A) Can the bank issue open-ended guarantees ?
The banks / DFIs may issue open-ended guarantees only in favor of Government departments, corporations / autonomous bodies owned/controlled by the Government and guarantees required by the courts. While issuing such guarantees, the banks/DFIs should secure their interest by adequate collateral or other arrangements acceptable to them.
B) What is the “Rule in Clayton’s Case”?
The Clayton’s case refers to the case of Devaynes Vs Noble in the year 1816. Mr. Clayton had an account with a Banking firm, of which Mr.Devaynes was a partner. As it so happened, Mr. Clayton withdrew more than the available balance in his account, thereby creating a overdraft.
Subsequently, he repaid the same, and then deposited further amounts in his account, as part of his operations in the said account. In the meantime, Mr.Devaynes died, but the Banking firm, in which he was one of the partners, continued to operate as usual. Later on, the firm was declared bankrupt.
At that point of time, Mr.Clayton sought to withdraw money from his account, which was declined, in view of the declared bankruptcy of the firm. The matter then went to court, with Mr. Clayton laying claim to his monies from the estate of the deceased partner of the Banking firm, Mr. Devaynes. The Court, however ruled against him, laying down, what came to be known as, “the Rule in Clayton’s Case”.
The Court held that the first credit in a account would go towards adjusting the first debit in the said account, and so on. In the case of a Banking firm, under partnership constitution, upon the death of one partner, credits made by a customer in his account would become the responsibility of the remaining partners, and could not be repaid out of the estate of the deceased partner.
This principle of first in first out, upheld by the English Court in 1816, is still in vogue, despite criticism from certain quarters about its fairness and relevance. However, there are certain exemptions to the rule.
For instance, a case where the Clayton’s rule does not apply, relates to a Trust Account, wherein the Trustee commits breach of trust, by mixing up his personal funds with those of the Trust, and proceeds to utilize such funds for his personal expenses. In a case like this, it is assumed that the amount deposited by the fraudulent trustee would go towards adjusting the withdrawal made by him for his personal benefit, irrespective of the order of such credits and debits. The Trustee holds a fiduciary position in a transaction of this nature.
The Rule in Clayton’s Case is a landmark judgment in the application of Banking laws, and is extremely useful in tracing claims where fraud is committed in an account by a person, in a fiduciary position, and also where an account is used for stashing away ill-gotten wealth.
For example, a thief deposits various sums of monies he stole, into his Bank account, on different dates, and then withdraws certain amounts on different dates. The thief is caught, and the Police receive five claims for the balance of credit lying in the thief’s account. In a case like this, the Court would apply the Clayton’s rule, in settling the rights of the five claimants.
Banks scrupulously follow this rule in dealing with cases of insolvency, bankruptcy, death etc., of their borrowers, and other account holders, especially in partnership accounts.
Banks follow a simple procedure of stopping the operations in such accounts, where the Clayton’s rule is applicable. And in case of joint accounts, a separate account is opened in the names of the surviving account holders.
C) Can exporters in Pakistan borrow in foreign currency?
Yes, Exporter can borrow, in US$ in Pakistan under the Foreign Currency Export Finance Scheme
D) Can an Islamic banking branch of a commercial bank take independent exposure upto 35% of its equity, as is admissible in case of full-fledged Islamic bank?
No, the regulation does not allow an Islamic banking branch of a conventional bank to take independent exposure up to 35% of its equity; rather the aggregate capping limit of 20% of the bank’s equity will be observed.
E) Can a bank extend credit facilities against lien on COIs/deposits maintained with NBFIs?
Yes. SBP has treated COIs / deposits of NBFCs / DFIs rated “A” and above as liquid securities, and loans can be extended against them.
