Banker
and Customer
By
Asok Nadhani
8.1
Banker and Customer
The law relating
to bankers and banking in India
i. Law regulating
relations between bankers, customers and outside world: These laws deal with matters relating to collection of various
financial instruments, loans and advances, bankers' lien, pledge, mortgage and
hypothecation. These laws are mainly contained in Contract Act, 1872, and the
Negotiable instruments Act, 1881.
ii. Law
regulating the Bankers & Banking:
These laws deal with matters relating to incorporation, control, management and
dissolution of banking companies and are mainly contained in Companies Act, 1956 and Banking Regulation
Act, 1949.
8.2
Definition of Banker and Customer
8.2.1
Banker (Sec.3)
As
per N I Act, the term Banker includes any person acting as a Banker. The
Banking Regulation Act, 1949 defines 'Banking Company' as "a company which
transacts the business of banking in India
8.2.2
Customer
A
person becomes a customer of a bank when he opens an account with the bank for
any banking service.
8.3
Legal relationship between Banker and Customer
A
Banker and a customer establish a contractual relationship between them.
8.4 Rights and
Obligations of Banker
a.
Rights
− Banker’s
General Lien
− Claim
incidental charges and interest
− Right
to set-off
− Right
of appropriation
b.
Obligations
− Honour
cheque
− Record
of transactions
− Follow
instructions of customer
− instances
when banker may dishonour customer’s cheque
8.4.1 Banker’s General Lien
In
the absence of a contract to the contrary, the banker may, retain goods and
securities bailed to him as security for general balance of account (sec.171 of
the Indian Contract Act).
8.4.2 Claim incidental charges and interest
The
banker has the right to claim incidental charges and interest on money lent and
banking services rendered to the customer as per rules.
8.4.3 Right to set-off
The
banker may combine two or more accounts of a customer to set off Debit Balance
of an account against credit balance of another account of the customer with
the bank.
8.4.4 Right of appropriation
The
banker may make appropriation of Receipts & Payments in a current account
of customer, as per Sec 59 to 61 of the Indian Contract Act, 1872. As per this
rule, unless there is a standing rule or instruction to the contrary, the first
credit would be set off against first debit and balance carried to the next set
of transaction and so on.
8.4.5 Honour cheques
i. A
banker must honour his customer's cheques (Sec. 31) if the customer has
sufficient fund in his account and the cheque is properly applicable for the
payment, otherwise he is liable to customer damages for financial loss and also
for injury of customer’s reputation.
ii. In
case of wrongful dishonour the banker is only liable to the drawer only (and
not to the payee or the holder of the cheque as there is no contract between
them and the banker).
8.4.6 Record of transactions
The
banker must keep a proper and accurate record of all the transactions of the
customer.
8.4.7
Follow instructions of customer
i. The
banker must abide by express and clear instructions of the customer, subject to
the laws laid down in the N I Act.
ii. In
absence of any express instructions, the banker must act according to the usage
prevailing at the place of his banking business applying reasonable skill and
diligence in his work. [R.J.Mohamed v. Indian Bank]
8.4.8 Keep confidentiality
The
banker should take adequate care to keep the state of account of his customer's
affairs confidential and not disclose to other parties which may injure the customer’s
reputation and credit. If the banker fails in this duty, he is liable in
damages.
8.5 Instances
when banker may dishonour customer’s cheque
A banker may
dishonour customer’s cheque in the following cases:
i.
Insufficient
Fund : The banker does
not have sufficient funds to honour the cheque in full.
ii.
Available Funds
not proper : Funds to the
credit of the customer are not applicable to the payment of the cheque (e.g.,
when the money is held in trust).
iii. The cheque not proper : The cheque drawn is ambiguous or of
doubtful legality, irregular, materially
altered, not duly presented, torn or mutilated.
iv. Signature not matching : The customer's signature does not agree
with the specimen signature in the bank’s record, or signature not properly
done (e.g not signed by all the required signatories).
v.
Post Dated
Cheque : The cheque is
presented before the ostensible date of the cheque.
vi. Stale Cheque : The cheque is
not presented within its validity (six months from the date of its issue).
vii. Cheque presented at wrong branch : If the cheque is presented at a branch
other than the one where the customer has the account.
viii. Set Off : The banker has
a claim for set-off and the cheque is excess of the claim.
ix. Undated cheque: A banker is not bound to pay an undated cheque (cheque
which does not contain any date on its face).
x.
Presentment after banking hours: The bank may refuse to pay
a cheque if the cheque is presented after banking hours. But, a bank may pay a
cheque even after business hours, at its discrection.
8.6
Instances when banker must dishonour customer’s cheque
A
Banker must dishonour a cheque at the following instances:
i.
Customer becomes insolvent or an order
of adjudication has been made against him.
ii.
The customer orders the banker not to
honour a cheque.
iii.
The banker receives notice of the
customer's death or insanity.
iv.
A garnishee or other legal order
attaching the funds of the customer is served on the banker.
v.
When the customer gives notice to the
banker to close the account or assignment of the credit balance of his account.
vi.
The title of the person presenting the
cheque is defective.
vii.
The holder gives a notice of loss of a
cheque to the banker.
viii.
Prohibitions by Government. A banker must not pay a
cheque if the payment of such cheque is prevented by the Government or under
Exchange Control Restrictions.
ix.
Cheque not signed by all the joint holders. The banker must refuse cheque payment if it is not signed by all the
joint holders. However, if all the joint
holders have authorised any of them to draw cheque the banker must pay the
cheque signed by the authorised joint holder singly.
x.
Material alteration. The banker must not make the payment of materially altered cheque.
Cheque without making sufficient inquiries and obtaining evidence that the
holder has a valid title to the cheque.
xi.
Irregular endorsement. Where a cheque payable to order is endorsed, which appears to be forged
or otherwise irregular, the banker must not pay the cheque.
Section 85 gives
protection to a banker where a banker makes payment on forged cheque only if the
payment is made in due course. [Canara Bank vs. Canara Sales Corporation]
xii.
Prohibition in case of trust money. A banker must refuse to
honour a cheque drawn in breach of trust where he has notice of breach.
8.7
Protection of paying Banker
The
privileges of the paying banker are listed below for (sec.85),
−
Cheque payable to order
−
Cheques payable to bearer
−
Crossed cheques
8.7.1
Cheques payable to order [Sec. 85 (1)]
a.
Where a banker pays a cheque payable to
order, purporting to be endorsed by or on behalf of the payee, he is discharged
from liability by making the payment in the due course. The banker can debit
his customer's account with the amount so paid even if the endorsement turns
out to be is forged, or without authority. [Charles
v. Blackwell], [Canara Bank v. Canara Sales Corpn], [Charles
v. Blackwell], [Smith v. Union Bank of London
b.
However, the banker cannot debit the
account of his customer in the following cases :
(i)
Where the payment is not made in due
course and in accordance with the apparent tenor of the cheque.
(ii)
If there is a discrepancy between the
name of the payee and his indorsement.
(iii)
Where the payment of a crossed cheque
is made on the counter.
(iv)
If signature of the customer is forged.
But if the forgery is due to the negligence of the customer the banker can
debit the account of the customer intimately connected with the negligence. Ex.8.4
8.7.2
Cheques payable to bearer [Sec. 85 (2)]
i. Where
a cheque is originally drawn payable to bearer, the paying banker is discharged
by making the payment to the bearer of the cheque, provided such payment is a
payment in due course.
ii.
If payment is made in due course, the
paying banker shall not be liable, even if –
a. any
endorsement (whether in full or in blank) has been made on the cheque or
b. any
endorsement made on the cheque restricts or excludes the right of further
negotiation.
Thus, the rules
in case of bearer cheques is, “once a bearer, always a bearer”, or “A bearer
cheque is always a bearer cheque”.
8.7.3
Crossed cheques
i. Payment
of cheque crossed generally: The drawee banker is discharged by
payment in due course of a generally crossed cheque to a banker.(Sec.126)
ii. Payment
of cheque crossed specially: The draweee banker is discharged by
payment in due course of a specially crossed cheque to the banker to whom it is
crossed or his agent for collection. (Sec.127)
iii. Payment
of crossed cheque in due course: The drawee banker is discharged
when he pays a crossed cheque in due course (i.e., in good faith and without
negligence) the proceeds of the cheque reaches the hands of the true owner.
(Sec. 128)
iv. Payment
of crossed cheque out of due course: When the
banker pays a crossed cheque otherwise than in accordance (i.e., pays otherwise
than to a banker to whom it is crossed), he is liable to the true owner of the
cheque for any loss sustained by such default. (Sec. 129)
8.8 Collecting Banker
A collecting
banker is one who receives instrument from his customer in order to collect the
proceeds and credit them to his customer’s account. So he acts as:
a.
as the holder for value.
b.
as an agent of the customer.
8.8.1
Protection to Collecting Banker
a.
Collecting banker as a holder in due
course: When collecting banker acquires a cheque for value and in
good faith, he collects it for himself and has all the privileges of a holder
in due course.
b.
Collecting banker as an agent of the
customer: A banker who has in good faith and without negligence
received payment for a customer of a cheque crossed generally or specially to
himself, does not incur any liability to the true owner of the cheque, even if
the title to the cheque proves defective. A collecting banker does not get any
protection in case of a cheque crossed ‘not negotiable’.
8.8.2 Duties of Collecting
Banker
i.
The collecting banker is bound to show due care and
diligence in the collection of cheque given to it. If he fails and
consequently, the customer suffers loss, the collecting banker is responsible
to compensate the loss.
ii.
The collecting banker must show due diligence in
informing his customer about the dishonour of a cheque.
8.9 Non-liability of banker receiving payment of
cheque
A banker who has
in good faith and without negligence received payment for a customer of a
cheque crossed generally or specially to himself, shall not, in case the title
to the cheque proves defective, incur any liability to the true owner of the
cheque by reason only of having received such payment. (Sec. 131)
Ex: 8 Examples
Cheques
payable to order
Ex.
8.1 A cheque drawn 'payable to B or order' is stolen and B's
indorsement is forged. The banker pays the amount in due course. The banker is
discharged from liability [Ref. 8.7.1
(a)]
Ex.
8.2 A cheque is
drawn 'payable to B or order" is delivered to B in payment of a debt. B's
agent, indorses the cheque 'per pro' for B and obtains payment of the money and
misappropriates it. The banker is discharged by payment in due course. [Ref. 8.7.1 (a)]
Ex. 8.3 A
draws on X bank a cheque payable to B or order and forwards it to his agent, C
with instructions to hand it over to B. C forges B's indorsement and collects
payment on the cheque. The banker is discharged by payment in due course. [Ref. 8.7.1(a)]
Ex. 8.4 E draws a
cheque on his banker for Rs. 50 carelessly leaving a blank space before the
words and figures 'fifty'. The holder fills it up as a cheque for Rs. 550 and
obtains payment. The banker can debit his account for the amount so paid. [Ref. 8.7.1(b)]
For more details, refer
to Business & Corporate Laws by Asok Nadhani, BPB Publications, www.bpbonline.com,
bpbpublications@gmail.com
