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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

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

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

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, a
direct 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.

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 customers credit and those that are
available to him at the bank at the precise moment when the order is

II.
III.

received.
The unutilised amount of an overdraft limit is attached.
The bank is entitled to exercise its right of set-off, if any. In this case,

IV.

loan already due for repayment and demanded for may be deducted.
As regards future credits, the principle is that any credit which has not
been cleared to the customers account at the time when the order is

V.

received is not attached.


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

VI.

partnership account.
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

VII.

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


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

VIII.

order. Money held in domiciliary accounts is however attached.


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

IX.

affect cash paid in before the order was served.


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

X.

attached.
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

requirements. This is because a garnishee order made absolutely cancels


XI.

such receipt.
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

XII.

than the court.


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.

XIII.

Vs Tester (1937).
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.

XIV.

(Nigerian Bills of Exchange Act, 1990).


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

XV.

attached even though not yet debited to the account.


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

XVI.

does not applied to incorporated companies.


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

XVII.

contingent liability.
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.

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 companys 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.

Bankers 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 Whitley 4, 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, Tannans Banking law, 23rd Edition, 994


4 1892 AC 118
5 Supra 2, 996

In Hindustan Bank Ltd. V Kanshi Ram 6, 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

Applicability of Garnishee Order

Garnishee Order is Applicable8 to the following:


a)
b)
c)
d)
e)
f)

Where there is a credit balance


Attaches the amount drawn by a cheque but payment not yet effected.
All bank branches of a bank are treated as one entity.
Attaches future maturing term deposits also.
Attaches joint account if issued so
Attaches personal account of partners if an order is served on a
partnership account.

The Order is NOT Applicable to the following:


a)
b)
c)
d)
e)
f)
g)

Where a cheque has been marked for good payment.


Attaches the amount specified only
Not applicable to sanctioned limit.
Where any assignment of balance has been made and acknowledged
Not applicable to deceased and insolvents
Salary is not attached.
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-agarnishee-order last visited 15th February, 2016

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 the
account 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 firms 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

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 bank

sending 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 creditors 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

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 banks 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 banks 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 account
holder, 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 holders 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.

Obligations of Bank
Generally it is the banks 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 customers 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 customers 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 customers 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-tocustomers.htm Last visited 15th February, 2016
12 Manohar Veera, Legal Aspects of Banking : GARNISHEE ORDER

wrongful dishonor, is not limited to the actual pecuniary loss, sustained by


reason of such dishonor.
The customer is entitled to claim substantial damages, even if he has sustained
no actual pecuniary loss. Where the bank is at the fault the amount of
damages is not based on the amount of the cheque dishonoured but on how
the customers reputation and creditworthiness has been affected.
If a postdated cheque is honoured by the banker before the date of the cheque
and thus the balance in the customers account is reduced, the banker will be
liable for wrongful dishonor of cheque subsequently presented for the payment.
The liability of the bank for a wrongful dishonor of a cheque is towards the
drawer and not the payee.
It is the duty of the bank to return the cheque to the customer, or to intimate
the customer regarding the dishonor.
The banker is bound to act in accordance to the instructions of the customer.
Banker is also expected to use reasonable skill and diligence in his work,
otherwise he will be liable for damages.

Bank is obliged to provide service to its customers


Bank must provide service to customers irrespective of whether the customer is
a debtor or a creditor. However, the bank shall provide its services to its
customer so as to enable him to carry on his normal day to day business
transactions.

Secrecy of the customers account

The banker must not disclose the condition of his customers account and the
obligation to observe secrecy does not end even with the closing of customers
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
4.
5.
6.
7.

justified in answering all the questions


By the order of the court
In case of danger of treason to the state
As in an action against the customer for money due
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

Case Analysis

In Global trust bank Ltd. v. Fargo Frieght ltd. & ors 14, the Honble 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 an
attachable 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.
In Syndicate 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

thereof. The Honble 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 banks claim shall be available to satisfy the decree.

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 by
the 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

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.

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
Tannans Banking Law and practice in India, 23rd Edition, M.L.Tannan