John holds two accounts at the Bank. His first account (called his ‘Number 1 Acc

Question

John holds two accounts at the Bank. His first account (called his ‘Number 1 Account’) has a credit balance of $20, 000 and his second account (called his ‘Number 2 Account’) is overdrawn in the sum of $5, 000. The Bank has written John a general letter asking when he expects to be in a position to reduce his overdraft. John draws a cheque for $18, 000 on his Number 1 Account in order to pay a particularly large expense. He is surprised and annoyed when the Bank dishonours this cheque. He is particularly annoyed that the Bank did not even pay him the courtesy of letting him know that the cheque would be dishonoured. John seeks your advice as to whether the Bank is entitled in law to dishonour his cheque in this way.

Advise John whether the Bank is entitled in law to dishonour John’s cheque in this way. In your answer you must cite the relevant case law and legal principles which support your conclusion.

Explanation / Answer

Ans :- The right to setoff is a common banking practice that is followed by bank as per the Texas Finance code section 34.307. The bank has right to set off the overdrawn amount against all the account held by a depositor provided the bank as expressly disclosed it right. If the depositor defaults in repayment of its obligation then the bank has right to set off the payment without notice or consent of depositor. However here in the case the bank has written a general letter without expressly disclosing this right and timelines when the overdraft to be repaid so it seem that the bank was not entitled in law to dishounour John's cheque in this way.

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