Banking Law Term Paper

8/19/2019 Banking Law Term Paper

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Garnishee Orders and

Obligations of the Bank

TERM PAPER SUBMITTED

BY

AMANRAJ SINGH CHADHA

A3268615027

LLM (CB&IL) 2015-16

AMITY LAW SCHOOL

AMITY UNIVERSITY, NOIDA


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Index

S.No. TOPIC

1. What is garnishment

2. Applicability of Garnishee Order

3. Effects of Garnishee Order

4. Obligations of Bank

5. Case Analysis

6. Conclusion


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What is Garnishment?

The concept of 'Garnishment' has been introduced in Civil Procedure Code by

the amendment Act, 1976 and is a remarkable piece of legislation. This term

has been derived from the French word 'garnir' which means to warn or to

prepare. In simple words the garnishee is the person who is liable to pay a debt

to a debt to judgment debtor or to deliver any movable property to him. Besides

Judgment Debtor and decree Holder, Garnishee is a third person in whose

hands debt of the judgment debtor is kept. Basically he is the Debtor of

Judgment Debtor1.

Garnishee Order is an order passed by an executing court directing or ordering

a garnishee not to pay money to judgment debtor since the latter is indebted to

the garnisher (decree holder). It is an Order of the court to attach money or

Goods belonging to the judgment debtor in the hands of a third person. The

third party is known as 'Garnishee' and the court's order is known as

Garnishee Order. It is a remedy available to the Decree holder.

This Order may be made by the Order of the court to holders of funds, i.e. a

third party that no payments have to be made until the court authorizes them.

The purpose of the Order is to protect the interest of the Decree holder. This is

an Order served upon a garnishee requiring him not to pay or deliver the

money or property of the debtor (defendant) to him and/or requiring him to

appear in the court and answer to the suit of the plaintiff to the extent of the

liability to defendant.

The power of the court enshrined under Rule 46A to issue court notice, is

discretionary and the court may refuse to pass such Order if it is Inequitable

and the court apprehends that it can cause prejudice to the garnishee, or that

1 Shivanand Singh, A Glance On Provision Of – "Garnishee Order", Singh &

Associates


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the grounds of the application seeking that remedy is not sufficient or if the

affidavit is filed by decree holder is frivolous or ambiguous, etc. The discretion,

however, must be exercised judicially. Where the court finds that there is

bonafide dispute against the claim and the dispute is not false or frivolous, it

should not take action under this rule.

The executing Court has been given power to recover any of the amounts of the

judgment debtor, which is in the hands of other. The rule of 46 A requires a

notice to be issued to a garnishee before a garnishee order is passed against

him. If such notice is not issued and an opportunity of hearing is not provided

by the court, the order would be null and void.

In the eyes of law, there is no existence of such an order and any step taken

pursuant to or an in enforcement of such an order would also be void. The

object of this rule is to render debt due by the debtor of the judgment debtor

available in execution to the decree holder and not to drive him to a suit. It

applies to a debt, other than a debt secured by a mortgage or a Charge, which

has been attached under rule 46.

Prior to this amendment in 1976, there was no provision relating to garnishee

order in the code of civil procedure, 1908. After insertion of this amendment, adirect provision was added to the code of civil Procedure, which empowers the

court to issue such an order on the application duly filed. It is the discretionary

power of the court to issue a garnishee order and not a mandatory provision.

Garnishee proceedings are the proceedings in rem as well as in personam. It

operates on the personam of the garnishee as on the debt. Therefore it is

classified as a proceeding quasi in rem. Cheques cannot be attached under

Order XXI Rule 46. It is attached under O21 R46. It is attached under OXXI

R51 relating to Negotiable Instrument Act. Similarly contingent Debts can also

not be attached. The court has to use this power with caution thinking properly

and after being ensured that the case is prima facie and that no innocent is

harassed, otherwise the very purpose of the legislation of providing the

concerned remedy as discussed above shall come to be at a stake.


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We need to note the following points as rules in respect of bank accounts that

would be attached by a garnishee order2:

I. The general principle is that an unlimited garnishee order attaches the

cleared net sum standing to the customer’s credit and those that are

available to him at the bank at the precise moment when the order is

received.

II. The unutilised amount of an overdraft limit is attached.

III. The bank is entitled to exercise its right of set-off, if any. In this case,

loan already due for repayment and demanded for may be deducted.

IV. As regards future credits, the principle is that any credit which has not

been cleared to the customer’s account at the time when the order is

received is not attached.

V. A garnishee order is issued to one party in a joint account does not

attach the joint account. In the same manner, the order on one or some

of the partners in a partnership business does not attach the

partnership account.

VI. If the garnishee order names two judgement debtors who are joint

account holders, it will however attach the joint account and individual

accounts of the joint parties. In partnership, the order attaches the

partnership account. It also attaches personal accounts of the partners.It attaches the account of anyone of the partners for the whole sum of

the order because of the Principle of Joint and Several Liability.

VII. Money held in overseas branches of a bank is not attached. This is

because such money is outside the jurisdiction of the court issuing the

order. Money held in domiciliary accounts is however attached.

VIII. The order will attach cash paid in at other branches of the bank. This

affect cash paid in before the order was served.

IX. Money held in a suspense account of a bank for the judgement debtor is

attached.

X. Deposit account will be attached regardless of the maturity condition,

submission of deposit receipt issued to the customer or any other notice

2 Peter Kehinde Mogaji, The Operation of Garnishee Order in Banking


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requirements. This is because a garnishee order made absolutely cancels

such receipt.

XI. The order must correctly identify the judgement creditor; if not, the bank

will be entitled to ignore it as this can lead to a wrongful dishonour of a

cheque drawn on an account that was not intended to be attached. The bank may also ignore corrections made on the order by a party other

than the court.

XII. The order attaches money held on behalf of another party or on trust as

much as the money is held to the credit of the customer (judgement

debtor) and the customer (judgement debtor) can withdraw it. (Plunkett

Vs Barclays bank Ltd. 1936). However, a trust account so attached can

be protected if the beneficiary can prove his interest as in Harrods Ltd.

Vs Tester (1937).

XIII. If a bank confirmed a cheque good for payment if presented, but before

the actual physical presentation of the cheque, a garnishee order is

served, the paying bank cannot debit the cheque to the account.

(Nigerian Bills of Exchange Act, 1990).

XIV. When a bank issued its own instrument to pay a cheque that was

specially presented to it before the receipt of the garnishee order, the

amount of the cheque is deductible in calculating the balance to be

attached even though not yet debited to the account.

XV. Money held in an account opened under a trading name is attached asmuch as the name attached is the sole owner of the business. This rule

does not applied to incorporated companies.

XVI. The order protects ascertained debts only. It gives no protection to

contingent liability.

XVII. Money which has been conclusively or irrevocably paid from the account

will not be attached provided the payment/or transfer of such money has

been completed as at the time of serving the order. It was decided in

Rekstin v. Sevro Sibirsko (1933) that a garnishee order revokes an

instruction by a customer to transfer fund despite the completion of book

entries as much as the transfer has not been informed.


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Effect of Bankruptcy or winding up3

Where a garnishee order nisi has been served and, before it is made absolute,

notice of an act of bankruptcy or presentation of a petition is received, or if a

receiving order has been made, the garnishee order fails.

Likewise where a garnishee order nisi is outstanding on a company’s account

and a petition for winding up is presented, the order will fail. Moreover, where a

company is being wound up by the court, any attachment after the

commencement of winding up is void.

Banker’s liability for dishonor of cheques

Where under a garnishee order nisi, received prior, the bank dishonoured the

cheque despite adequacy of balance in the account, the plaintiff filed a suit for

damages and argued that the intention of garnishee order was that the whole

debt should be attached where it was less than the amount of the judgment of

the debt. It was held by the House of Lords in Rogers v Whitley4, that on the

service of the order upon the bank, all the debts owing or accruing from the

garnishee to the judgment debtor were bound, irrespective of the amount of the

judgment debt; the bank was justified in dishonouring the cheques after the

receipt of the order nisi and no liability attached to it.

Garnishee Order- Attachment of bank deposit before judgment5

3 M.L.Tannan, Tannan’s Banking law, 23rd Edition, 994

4 1892 AC 118

5 Supra 2, 996


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In Hindustan Bank Ltd. V Kanshi Ram6, it was held that an order of

attachment before may be passed under the Companies Act, 1956. Under

Order38 Rule11 of the CPC, when an order of attachment before judgment is

passed in a pending suit, the plaintiff is not required to reattach the property

in execution proceeding. It Is the settled law that bank deposit account can be

attached before the judgment and the court is issuing garnishee order is a

common practice.7

6 AIR 1917 Cal 852

7 Canara Bank v. Govardhan Das, AIR 1980 Guj 809


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Applicability of Garnishee Order

Garnishee Order is Applicable8 to the following:

a)Where there is a credit balance

b)Attaches the amount drawn by a cheque but payment not yet effected.

c)All bank branches of a bank are treated as one entity.

d)Attaches future maturing term deposits also.

e)Attaches joint account if issued so

f)Attaches personal account of partners if an order is served on a

partnership account.

The Order is NOT Applicable to the following:

a)Where a cheque has been marked for good payment.

b)Attaches the amount specified only

c)Not applicable to sanctioned limit.

d)Where any assignment of balance has been made and acknowledged

e)Not applicable to deceased and insolvents

f)Salary is not attached.

g)Bank can exercise the right of set off before complying with Garnishee

Order.

8 http://www.tfguru.com/categories/faqs/banking-general/206-what-is-a-

garnishee-order last visited 15th February, 2016


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Effects of Garnishee Order

There are various types of bank accounts thus attract different effects from

garnishee orders being attached to them9:

a)Joint Account: A joint account is opened in the names of two or more

persons. If only one of them is a judgment –debtor, the joint account

cannot be attached. But, if both or all the joint account- holders are joint

judgment- debtors in any legal proceedings, the joint account can be

attached. For example, if A owes a debt of Rs. 1,000 to B in his personal

capacity, the latter cannot pray for the attachment of a joint account in

the names of A and C. But if A and C are jointly responsible for the debt,

their joint account may be attached. But the reverse is possible, i.e., in

the case of a debt jointly taken by two or more joint judgment-holders,

their individuals accounts with the banks may be attached because each

one of them is jointly and severally liable for the loans jointly taken by

them.

b)Partnership Account: In case of debt taken by a partnership firm, the

personal accounts of the partners can also be attached in addition to theaccount in the name of the firm because the liability of partners is both

joint and several. But the reverse is not possible. If a partner is a

judgment-debtor, only his individual account may be attached and not

that of the firm or those of other partners.

c)Proprietorship Account: the firm’s account is attached only if garnishee

order is issued in the name of the sole proprietor as the only judgment

debtor.

d)Trust Account: A trustee hold the funds or property of some else for the

benefit of the beneficiary. An account opened in the personal name of the

Trustee, in his capacity as such, cannot be utilized for paying his

personal liabilities. The banker should, therefore, inform the court that

9 Garnishee Order on Accounts (http://updatedindianbanking.com/td.asp?

id=126) last visited 15th February, 2016


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the account is a Trust account and in the meanwhile stop payments from

the account and instruct the Trustee.

e)Accounts impressed with Trust: cannot be used to settle personal

liabilities and the banker is not bound by garnishee order.

Banks view garnishments as a two-edged sword:

• Banks like that a garnishment spares the bank from getting thrust into

the middle of a squabble between two parties claiming the same funds in

a bank account.

•

Banks hate that a garnishment almost always ends with the banksending funds out the door.

• Banks also hate that when someone loses their funds through a

garnishment, no matter what the reason, they often want to sue

someone; and they mistakenly see the bank as the culprit that took their

funds, even though the bank was only following the order of a court.

Typically, the garnishment process10 unfolds like this:

1.A debtor defaults on a debt.

2.The creditor to whom the debt is owed sues the debtor.

3.The creditor wins and a judgment is placed against the debtor.

4.The creditor files a court action to take the specific amount of funds that

are owed from the creditor’s bank account (or accounts), i.e., garnish the

account(s), at a specific bank. (Note that the creditor must know where

the debtor has a bank account.)

10 Don Coker, Defending Bank Garnishment Litigation Filed Against Banks

and other Financial Institutions


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5.The court sends to the bank a document that goes by different names

but may be called a summons of garnishment, notice of garnishment, or

something similar.

6.In compliance with the summons or notice of garnishment, the bank is

ordered to take action to prevent the creditor, i.e., the bank’s customer,from removing funds from the account, or accounts that are being

garnished. The bank may freeze the account to any further activity and

access by the owner of the account, move the amount of garnished funds

to a suspense account, or simply place a hold on the funds. (Note that a

hold is generally used on time savings deposits such as certificates of

deposit since moving them to a suspense account would make it difficult

for the bank’s computer to keep accruing interest on the account.)

7.In order to cover the amount stated in the summons of garnishment, the

bank may be required to freeze or hold more than one account.

8.Due to the additional manpower and individual handling that are

required for a bank to handle garnishments, state laws as well as

industry standard practice allow banks to charge a fee for this work. The

unacceptable alternative would be for the bank to increase the service

charges for everyone with an account at the bank in order to reimburse

the bank for the cost of processing the garnishments for the account

holders that were being garnished.

9.Banks place the account freezes or holds and then notify the accountholder, the same day or within a couple of days, that they should contact

the creditor, an attorney, or the court if they plan to contest the

garnishment. This usually involves filing what lawyers call a traverse.

Part of this process includes the account holder’s responsibility for

notifying the court if any of the funds in the accounts are exempt from

garnishment.

10. The summons of garnishment will state a date range during which

the bank will have to forward the garnished funds to the court, usually

thirty to forty-five days or so from receipt of the summons. By the end of

this summons period, the bank must transmit the amount of garnished

funds to the court, or else the bank gets into trouble with the court for

failing to follow its order.


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Obligations of Bank

Generally it is the bank’s primary obligation to take care of its customers and

provide services which are fundamental to the contractual relationship of the

banker and the customer. Further provisions stated in the Banking Code state what services will the bank provide to its customers as a part of general

contractual obligations which are owed to the customer. E.g. the bank will help

you to choose products or services which meet your needs and will also give

you clear information with regards to services which the bank will provide to

you e.g. joint account customer’s rights and responsibilities and many more.

The Bank will also provide its customers with regular account statements and

all information with respect to running the customer’s account e. g how direct

debit works, or cheque payments work etc. If the customer has a passbook the bank will not be required to send bank statements to the customer. The

Banking Code also contains provisions regarding the means of notification of

the change to the terms and conditions; there should also be a notice period of

30 days which must be given to the customer11.

If the change in terms and conditions is advantageous to the customer such

change can be carried out immediately without the need for notice to be

submitted to the customer. The notice period stated in the Banking Code is 30

days however under common law such notice only needs to be reasonable.

What is reasonable is determined by the case law.

Obligation for wrongful dishonor of cheque12

If a banker, without justification, dishonours his customer’s cheque, he is liable

to compensate the customer for injury to his credit. The amount of

compensation recoverable by the drawer of a cheque from a banker in case of a

11 http://www.inbrief.co.uk/personal-finance/bank-obligations-to-

customers.htm Last visited 15th February, 2016

12 Manohar Veera, Legal Aspects of Banking : GARNISHEE ORDER


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The banker must not disclose the condition of his customer’s account and the

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

account.

Disclosure is justified in following cases13:

1.Answering questions proposed by a guarantor or under compulsion of

law

2.With express or implied consent of the customer

3.Where the customer has given as a reference, the banker will be fully

justified in answering all the questions

4.By the order of the court

5.In case of danger of treason to the state6.As in an action against the customer for money due

7.When the bank calls upon the guarantor for payment, giving the amount

of indebtedness of his customer for which the guarantor is liable, the

disclosure is justified

8.Under section 131 of Income Tax Act, 1961; Section 37 of the Wealth Tax

Act, 1957; Section 36 of the Wealth Tax Act, 1958; Section 94 of the

Cr.P.C

13 Jarvis Rottney, Banking Fundamantals


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Case Analysis

InGlobal trust bank Ltd. v. Fargo Frieght ltd. & ors14, the Hon’ble court held that

it applies not only to a debt other than a debt secured by a mortgage or a

charge, which has been attached under Rule 46 of Order 21 but also to a debt

under a negotiable instrument. The foundation of a garnishee proceeding is an

attachment under rule 46(1) of Order 21 of the Code. At the most it can be said

that orders, which were passed, are akin to attachment proceedings under

which by operation of various interim orders the appellant had been directed to

keep the letter of credit alive. But the question in this instant case is that

whether mere attachment would entitle and enable the Court to otherwise

make a direction for the payment of the amount, without adjudicating upon the

case set up by appellant that for various reasons it is not liable to pay the

amount. It has also been noticed above that the appellant is seriously

disputing its liability under the letter of credit to pay. Rule 46B of Order 21 of

the Code says that when the garnishee does not forthwith pay into Court the

amount due form him and fails to appear and show cause in answer to the

notice, the Court may order the garnishee to comply with the terms of such

notice. Rule 46C of Order 21 lays down the procedure when the garnishee

disputes indebtedness to the judgment debtor or alleges that the debt is not anattachable debt. The Court must order an issue to be raised and tried. Even if

there is a reasonable doubt the matter should be tried. The garnishee is

required to make out a prima facie case before an issue as to his liability may

be ordered to be raised; In other words he would disclose facts from which a

reasonable inference may be drawn that there is a valid dispute as to his

alleged liability.

InSyndicate Bank v. Vijay Kumar15, while furnishing bank guarantee in favor of

high Court customer furnished two fixed deposit receipts duly discharged to

the bank and authorized the bank the custody of the receipts and renewals

14 AIR 2002 Delhi 13

15 1992 2 SCC 330


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thereof. The Hon’ble Supreme Court held that it becomes a general lien. Bank

can set off liability of the party against the receipts. If the fixed deposits are

attached to bank garnishee has to go to the court. The balance after

adjustments of bank’s claim shall be available to satisfy the decree.


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Conclusion

The Code of Civil Procedure empowers the court to issue the garnishee order.

Prior to the amendment in 1976, there was no provision relating to garnishee

order in the code of civil procedure, 1908. After the insertion of Amendment bythe way of Code of civil procedure Amendment Act, 1976, a direct provision was

added to the Code of Civil Procedure, 1908. It empowers the court to issue

such an order on the application duly filed. But it is not mandatory on the

courts to issue the order every time as and when the application for its

issuance is filed. It is the discretionary power of the court to issue a garnishee

order and not the mandatory provision. The word ‘may’ in the rule means that

the rule is discretionary and the court may refuse to act under this rule if it

inequitable or if it is likely to cause prejudice to garnishee.

The garnishee is required to make out a prima facie case before an issue as to

his liability may be ordered to be raised. Even if the garnishee disputes the

indebtedness to the judgment debtor, the court shall carry on the proceedings.

If there is even little doubt about the indebtedness of the judgment-debtor, the

court shall continue with the proceedings. The Court must order an issue to be

raised and tried. Even if there is a reasonable doubt the matter should be tried.

The court has no power to issue order or direction to anybody, may it be usual

financier of the judgment-debtor, who is not holding any money of the

judgment-debtor to pay to satisfy the debt or decretal amount for the

judgment-debtor, may it under assumption the garnishee is able and can

recover the amount from the judgment-debtor or the judgment-debtor will pay

to the garnishee16.

The court may reject the application or refuse to issue such order if suitable

grounds are not found i.e. if the affidavit filed by the decree holder is vague,

insufficient and ambiguous; the proceedings would not sustain and would

come at stake. The court may, in exercise of sound discretion, control the use of

writs of garnishment to the extent of preventing it from being abused or

becoming oppressive. If the assets are belonging to the defaulted member it

16 Varsha Rajora, Power of Indian courts to issue Garnishee Order


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cannot be attached in Garnishee proceedings since it is not a debt due to the

defaulted member.

Thus, it is concluded that it is very good piece of legislation by our

parliamentarians. But it has to be used with caution. While issuing such order,

it is the duty of the court to check whether the case is prima facie. It is also the

duty of the court that while exercising the discretionary power, the power is not

misused and the innocent is not harassed.


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Bibliography

Websites:

• http://updatedindianbanking.com/td.asp?id=126

• http://www.sbank.in/2013/10/legal-aspects-of-banking-garnishee-

order.html

• http://www.tfguru.com/categories/faqs/banking-general/206-what-is-

a-garnishee-order

• http://thelawcentre.ca/self_help/small_claims_factsheets/fact_19

• http://elearning.nokomis.in/uploaddocuments/Banking

%20Fundamentals/Chp.16%20Bankers

%20Obligation/Summary/chapter%2016.pdf

Books:

• Code of Civil Procedure, 1908

• Income Tax Act, 1961

• Tannan’s Banking Law and practice in India, 23rd Edition, M.L.Tannan

Documents

Banking Law Term Paper