In the light of the current global credit crisis, many people who have savings in banks have become a little bit alert when thinking of the possibility that the bank just might go bankrupt and the clients could lose the cash in their accounts. What makes it even less tolerable is the fact that in many countries the bankruptcy of a bank causes the clients to lose their cash, but does not in any way terminate the loan obligations of the clients to the bank.
Fortunately small deposits are, in many countries, secured by the Guarantee Fund (or similar funds) up to certain amount (when writing this article the amount in Estonia is 20,000 euros and it has been in principle decided by the government to lift the limit up to 50,000 euros). Nevertheless the average "home loan" in Estonia is about 1 million kroons (approximately 64,000 euros), which means that if the client would have more cash in his/her account than the guaranteed amount, then he/she would have the risk of losing the excess amount.
However, if a set-off of monetary obligations would be possible then the clients could save their saving by setting off the excess amount against their loan obligations. Luckily this is the case in Estonia.
According to the Estonian Bankruptcy Act § 99, the set-off in bankruptcy proceedings is possible if a creditor had the right to set off the claim thereof against the claim of the debtor before the declaration of bankruptcy, the creditor may set off the defended claim also after the declaration of bankruptcy.
How does it work in practice?
According to the law the cash held in a bank account is legally a monetary claim of the client against the bank. The loan taken from the bank is also a monetary claim, but in this case it is naturally reversed 's the bank holds the claim against the client. In short, this means that the client and the bank have existing mutual claims, which in principle may be set off provided that the circumstances of set-off exist.
What are the circumstances for set-off?
According to the Estonian Law of Obligations Act § 197 if two persons (parties to a set-off) are required to pay each other a sum of money or perform another obligation of the same type, either party (the party requesting the set-off) may set off the claim thereof against the claim of the other party if the party requesting the set-off has the right to perform the obligation thereof and to require performance from the other party. The mandatory circumstances for set-off therefore include the right of the party requesting the set-off to perform the obligation (in this case pay back his/her loan) and to require performance from the other party (in this case in practice to take out the cash from the bank account).
The last requirement might be problematic in case of long term deposits, which may not be withdrawn before a certain point in time. The first requirement is usually problematic because long term loan obligations are usually paid back in installments, meaning that the early repayment might be restricted. Having said that, it is clear that the circumstances of the set-off are not always clear. In order to evaluate whether the set-off is possible in any given situation the law (incl. consumer protective provisions) and the specific contracts between the bank and the client need to be analyzed.
The possibility to set-off depends on the specific legal relationships (contracts) between the bank and the client and it must be stressed that the general rule of law prescribes that in most cases the set-off of the mutual monetary obligations should be possible even in cases where it in principle requires premature fulfillment of the obligations. According to the Estonian Law of Obligations Act § 84, the general rule of the earlier performance of an obligation is that an obligee shall not require the performance of an obligation before the due date for performance, but shall not refuse to accept performance of the obligation before the due date unless the obligee has a legitimate interest in such refusal.
As a conclusion, it would be wise to keep in mind that it might be possible, in case of bankruptcy of a bank in Estonia, that the clients have the possibility to save the money from the insolvent bank by way of a set-off claim against the bank with the obligation in front of the bank. Naturally, this article is not an overwhelming legal analysis on the subject and it is not to be regarded as advice from the author of the article, but it is rather a call for every worried client to read your client agreements and keep your cash where your loan is and you just might be better off when something crucial happens to your bank.
Jürgen Valter is a lawyer with the Glikman & Partners Law Firm, a member of Baltic Legal Solutions, a pan-Baltic integrated legal network of law firms which includes Kronbergs and Cukste in Estonia and Jurevicius, Balciunas & Bartkus in Lithuania, dedicated to providing a quality 'one-stop shop' approach to clients' needs in the Baltics.
