Set-off against third-party secured funds denied, but dividend payable must be applied to debtor's liability in liquidation.

A debtor cannot claim set-off in winding-up by treating as a cross-demand the amount due from an insolvent bank to a third party who provided a fixed deposit as security; the court reasoned the third party's interest in the deposit in liquidation constitutes a claim for a dividend rather than a present mutual credit, so full set-off is not available. Principles for wrongful conversion or equitable adjustment were found inapplicable to convert the third party's claim into a bilateral debt. However, equity requires any dividend payable under the fixed deposit to be applied towards the debtor's liability.

---

---

Issues: Whether a debtor can claim a set-off in winding-up by treating as a cross-demand the amount due from an insolvent bank to a third party who furnished a fixed deposit as security for the debtor's loan.

Analysis: The Court examined whether the existence of a fixed deposit given by a third party as security, together with a written authorisation permitting the bank to set-off the deposit, creates a right in the debtor to claim set-off against the bank in liquidation. The Court distinguished cases where the creditor and debtor are mutually indebted or where the surety is severally liable, noting that here the security was provided by a third party who did not personally undertake the debt. The Court held that the third party's interest in the deposit, in liquidation, amounts to a claim for dividend rather than a present money demand susceptible to mutual credit; accordingly the debtor cannot claim the full value of that security by way of set-off. The Court further considered authority on wrongful conversion of security and cases permitting equitable adjustment where a creditor has improperly disposed of security, and found those principles inapplicable to a liquidation where the third party's remedy is to claim a dividend. Having rejected a debtor's right to set-off, the Court nonetheless directed that equity requires the bank to apply any dividend payable under the fixed deposit towards the amount due from the debtor.

Conclusion: No set-off is allowable in favour of the debtor against amounts due to a third party who provided security; however the bank in liquidation must adjust any dividend payable under the fixed deposit towards the debtor's liability.

---