Overdraft facilities
WHAT IS AN OVERDRAFT?
• An overdraft is a credit facility that is linked to the customer’s bank account.
• An overdraft is directly linked to a customer’s daily banking transaction account. This means
the customer can borrow money through their current account without the need to manage a
separate credit account or transfer funds between accounts.
HOW DOES IT COME ABOUT?
• The bank may expressly or tacitly agree to provide an overdraft facility to its customer either at
the time the account is opened or at any other time during the subsistence of the bank-
customer relationship.
THE EFFECT THEREOF?
• In granting an overdraft facility, the bank agrees to make payments to or on behalf of the
customer in excess of the amount standing to the credit of his account, usually up to an agreed
limit.
• Each payment made against the overdraft gives rises to a separate debt which the customer
then owes to the bank. An overdraft is therefore a series of loans repayable on demand.
THE AFTER EFFECTS
• The customer is obliged to pay interest on an overdraft if there is an express or tacit agreement or a
trade usage to this effect.
SUSPENSION/TERMINATION/CANCELLATION
• The bank MAY be entitled to suspend or terminate an overdraft facility under certain circumstances:
Applicability of the National Credit Act (NCA)
• Where the National Credit Act (NCA) is applicable, the bank may suspend a credit facility at any time
where the consumer is in default under the agreement and the Act does not require notice to be given
under these circumstances.
• Furthermore, subject to certain limitations, the Act entitles the bank to terminate a credit facility at any
time by giving the customer ten business days’ written notice before doing so. The Act does not require
reasons to be given for terminating a credit facility and it has been suggested that a credit provider can
terminate ‘without advancing or even having any reason’ for doing so.
Non-applicability of the National Credit Act (NCA)
• It is submitted that in the absence of a cancellation clause, the bank may terminate if the
customer breaches the terms of the overdraft agreement and this breach is sufficiently
serious to warrant termination and breaches the terms of the overdraft agreement and
this breach is sufficiently serious to warrant termination. This must be determined on a
case by case basis having regard to the terms of the overdraft agreement.
• It is submitted that the bank must give the customer reasonable notice of its intention to
terminate the overdraft facilities, in the absence of an agreement to the contrary.
Reversal of credit entries
GENERAL RULE
• Where a customer makes a deposit into his bank account or a third party makes a payment
into the account, the bank is obliged to pass a credit entry in the customer’s favour.
• When the bank unconditionally credits the account of its customer with a particular amount, it
is obliged to account to him for this amount on demand and may not reverse the credit entry
without his concurrence.
EXCEPTION TO THE GENERAL RULE
• Crediting a customer’s account in the bank’s books does not in all circumstances create an
absolute duty on the bank to account to its customer. A credit entry can be validly reversed
under the following circumstances:
(i) where the credit entry is treated as provisional or conditional, such as where it is
subject to a hold period in terms of standing banking practice;
(ii) where the customer acquired the money by way of theft or fraud; AND
(iii) where the money was erroneously transferred.
The bank’s right to reverse a credit entry, under these circumstances, is a term of the bank-
customer contract implied by law and banking custom and usage.
Payment from Accounts
• Unless it is stated otherwise in terms of a contract, if a debtor is indebted to a
creditor in respect of more than one debt, he can, when making a payment indicate
either expressly or tacitly how such payment is to be allocated.
• Similarly, if a customer has more than one account with the same bank and he
makes a payment to the bank, he can indicate which account he wants to have
credited with the amount paid even if the account chosen is in credit and the other
account is overdrawn.
• A customer may also appropriate within a particular account by specifying that any
amount paid into the account should be used to meet a particular debit item within
the account. If the customer (debtor) does not appropriate the payment then the
right to do so passes to the bank (creditor). Failing appropriation by either party,
appropriation is determined according to certain residual common-law rules.
Set-off between bank accounts
• Where a customer has two separate current accounts with the same bank, one with a credit balance and the
other, a debit balance, the respective debts that the bank and customer owe to each other in respect of those
accounts may be reduced or extinguished by set-off.
• In respect of set-off, the following general requirements should be satisfied:
(i) The obligations must be mutual in the sense that both parties must be indebted to each other in
the same capacity. There can be no set-off between an overdrawn current account held by a
customer in his personal capacity and an account operated by him in his capacity as trustee;
(ii) The debts must be of the same kind;
(iii) The debts must be due and enforceable AND
(iv) Both debts must be liquidated.
Set-off will apply even if the bank accounts are held at different branches of the same bank. However, it will not
apply if it is excluded by statute, or if the parties have excluded its operation by express or tacit agreement.
Termination of the bank-customer
relationship
Circumstances in which the relationship terminates
i. Agreement
The parties may expressly or tacitly agree to terminate their contract.
ii. Notice of termination
In the absence of agreement to the contrary, the customer may summarily terminate his contract with the
bank by notifying it to this effect.
iii. Death or dissolution of the customer
The bank-customer relationship terminates upon the death of the customer if he is a natural person. If the
customer is a juristic person, such as a company or a close corporation, the bank-customer relationship will
also terminate upon its dissolution. Similarly, dissolution of a partnership will terminate the relationship
created with the bank in respect of the partnership account.
iv. Sequestration of the customer
Insolvency does not automatically terminate a contract of mandate. Instead, it is necessary to examine the
nature of the particular mandate in question in order to determine whether or not it terminates.
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v. Insanity of the customer
• It is arguable that if the customer is mentally incapacitated to such an extent that he no longer has contractual
capacity, then the contract of mandate, which underpins the bank-customer relationship, may terminate under these
circumstances. However, from the bank’s perspective it may be difficult to determine whether the customer is so
mentally disabled so as to be deprived of contractual capacity. Chorley and Holden suggest that the bank should
treat the customer as sane unless there is conclusive evidence of mental disability.
vi. Dissolution of the bank
• The bank-customer relationship terminates upon dissolution of the bank. This may occur if the bank is wound up
either voluntarily or by the court. If the bank amalgamates with another bank, or subsequently sells and transfers its
assets and liabilities to another bank then, by operation of law, the amalgamated or transferee bank, as the case
may be, obtains the same rights and is subject to the same obligations as the amalgamating banks or transferor
bank prior to the transfer. Furthermore, all agreements, transactions or documents made or entered into by the
amalgamating banks or transferor bank are subsequently construed as having been made by or in favour of the
amalgamated or transferee bank.
vii. Effluxion of time
• A fixed deposit is a deposit of money with the bank for a fixed period of time, subject to certain terms of repayment.
After the expiry of that period of time, the account terminates and the customer then has the choice of either
reinvesting the money for a further period or of obtaining payment.
Consequences of Termination
When the bank-customer relationship terminates, the whole of the balance standing to the credit
of the customer’s account becomes immediately repayable by the bank.
Conversely, if the customer’s account is in debit, the bank may sue to recover any debit balance
that exists in respect of that account.
Complications may arise if the customer holds several accounts at the bank and decides to close
only one of more of these accounts. The position in such an instance appears to be that the
closing of one or more accounts with the bank does not terminate the bank-customer relationship
provided that the customer still has at least one account open with the bank.
While the bank’s mandate in respect of the closed accounts terminates, the bank’s duties and
obligations in respect of the remaining accounts continues.
Termination of the bank-customer relationship also brings to an end certain duties, notable
exceptions in this regard are the duty of secrecy, which continues notwithstanding the
termination, and any accrued duties of the customer to pay overdrawings, interest and bank
charges, for which he remains liable.
