Unit 3 — Exam Guide

Introduction

The relationship between a banker and his customer depends upon the nature of service provided. Before examining this relationship, we must understand the definitions of "banker" and "customer."

Definition of Banker

As per H.L. Hart, a banker is one who in the ordinary course of his business honours cheques drawn upon him by persons from and for whom he receives money on current accounts. Section 3 of the Negotiable Instruments Act, 1881 defines: "Banker includes any person acting as a banker." Section 5(b) of the BR Act, 1949 defines "banking" as accepting deposits for the purpose of lending or investment, repayable on demand or otherwise, and withdrawable by cheque, draft, order, or otherwise.

Definition of Customer

The term "customer" is not defined by law. According to Sir John Paget's "duration theory", to constitute a customer there must be a recognizable course or habit of dealing in the nature of regular banking business — a person does not become a customer merely on opening an account.

This theory was rejected in Ladbroke v. Todd, where Justice Bailhache held that the relationship of banker and customer begins as soon as the first cheque is paid in and accepted for collection, not merely when it is paid. This was confirmed in Commissioner of Taxation v. English Scottish & Australian Bank — frequency of transactions is not essential, but the customer's position must be such that transactions are likely to become frequent.

I. Debtor-Creditor Relationship (Primary)

On opening of the account, the banker assumes the position of a debtor. The money deposited by the customer is, in legal terms, lent by the customer to the banker. The banker is not a depository or trustee — a depository accepts something for safe custody on condition it will not be opened or replaced. The creditor has the right to demand back his money, and the banker is obliged to repay.

The relationship reverses when the customer's account is overdrawn — the banker becomes creditor of the customer and continues until the loan is repaid. As loans are usually secured by tangible assets, the banker becomes a secured creditor.

This relationship differs from ordinary commercial debts in three respects:

• Creditor must demand payment: The banker is not required to repay on his own accord — the depositor must make a demand. If the banker closes the account on his own, cheques issued by the depositor might be dishonoured.
• Demand at proper place: The demand must be made at the same branch where the account was opened. The banker is not bound to honour at another branch unless special arrangement exists.
• Demand in proper manner: The demand must be through a cheque or order as per common banking usage — not verbally or telephonically.

II. Banker as Trustee

In certain circumstances, the banker acts as a trustee. A trustee holds money or assets for the benefit of another (the beneficiary). If a customer instructs the bank to purchase securities from his deposit, but the bank fails before making such purchase, the bank remains a debtor (not trustee) if the amount was not debited from the customer's account. The banker's position as trustee depends on the specific instruction given by the customer regarding the purpose of the money.

III. Banker as Agent

A banker acts as an agent performing agency functions — buying or selling securities on behalf of the customer, collecting cheques, making payment of insurance premiums and other dues. The range of agency functions has become much wider with modern banking.

IV. Banker as Bailee

When a customer deposits valuables for safe custody, the banker acts as a bailee under the provisions of the Indian Contract Act, 1872.

Closing of Account

The customer-banker relationship may end by: (i) customer's notice; (ii) customer's death; (iii) customer's insanity; (iv) customer's insolvency; (v) garnishee order from court; (vi) assignment of credit balance. The bank must give adequate notice before closing — in Prosperity Ltd v. Lloyd's Bank Ltd, one month's notice was held inadequate given the wide spectrum of operations. In UBI v. Devi, the SC held that notice of death to one branch is not constructive notice to all branches.

Conclusion

The banker-customer relationship is multifaceted — primarily debtor-creditor, but also trustee, agent, and bailee depending on the nature of services rendered. This relationship is both contractual and statutory, governed by the NI Act, BR Act, Indian Contract Act, and banking customs.

Introduction

A banker has an implied duty to keep the customer's account information confidential. This obligation arises from the implied term of the contract between banker and customer. The banker must not disclose details of the customer's account, transactions, or financial position to any third party. However, this duty of secrecy is not absolute — there are several circumstances where disclosure is justified.

The Tournier Case — Foundation of the Law

The leading case on this subject is Tournier v. National Provincial Bank (1924). The Court of Appeal held that the banker's duty of secrecy is a legal duty arising out of contract but subject to four qualifications. Bankes LJ stated that the duty extends beyond account information to all information acquired through the banking relationship — including information from third parties about the customer.

When Disclosure is Justified

1. Compulsion of Law

Disclosure is required when ordered by:

• Courts: Garnishee orders, discovery orders, subpoenas requiring production of bank records
• Income Tax authorities: Under Sections 131 and 133 of the Income Tax Act, IT officers can call for information from banks regarding customers' accounts
• Police: During investigations under the Code of Criminal Procedure
• Customs and Excise authorities: Under relevant statutes for detecting evasion
• Foreign Exchange Management Act (FEMA): Enforcement Directorate can require disclosure

2. Duty to the Public

Disclosure is justified when it is necessary in the interest of the public:

• To prevent fraud or crime
• Suspected money laundering — under the Prevention of Money Laundering Act, 2002
• Suspected terrorist financing
• When public safety or national security is at stake

3. Interest of the Bank

The banker may disclose when necessary to protect its own interests:

• Suing the customer for recovery of dues — the bank must disclose the customer's account details to prove its claim
• Enforcing security — disclosing to co-guarantors or sureties
• Defending itself in litigation brought by the customer

4. Express or Implied Consent of the Customer

Disclosure is justified when the customer has given:

• Express consent: Written authorization to disclose to specified third parties
• Implied consent: When the customer gives the bank's name as reference to another bank or credit institution; when the guarantor's bank provides credit information to the bank of the person being guaranteed

Additional Statutory Provisions

5. RBI Directions

Under Section 35A of the BR Act, RBI can give directions to banking companies in the public interest, which may include disclosure of customer information. RBI's inspection powers under S.35 also require banks to open their books for examination.

6. Bankers' Books Evidence Act, 1891

Under this Act, courts may order inspection and copying of entries in bankers' books as evidence in legal proceedings. A certified copy of an entry in the banker's books is prima facie evidence of the matters recorded.

Duration of the Duty

The duty of secrecy is not limited to the duration of the banking relationship — it continues even after the customer's account is closed or the customer has died. The banker remains bound not to disclose information acquired during the relationship. This was recognized in the Tournier case itself.

Right to Privacy

In Kharak Singh v. State of UP (1963), the Supreme Court recognized the right to privacy as part of personal liberty under Article 21 of the Constitution. This constitutional right supports the banker's duty to maintain secrecy of the customer's financial information.

Conclusion

While the banker's duty of secrecy is a fundamental obligation arising from the banking relationship, it is not absolute. The four qualifications laid down in the Tournier case — compulsion of law, duty to the public, interest of the bank, and customer's consent — along with statutory provisions (RBI powers, IT Act, Bankers' Books Evidence Act) define the permissible boundaries of disclosure. The duty balances the customer's right to privacy against legitimate public interests and legal requirements.

Introduction

A lien is the right of a creditor in possession of goods, securities, or other assets belonging to the debtor to retain them until the debt is repaid, provided there is no contract to the contrary. As stated in Halsbury's Laws of England: "Lien is, in its primary sense, a right in one man to retain that which is in his possession belonging to another until certain demands of the person in possession are satisfied."

Banker's Lien — An Implied Pledge

Under Section 171 of the Indian Contract Act, 1872, bankers have a general lien on all bills and securities received from a customer in the ordinary course of banking business, in respect of any balance due from such customer. The banker's lien has been judicially defined as an "implied pledge" — it is something more than an ordinary lien. This right, coupled with rights under S.43 of the NI Act, 1881, permits the banker to realize negotiable instruments when due and sell other securities on default after reasonable notice.

Requirements for Banker's Lien

• (1) The property must come into the hands of the banker in his capacity as banker in the ordinary course of business — State Bank of Travancore v. Bhargavan (1969)
• (2) There should be no entrustment for a special purpose inconsistent with the lien
• (3) The possession must be lawfully obtained
• (4) There should be no agreement inconsistent with the lien

When Lien is NOT Permissible

• (i) Where there is an express contract like counter-guarantee — Krishna Kishore Kar v. UCB (1982)
• (ii) Where there is no mutual demand between banker and customer
• (iii) Where valuables are received for safe custody — Cuthbert v. Roberts (1909)
• (iv) Where goods are entrusted for a specific purpose stated to banker — Greenhalgh v. Union Bank (1924)
• (v) Where deposit is for a specific purpose with express or implied notice
• (vi) Where valuables are left with banker inadvertently
• (vii) Where the banker has only a contingent debt
• (viii) Where the account is in respect of a trust

Right to Set-off

The right to set-off allows the banker to combine two or more accounts of the same customer and adjust the credit balance of one account against the debit balance of another. A bank may not exercise lien over money deposited (as the bank becomes owner), but it has the right to adjust amounts against debts due from the customer — the purpose of lien is attained through set-off.

Conditions: (1) Same customer, same name, same capacity; (2) Debts must be mutual and presently payable; (3) Accounts must be in the same right — a trust account cannot be set off against a personal account.

Key Judicial Pronouncements

In Syndicate Bank v. Vijay Kumar (1992), the Supreme Court upheld the right of banker's lien and set-off, holding these are of mercantile custom and judicially recognized. The bank has a general lien over all securities/NIs deposited in the ordinary course of business.

In Purewal & Associates v. PNB (1993), the SC ordered the bank to allow operation of one current account free from lien so the debtor could carry on day-to-day business, while giving the bank liberty to pursue recovery through other proceedings.

In SBI v. Javed Akhtar Hussain (1993), the Court held that the bank's action of keeping lien over TDR and RD accounts in joint names without giving notice was unilateral and high-handed. The bank being a debtor in respect of FD money had no right to invoke banker's lien.

Conclusion

Banker's lien and right to set-off are valuable rights of the banker, recognized by law and mercantile custom. However, these rights are subject to important limitations — they cannot be exercised against safe custody items, specific purpose deposits, trust accounts, or joint deposits where only one party is indebted. Courts have intervened to ensure these rights are exercised fairly and not in a high-handed manner.

Introduction

Opening of an account binds the banker and customer into a contractual relationship. Every person who is competent to contract can open an account. However, the capacity of certain classes of persons is subject to legal restrictions. The banker must take extra precautions while dealing with special types of customers.

General Precautions

• (i) Proper introduction — the manager must verify that the customer is a person of integrity and reputation, to prevent fraud
• (ii) Reasonable enquiry from references given by the customer about their status — need not act like a "master detective"
• (iii) If proper enquiries are made, the banker gets protection under Section 131 of the Negotiable Instruments Act

1. Minor

A minor has legal incapacity (incapax) to enter into contracts. The rule exists to protect and safeguard the minor's interests. The guardian (father as natural guardian, then mother; or court-appointed guardian) may open and operate the account on behalf of the minor, ceasing on the minor attaining majority.

Practice: Banks allow a minor above 12 years to open an account in his own name and issue cheques as per S.26(a) of the NI Act. No overdraft can be given — it involves a contract which would be void ab initio. A minor may be admitted to the benefits of a partnership firm under S.30 of the Partnership Act but is not liable for the firm's debts.

2. Lunatics

A person of unsound mind cannot make a valid contract. The banker should not open an account for a person of unsound mind. If a customer becomes lunatic after opening the account, the banker should stop operations upon receiving conclusive proof of insanity.

3. Illiterate Persons

While opening an account for an illiterate person is unavoidable, the banker should obtain: (1) Left thumb impression on the account opening form and specimen card in the presence of an authorized bank official; (2) Identification marks noted on the forms; (3) At least two copies of photograph duly attested by an account holder or bank official.

4. Married Woman

A married Hindu woman has contractual capacity (if 18+) and the right to acquire or dispose of her personal property called "Stridhana". The husband is not liable for her debts except for loans incurred for necessaries of life. Precautions for loans: (i) she may have no property as Stridhana; (ii) husband's property not liable except for necessaries; (iii) she may plead undue influence; (iv) she cannot be committed to civil prison.

5. Partnership Firm

Application signed by all partners along with the partnership deed. The banker should obtain an authority letter signed by all partners authorizing specific partners to draw cheques, endorse bills, mortgage property, etc. Under S.4 of the Partnership Act, a partner's act binds the firm if done in the usual business. Registration under S.69 is optional, but an unregistered firm cannot sue outsiders. Maximum partners: 10 (banking), 20 (other businesses).

6. Joint Stock Companies

Documents required: (i) Certified copy of Memorandum of Association; (ii) Articles of Association; (iii) Certificate of Incorporation; (iv) Certificate of Commencement (for public companies); (v) Board Resolution authorizing the account and naming authorized directors; (vi) Complete list of directors; (vii) Balance sheets for 3 years.

As observed in Royal British Bank v. Turquand, all persons dealing with the company are expected to know the contents of its MOA and AOA. When the company seeks a loan, the banker must verify borrowing powers, board resolution, and register any charge on assets within 30 days with the Registrar.

7. Trusts

The banker must be cautious — trustees handle public money. The trust deed must be carefully observed. The account is operated strictly as per the terms of the trust.

8. Joint Account

All concerned persons sign the application. Instructions must specify how the account is to be operated and who is authorized on all matters. Survivorship instructions are essential — generally payable to "either or survivor." On the death of a joint holder, the survivor is entitled to the amount if the deceased intended to benefit them.

Conclusion

The banker must exercise due diligence and take appropriate precautions while opening accounts for different types of customers. Proper enquiries and documentation protect both the banker (S.131 NI Act) and the customer's interests, while ensuring compliance with the law governing contractual capacity.

Introduction

The banker-customer relationship is both contractual and statutory. Both parties have well-defined duties and rights. The customer's duties ensure smooth banking operations, while the customer's rights protect against unfair practices. The banker's most fundamental obligation is to honour the customer's cheques.

I. Duties of the Customer

1. Banking Hours

A customer must present cheques for payment and collection during banking hours. Cheques presented outside banking hours need not be honoured by the banker.

2. Timely Presentation

A customer is required to present cheques for payment before they become stale or outdated. A cheque is generally valid for 3 months from the date of issue. An outdated cheque need not be honoured by the banker.

3. Safekeeping of Cheque Book

A customer should keep his cheque book under lock and key so that it may not go into the hands of an unauthorized person. Negligence in this regard may absolve the banker from liability for unauthorized withdrawals.

4. Warning of Forgery

If a customer knows or has reasonable grounds for believing that his signature is being forged on a cheque, it is his duty to warn the banker at the earliest opportunity. Failure to do so may result in the customer being estopped from claiming loss.

5. Careful Drawing of Cheques

A customer should draw cheques in such a careful way that there is no room left for raising the amount. Spaces should not be left that could allow fraudulent alteration of the amount.

II. Rights of the Customer

1. Right to Fair Treatment

Banks cannot discriminate between customers on the basis of gender, age, religion, caste, or physical ability while providing services. However, banks can offer schemes designed for particular groups and differential interest rates.

2. Right to Transparent, Fair and Honest Dealing

The contract between bank and customer should be easily understood by the common person. The bank must explain interest rates, risks involved, and all terms and conditions. Banks should not hide anything before signing. The language in the contract should be simple.

3. Right to Privacy

The customer has a right to confidentiality of account information — the banker's duty of secrecy protects this right.

4. Right to Grievance Redressal

The customer has the right to complain about deficient services and seek redressal through the bank's grievance mechanism, the Banking Ombudsman, or consumer forums under the Consumer Protection Act.

III. Banker's Obligation to Honour Cheques

The most fundamental duty of the banker is to honour the customer's cheques as long as:

• There are sufficient funds standing to the credit of the customer's account
• The cheque is properly drawn and not defective or mutilated
• It is presented during banking hours
• There is no legal bar to payment (no garnishee order, no notice of death/insanity)

Wrongful Dishonour

Wrongful dishonour of a cheque amounts to a breach of contract between the banker and the customer. The banker becomes liable to pay damages to the customer. In the case of a trader, wrongful dishonour can cause damage to reputation and goodwill — the trader need not prove actual damage, as the law presumes damage to a trader's reputation.

When the Banker May Refuse Payment

• Insufficient funds in the customer's account
• Stale or post-dated cheque
• Stop payment order (countermand) by the drawer
• Notice of customer's death, insanity, or insolvency
• Garnishee order from the court
• Defective or mutilated cheque
• Cheque drawn by an unauthorized person
• Material alteration on the cheque

Conclusion

The duties and rights of a customer, along with the banker's obligation to honour cheques, form the core of the banker-customer relationship. While the customer must act responsibly (timely presentation, careful drawing, safekeeping), the banker must honour cheques, treat customers fairly, and maintain transparency. Wrongful dishonour exposes the banker to damages, reinforcing the importance of this fundamental obligation.