Banking Law and Practice

Preface

Because of its sensitivity and importance to the public at large, banking is a heavily regulated industry. This book continues along the path started by the first two in this series by discussing bank operations. It takes a new tack, however, by looking at how banks operate in a legal and regulatory light and delves deep into laws and regulations and how banks can shape their practices to meet all the necessary legal and regulatory requirements.

This book is divided into four parts and nine chapters, each looking at a separate issue at considerable depth. Further reading is encouraged and suggestions are provided at the end of each chapter. Every effort has been made to ensure that the laws and regulations referred to in this book are up to date and the most current in use as of November 2011. Updates will be made for later laws and regulations in future editions.

The first part of this book starts with a discussion of the laws and regulations that determine and impact the relationship between a bank and its customers including Hong Kong legislation, Hong Kong Monetary Authority guidelines, and privacy and confidentiality requirements. It includes a look at account handling, the many documents involved in a bank’s external operations, and the different types of customers.

The second part of this book begins in Chapter 3 with an examination of the legal issues that govern negotiable instruments, in particular bills of exchange and promissory notes. The part continues with a look at other types of services and delivery platforms. Prominent among these are credit cards, investment advice, direct debiting, and automated banking.

Part 3, which begins in Chapter 5, begins with a look at security, security held by banks against a loan or credit. The first chapter in this part looks at guarantees, the most common form of security used by banks and other creditors. Chapter 6 looks at mortgages, which are a more popular type of security. Chapter 7 closes off this part with an examination of the laws and regulations governing the use of other types of security like company charge, stocks or bonds, or physical goods.

The last part of this book encompasses the last two chapters. Chapter 8 looks at insolvency and the legal issues that emerge in bankruptcy, when a client cannot pay debts to a bank. Chapter 9 looks at the process of winding up and the legal issues that emerge that involve a bank.

This book includes detailed explanations, summaries, tables, and charts to help industry professionals develop sound theoretical frameworks for their work in the field. Both students and working professional can benefit from this detailed work, produced in collaboration with some of Hong Kong’s most prominent professionals. Aimed at banking practitioners and designed as an essential tool to achieve learning outcomes, this book includes recommendations for additional readings. A list of further readings at the end of each chapter will help readers expand their knowledge of each subject, while supplementary readings can help dig deeper into specific areas. Essential readings will occasionally be highlighted and these are important for students preparing for the Associates Examination of the Hong Kong Institute of Bankers (AHKIB).

Above all, it is most important to acknowledge Mr. Simon B. C. Chan, whose decades of experience and encyclopaedic knowledge of laws and regulations have been invaluable for the development of banking in Hong Kong. His book Hong Kong Banking Law and Practice (Vol. 1 & 2), published by the Hong Kong Institute of Bankers, has long been the go-to legal reference for the industry. While Mr. Chan was not directly involved in the writing or editing of this book, we are thankful for his support in permitting his work (1st edition) to be used as an important reference and source of information.

There are others whose contributions have been of particular significance in the preparation of this essential reference for banking professionals. Among them are Mr. Steve Lau, Mr. Eddie W. K. Leung, Dr. Luk Kwai Wing, Mr. Antony M.H. Sin, Dr. Alex Wong, and representatives from the Hong Kong Monetary Authority.

The preparation would not have been possible without the help, advice, support and encouragement of all these people and dozens more. We would like to extend our warm thanks to them all.

The Hong Kong Institute of Bankers

PART 1

BANK-CUSTOMER RELATIONSHIP AND ACCOUNT OPENING

CHAPTER 1

Contractual Relationships in Law and Practice

Learning objectives

After studying this chapter, you should be able to:

1 Describe the nature of the relationship between banker and customer and the key legal and regulatory issues relating to the terms of the contract between them

2 Understand the legal issues around the operation of bank accounts, including mandates, power of attorney, limitation of actions, appropriation of payments, set-off, and banker’s lien

3 Explain the concept of banker’s duty of secrecy and how it relates to the provisions of the Personal Data (Privacy) Ordinance, including the six principles of data protection

4 Discuss recommended bank practices related to a statement of account or passbook, wrongful dishonour of cheques, and exemption clauses

Introduction

Many legal issues arise in the course of day-to-day banking operations. Bankers, therefore, need to learn about these issues and be guided by them in order to protect their companies and themselves from liability. In this chapter, we provide an overview of the relationship between a bank and its customers from a legal and regulatory perspective. We discuss the implied terms of the banker and customer relationship relating to a banker’s duty of secrecy, and explain specific legal issues relating to the terms of the contract and the respective rights and duties of the bank and the customer.

References are made to common law, legislation in Hong Kong, guidelines of the Hong Kong Monetary Authority and the Code of Banking Practice. We also discuss the relevance of the Personal Data (Privacy) Ordinance and the six data protection principles in protecting, and providing for the proper use of, the personal data of customers in the course of day-to-day banking operations. We conclude the discussion with an analysis of a number of issues commonly affecting the operation of bank accounts.

Definition of ‘Customer’

There is actually no statutory definition in Hong Kong of who a customer of a bank is, so we have to refer to the decisions of the courts in order to discover the principles which determine whether or not a person is a customer.

In common law, which is a body of law developed through court decisions rather than bills passed by the legislature, a customer is a person who maintains an account with the bank. There must be some sort of account, either a deposit or a current account or similar relation, to make a man a customer of a banker, a British court held in the case of Great Western Railway Co. v. London & Country Banking Co. The judge ruled that though a person may habitually deal with a bank, for example, to buy gift cheques, this does not make the person a customer of that bank.

Common law also holds that a relationship between a banker and customer does not come into existence unless and until both parties intend to enter into it. However, the relationship can be deemed to have started even before an account has been actually opened. In Ladbroke & Co. v. Todd, the court held that it was not necessary that a person should have drawn any money or even that he should be in position to draw money before he could become a customer. A banker-customer relationship is immediately established upon the bank’s acceptance of a person’s offer to open an account in that bank.

Why does a banking professional need to know who is a customer and who is not, legally speaking? One reason is to avoid contractual liability, which can arise when giving off-the-cuff investment advice, for example, in the belief that no contractual relationship exists. If there is an intention on both sides to enter into a relationship, that person can be considered already a customer and therefore could theoretically sue the banker for giving negligent advice.

Another reason is to be protected by Section 86 of the Bills of Exchange Ordinance, which provides that bankers who receive a payment for a customer or credit a customer account will not be treated as having been negligent if the customer turns out to have no title or a defective title to that payment. If the banker receives a payment or performs a remittance funded by a cheque, to give two examples, for someone who is, legally speaking, not a customer, then he is not protected by Section 86.

Nature of the Banker-Customer Relationship

In legal terms, the relationship between banker and customer is essentially a contractual one, meaning that each side has explicit and implicit obligations. Breaching those obligations could be grounds for litigation. The nature of the relationship can take several forms, arising from the types of services rendered by the bank:

Banker and customer;

Debtor and creditor;

Principal and agent;

Bailor and bailee.

Banker and Customer

In recent years, many banks have tried to set out the terms of the contract between banker and customer as comprehensively as possible in written form. Customers are provided with a set of standalone consolidated terms and conditions and are asked to sign an application for account opening, which includes a reference to the terms and conditions and an acknowledgment of acceptance. The application normally takes the form of the customer’s mandate to the bank and the terms and conditions are incorporated by reference in the application.

However, in most cases, there is no formal agreement which provides that a banker must maintain strict secrecy concerning his customers’ accounts or that the customer must exercise care when drawing cheques to prevent the amounts from being fraudulently altered.

Of course, when most accounts are opened, such as current and savings accounts, a mandate is executed, which gives the bank express instructions and/or authorities concerning the operation of the account. However, even in those cases, no attempt is made to prepare a comprehensive list of the respective rights and duties of banker and customer. This may be because it is impossible to list all the terms contemplated and banks also consider the impact on bank marketing.

The contractual relationship between banker and customer is founded on the customs and trade usages of bankers. To the extent that the customs and trade usages have been recognised by the courts of Hong Kong, they must be regarded as implied terms of contract between banker and customer. Therefore, the implied terms are of vital importance in banking law and practice.

The Code of Banking Practice requires banks to make readily available to customers, or prospective customers, written terms and conditions of each banking product or banking service and to advise customers to read and understand them. The terms and conditions should meet the following criteria:

Provide a fair and balanced description of the relationship between bank and customer;

Generally available in both Chinese and English;

Use plain language and avoid legal and technical language unless it is necessary;

Highlight any fees, charges, penalties, and the relevant interest rates (or the basis for determining the interest rates), and the customer’s liabilities and obligations in using the service;

Consistency with the provisions of the Code, and be kept under review to ensure such consistency;

Have due regard to applicable laws in Hong Kong, in particular prevailing consumer protection legislation.

Debtor and Creditor

The deposit of money into a bank renders the bank a debtor and the depositor a creditor. The bank is therefore obliged to repay any sum deposited to the depositor (except in certain defined circumstances such as banker’s right and set-off). These roles are reversed when a bank lends money to a customer.

It was settled in Foley v. Hill that the established debtor and creditor relationship excludes any element or suggestion of trusteeship or fiduciary relation with the banker with regard to a current account. The House of Lords held that the relation between a banker and his customer, who pays money into the bank, is the ordinary relation of debtor and creditor, with an additional obligation arising out of the custom of bankers to honour the customer’s cheques.

Principal and Agent

When a banker is performing certain duties, he frequently acts as an agent. For example, the banker often collects the proceeds of cheques as an agent for his customers. In drawing and paying cheques, the relationship between customer and banker is that of principal and agent. Further, the banker acts as an agent when accepting customers’ instructions in regards to the purchase and sale of the stocks and shares.

However, when a banker is instructed by the customer to place an order with a broker for the purchase of shares on the customer’s behalf, the relationship of principal and agent arises between the customer and the broker when the broker accepts the order; no such relationship arises between the customer and the banker.

Bailor and Bailee

When articles are delivered to a bank for safe custody, the contract between the bank (as bailee) and the customer (as bailor) is one of bailment, which involves the transfer of possession, not ownership. The bank is not entitled to use the articles whilst they are in its possession. The customer can demand the return of the articles at any reasonable time.

Safekeeping of title deeds after the mortgage loan of a customer is paid off is an example of custody service.

Laws and Practice

In Hong Kong, the sources of the laws and practice that govern the bank-customer relationship include the following:

Common law

Legislative sources

Non-statutory rules

Code of Banking Practice

Common Law

Although China has resumed sovereignty, Hong Kong still follows the English legal system of Common law. As laid down by the Basic Law of the Hong Kong Special Administrative Region, laws previously in force in Hong Kong (Common law), rules of equity, ordinance, subordinate legislation, and customary law shall be maintained except for any that contravenes the Basic Law. However, Common law is subject to amendment by the Hong Kong legislature, which has begun passing measures that diverge from it.

The doctrine of legal precedent has also been preserved in Hong Kong, although the court of final adjudication is the Court of Final Appeal in Hong Kong instead of the Privy Council in England. All decided cases in Commonwealth countries would be considered in equal standing by the court of Hong Kong, which may also refer to precedents of other common law jurisdictions. The same is applicable to Banking Law.

Legislative Sources

The two most important legislative sources in Hong Kong are the Banking Ordinance (Cap. 155) and the Bills of Exchange Ordinance (Cap. 19).

The Banking Ordinance is a statute providing for the regulation of banking business and the business of taking deposits in Hong Kong. It defines the term banking business and refers to the three-tier financial system in which licensed banks, restricted licence banks, and deposit-taking companies are collectively referred to as authorised institutions. The Bills of Exchange Ordinance, on the other hand, deals with the law relating to negotiable instruments, including bills of exchange, cheques, and promissory notes.

The Hong Kong Association of Banks Ordinance (Cap. 364), the Exchange Fund Ordinance (Cap. 66) and the Protection of Investors Ordinance (Cap. 335) are other important sources of banking law. The Companies Ordinance (Cap. 32), the Partnership Ordinance (Cap. 38), the Bankruptcy Ordinance (Cap. 6) and the Conveyancing and Property Ordinance (Cap. 219) have a bearing on banking as well.

Subsidiary legislation made by virtue of the Banking Ordinance and the above-mentioned ordinances are also important and bankers must take note of such legislation.

Given the growing significance of securities related services among banks’ core business, the Securities and Futures Ordinance (Cap. 571) is also an important legislative source.

The Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (Cap. 615), which codifies customer due diligence and record-keeping requirements for financial institutions and provides for supervisory and criminal sanctions for contravention of the statutory requirements, was enacted in June 2011 with effect from 1 April 2012.

Statutory and Non-statutory Guidelines

The Banking Ordinance empowers the Hong Kong Monetary Authority (HKMA) to issue guidelines relating to the internal workings of authorised institutions to ensure that proper banking standards are maintained. There are two broad categories of guidelines: statutory and non-statutory.

The HKMA’s statutory guidelines are issued under the Banking Ordinance, which set out the minimum standards with which authorized institutions are expected to comply to satisfy the requirements of the Banking Ordinance. Statutory guidelines do not have the force of law. Non-statutory guidelines are typically issued to set out the HKMA’s recommendations to AIs in respect of the standards they should aim to achieve, or for the purpose of clarifying the HKMA’s interpretation of regulatory and reporting matters. Any failure to adhere to any of these guidelines, whether statutory or non-statutory, may call into question whether the AI concerned continues to satisfy the minimum criteria for authorization under the Banking Ordinance. In addition, where such failure is in respect of any of the statutory guidelines, it may constitute a contravention of the relevant provisions or requirements of the Banking Ordinance.

Code of Banking Practice

The Code of Banking Practice is issued jointly by the Hong Kong Association of Banks (HKAB) and the DTC Association (the industry group for restricted licence banks and deposit-taking companies), and is endorsed by the HKMA. Whilst it specifically covers banking services such as current accounts, savings and other deposit accounts, loans and overdrafts, and card services, its principles apply to the overall relationship between institutions and their customers. The Code does not apply retrospectively to transactions completed before its issuance.

The recommendations do not supplant any relevant legislation, codes, guidelines, or rules applicable to institutions authorised under the Banking Ordinance. However, the HKMA expects all authorised institutions to comply with the Code and will monitor compliance as part of its regular supervision. Authorised institutions may be challenged for any non-adherence to the Code.

The Code applies to cases where an institution is dealing with a personal customer. A personal customer is defined as a private individual who (i) maintains an account in Hong Kong with or receives services from an institution; or (ii) acts as guarantor or provider of third party security for a borrower (who may or may not be an individual).

Mandates

A mandate is a written instruction from a customer to a bank to do certain acts on the customer’s behalf. In practice, it is a standard printed form drafted by the bank for customers’ use on the opening of new accounts or when customers change the ways accounts are to be operated. The printed forms typically refer to a booklet that includes the terms and conditions of the mandate.

Through these documents the customer typically declares that, until he gives written notice to the contrary, a named person (whose signature appears on the mandate) is authorised to draw and endorse cheques on his behalf, notwithstanding that the debiting of any such instruments to his account may cause the account to be overdrawn. This latter provision is important because, in common law, the authority to draw cheques does not necessarily confer power to overdraw the account.

In a mandate, most terms are compulsory, that is, customers must accept them if they wish to open and maintain an account with a bank. However, there may be a number of optional clauses, one or more of which may be deleted in order to meet the wishes of the customer.

Most banks have two types of mandates:

Mandates for opening new accounts, which are individual, joint, sole proprietorship, partnership, limited companies, clubs, unincorporated associations, and society; and

Mandates allowing third parties to operate the account, which would confer power upon the agent:

i. to receive cheques, statements, and other vouchers relating to the account;

ii. to draw, accept, make, and endorse bills of exchange and promissory notes on behalf of the customer;

iii. to withdraw from the bank securities or other property belonging to the customer;

iv. to negotiate advances whether by way of loan, overdraft, discount, or otherwise; and

v. to pledge or deposit with the bank types of security for repayment for such advances.

These types of authority will not enable any agent to execute a deed on behalf of the customer, and the agent will not be able to create a legal charge by way of security.

In a strict legal sense, mandates are only instructions from customers to banks and not an agreement made between bankers and customers. In practice, however, most banks have incorporated many contractual clauses into a mandate. In other words, a mandate has become in practice a binding contract between the bankers and customers in most aspects of the terms of contract between them. For instance, the mandates of the banks would stipulate that both joint account holders would accept and limit the joint and several liabilities in respect of or arising out of the operation of the joint account maintained with the banks.

A bank should exercise reasonable care and skill when considering which clauses should be incorporated into a mandate. The clauses may not be enforceable if they are not in accordance with usual banking practice in Hong Kong.

Furthermore, any exemption clauses in a mandate, if any, are subject to the test of reasonableness under the Control of Exemption Clauses Ordinance (Cap. 71). Whether the clauses are reasonable will be determined in accordance with usual normal banking practice.

Because a mandate in practice has become a contract between bankers and customers, banks should not accept a mandate drafted by the customer, except for an account opened only for very special purposes and for a very valuable customer. In this special case, the bank must seek legal opinion on the contents of such special mandates, which should be approved by top executives.

In practice, banks would not open an account for any customer, including a valuable customer, if the customer requests to amend or vary the terms stated in the mandate. Only in a very special case would the bank allow any amendment or variation to the mandate. In those cases, the bank must seek legal opinion on any proposed amendment or variation.

Power of Attorney

Sometimes a customer may wish to authorise a third party to operate his account. He may do so by signing the bank’s third-party mandate or executing a power of attorney. In this connection, it is important to distinguish between a mandate and a power of attorney.

A power of attorney is a document, usually executed under seal, which authorises one person (called the attorney, donee, or grantee) to act on behalf of another person (called donor, principal, or grantor).

The following differences between the two types of documents should be noted:

A power of attorney is usually addressed to the world at large. A customer who wants the appointment of an attorney to be known to several parties could just execute one document instead of several. A mandate is usually addressed to one particular person, for example, a particular bank.

In general, the donor of a power of attorney cannot notify his decision to revoke the power of attorney to everyone who might rely on it. The law makes special provision in favour of persons who rely upon a power in the honest belief that it has not been revoked. By contrast, a person who has signed a form of mandate may easily inform the person to whom it was addressed (the bank) that the authority of the agent has been cancelled.

The general rule of law is that where an agent is authorised to execute a deed on behalf of his principal, his authority must be given by an instrument under seal. Therefore, an attorney under a power may be empowered to execute deeds, for example, legal charge. In contrast, an agent whose appointment is set out in a mandate cannot do so.

Types of Power of Attorney

There are two main types of powers of attorney: special/specific and general. A special power is one given for a specific purpose, for example, the attorney may be empowered to execute a legal charge only or to operate the accounts. An example would be an attorney being empowered to execute a mortgage.

A general power usually confers very extensive powers upon the donee. Both types (special and general) are usually executed under seal (signed, sealed, and delivered), thus enabling the donee to execute deeds on behalf of the donor.

Regardless of type, the power is revoked upon the death, winding up, bankruptcy, mental incapacity of, or expressed revocation by the donor. If a person without knowledge of the revocation deals with the donee, the transaction between them will be as valid as if the power is in existence.

Rules in the Use of Power of Attorney

The general rules in the use of the power of attorney include the following:

Any person having power to contract may appoint an attorney.

A corporation may appoint an attorney to complete intra vires (within the authority) acts.

The attorney need not have contractual powers.

The attorney cannot delegate his powers except under clear authority.

A power given to two or more trustees jointly may be exercised by the survivors of those trustees.

The banker should make sure that:

The power is operated exactly within the specific objects laid down.

The power is still in force.

The identity of the attorney is verified.

The power is under seal.

A certified copy of the power of attorney is obtained.

Revocable and Irrevocable

The banker may regard all powers of attorney as revocable, meaning that they can be revoked any time, even if expressly stated otherwise.

The only exception is under Section 4 of the Powers of Attorney Ordinance, which provides that the power of attorney is irrevocable if the power is expressed to be irrevocable and is given to secure a proprietary interest of the donee of the power or the performance of an obligation owed to the donee.

So long as the donee has that interest or the obligation remains undischarged, the power will not be revoked unless consented to by the donee or upon the death, bankruptcy, liquidation, and so on of the donor. As an example, the banker as mortgagee is always granted an irrevocable power of sale of the mortgaged property as an attorney of the mortgagor.

Enduring Power of Attorney

The Enduring Powers of Attorney Ordinance enacted in 1997 established a procedure for appointing an attorney who can manage a person’s affairs after that person has become mentally incapable.

Practical Considerations for Banks

When a banker is given a general power of attorney under the Powers of Attorney Ordinance, there will be no problem ascertaining the scope of the attorney’s power or authority. He will have power to do anything on behalf of the customer which the customer can lawfully do. But when a banker is given a special power of attorney, he would face the onerous task of finding out exactly what power has been conferred.

To operate an account under a power of attorney, the bank will need the original sealed power of attorney. If a bank is furnished with a power of attorney which is not in a form set out under Section 7 of the Powers of Attorney Ordinance, the banker has to ascertain the nature and extent of the power. Reading the document as a whole is a must.

Any exercise of the power by the attorney must be in accordance with the purpose for which the power was given. If the purpose of the power is unclear to the banker or the banker is not sure whether the actions of the donee will benefit the donor, a prudent banker should ask the donor of the power directly so as to confirm the actions of his attorney. In such cases, the banker should seek legal opinions from the bank’s legal advisers.

When a power of attorney or a certified true copy (certified by the donor or a solicitor) executed by a customer is exhibited to the customer’s bankers, the bankers must satisfy themselves that the following requirements have been complied with:

The power must appear to have been validly executed. In some cases, difficulties arise if the customer is verging on senility, for example. In practice, it is prudent to have the power witnessed by the customer’s doctor (a registered medical practitioner), who should certify that the said customer understands the nature and effect of the document being executed. However, the power may be revoked by the subsequent mental incapacity of the customer. The Enduring Powers of Attorney Ordinance establishes a procedure for appointing an attorney who can manage a person’s affairs after that person has become mentally incapable.

A true copy of the instrument creating the power of attorney must be supplied to the bank, preferably supplied directly from the donor (the customer) or his solicitors.

The person claiming to be the attorney or donor must in fact be the person named in the power. In practice, the banker has to check and/or verify the identity of such person.

The powers conferred upon the attorney must cover the transaction(s) which the donor wishes to enter into. This occasionally gives rise to difficulty because powers are strictly construed by the courts. The banker should request the customer to execute the bank’s standard mandate, which is specially adapted to banking transactions. Alternatively, the customer may execute a general power of attorney. The signing of a third-party mandate is a must whenever a bank is asked to operate an account by an appointed attorney.

Limitation of Actions

Lapse of time does not generally put an end to a contract or other liability, although it has been part of the public policy of Hong Kong law to prevent enforcement by legal action of long-dormant claims. The legislature has laid down certain periods of limitation after the expiry of which no action can be maintained. The statute of such law is the Limitation Ordinance (Cap. 347).

Two-year Limit

A two-year time limit applies in respect of actions to recover a penalty or forfeiture recoverable under any ordinance and to actions to recover a contribution pursuant to the Civil Liability (Contribution) Ordinance (Cap. 377). However, this does not apply to any action or arbitration for which a period of limitation is prescribed by another enactment.

Three-year Limit

The three-year time limit applies in actions for negligence, nuisance, or breach of duty, where the damages claimed by the plaintiff include damages in respect of personal injuries and to actions under the Fatal Accidents Ordinance (Cap. 22).

Six-year Limit

The six-year time limit applies to:

Actions in respect of or arising out of simple contract or tort;

Actions to enforce a recognizance;

An award (where the submission is not by an instrument under seal);

Actions to recover any sums recoverable under any ordinance;

Actions for an account;

Actions in respect of successive conversion of chattels;

Actions to recover rent;

Actions to recover arrears of interest payable in respect of money secured by a mortgage; or charge or in respect of a legacy;

Certain actions by beneficiaries against trustees.

Twelve-year Limit

The 12-year time limit applies to:

Actions upon specialities;

Actions upon any judgement (save and except in respect of arrears in interest in respect of any judgement debt for which the period of limitation is six years);

Actions to recover land, including foreclosure actions;

Actions to redeem land;

Actions to recover the principal monies secured by a mortgage or to foreclose a mortgage of personality;

Actions claiming the personal estate of deceased persons.

No Limit

There is no period of limitation applicable to an action by a beneficiary, against a trustee, in respect of the trustee’s fraud or fraudulent breach of trust or to recover trust property in the possession of the trustee or converted by him.

Extension of Period of Limitation

Part II of the Limitation Ordinance provides for the extension of the period of limitation as follows:

In cases where the plaintiff was under a disability at the time when the cause of action accrued;

In cases of an acknowledgement of the cause of action in writing or part payment by the defendant or his predecessor or agent;

In cases where the action is based on fraud, the right of action was fraudulently concealed, or where the action is for relief from the consequences of a mistake.

The court also has the discretion to override the time limit for actions in respect of personal injuries, where the court considers that it would be equitable to allow the action to proceed.

Appropriation of Payments

Appropriation of payments is the right of a customer or a bank to apply a specified deposit to meet a specified debt. If the right of appropriation devolves on the creditor, the creditor may appropriate to a debt which is statute-barred, although such appropriation will not revive or acknowledge the debt. However, he may not appropriate to an illegal debt.

In Canton Trust and Commercial Bank Ltd. v. Ho Pui Shue, it was held that, in the absence of any instructions from the customer, the bank was entitled to appropriate any account. In this Hong Kong case, the court ruled that the bank acted properly in applying the payments to the current account and not to the trust account.

The creditor need not exercise his right of appropriation at the time of payment. It was held in Seymour v. Pickett that the creditor may make an appropriation when he is being examined as a witness in a legal action by him against the debtor. However, once a creditor has made an appropriation, it is made once and for all, and it does not lie in the mouth of the creditor afterwards to seek to vary that appropriation.

The common law principles regarding the appropriation of payments are as follows:

The party who makes a payment has the right to apply that payment in whichever way he deems fit. For example, if the payer owes more than one debt, he is entitled to specify which debt is to be discharged by his payment. The payer’s intention may be inferred from the course of dealings or other circumstances. Money deposited into a bank account to pay a bill or cheque cannot be applied in any other way.

If the payer does not specify the manner of application of funds at the time of payment, the right to apply the funds will generally pass to the recipient of the payment.

If there is no specific appropriation by the parties in relation to current accounts where payments into and out of the account continue to be made, it is presumed that the first sum paid in is first drawn out, and the first debit item is discharged or reduced by the first sum paid. This is the rule established in Devaynes v Noble, Clayton’s Case (commonly referred to as the rule in Clayton’s Case). However, Clayton’s rule is a presumption in law only and may be rebutted by evidence indicating it was not the intention of the parties to apply the rule.

Rule in Clayton’s Case

The rule may operate against a bank in certain circumstances where the current account is overdrawn and subsequent payments into the account operate to reduce the overdraft, to the prejudice of the bank’s interests. The following are two examples:

The bank extends an overdraft facility to the customer, which is secured by a mortgage. Clayton’s rule would operate such that any payments into the account will reduce overdrawn amounts which are secured, whilst payments out will constitute fresh advances, which are not covered by the security. To overcome this, bank security documents typically contain a clause providing that the security shall be a continuing security that extends to cover any sums constituting the balance due for the time being.

Where an overdraft is guaranteed by a third party and the guarantee is for any reason terminated, the rule in Clayton’s case would operate such that payments into the account after termination will reduce or even discharge the principal debtor’s liability, whilst payments out will constitute fresh advances made after termination for which the guarantor will not be liable.

To overcome this, guarantees now typically provide that in case of termination, the bank may continue the account with the principal debtor, and the guarantor’s liability for the debtor’s debt as at the date of termination will