Special types of customers under the Banking Act: A Analytical study

ATIN KUMAR DAS, NATIONAL LAW INSTITUTE UNIVERSITY BHOPAL.

INTRODUCTION

The term ‘customer’ of a bank is not defined by law. Ordinarily a person who has an account in a bank is considered its customer. There is no statutory definition of “customer”, and so one has to refer the decisions of the courts in order to discover the principle which determines whether or not a person is a customer. In the United States, customer means, ‘any person having an account with a banker or from whom a bank has agreed to collect items and includes a bank carrying an account with another bank’.The statutory protection under section 131 and 131A of the Negotiable Instruments Act, 1881, is available to a collecting banker only if the banker inter alia receives payment of a cheque or a draft for a customer. Though a customer is a very important person for a bank, he appears only once in law of Negotiable Instrument (i.e., in section 131 of the Negotiable Instruments Act) and even there only casually; he is neither defined nor explained. A customer of a banker need not necessarily be a person. A firm, joint stock Company, a society or any separate legal entity may be a customer. According tosection 45-Z of the Banking Regulation Act, 1949, “Customer” includes a government department and a corporation incorporated by or under any law.[2]

Now come to the researcher’s topic is that Special types of customer means are those who are distinguished from other types of ordinary customers by some special features. Hence, they are called a special types of customers. They are to be dealt with carefully while operating and opening the accounts. The following are some examples of special types of customers:

° Married women

° Lunatics

° Minors

° Illiterate Persons

° Joint Hindu Family

° Co-operative Societies

° Partnership

° Trustees

In the case of Commissioner of Taxation v. English Scottish and Australian Bank[3], Lord Dunedin observed, “the word customer signifies a relationship in which duration is not essence. A person whose money has been accepted by the bank on the footing that the bank undertakes to honour cheques upto the amount standing to his credit, is a customer of the bank irrespective of whether his connection is of long or short standing.”

The above view was also confirmed by the Kerala High Court in the case of Central Bank of India, Bombay v. Gopinath Nair and Others[4], the Lordship observed: “Broadly speaking a customer is a person who has the habit of resorting to the same place or person to do business. So far as the banking transactions are concerned he is a person whose money has been accepted on the footing that the banker will honour his cheques upto the amount standing to his credit, irrespective of his connection being of short or long standing”.[5]

Thus in order to constitute customer, a person should satisfy two conditions:[6]

° He should have an account with the bank, whether fixed, savings or current.

° The dealings should be of a banking nature.

Review of Literature:

1. Cranston Ross, “Principles of Banking Law”, the researcher mainly follow the book to know about the Banking Law and Banking Regulations in India.

2. Milnes Holden T, “Banking Law and Practice in India”, the researcher follow the book to know about the Banker and Customer Relationship in India.

3. Tannan M.L., “Banking Law and Practice in India”, the researcher follow the book to know about the Legal Provisions which covers or governs the relationship between banker and customer.

4. Banker’s Journal , February 2010, The Banking Law in Theory and Practice the researcher mainly follow the journals to know about the cases on banker and customers relations.

Title of the Project:

Special Types of Customers under The Indian Legal Regime.

Formulation of Problem:

Special Types of Customers under The Indian Legal Regime: A Critical Analysis.

Statement of Problem:

In this research researcher try to find out who are the special types of customers? And how they get the privileges under the Indian Legal Regime?

Aims and Objectives:

The main aims of the project are as follows:

° The paper essentially seeks to outline the Special types of Customers.

° To identify or examine the different Laws to provides the privileges to the special types of customers.

° The comparative study between India and United States.

Scope, focus and limitations of the project: (Hypothesis)

To analyze the Banks procedures and stipulated terms.

To analyze the Banking Regulation Act,1949.

To Analyze the Judicial pronouncements.

Sources of data:

The researcher has mainly relied upon secondary sources such as books and articles.

Methods of analysis:

This project uses both the analytical and descriptive methods. The Analytical method is used widely throughout this project while examining the role of the state, its various mechanisms (legislature, judiciary, executive). Descriptive method is also used in this project to give illustrations and instances of subjugation being perpetuated by several books and articles.

References and style of footnoting:

All references are cited and a uniform style of footnoting has been followed throughout the project, acknowledging the respective sources that have been used.

CHAPTERISATION

CHAPTER I

Special Classes of Customers

MINOR

A person under the age of 18 years is years is a minor; if a guardian of his person or property or both has been appointed by a court or if the superintendence of his property or both has been assumed the age of 18 years, he remains minor till he completes the age of 21 years.[7] According to the Indian Contract Act, 1872, a minor is not capable of entering into by a minor is void. The banker should, therefore, be very careful in dealing with a minor and take the following precautions:[8]

OPENING THE ACCOUNT

The banker may open a savings bank account, not a current account in the name of a minor since in case of an overdraft the minor does not have any personal liability. The savings bank account may be opened in any of the following ways:

° In the name of the minor himself.

° In the joint names of the minor and his/her guardian.

° In the name of guardian in the following way “ABC, natural guardian of XYZ”.

Section 26 of Negotiable Instruments Act provides that a minor may draw, endorse, deliver and negotiate a negotiable instrument. In case of the minor can operate the account only jointly with his or her guardian while in case of the account is to be operated by the guardian on behalf of the minor. In cases the minor must have at least attained the age of 12 years and should be in a position to read or write English, Hindi or Regional language.[9]

DATE OF BIRTH

At the time of opening of the account of minor, the bank should record the date of birth of the minor as disclosed by his or her guardian.

DEATH OF THE MINOR GUARDIAN

In the event of death of a minor the money will be payable to the guardian. In case the guardian dies before the minor attains majority and the account is a joint account or to be operated by the guardian only, the money should be paid by the bank to the minor or attaining majority or to some person appointed by the court as his guardian.

MINOR AS A PARTNER

A minor can be admitted to the benefit of partnership with the consent of all the partners but he will not be liable for the losses or debts of the firm. Within six months after majority he should repudiate the liability as partner otherwise he will be liable as a partner.[10]

PROVISIONS REGARDING LGAL GUARDIANSHIP OF A MINOR

° Natural guardian

° Testamentary guardian

° Guardian appointed by the Court

The first two types of guardians are governed by the provisions of the Hindu Minority and Guardianship Act, 1956, whereas a guardian is appointed by a court under the Guardians and Wards Act, 1890.

RESERVE BANK’S DIRECTIVES

Reserve bank of India has advised the banks to allow opening of minors accounts with mother as guardian. Thus, banks are now permitted to open account of minor in the guardianship of the mother, even if the father of the minor is alive.[11]

CHAPTER II

MARRIED WOMAN

A married woman is competent to enter into a valid contract. The banker may, therefore, open an account in the name of a married woman. In case of a debt taken by a married woman, her husband shall not be liable except in the following circumstances:

° If the loan is taken with his consent or authority; and

° If the debt is taken for the supply of necessaries of life to the wife, n case the husband defaults in supplying the same to her.

The husband shall not be liable for the debts taken by his wife in any other circumstances. The creditor may in that case recover his debt out of the personal assets of the married woman.[12] While granting a loan to a married woman, the banker should, therefore, examine her own assets and ensure that the same are sufficient to cover the amount of the loan.

PARADANASHIN WOMAN

A paradanashin woman observes complete seclusion in accordance with the custom of her own community. She does not deal with the people, other than the members of her own family. As she remains completely secluded, a presumption in law exists that:

° Any contract entered into by her might have been made with her free will and with full understanding of what the contract actually means.

° The same might not have  been made with her free will and with full understanding of what the contract actually means.

The banker should, therefore take due precaution in opening an account in the name of a paradanashin woman. As the identity of such a woman cannot be ascertained, the banker generally refuses to open an account in her name.

ILLITERATE PERSONS

Illiterate persons cannot sign their names and hence the bankers taken their thumb impressions as a substitute for signature, and also a copy of their recent photograph. The application from and the photograph should be attested by an approved witness. For withdrawing money, he must attend personally and affix his thumb impression in the presence of an official of the bank, for the purpose of identification.

Auchteronis Co. vs. Midland Ltd.[13] In this case the court held that a bank does not owe duties to third parties who are not its customers. Certainly the mere fact that a bank owes a duty to its customer in connection with a transaction does not mean that it owes a duty to its customer in connection with a transaction does not mean that it owes a parallel duty to  third person who may also be interested in the transaction.

 LUNATICS

The banker should, therefore, not open an account in the name of a person who is of unsound mind. But if a banker has discounted a bill duly written, accepted or endorsed by a lunatic he can realize the money due on the same from such person except in the circumstances where it is proved that the banker was aware of the lunacy of the person concerned at the time he discounted the bill. The banker should suspend all operations on the account of a customer as soon as he receives the news of his lunacy till he gets the proof of his sanity or is served with an order of the court.

In the case of Shanti Prasad Jai v. Director of Enforcement Exchange Regulation Act.[14] High court cases in India, it has been repeatedly held that the banker and customer relationship in respect of money deposited in the account of  customer with the bank is that of debtor and creditor.

CHAPTER III

JOINT HINDU FAMILIES

The concept of joint Hindu Family is recognized by law. A business, according to law is a distinct heritable asset. Where a Hindu dies, leaving a business it passes on the heirs. If he leaves male issues it descends to them and the property becomes joint Hindu Family property. The members of the family are called co- parceners and the eldest male member is the manager or the karta. When an account in the name of the JHF is opened all the adult co- parceners are to sign the account opening form, even though the karta would operate on the account. In addition, the bankers also obtain a letter of undertaking signed by all the adult co- parceners stating that the business carried on by the family through births and deaths will be advised to the banker. If the business is ancestral, the co- parceners are liable to the extent of their share in the family property, whereas if the business is not ancestral, co- parceners will be personally liable for the family from the bank.

The main problem in dealing with a JHF arises in respect of loans. In the JHF governed by mithakshara law, all the members acquires a right in the property by birth and this right starts from the date of conception in the womb and so there is always the danger of a loan being repudiated by a  member who was not even born on the date of the transactions. The burden of proving this necessity lies on the banker and the banker has to not only prove the legal necessity, but also prove that he made reasonable inquiries and was satisfied as to the existence of the legal necessity.

To avoid these and several other difficulties, some banks requires a Hindu customer opening an account, to furnish a statement to this effect that the money deposited is his self acquired property and not that of JHF.

° The account should clearly indicate that it is a JHF.

° The JHF letter should be signed by all the co- parceners.

° The letter should clearly indicates the powrs of the karta.

° All co- perceners should sign the documents for loans.

° Death/Lunacy/Insolvency of co- perceners does not dissolve the JHF. It continues till partition of property.

 TRUSTEES

According to the Indian Trusts Act, 1882, a ‘trust’ is an obligation annexed to the ownership of property, and arising out of a confidence responed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner Section 3. The person who resposes the confidence is called the author of the trust. Trustees is the person in whom the confidence is resposed. The person for whose benefit the trust is formed is called beneficiary.

In the case of New Bank of India v. Union of India[15], Supreme Court observed that a trustees is generally not entitled to dispose of or appropriate trust property for his benefit. In the present case the banker was entitled to dispose of the share and utilities the amount thereof for adjustment to the loan account if the debtor defaults. This bankers obligation to transfer back the shares can arise only when the debtor clears dues of the bank. Hence bank was not considered as trustees.

PARTNERSHIP

A bank should take the following precautions in the course of having business dealing with the firm:

° The banker should open an account in the name of partnership firm only when one or more partners make an application to the effect.

° The bank should ask for a copy of the partnership agreement and thoroughly acquaint itself with its clauses.

° The banker should take a letter signed by all the partners containing the following:

° The name and address of all partners

° The nature of the firms business

° The names of the partners authorized to operate the account in the name of the firm.

° The banker should not credit a cheque in the firms name to the personal account of a partner without enquiring from other partners.[16]

In the absence of any contract to the contrary, a partnership firm stands dissolved on the death of a partner. In case the firm continues to carry on the business, the estate of the deceased is not liable for any act of the firms after his death.

CHAPTER IV

ACCOUNTS IN THE NAME OF LIQUIDATORS

A liquidator is a person appointed by the court to wind up the affairs of a company. His business is to realize the company’s assets and apply funds thus collected in repayment of debts and distribute the balance among shareholders. He has power to borrow money on the security of the company’s assets and to draw endores and accept instruments on behalf of the company. While exercising such powers, the liquidator is free personal liability.

Every official liquidator is required to maintain a personal ladges account with RBI or SBI or any Nationalized Bank in terms of the court order.

CO – OPERATIVE SOCIETIES

These are established under Co – operative socities act in force in various states. They are governed by their respective rules and by – laws. Before opening the accounts, these have to be scrutinized to see if there are any restrictions on opening bank accounts. In some states, the co- operative societies cannot open accounts with commercial banks without permission from the registrar of co- operative societies and the registrar may also impose certain conditions like maximum balances. All such conditions should be observed while opening and operating the accounts.

RECOMMENDATIONS AND SUGGESTIONS

The present discussion highlights the legal position of the special cases of a bank’s customer and the necessary precautions that a prudent banker should take while dealing with them. A bank account may be opened by any person who can legally enter into a valid contract and applies to the bank in the proper manner i.e., undertakes to abide by the bank’s procedure and stipulated terms and conditions. Some persons like the minors, drunkards, lunatic, and insolvents are not competent to enter into valid contracts. Thus requiring extra care to ensure that their accounts are conducted in accordance with the provisions of their respective charters.

CONCLUSION

The customers of banks consist of millions of private individuals, hundreds of thousands of small businesses some formed as private limited companies the majority being sole traders or partnerships. Some persons like the minors, drunkards, lunatics and insolvent not competent to enter into valid contracts. Some other persons like agents, trustees, executors, etc. who act on behalf of others, have limitations on their powers. Thus requiring extra care to ensure that their accounts are conducted in accordance with the provisions of their respective charters.

BIBLIOGRAPHY

Cranston Ross, Principles of Banking Law ,Published by Clarendon Press Oxford, Edition I, 1997.

Gupta S.N., The Banking Law in Theory and Practice Published by Universal Law Publishing co. pvt. Ltd. Edition III 2004.

Holden Milnes J, The Law and Practice of Bankin in India, Published by Pitman Publishing Ltd, London, Edition II, 2001.

Tannan M.L., Banking Law and Practice in India , Wadhwa Nagpur, Edition XXI 2007.

Banker’s Journal, The Banking Law in Theory and Practice February 2010.

WEBLIOGRAPHY

http://www.nls.ac.in

http://www.infibeam.com

http://www. bot-tz.org

http://www.economywatch.com

http://www.iibf.org

http://www.ssrn.com

http://www.articleaalley.com

http://www.findarticles.com

http://www.lexisnexis.com

http://www.ezinearticles.com

[1] Section 4 – 104(1)(e) of the Uniform Commercial Code.

[2] http://www.nls.ac.in

[3] 1920 AC 683.

[4] AIR 1970 Kerala 74.

[5] http://www.lexisnexis.com

[6] http://www.ssrn.com

[7] Indian Majority Act, 1875, Section 3.

[8] http://www.infibeam.com

[9] http://www.articlealley.com

[10] Indian Partnership Act, 1932, Section 30(7)(a).

[11] http://www.ezinearticles.com

[12] http://www.findarticles.com

[13] AIR 1928

[14] AIR 1962 SC.

[15] AIR 1981, 51 Company Case.

[16] http://www.ehow.com