CENTRAL INSURANCE COMPANY LTD v. DIAMOND BANK LIMITED
HIGH COURT
(LAGOS DIVISION)
(OYEFESO J.)
FACTS
Central Insurance Company Ltd (“the Claimant”), a company engaged in general insurance business, was involved in two separate commercial transactions with the now-acquired Diamond Bank Limited (“the Defendant”), a popular commercial bank with branches in Lagos and other parts of Nigeria. The Claimant secured a mandate from the Accountant General of the Federation which it subsequently cashed in and received the sum of ₦26,442,028.00 (Twenty-six million, four hundred and forty-two thousand, twenty-eight naira only). The said amount was received in the Claimant’s Pension Call Deposit Account maintained with the Defendant for the payment of pension and gratuity benefits of staff of the Federal University of Agriculture, Makurdi, Federal University of Agriculture, Abeokuta, and Federal University of Agriculture, Umudike. Under the terms of the mandate, the Claimant was appointed as the Underwriter, while the Defendant was the Banker.
In the ordinary course of its business, the Claimant also issued Credit Bonds to secure loans granted by the Defendant to four of its customers. Unfortunately, those customers defaulted on their loan obligations and the Defendant exercised its right to call in the Credit Bonds. Pursuant thereto, the parties held several meetings with a view to reconciling accounts and resolving the outstanding indebtedness due to the Defendant under the said credit facilities. However, while negotiations were still ongoing, the Defendant without the consent or authority of the Claimant, unilaterally set off the sum of ₦8,213,110.10 (Eight million, two hundred and thirteen thousand, one hundred and ten naira, ten kobo) being the outstanding balance allegedly due under the Credit Bond, from the Pension Call Deposit Account. The Claimant’s position was that the Pension Call Deposit Account and the credit bond transactions were entirely separate and distinct, arising from different dealings between the parties.
One of the issues formulated for determination was: Whether or not the Defendant was entitled to set off the sum from the Claimant’s account maintained with the Defendant, in satisfaction of the Claimant’s obligations arising from Credit Bonds issued by the Claimant in favour of the Defendant.
ARGUMENTS
Learned counsel for the Claimant contends that the since the Claimant maintained three distinct accounts with the Defendant Bank namely, a Current Account, a Pension Call Deposit Account, and a Credit Bond Account. And the sum of ₦26,442,028.00 (Twenty-six million, four hundred and forty-two thousand, twenty-eight naira) was paid into its account by the Office of the Accountant-General of the Federation as insurance premium for the staff of the Federal Universities of Agriculture, Abeokuta, Makurdi, and Umudike. By mutual agreement, the said amount was placed on call, giving rise to the Pension Call Deposit Account. He submits that the Pension Call Deposit Account and the Credit Bond Account were separate and distinct accounts, arising from different commercial relationships. Accordingly, there was no authority or mandate given to the Defendant to debit or set off funds from the Pension Call Deposit Account in satisfaction of any obligations allegedly owed under the Credit Bond arrangement. Counsel argued that the Defendant’s unilateral debit from the Pension Call Deposit Account constituted a breach of the banker–customer relationship. The debit, he contends, crippled the Claimant’s ability to settle pension claims, caused significant financial hardship, and led to the loss of clients who felt aggrieved and consequently ceased doing business with the company.
Learned counsel further submitted that the Defendant, having engaged in several meetings and negotiations over the disputed bond claims, is estopped from unilaterally setting off funds while discussions were ongoing. It maintains that such conduct amounts to bad faith and a violation of the duty of care owed by a banker to its customer arguing that a bank cannot combine accounts or exercise a right of set-off where the customer is not the beneficial owner of the monies in question. It argues that the funds in the Pension Call Deposit Account represented premiums paid by policyholders, which are held in trust to meet future pension and gratuity liabilities. Such funds, according to the Claimant, are not its free assets but are held for the benefit of third parties; therefore, they cannot be subject to set-off against unrelated obligations. Additionally, counsel argued that under a Credit Bond arrangement, the insurer’s liability to the bank only arises after due process of investigation and confirmation that the insured party has defaulted in a manner that triggers the bond. Therefore, since the Claimant was still investigating the claims, the Defendant’s action in debiting its Pension Call Deposit Account was premature, unauthorized, and unlawful. The Claimant thus prays the Court to hold that the Defendant acted in breach of its duty and is liable to the Claimant for the losses suffered.
In response, learned counsel for the Defendant argued that the Defendant’s action in setting off the outstanding sum from the Pension account was lawful and justified. Counsel contends that prior to the set-off, the Defendant made repeated demands on the Claimant to honour its obligations under the Credit Bonds issued as collateral for facilities granted to certain customers, the said facilities having fallen due, had remained unpaid, notwithstanding several reminders and discussions held with the Claimant. It is also the defendant’s case that the Claimant had acknowledged its obligations to it and made several repayment proposals, none of which were fulfilled. Additionally, while discussions were still ongoing, the Defendant observed that the Claimant attempted to withdraw funds it held with the Bank, whereupon the Defendant exercised its right of set-off to recover the outstanding amount.
Counsel submitted that the Defendant’s right to combine the Claimant’s accounts and set off the outstanding indebtedness was clearly supported by the Letter of Set-Off duly executed by the Claimant in favour of the Defendant. He maintained that the letter empowered the Defendant to appropriate any credit balance in the Claimant’s accounts to liquidate debts or liabilities owed to the Defendant, regardless of the account in which the funds were held. Accordingly, it was submitted that the Defendant did not breach any of its contractual obligations with the Claimant.
DECISION OF THE COURT
In resolving this issue, the High Court held that:
A bank is entitled to combine accounts maintained by a customer in his own right, even if such accounts are held at different branches of the same bank, and to treat the resultant balance, if any, as the only sum truly standing to the credit of the customer, unless precluded by an agreement. The Court further held that any contract between the parties restraining the banker from combining the monies in the different accounts of the customer ceases to have effect once the banker–customer relationship comes to an end.
It is the Court’s decision that where a Claimant contends that no agreement for set-off exists, as in the instant case, the onus of proof lies squarely on the Claimant. The Claimant must establish that it was not indebted to the Defendant, and that no authority had been granted to exercise the right of set-off. The court held that, since there exists a Letter of Set-Off duly executed by the authorised signatory of the Claimant and addressed to the Defendant, the Claimant expressly conferred upon the Defendant the right to exercise at any time, and without prior notice, to combine or consolidate its accounts. It also has the right to set off or transfer any sums standing to the credit of the Claimant in satisfaction of any liabilities on any other account maintained by it.
Issue resolved in favour of the Defendant.
C. I. Duru for the Claimant
C. J. Atulomah for the Defendant
This summary is fully reported at (2006) 4 CLRN in association with ALP NG & Co.
See www.clrndirect.com ; www.alp.company.
