Introduction

This report examines the Supreme Court of Sri Lanka’s decision in S.C. (CHC) Appeal No. 22/2010, a pivotal case involving a dispute over financial transactions between Pramuka Savings and Development Bank Limited (Plaintiff-Appellant), later substituted by Sri Lanka Savings Bank Limited, and Habib Bank AG Zurich (Defendant-Respondent). The core issue pertained to whether the Defendant Bank had a right to exercise a lien or set-off over deposits amounting to Rs. 70 million made by the Plaintiff Bank, against debts owed by a third party, Vanik Incorporation Limited.

Case Overview

Background Facts

1. Deposits and Transactions:
   • The Plaintiff Bank made time deposits totaling Rs. 70 million with the Defendant Bank, which were periodically reinvested between March 2000 and May 2001.
   • By May 5, 2001, the total maturity value of Rs. 78.4 million (including interest) was due for repayment.
2. Plaintiff’s Claims:
   • The Defendant Bank unlawfully reinvested and withheld the deposits, refusing to repay the maturity proceeds as directed.
   • The Plaintiff sought a declaration that the Defendant had no right to lien or set-off over the deposits and demanded repayment of Rs. 78.4 million with interest.
3. Defendant’s Defense:
   • Argued that the deposits were made on behalf of Vanik Incorporation Limited as security for Vanik’s borrowings from the Defendant Bank.
   • Claimed a lien and set-off over the deposits against Vanik’s outstanding debts.
4. High Court Judgment:
   • The High Court ruled in favor of the Defendant Bank, validating its claim to a lien and set-off.
5. Appeal:
   • The Plaintiff appealed to the Supreme Court, challenging the High Court’s decision.

Legal Issues

The Supreme Court deliberated on the following key issues:

1. Ownership of Deposits:
   • Whether the deposits belonged to the Plaintiff Bank or were held on behalf of Vanik Incorporation Limited.
2. Existence of a Valid Lien or Set-Off:
   • Whether the Defendant Bank had legal grounds to exercise a lien or set-off over the deposits.
3. Estoppel by Conduct:
   • Whether the Plaintiff’s actions or omissions created an estoppel, barring it from contesting the Defendant’s claims.

Supreme Court’s Analysis

1. Ownership of Deposits

• The Court examined evidence, including testimony from the Defendant’s own witness (CEO of Vanik Incorporation Limited), who confirmed that the deposited funds belonged to the Plaintiff Bank.
• The Court rejected the Defendant’s claim that the deposits were made on behalf of Vanik, as no documentary evidence supported this assertion.

2. Legal Basis for Lien or Set-Off

• Banker’s Lien:
  • A lien generally arises over securities or funds of a customer to secure debts owed by the same customer.
  • The Court noted that the deposits belonged to the Plaintiff Bank and were not linked to Vanik’s debts. Therefore, no lien could be exercised.
• Right to Set-Off:
  • Set-off requires accounts to belong to the same customer or a clear agreement permitting such action.
  • No agreement between the Plaintiff and Defendant Banks granting a set-off right was presented.
  • The Court cited precedents emphasizing that a bank cannot set off funds held in one customer’s account against the debts of another unless clear and indisputable evidence exists.

3. Representation and Estoppel

• The Defendant argued that the Plaintiff’s conduct, such as extending the deposit periods, implied consent to a lien or set-off.
• The Court found no evidence of explicit or implicit representation by the Plaintiff supporting this claim.
• Letters exchanged between the parties, including a “Letter of Comfort” from the Plaintiff, explicitly negated the creation of any lien or encumbrance over the deposits.
• The Court highlighted that the Defendant failed to respond to these communications, undermining its claims of estoppel.

Legal Principles and Precedents

The Court relied on the following principles and case laws:

1. Banker’s Lien and Set-Off:
   • A lien or set-off requires clear ownership or consent.
   • A bank cannot hold funds belonging to one customer to satisfy another’s debts without a contractual or legal basis.
2. Estoppel:
   • Representation or conduct creating an estoppel must be clear and intentional.
   • The burden of proof lies with the party asserting estoppel.
3. Relevant Cases:
   • Bhogal v. Punjab National Bank (1988): Set-off cannot be exercised based on an arguable suspicion.
   • Saudi Arabian Monetary Agency v. Dresdner Bank AG (2005): Banks require indisputable evidence to assert set-off rights over third-party accounts.

Judgment

The Supreme Court reversed the High Court’s decision and ruled in favor of the Plaintiff Bank. Key aspects of the judgment include:

1. Declaration of Rights:
   • The Defendant Bank had no right to lien or set-off over the Plaintiff’s deposits.
2. Repayment Order:
   • The Defendant Bank was directed to repay Rs. 78.4 million to the Plaintiff Bank, along with applicable interest.
3. Costs:
   • Costs of the appeal were awarded to the Plaintiff.

Conclusion

The Supreme Court’s decision underscores the sanctity of the depositor-bank relationship and the legal limitations on a bank’s right to lien or set-off. The judgment reinforces the need for clear agreements and transparency in financial dealings, protecting depositors’ rights from unauthorized claims by financial institutions.

This case serves as a crucial precedent in banking law, particularly concerning third-party claims over deposits, and highlights the judiciary’s role in safeguarding fairness and accountability in financial transactions.