Can Your Bank Simply Help Itself to Your Money? The Commonwealth’s Law on Banker’s Set-Off

A liquidator’s letter, a frozen account, and a bank that helped itself to the money anyway — from London to Kuala Lumpur, the law draws a line

by GK Ganesan July 30, 2026 27 Views

Can a bank sweep your account to cover a debt elsewhere?

Five fences on set-off, shared across the Commonwealth, and a fresh 2026 case worth questioning.

Picture a Tuesday morning, unremarkable in every way but one

A small trading company’s finance manager rings the branch, voice climbing an octave. Payroll has bounced. The current account, healthy the night before, now shows a fraction of its former self. No warning arrived. No polite call, no letter, no chance to argue. Only a debit entry, executed while everyone slept, and a much thinner Tuesday.

Is this legal?

Astonishingly, mostly yes. And it is legal in almost exactly the same way whether the branch sits in Kuala Lumpur, Sydney, Lagos, or the City of London. Banks have wielded this quiet power since the age of gaslight and top hats, and the whole Commonwealth inherited it together.¹

But the power has a fence: rather a good one, in fact.

And a surprising number of bankers, on every continent, still treat the garden as though it had no edge at all.

One Doctrine, Exported Everywhere

Lawyers call it ‘set-off’. Or, if they wish to sound especially dusty, “the combination of accounts.” The idea itself is almost embarrassingly simple.

Hold a savings account in credit and an overdraft in debit, both at the same bank, and the law does not see two relationships.

It sees one contract, dressed up in two ledgers, like a man in mismatched socks pretending he meant to do it.

A Victorian court settled this in 1872: one customer, one bank, one contract, however many account numbers decorate the statement.²

From there, the doctrine travelled. It travelled the way English commercial law always travelled in the nineteenth century, in the hold of a ship, tucked inside a reception statute.

Malaysia received it wholesale

The Civil Law Act 1956 imported English commercial law, banking law expressly included, exactly as it stood on 7 April 1956.³ Which is why a nineteenth-century English judgment still quietly governs a Malaysian overdraft today.

Our own courts say so without apology: a bank may combine your accounts, and you are taken to know the running total of each one, whether you have bothered to check or not.⁴

Australia, Singapore, Hong Kong, India, Nigeria, Kenya, Canada, and New Zealand each inherited a version of the same reception clause, and each still cites the same nineteenth-century English cases when a bank and a customer fall out.

The wording of the local companies or insolvency statute differs from country to country. The underlying idea does not.

The justification is not unreasonable, to be fair

A bank lending on overdraft takes a risk on your solvency generally, not on one column of one ledger, examined in isolation. Forcing it to sue for the overdraft, while sitting patiently on your credit balance elsewhere, would be an absurd and expensive piece of theatre. Set-off simply lets the bank net the two, quietly, before anyone need reach for a writ.

Five Fences, Recognisable From Any Commonwealth Garden

Here is where the sermon usually ends, and the small print begins. The right is real. It is neither automatic in every case, nor without walls, five of them, to be exact, and a customer in Manchester or Melbourne will recognise every one.

First: mutuality.

The credit and the debit must belong to the same person, in the same capacity. A bank may not dip into money it holds for you as trustee, or as stakeholder for someone else, merely because you personally owe it money elsewhere. English courts insist on “clear and indisputable evidence” of nominee or trust status before a bank may treat such funds as fair game. Mere suspicion will not do.⁵ South Africa’s highest commercial court has said much the same, in rather sterner language: a bank may not set off against funds it knows are earmarked for someone else’s benefit.⁶

Second: agreement can override the default.

Promise, in the facility letter, to keep accounts separate, and the bank is bound by that promise. Bound, that is, until circumstances change materially, and a resolution to wind up the company counts as precisely such a change.

The House of Lords settled this for the whole Commonwealth to follow.⁷ The promise, in other words, is conditional. Not eternal.

Third: a lien is not a set-off, whatever the bank’s letterhead suggests.

One instructive Kuala Lumpur judgment found no true lien over the bank’s own indebtedness to a customer, merely because she held another overdrawn account elsewhere.

The bank’s actual justification, when finally produced, rested on something narrower: a specific written authority over her fixed deposit, given to secure a related company’s debt.⁸

Lazy assumption of a general power does not survive close judicial scrutiny anywhere in the Commonwealth. It rarely does.

Fourth: priority battles do not automatically favour whoever shouts loudest.

Malaysia’s Federal Court has confirmed that a bank’s set-off right, once crystallised, can outrank a garnishee order obtained later by a judgment creditor over the very same money.

A bank need not play detective into the source of a customer’s funds, unless it actually knows something is amiss.⁹

Timing and knowledge remain everything.

Fifth, and most dramatically: winding up changes the rules entirely.

Once a company enters liquidation, or the local equivalent of administration, a mandatory statutory regime takes over, whether the parties like it or not.

This is the one fence every Commonwealth jurisdiction has built in almost identical stone. England and Wales calls it the mutual credit and set-off rule.¹⁰

Australia calls it section 553C of the Corporations Act.

Singapore and Hong Kong each carry their own version.

Malaysia’s is section 526 of the Companies Act 2016, which preserves set-off for mutual dealings existing before the winding up begins, but excludes any sum where the other party had notice, when it fell due, that a petition was already pending.¹¹

The rule cannot be contracted out of in advance. The House of Lords settled that decisively in Halesowen, and every major Commonwealth insolvency statute has echoed it since, almost word for word.

A Malaysian Federal Court Judgment That Reads Like a Roll-Call of the Commonwealth

The doctrine of “mutual dealings” at the heart of the fifth fence has its own well-travelled passport, and nowhere is that clearer than in Malaysia’s own leading authority on the point.

In 1998, a lessor and a wound-up lessee argued over a security deposit and a set-off clause in an equipment lease.¹²

The Federal Court answered two separate questions

First, whether the set-off amounted to an undue preference within the six-month “twilight period” before winding up. The answer turned on a single, elegant point: the relevant date is the date of the underlying transaction, not the date of the set-off itself. Since the deposit had physically passed into the lessor’s hands eleven months before the winding-up petition, comfortably outside the twilight period, there was no preference to unwind.¹³

Second, and separately, whether “mutual dealings” existed at all for statutory set-off to apply. Here the Federal Court reached for the whole Commonwealth’s learning at once, in a judgment delivered by Edgar Joseph Jr FCJ.

Reading Edgar FCJ is like sailing down the Nile. The great river bears the argument steadily on; yet every so often the captain eases into a small tributary — an Australian case here, a Victorian aside there — to show you some wonder you would never otherwise have seen.

Then out again, and on, the current unbroken. The voyage is the deeper for every detour, and the more colourful too.

The judgment cited the House of Lords for the proposition that statutory insolvency set-off is mandatory and cannot be excluded by agreement.¹⁴

It cited Lord Denning himself, sitting as Master of the Rolls, for the proposition that parties cannot contract out of statutory set-off where mutual liabilities arise from a single contract between them.¹⁵

It cited the High Court of Australia for the width of the word “dealings,” and Sir Owen Dixon, no less, for the proposition that mutual dealings need only exist, at the commencement of winding up, in a form capable of maturing into a pecuniary claim.¹⁶

Dixon’s is a name worth pausing over. He would later serve as Chief Justice of Australia, and the common-law world still speaks of him in the same breath as Lord Atkin — the same strength, the same clarity, the same gift for making the difficult look inevitable.

Of the judges who came after, perhaps only Lord Neuberger has stood comfortably in that company.

Practitioners and law students alike: read him slowly. He repays the visit.

Crucially, though, the deposit itself, the actual sum of money that constituted the mutual dealing, had already passed into the lessor’s hands well before the lessee’s insolvency was ever on the horizon. The mutuality the Federal Court found was anchored to a specific, completed transaction. Not merely to a facility letter sitting in a drawer. That distinction has just been tested again, on rather less comfortable facts.

A Fresh Verdict, and a Question Mark

The Malaysian High Court decided Keluarga Utama Sdn Bhd (in liquidation) v Public Bank Bhd on 16 January 2026.¹⁷

The company was wound up in July 2023. Within days, the liquidator wrote to the bank, gave formal notice of the order, and asked it to close the account.¹⁸

The account stayed open regardless. Between 4 and 16 August, government subsidy refunds of RM137,220 landed in it anyway.

The bank quietly deducted RM3,470 towards a loan instalment on 4 August, issued a notice to hold and set off the balance on 30 August, and on 15 September helped itself to RM136,569.32, clearing the loan entirely.¹⁹

The liquidator sued, hoping to recover the money for the general body of creditors. He lost.²⁰

The reasoning deserves a second look, and the whole case turns on section 526(1): mutual dealings must exist “before the commencement of the winding up.”

The disputed money arrived after the winding-up order. After the bank had actual notice of it. After the liquidator had asked, in writing, for the account to close.

The court found mutuality satisfied anyway, reasoning that the loan facility itself dated from 2021, and treating the underlying facility letter as the relevant transaction, borrowing Sime Diamond‘s language that the relevant date is the date of the transaction, not the date of set-off.²¹ “The Defendant owed the Plaintiff the balance in its current account; the Plaintiff owed the Defendant the outstanding loan. Mutuality is therefore satisfied,” the court held.²²

There is real force in that reasoning, on the classical banker-and-customer analysis: a running account is always mutual, by its very nature, for as long as it exists.

But Sime Diamond itself did not rest its own mutuality finding on a facility letter sitting quietly in a drawer. It rested on a specific sum of money that had actually changed hands, eleven months before any winding up was contemplated.

In Keluarga Utama, by contrast, the specific sum in dispute, the RM137,220 in subsidy refunds, changed hands only after the winding-up order, after the bank had notice, and after the liquidator’s written request to close the account.²³

The judgment borrows the transaction-date answer to the first Sime Diamond question, the twilight-period preference issue, and deploys it to answer the second, quite different question, whether mutual dealings existed at all, without confronting that Sime Diamond‘s own answer to that second question turned on money already in hand.

Nor does the judgment engage with the mandatory, non-contractable-out-of character of insolvency set-off that Halesowen established, and that Sime Diamond itself imported into Malaysian law at the very same page.²⁴

That principle exists for a specific reason, to stop one creditor quietly improving its own position at everybody else’s expense once insolvency is in the wind.

Whether post-notice receipts into a running account should be treated the same as pre-existing mutual credit is precisely the question Halesowen‘s own policy would seem to invite, and it goes unaddressed.

None of this means the result is necessarily wrong.

It means the reasoning has not yet grappled with the two threads of its own leading authority that pull the other way.

The decision was delivered by a Judicial Commissioner at first instance, and has not, so far as the record shows, been tested on appeal.

Liquidators, banks, and their lawyers, in Malaysia and anywhere else this doctrine is inherited, would do well to treat it, for now, as persuasive at best, rather than as the last word.

A Cautionary Tale, For Anyone Who Thinks This Is Only a Bank’s Problem

Picture a small logistics outfit. Three lorries, a modest overdraft, and a contract finally won with a large retailer.

The retailer pays a generous advance into the company’s current account, ring-fenced by written instruction: fuel and driver wages only.

The bank, spotting a healthy credit balance beside a stubborn overdraft, sweeps it anyway.

Wages go unpaid. The retailer, understandably furious, pulls the contract.

On the law set out above, that sweep may well be unlawful, in Kuala Lumpur, in Johannesburg, or in Birmingham.

The funds were earmarked, and the bank arguably knew it. But by the time a lawyer is instructed, the contract has gone, and so has the goodwill.

The moral is not that bankers are villains. Most are simply following a template, the same template, more or less, wherever the branch happens to sit.

The moral is that silence costs money, and speed costs rather less than silence.

And someone has to ask whether blindly following a template can lead one over the cliff.

Your Arsenal: What to Do Before the Bank Helps Itself

The law above is not decoration for a lecture hall.

It is a toolkit, and it travels. Use it wherever your account sits.

[1] Read the facility letter before you sign it, not after the sweep.

If your bank has promised separate accounts, that promise is a real, enforceable term, not a courtesy extended at its pleasure.²⁵

[2]. Ask, in writing, for an express no-set-off clause over any account meant to be ring-fenced: payroll, client trust monies, or advances tied to a specific purpose. A clause is worth ten arguments after the fact.

[3]. Keep ring-fenced money at a different bank entirely, where the relationship allows it.

Mutuality cannot bite across two separate institutions, however much a branch manager might wish otherwise.²⁶

[4]. The moment money vanishes without warning, put the objection in writing that same day.

State plainly that you rely on mutuality, on any written promise of separation, or on the absence of a true lien, whichever applies. Name the doctrine. A bank’s legal department reads a letter citing Garnett v M’Kewan rather differently from one that simply complains.

[5]. If insolvency is approaching, remember the freeze point. The instant your bank has notice that winding up, judicial management, or the local equivalent is coming, the mandatory statutory set-off regime, not the bank’s own contract, takes over.²⁷ A liquidator who suspects a bank has helped itself to post-notice receipts has a real argument, whatever one first-instance decision may now suggest.

[6]. And if a bank has already helped itself, do not assume the matter is closed.

A lien claimed without a specific written authority behind it has failed before, on our own facts, in our own courts.²⁸

[7]. Ask the bank, in writing, to identify precisely which doctrine it relies upon, which clause, which statute, and which document supports it.

A bank asked to show its working is a bank that sometimes discovers it has none.

None of this replaces proper advice, taken early, wherever in the Commonwealth you happen to bank. But a customer who knows the five fences argues from a position rather stronger than the manager expects.

The Short of It

A bank’s right to set off is real, old, and mostly sensible. It travelled the world in the nineteenth century, and it still governs your account today, wherever the Union Jack once flew over the local courthouse.

It is not, however, a blank cheque, drawn on your account without your knowledge.

Know where the fence runs, and you will never again be surprised by how quickly it moves.

∞§∞

This article is written for a general readership and does not constitute technical or legal advice. Readers with legal questions are encouraged to seek independent legal advice. The author thanks KN Geetha, TP Vaani, JN Lheela, and Lydia Jaynthi at GK Legal.

Our gratitude to Julie Ricard of Unsplash for the image.

Claude, Anthropic’s AI, smoothed the drafting; Perplexity Pro checked the facts.

The argument, the views, and the errors remain the author’s.

@Copyright reserved. All content on this site, including but not limited to text, compilation, graphics, documents, and layouts, is the intellectual property of GK Ganesan Kasinathan and is protected by local and international copyright laws. Any use shall be invalid unless written permission is obtained by writing to gk@gkganesan.com.

Can Your Bank Simply Help Itself to Your Money? The Commonwealth’s Law on Banker’s Set-Off

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