The sequence of banking operations involved in payment turns, in part, on whether there is a credit transfer or debit transfer. With a credit transfer the payor instructs its bank to pay, and the payor’s bank responds in a variety of ways. One response is to debit the payor’s account. If the payee has its account at another bank, the payor’s bank will send a pay ment message to that bank (perhaps indirectiy, as we shall see).
Ultimately the payee’s account will be credited. Funds are often said to be ‘pushed’ to the payee, but the language is apt to mislead when all that payment entails is at most messages, movements on accounts, and ultimately settlement between different banks. Credit transfers are widely used for commercial payments, but also feature in payments of employee’s salaries, company dividends, and social welfare benefits.
With a debit transfer the sequence begins with the payor authorizing its bank to pay, but actual payment is initiated when the payee presents a debit instrument (e.g. a cheque) or debit instruction (e.g. under a direct debit) to the payor’s bank. Typically this will be through the payee’s bank. For example, with non-paper-based systems the payee’s bank will send a debit message to the payor’s bank. With a paper-based system such as cheques, the payee’s bank will ‘collect’ the instrument hence the term debit collection by presenting it to the payor’s bank, in most cases through an organized clearing system. The payee’s account will
probably be credited, albeit provisionally, before the payor’s account is debited. This is, of course, the reverse of what happens with a credit transfer. Overall it is sometimes said that with a debit transfer funds are being ‘pulled’ from the payor.
Different types of credit-transfer and debt-transfer payment systems are examined at greater length in the next chapter.Thus it should not be drawn into the detail (e.g. on how the borrower is to schedule payments when experiencing difficulties), and more gener ally should avoid leaning on the directors to follow any advice it gives. If a bank simply lays down certain conditions to ensure the continuance of a lending facility, the company then has a choice whether or not to comply with the conditions.
Even when a bank has appointed directors to the board, it does not follow automatically that the company will be accustomed to act on their suggestions, quite apart from whether these suggestions can be sheeted home to the bank as a matter of law. In any event, there is a statutory safe harbour to wrongful trading where the bank takes every reasonable step to minimize losses to other creditors, assuming it knew that there was no reasonable prospect of avoiding insolvency.To what extent will non-statutory duties be imposed on banks in a workout because of their active intervention in the borrower’s affairs?
The argument was considered by the English Court of Appeal in the Pinios case. In that case the bank, instead of calling default, entered into a tripartite agreement with Pinios and a manager, whereby the man ager was appointed as sole and exclusive agent to manage and conduct the activities of the vessel, the construction of which was being financed. The manager was obliged to do this in the best interests of Pinios and the bank, but failed to insure adequately. The vessel was lost. After failing to obtain payment from the manager, despite a successful judgment of the House of Lords, Pinios now counterclaimed against the bank, arguing that it was under a duty to see that the manager did not under-insure the vessel.