Garnishee Order :
The obligation of a banker to honour his customer’s cheques is extinguished on receipt of an order of the Court, known as the Garnishee order, issued under Order 21, Rule 46 of the code of Civil Procedure, 1908. If a debtor fails to pay the debt owed by to his creditor, the latter may apply to the Court for the issue of a Garnishee Order on the banker of his debtor. Such order attaches the debts not secured by a negotiable instrument, by prohibiting the creditor the creditor from recovering the debt and the debtor from the making payment thereof. The account of the customer with the banker, thus, becomes suspended and the banker is under an obligation not to make any payment from the account concerned after the receipt of the Garnishee Order. The creditor at whose request the order is issued is called the judgement- creditor, the debtor whose money is frozen is called judgement- debtor and the banker who is the debtor of the judgement debtor is called the Garnishee.
The Garnishee Order is issued in two parts. First, the Court directs the banker to stop payment out of the account of the judgement- debtor. Such order, called Order Nisi, also seeks explanation from the banker as to why the funds in the said account should not be utilized for the judgement- creditor’s claim. The banker is prohibited from paying the amount due to his customer on the date of receipt of the Order Nisi. He should, therefore, immediately inform the customer so that dishonour of any cheque issued by him may be avoided. After the banker files his explanation, if any, the Court may issue the financial order, called Order Absolute where the entire balance in the account or a specified amount is attached to be handed over to the judgement- creditor. On receipt of such an order the banker is bound to pay the garnished funds to the judgement- creditor. Thereafter, the banker liabilities towards his customer are discharged to that extent. The suspended account may be revived after payment has been made to the judgement- creditor as per the directions of the Court. The following points are to be noted in this connection:
II. The amount attached by the order. A garnishee order may attach either the amount of the judgement debtor with the banker irrespective of the amount which the judgement-debtor owes to the creditor or a specified amount only which is sufficient to meet the creditor’ claim from the judgement-debtor. In the first case, the entire amount in the account of the customer in the bank is garnished or attached and if banker pays any amount out of the same which is in excess of the amount of the debt of the creditor plus cost of the legal proceedings, he will render himself liable for such payment. For example, the entire to the credit of X, the principal debtor, Rs. 10,000 is attached by the Court while the debt owed by him to his creditor Y is only Rs. 6,000. If the banker honours the cheque of the customer X to the extent of Rs. 5,000 and thus reducing the balance to Rs. 5,000 he will be liable for defying the order of the Court. On the other hand, if he dishonours all cheques, subsequent to the receipt of the Garnishee Order, he will not be liable to the customer for dishonouring his cheques.
It is to be noted that the Garnishee Order does not apply to the amount of the cheque marked by a bank as a good for payment because the banker undertakes upon himself the liability to pay the amount of the cheque. On the other hand, if the judgement debtor gives to the bank a notice to withdraw, it does not amount withdrawal, but merely his intention to withdraw. The Garnishee Order will be applicable to such funds. In the second case, only the amount specified in the order is attached and the amount is excess of that may be paid to the customer by the banker.
For example, X is customer of SBI and his current account shows a credit balance of Rs. 10,000. He is indebted to Y for Rs. 5,000. the latter applies to the Court for the issue of a Garnishee Order specifies the amount (Rs. 5,000) which is being attached, the banker will be justified in making payment after this amount, i.e., the balance in the customer’s account should not be reduced below Rs. 5,000. Usually in such cases, the attached amount is transferred to a suspense account and the account of the customer is permitted to be operated upon with the remaining balance.
III. The order of the Court restrains the banker from paying the debts due or accruing due. The word ‘accruing due’ mean the debts which are not payable but for the payment of which an obligation exists. If the account is overdrawn, the banker owes no money to the customer and hence the Court Order ceases to be effective. A bank is not a garnishee with respect to the unutilized portion of the overdraft or cash credit facility sanctioned to its customer and such utilized portion of cash credit or overdraft facility cannot be said to be an amount due from the bank of its customer. The above decision was given by the Karnataka High Court in Canara Bank vs. Regional Provident Fund Commissioner. In his case the Regional Provident Fund Commissioner wanted to recover the arrears of provident fund contribution from the defaulters’ bankers out of the utilized portion of the cash credit facility. Rejecting this claim, the High Court held that the bank cannot be termed as a Garnishee of such unutilized portion of cash credit, as the banker’s position is that of creditor. For example, PNB allows it as customer to overdraw to the extent of Rs. 5,000. The customer has actually drawn (Rs. 3,000) cannot be attached by a Garnishee Order as this is not a debt due from the banker. It merely indicates the extent to which the customer may be the debtor of the bank.
The banker, of course, has the right to set off any debt owed by the customer before the amount to which the Garnishee Order applies is determined. But it is essential that debt due from the customer is actual and not merely contingent. For example, if there is an unsecured loan account in the name of the judgement-debtor with a balance of Rs. 5,000 at the time of receipt of Garnishee Order, such account can be set off against the credit balance in the other account. But if the debt due from the judgement- debtor is not actual, i.e., has not actually become due, but is merely contingent, such set off is not permissible. For example, if A, the judgement- debtor, has discounted a bill of exchange with the bank, there is contingent liability of A towards the bank, if the acceptor does not honour the bill on the due date. Similarly, if A has guaranteed a loan taken from the bank by B, his liability as surety does not arise until and unless B actually makes default in repaying the amount of the loan.
The banker is also entitled to combine two accounts in the name of the customer in the same right. If one account shows a debit balance and the other a credit one, net balance is arrived at by deducting the former from the latter.
IV. The Garnishee Order attachés the balance standing to the credit of the principal debtor at the time the order is served on the banker. The following points are to be noted in this connection:
(a) The Garnishee Order does not apply to: (1) the amounts of cheques, drafts, bills, etc.., sent for collection by the customer, which remain uncleared at the time of the receipt of the order, (2) the sale proceeds of the customer’s securities, e.g., stocks and shares in the process of sale, which have not been received by the banker. In such cases, the banker acts as the agent for the customer for the collection of the cheques or for the sale of the securities and the amounts in respect of the same are not debts due by the banker to the customer, until they are actually received by the banker and credited to the customer’s account. But if the amount of such uncleared cheque, etc., is credited to the customer’s account, the position of the banker changes and the garnishee order is applicable to the amount of such uncleared cheques. Similarly, if one branch of a bank sends its customer’s cheque for realization to its another branch and the latter collects the same from the paying banker before the receipt of the Garnishee Order by the first branch, the amount so realized shall also be subject to Garnishee Order, even though the required advice about realization of cheque is received after the receipt of the Garnishee Order. Giving this judgement in Gerald C.S. Lobo v. Canara Bank (1997) 71 Comp. Cases 290, the Karnataka high Court held that the branch which collects money on behalf of another branch is to be treated as agent of the latter and consequently the moment a cheque sent for collection by the other branch has been realized by the former, the realization must be treated as having accrued to the principal branch.
(b) The Garnishee Order cannot attach the amounts deposited into the customer’s account after the Garnishee Order has been served on the banker. A Garnishee Order applies to the current balance at the time the order is served, it has no prospective operation. Bankers usually open a new account on the name of customer for such purpose.
(c) The Garnishee Order is not effective in the payments already made by the banker before the order is served upon him. But if a cheque is presented to the banker for payment and its actual payment has not yet been made by the banker and in the meanwhile a Garnishee Order is served upon him, the latter must stop payment of the said cheque, even if it is passed for payment for payment. Similarly, if a customer asks the banker to transfer an amount from his account and the banker has already made necessary entries of such transfer in his books, but before the intimation could be sent to the other account-holder, a Garnishee Order is received by the banker, it shall be applicable to the amount so transferred by mere book entries, because such transfer has no effect without proper communication to the person concerned.
(d) In case of cheques presented to the paying banker through the clearing house, the effectiveness of the Garnishee Order depends upon the fact whether time for returning the dishonoured cheques to the collecting banker has expired or not. Every drawee bank is given specified time within which it has to return the unpaid cheques, if any, to the collecting bank. If such time has not expired and in the meanwhile the bank receives a Garnishee Order, it may return the cheque dishonoured. But if the order is received after such time over, the payment is deemed to have been made by the paying banker and the order shall not be applicable to such amount.
(e) The Garnishee Order is not applicable to:
(i) Money held abroad by the judgement- debtor ; and
(ii) Securities held in the safe custody of the banker,
(f) The Garnishee Order may be served on the Head Office of the bank concerned and it will be treated as sufficient notice to all of its branches. However, the Head Office is given reasonable time to intimate all concerned branches. If the branch office makes payment out of the customer’s account before the receipt of such intimation, the banker will not be held responsible for such payment.