. A solicitor’s personal account which is overdrawn cannot be combined with his client’s account.

When money is deposited in a bank, the bank becomes the debtor of the depositor to the extent of the deposit If the depositor is indebted to the bank on a matured obligation under a separate financing arrangement, a mutual indebtedness arises which the bank may extinguish by setting off its debt against the amount of the depositor's debt.'" There are, however, restrictions placed on the exercise of set off. The indebtedness between the bank and depositor must be mutual;" the account must not be opened for a special or limited purpose;'" and the deposit must not be a trust account of which the bank had actual or constructive notice. 3 Most importantly, set off will be allowed only when the debt to the bank has matured.'"

The debt of the depositor to the bank may be created simultaneously with, subsequent to, or antecedent to the deposit.'5 Most courts hold that all three situations constitute transfers for value which cut off all prior equities, including those of the depositor.'" The rule in the simultaneous debt situation results because a deposit is made in exchange for the extension of credit.'7 A subsequent debt situation constitutes a transfer for value since credit is extended in reliance on the existing deposit.'" Finally, where a set off is made in satisfaction of an antecedent debt, these courts recognize a transfer for value.'

The funds held by a person in a trust account are to be treated in a different right from his own liability as an individual. Theses cannot be used by the bank for set-off.