Professional Documents
Culture Documents
University of Nairobi
Faculty of Law
9TH AUGUST 2004
BOOKS
REGULATION OF BANKING
This Banking Act was enacted to address deposits protection after a crisis
and the intention is to protect and control the banking industry.
BANK/CUSTOMER RELATIONSHIP
REGULATIONS:
The current Banking Act Cap 488 came into force in November of 1989. In
enacting this statute parliament was seeking to address a crisis in the
industry that was precipitated by the collapse of a number of institutions.
And under the provisions of this statute the previous Banking Act that
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essentially dealt with the relationship between the bank and the customer
was repealed. Section 56 of the current Banking Act is a repealing provision
repealing the previous statute.
LICENSING REQUIREMENTS
The Banking Act under Section 3 prohibits any person from transacting
any Banking Business or financial business or the business of a mortgage
finance company unless
Section 2 of the Banking Act Cap 488 Laws of Kenya defines a Bank to
mean a company which carries on or proposes to carry on banking
business in Kenya and it includes the co-operative bank of Kenya
but excludes the Central Bank of Kenya.
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Banking business is then defined under Section 2 of the same Act to mean
A Company (Kirkwood) purchased cars for its business using the money it
borrowed from UDT. The company failed to pay when required to do so.
When UDT sued the company it argued that UDT was not entitled to recover
because it was not registered as a lender uder the Money lenders Act of
1906 of England. That UDT was not a bank. UDT argued that it was a bank
and it need not have been registered under the Act alleged.
3
Our own statute banking law definition is largely influenced by the common
law definition of banking as was stated in United Dominions Trust vs.
Kirkwood [1966] 2 QB 431T. This case. Statutory definition overrides
the common law definition as provided for under the Judicature Act Cap
8. As far as Kenya is concerned we have statutory definition of bank
under the Banking Act which is applicable in Kenya.
FINANCIAL BUSINESS
Financial Business under the statutes means the accepting from members of
the public of money on deposit repayable on demand or at the expiry of a
fixed period or after notice; and the employing of money held on deposit or
any part of the money, by lending, investment or in any other manner for the
account and at the risk of the person so employing the money. This is
everything the statute says is banking business except the acceptance of
money on current account and payment on and acceptance of cheques.
MORTGAGE BUSINESS
This means a company other than a financial institution which accepts, from
members of the public money on deposit, repayable on demand or at the
expiry of a fixed period or after notice and is established for purposes of
employing such money, to make loans for the purpose of acquisition,
construction, improvement, development, alteration, or adaptation for a
particular purpose of land in Kenya and the repayment of that loan together
with interests and other charges is secured by a mortgage or a charge over
land with or without additional security or personal or other guarantees. The
provisions of the Banking Act in this regard which is at Section 15 were
amended by Act No. 7 of 2001 which provides that a mortgage finance
company may grant other types of credit facilities against securities other
than land and may also engage in other prudent activities.
The minister has to address his mind to adequacy of capital. Section 7 of the
Banking Act provides for minimum requirements of capital which may be
changed from time to time with approval of parliament.
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PRUDENTIAL CONTROLS (IN TERMS OF RESTRICTIONS)
These are dealt with under Part III of the Banking Act what is classified as
prohibited business.
From Section 10 of the Act which limits advances or imposes limits on
advances that an institution is allowed to make to anyone person and the
limit here is that an institution should not grant or permit facilities to any
person to exceed 25% of that institution’s core capital.
Core capital’s definition is permanent share holders equity (issued and fully
paid-up ordinary shares and perpetual non-cumulative preference shares) in
the form of issued and fully paid up shares plus all disclosed reserves
(additional share premium plus retained earnings plus 50% of profits after
tax plus minority interest in consolidated subsidiaries), less goodwill or any
other intangible assets.
GOODWILL
This is the difference between the value of the business as a whole and the
aggregate of the fair values of its separable net assets at the time of
acquisition or sale.
The Central Bank of Kenya may permit with the Minister’s approval a
mortgage finance company to exceed that limit.
The definition that is given for who an associate is for purposes of the Act
associate in relation to a company or other body corporate means
1. Its holding company or its subsidiary;
2. A subsidiary of its holding company;
3. A holding company of its subsidiary;
4. Any person who controls the company or body corporate whether
alone or with his associates or with other associates of it.
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1. Any member of his family;
2. Any company or other body corporate controlled directly or
indirectly by him whether alone, or with his associates
3. Any associate of his associates.
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Act No. 9 of 2000 essentially restricts or prohibits an institution from
transacting in a fraudulent or reckless manner. Fraudulent is defined to
include intentional deception, false and material representation,
concealment or non-disclosure of a material fact or misleading conduct that
results in the loss and injury to the institution with an intended personal gain.
Reckless transacting includes under the Act the transacting business beyond
the limits set under the Central Bank of Kenya Act offering facilities contrary
to the Central Bank guidelines or regulations, failing to observe the
institution’s policies as approved by the institution’s Board of Directors and
misusing position or facilities of the institution for personal gain. All these
are classified as reckless or fraudulent.
The Central Bank may in the case of an advance, loan or credit facility to a
director of the institution, direct the removal of such director from the Board
of Directors of the institution. The bank may direct the suspension of any
other officer or employee of the institution who sanctioned the advance, loan
or credit facility.
But whilst proceedings are pending in the High Court challenging the
removal, the order directing the removal remains in force. If a director
defaults in the repayment of any facility, granted to him for 3 consecutive
months, such a director should forthwith be disqualified from holding office
in that institution.
The Act prescribes and says that an institution that allows such a director to
continue holding office is guilty of an offence and equally any institution that
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fails to comply with a directive from Central Bank for the removal of an
officer is also guilty of an offence.
There are exceptions to that rule so that an institution may take an interest
in such an undertaking in satisfaction of a debt due to it and such interests
have to be disposed of within such time as the Central Bank may allow. The
other exception is where the shareholding is in a corporation established for
the purpose of promoting development in Kenya and such shareholding has
been approved by the Minister.
Section 13 of the Banking Act addresses the question of ownership and share
capital of an institution. The object is to avoid a situation where an
institution is at the core of the owner. This restriction on ownership of share
capital of an institution, its objective is basically to diversify ownership of an
institution for the purpose of prudent management, direct or indirect share-
holding of an institution has been restricted to a maximum of 25% to any
one person other than.
(i) another institution;
(ii) the government of Kenya, or the Government of a foreign
sovereign state.
(iii) A state corporation within the meaning of the State
Corporations Act, or
(iv) A foreign company, which is licensed to carry on the business
of an institution in its country of incorporation.
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Restrictions on making advances for Purchase of Land (Banking Act
Section 14)
BANKING LAW
The Bank on the one hand and the customer on the other hand. The word
Bank and Banker and to an extent banking business will be used to mean
bank.
What is a Bank?
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Is the common law meaning relevant in light of the statutory definition?
Secondly it is at odds for the reason that section 3 of the Banking Act
restricts the carrying on of banking business to institutions which when one
looks at interpretation of Section 2 of the Banking Act will again refer you to
a company. Where under Bills of Exchange a Bank includes a company
whether incorporated or not the Banking Act only recognizes an incorporated
company. This could be one of the reason why the common law definition of
Banking remains as to who is a customer and who is not a customer.
Another example of the statute which appears to recognize banks or banking
business or bankers, outside of the ambit of definition under the Banking Act
is the Cheques Act Cap 35 Laws of Kenya.
Cap 35 does not itself define any of those terms bank, banker or banking
business but it makes reference to the term banker. Section 2 (2) of that Act
provides that it shall be read, i.e. the Cheques Act shall be read and
construed as one with the Bills of Exchange Act. Which therefore means that
the meaning of the word Banker as ascribed under the words of the Bills
Exchange Act would apply under the Cheques Act.
The meaning of the term banker at common law. Is the meaning different
from the statute meaning
In the case of United Dominion Trust Ltd v. Kirkwood (1966) 1 All 968
This case is a leading authority on the question of the common law meaning
of a Banker. It is a court of Appeal decision and the Judges were Lord
Denning, Lord Harman and Lord Diplok and to an extent all three judges
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differed on the law as well as on the application of that law to the particular
facts of that case.
Lord Denning “Lonsdale motors ltd a private company which ran a garage
business in a place called Carlisle. The Defendant Mr. Kirkwood was the MD
of that company and that he and his wife were the only shareholders of that
company. The Plaintiff UDT is a large public company which describes itself
as bankers carrying on business at United Dominion House somewhere in
the city of London. It is an important house and lends big sums of money to
various people. It has a high standard and includes Bank of England
amongst its share holders. It also owns a wholly owned subsidiary called
United Dominion Trust Commercial Ltd. which does a lot of financing of hire
purchase transactions and those two companies have branches in several
towns in England where a single manager acts on behalf of both companies
at those branches. In 1961 Lonsdale Motors desired to buy cars to put those
cars in their showrooms for sale and that they did not have money for that
purpose and they therefore went to the branch manager of UDT and
borrowed that money. And as security for that borrowing they gave bills of
exchange in favour of UDT. Lonsdale motors then disposed of those vehicles
after procuring them to customers who wanted them on hire purchase
terms. They went again to the branch manager who agreed to buy the cars
from the company and let them out on hire purchase to the customers. This
case arises from a loan of five thousand pounds which UDT lent to Lonsdale.
The bills of exchange were dishonoured on presentation and UDT sued the
Defendant.
The defendant had no defence to that case except that he raised a plea
under the Money Lenders Act of 1900. That defence was to the effect that
UDT are unregistered money lenders and therefore they could not recover
the five thousand pounds. UDT in response said “we are not money lenders
but we are Bankers and we can therefore recover this money”
If they are Bankers, they can recover if they are money lenders they cannot
recover anything.
Seeing that there is no statutory definition of Banking one must do the best
one can to find out the usual characteristics which go to make up the
business of banking. In the eighteenth century, before cheques came into
common use, the principle characteristics were that the Banker accepted the
money of others on the terms that the person who deposited it could have it
back from the Banker when they asked for it. Sometimes on demand at
other times on notice and meanwhile the Banker was at liberty to make use
of the money by lending it out at interest or investing it on mortgage or
otherwise.
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You notice that those characteristics do not mention the use of cheques or
the keeping of current accounts. The march of time has taken us far beyond
the cases of the Eighteenth Century. Money is now paid and received by
cheque.
1. they accept money from and collect cheques for their customers
and place them to their credit
.
2. They honour cheques or orders drawn on them by their customers
when presented for payments and debit their customers
accordingly.
Page 979 thus far the evidence adduced by UDT would not suffice to show
that …. The usual characteristics are not the sole characteristics there are
other characteristics that go to make a banker, soundness and probity
parliament would not to a ramshackle concern whose methods
are dubious.
He differs with Lord Denning on reputation and says that reputation on its
own is not enough.
Lord Diplock on his part says that it is essential to the business of banking
that a banker should accept money from his customers upon a running
account into which sums of money are from time to time paid by the
customer and from time to time withdrawn by the customers. He says the
payment in collection of cheque is also essential.
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cheques are essential to the carrying on of banking business and that
evidence of reputation is potentially relevant.
WHO IS A CUSTOMER
The case involved the question of who is a customer for purposes of the Bills
of Exchange Act and Lord Davey at page 420 had this to say
“ it is true that there is not definition of customer in the Act. But it is a
well known expression and I think that there must be some sort of
account either a deposit or a current account or some similar relation
to make a man a customer of a bank.”
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the customer has been achieved and that is according to another English
position in the case of Commissioners of Taxation v. English Scottish and
Australian Bank Limited. (1920) A.C. 683
Effectively even if all a person has is one transaction, it does not disqualify
the person from being a customer of the bank in the case of
14
Joachimson v. Swiss Bank Corporation. 1921 Vol. 3 A.B. 110
Lord Atkin in this case described that contract at page 127 in the following
terms
“I think that there is only one contract made between the bank
and its customer. The terms of that contract involve obligations
on both sides and require statements. They appear upon
consideration to include the following provisions. The bank
undertakes to receive money and to collect bills for its customers
account. The proceeds so received are not to be held in trust for
the customer but the bank borrows the proceeds and undertakes
to repay them. the promise to repay is to repay at the branch of
the bank where the account is kept and during banking hours. It
includes a promise to repay any part of the amount due against
the written order of the customer addressed to the bank, at the
branch. It is a term of the contract that the bank will not cease to
do business with a customer except upon reasonable notice.
The customer on his part undertakes to exercise reasonable care
in executing his written orders so as not to mislead the bank or
to facilitate forgery. I think it is necessarily a term of such
contract that the bank is not liable to pay the customer the full
amount of his balance until he demands payments from the bank
at the branch at which a current account is kept.
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those duties have expressly been stipulated under the contract. It is also
necessary to say that if an express term exists, then the question of implying
terms does not arise.
If for instance the contract says that the bank is at liberty to close an
account after the stipulated time, the question of whether or not the bank
has given a reasonable notice does not arise as long as the parties have
contracted and agree to the number of days. We can only talk of implied
terms where there are no stipulations.
The Banking Code which seeks to set the standards of banking practice
became effective on 1st October 2001 by the Kenya association of bankers.
It is modelled to a very large extent on the UK Good Banking Code of
Practice. To an extent this code sets out standards which the Kenya Bankers
Association considers to be standards of good banking practice.
The question is whether these standards form part and parcel of the Banker
Customer Relationship?
In its introduction, the code states that it is a voluntary code and that it sets
standards of good banking practice for banks choosing to participate in the
code i.e. it is voluntary and the banks have an option of whether to use it or
not to use it.
For instance one of the standards imposed is the requirement for banks to
give information to their customers about their accounts, operations etc, this
is required by the code of practice of the Kenya Association of Bankers.
Another undertaking is that the written terms and conditions that govern the
relationship will be fair and will set out the customers’ rights and
responsibilities in clear and clean language.
They also impose an obligation under the code that a customer’s account will
not be closed without notice to the customer unless there are exceptional
circumstances which might prevent the giving of notice. The exceptional
circumstance would be like if an account has been used to perpetrate fraud
etc.
There is the question of statements – the obligation on the part of the bank
to give regular account statements.
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The code stipulates that it is recommended that the customer should check
those statements on a regular basis and if a wrong entry is noted then the
customer is required to inform the bank. If the express terms and conditions
of the contract so provide, then the customer will be bound by the express
terms and conditions and cannot raise a claim against the bank.
Obligation on the part of the customer in the code is to the effect that the
customer must himself exercise care in writing cheques and also in the
storing of cheque books, the ATM cards the pin numbers etc so that should a
loss arise and is attributed to the customer’s failure in either filling out the
cheques or handling of ATM cards or Pin Numbers then the Bank will be
protected.
There is also the obligation requiring the Banker to keep the affairs of the
Customer confidential and there are exceptions to the rule where the law
permits disclosure, where the customer has authorised disclosure and where
public duty or interest demands that there be disclosure and when it is in the
banks own interest to disclose.
Ordinarily the banks will stipulate their terms and conditions and the
customers are bound by these.
It is not possible to exhaustively list the duties owed by the Banker and the
Customer to each other. No case is like the other and in each case the court
will be concerned with the particular facts and the particular circumstances
of the case before it and in addressing the question whether in a particular
case a Banker or a customer is in breach of an implied term, or whether a
term should be implied, the court will be guided by the usual principles in law
of proximity, reasonableness and justice and to a very large extent, those
principles themselves or the application of those principles will be guided by
the customs and usages of Bankers.
Case law gives a guidance about situations where a duty of care will or will
not be found to exist. For example, case law has established that a Banker
owes a duty of care in giving financial investment advice. For instance in the
case of Woods v. Martins Bank the court held that on the facts of that case it
was within the scope of the banks business to advise on financial matters
and that in doing so, the bank owed a duty of care to the Plaintiff to advise
him with reasonable care and skill. The bank in this case was seeking to
avoid liability to the Plaintiff on the grounds that it was not part of bankers
business to advise on financial matters. The court found and made the
statement that what is to be defined as bankers business is not a matter to
be laid down by the courts as a matter of law. What constitutes banking
business is a matter to be decided on the facts before the court.
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Statement by Samuel J. “in my judgment the limits of a bankers business
cannot be laid down as a matter of law …”
At Page 71 Salmon J. says “I find that it was and is within the scope of the
Defendant Bank’s business to advise on all financial matters and that as they
did advise him they owed a duty to the Plaintiff to advise him with
reasonable care and skill in each of the transactions.”
This principle is covered in the case of Hedley Byrne & Co. Ltd v. Heller
(1961) All E.R.
Another example where the courts have recognised the existence of a duty
of care is the duty of a paying banker to protect its customer from fraud i.e.
agent, directors, etc and with that duty is the duty on the part of the bank to
meet and comply with the customers’ mandate. It is an implied term of the
contract between the banker and the customer that the bank will observe
reasonable skill and care in and about executing the customers’ orders and
the leading authority is the case of
Barclays Bank Plc v. Quince care & Another (1992) Vol. 4 All E.R. 363
The bank sued both the company as the principal debtor and the guarantor
and the defences raised there involved the central question or issue whether
the bank acted in breach of its duty to the principal debtor. The principal
debtor contended that the bank acted in breach of the implied duty of care in
the Banker Customer relationship because according to the company (the
customer) the circumstances under which the £340,000 were transferred
raised questions in their submissions in the mind of a reasonable banker as
to whether that transaction was in fact authorised by the customer. The
customer also contended that those circumstances surrounding the transfer
of the funds should
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Two corporate customers of London Branch of an American bank applied for
an injunction to restrict the bank from producing documents relating to their
accounts pursuant to a subpoena issued by a grand jury and upheld by the
United States District Court for the Southern District of New York. The court
granted the interlocutory injunction to restrain disclosure. The issue having
arisen on an interlocutory application, it was dealt with in strict conformity
with American cynamid principles.
The court has power to order discovery of documents which would normally
be subject to the obligation of confidentiality owed by a bank to its customer.
Thus in the case of
The Plaintiff bank claimed that it had been fraudulently deprived of US$1
Million by two men, who then placed the money on deposit at the Hatton
Garden branch of the Discount Bank (Overseas) Ltd. The Plaintiff bank
brought an action against the two men and against the Discount Bank. The
defendant bank was duly served with the proceedings, but it was impossible
to serve the individual defendants, both of whom were said to be on the
continent, one of them being in jail in Switzerland during a fraud
investigation by the Swiss police. The plaintiff bank claimed as against the
defendant bank an order for discovery of the documents relating to these
sums of money. In his judgment in the court of appeal, Lord Denning said
that the Discount Bank had got mixed up with the wrongful acts of the two
men. The bank was under a duty to assist the plaintiff bank by giving them
full information and disclosing the position of the wrongdoers. Though banks
had a confidential relationship with their customers, it did not apply to
conceal the fraud and iniquity of wrongdoers. In the result, the Court of
Appeal made an order for discovery (i.e. disclosure) of the relevant
documents.
L had Eurodollar deposits amounting to over $300 million with the bank.
There were two accounts, one was held in New York and one at a London
branch. The bank refused to repay the deposit on L’s demand as a US
Presidential order had sought to freeze the accounts. It became important to
decide whether the contract was subject to English or to New York Law. It
was held that there was one contract between the parties, although the New
York account was subject to New York law and the London account was
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subject to English Law. It was also decided that, in the absence of any
express provision, L was entitled to demand the balance held on the London
account in cash. This was despite the evidence that it would involve seven
plane journeys from New York to bring over the necessary dollar bills.
The rationale of the exception of the Public duty is that there exists a higher
duty than the private duty owed to the customer.
The second danger is that inaccurate information may be given with the
result that one loses the deal that the information was required to aid.
The problem arises from the standpoint or from the perspective of the
Customer about whom the information is given and secondly from the
perspective of the person to whom information is given. The legal question
is whether the giving of information by the bank would give rise to a ground
for liability.
The more problematic area is with regard to the liability the bank may incur
with respect to the person who is the recipient of the information. Here
exposure to a claim of negligence could arise for misrepresentation.
The law imposes a duty on the part of the bank when giving information
regarding the credit of a customer to exercise care and the leading authority
for this proposition is the case of
20
Hedley Byrne & co. v. Heller & Partners
Bare facts are that the Plaintiffs who were advertising agents booked space
and time on behalf of a customer under a contract making them liable. The
Plaintiffs made an inquiry through their bankers and the enquiry was with
regard to the financial status of the defendant. As a result of the answers
they got in response to their enquiry, they incurred liabilities which ended in
loss. The trial judge held that the answer given in response to the inquiry
was negligent but that the defendant’s duty did not go beyond being honest
in giving a reply. The appeal court upheld that finding on the basis that
there was no duty of care in the absence of a contractual fiduciary or other
special relationship and that in the circumstances of the case, no special
relationship existed between the Plaintiffs and the Defendants.
The matter went to the House of Lords which considered the matter and
stated as follows:
Lord Morris “If someone who was not a customer of a bank made a
formal approach to the bank with a definite request that the bank
would give him deliberate advice as to certain financial matters of a
nature with which the bank ordinarily dealt, the bank would be under
no obligation to accede to the request. If however, they undertook,
though gratuitously to give deliberate advice, they would be under a
duty to exercise reasonable care in giving it. They would be liable if
they were negligent although there being no consideration no
enforceable relationship was created. It should now be regarded as
settled that if someone possessed of a special skill undertakes to apply
that skill for the assistance of another who relies upon such skill, a
duty of care will arise.”
The relationship that gives rise to a duty of care is not stemming from
contract or the existence of fiduciary responsibility but purely from
proximity.
TAKING SECURITY
The issues are if one takes the example of a property registered in the
names of Mr. and Mrs. X have raised a red flag in the eyes of the banker or
the circumstances were such that the bank should have been put on inquiry
or a duty to inquire arose on the part of the bank whether that transfer was
in fact authorised by the customer. It was contended for the customer that
in failing to make such inquiry the bank was negligent.
The court held that the relationship between a banker and a customer
regarding the drawing and payment of the customers’ cheques against the
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money of the customers in the bankers hands was that of a principal and
agent and that as an agent the bank owed fiduciary duties to the customer
and prima facie was also bound to exercise reasonable care and skill in
carrying out the instructions of its principal. Accordingly it was an implied
term of the contract between the bank and the customer that the bank
would observe reasonable skill and care in and about executing the
customers orders but generally that duty was subordinate to the bank’s
other conflicting contractual duties such as its prima facie duty when it
received a valid order to execute the order promptly on the pain of incurring
liability for consequential loss to the customer.
The court in this case is saying that on one hand the bank is under an
obligation to honour cheques that on the face of them appear proper but on
the other hand they have an obligation to protect their customers from loss.
It goes on to say that if the bank executed the order knowing it to be
dishonestly given or shut its eyes to the obvious facts of dishonesty or acted
recklessly, in failing to make such inquiries as an honest and reasonable man
would make the bank would plainly be liable.
The obligation of the bank is that it must not act recklessly and if
circumstances demands that it inquires it should inquire and should not
knowingly facilitate fraud. It is a balancing act.
The bare facts of this case are that a firm who were customers of a bank
entrusted the duty of filling out their cheques to a clerk whose integrity they
had no reason to doubt. The clerk presented to one of the partners for
signature a cheque drawn in favour of the firm or bearer. There was no sum
on words written on the cheque in the space provided and there were the
figures 2 in the space intended for the figures. The partner signed the
cheque. The clerk subsequently tampered with the cheque by adding the
words one hundred and twenty pounds in the space that had been left. The
clerk then presented that cheque for payment at the firm’s bank and
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received a hundred and twenty pounds out of the firm’s account. The
question was whether the bank would then be liable to the firm for that loss
that was perpetrated by their own clerk.
The House of Lords held that the firm had been guilty of a breach of duty
arising out of the relation of a banker and customer to take care in the mode
of drawing the cheque and that the alteration of the cheque by the clerk was
a direct result of that breach of duty. And accordingly the bank was entitled
to debit the customer’s account with the amount of that cheque.
Sections 3 and 4 of the Cheques act s. 3 (2) that where a banker in good
faith and without negligence and in the ordinary course of business
(a) Receives payment for a customer of a prescribed instrument to
which the customer has no title or defective title
Section 24 of the Bills of Exchange Act which provides that where a signature
on a bill is forged, or placed thereon without the authority of the person
whose signature it purports to be, the forged or the authorised signature is
wholly inoperative. In other words if the bank honours a forged cheque and
it subsequently turns out the cheque was forged, then the banker bears the
loss.
Does the duty of the customer extend to scrutinising bank statements and
are the statements to be deemed to be accurate unless challenged by the
customer within a given period.
As a matter of practice the banks will expressly provide that that is the case,
in the absence however of an express agreement with the bank, is such a
duty to be implied? If under the written terms of the contract there is no
agreement that statements will be binding after a certain time has lapsed.
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This was the issue in the case of Tai Hing Cotton Mills Ltd v. Liu Chong Hing
Bank Ltd P.C 1985 2 947
The holding of the privy council was as follows: “that in the absence of
express agreement to the contrary the duty of care owed by a customer to
his bank in the operation of a current account was limited to a duty to refrain
from drawing a cheque in such manner as to facilitate fraud or forgery and
that a customer had a duty to inform the bank of any unauthorised cheques
purportedly drawn on the account as soon as the customer became aware of
it. And on the question whether there was an obligation on the part of the
customer to screen statements which is what the bank had advocated or
argued, the court held, that the customer was not under a duty to take
reasonable precautions in the management of his business with the Bank to
prevent forged cheques being presented for payments nor was he under a
duty to check his periodic bank statements so as to enable him to notify the
bank of any unauthorised debit items because such wide a duty was not a
necessary incident of the Banker/Customer relationship since the business of
Banking was not the business of the customer but the business of the bank
and forgery of cheques was a risk of the service which the bank offered.
It had been suggested in this case that there was a duty owed to the bank by
the customer but the Privy Council stated that the customer was under no
duty to scrutinise statements to check if they are erroneous.
A term will not be implied into a contract unless it satisfied the following
conditions:
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2. It must be necessary to give business efficacy to the contract i.e. a
term will not be implied into a contract if the contract is effective
without that implied term.
3. The term must be so obvious that it goes without saying as it were.
4. The term must be capable of clear expression;
5. It must not contradict any express term of the contract.
CONFIDENTIALITY
The duty that the bank owes to the customer or the duty of secrecy.
There are situations when the banks could be in their right to disclose.
It was held in that case that it is an implied term of the contract between a
banker and its customer that the banker will not divulge to 3rd persons
without the consent of the customer express or implied either the state of
the customer’s account or any of his transactions with the bank or any
information relating to the customer, acquired through the keeping of the
customer’s account unless the banker is compelled to do so by order of a
court, or the circumstances give rise to a public duty of disclosure or the
protection of the banker’s own interests require disclosure.
The Plaintiff was a customer of the Defendant bank. A cheque was drawn by
another customer of the Defendant’s in favour of the Plaintiff who instead of
paying it into his own account endorsed it in favour of another person who
had an account at another bank. On return of the cheque to the Defendant
the manager enquired from the other bank to whom this cheque had been
paid and the information given was that it was paid to a bookmaker. That
information was disclosed by the Defendant to 3rd persons and the Plaintiff
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brought an action against the bank and the holding was that the disclosure
constituted a breach of the Defendant’s duty to the Plaintiff and that
although the information was acquired not through the Plaintiff’s account but
through the drawer of the cheque, the information was none the less
acquired by the defendants during the currency of the Plaintiff’s account and
in their character as bankers.
He goes on to say “the duty of secrecy does not cease the moment a
customer closes his account. Information gained during the currency of the
account remains confidential unless released under circumstances bringing
the case within one of the classes of qualifications I have already referred to.
Again the confidence is not confined to the actual state of the customer’s
account it extends to information derived from the account itself.”
CONFIDENTIALITY
Judgment of Scrutton J.
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cheques when there are insufficient assets or when ordered to answer
questions in the law courts or to prevent frauds or crimes.
I think also that the implied legal duty towards the customer to keep secret
his affairs does not apply to knowledge which the bank acquires before the
relation of banker and customer was in contemplation or after it ceased or to
knowledge derived from other sources during the continuance of the
relation. The banks can by express agreement provide for circumstances
when the bank may be at liberty to disclose.
Intercom Services Limited & Other v. Standard Chartered Bank Limited Civil
Case No. 761 of 1988 E.A. L. R 2002 Vol. 2 391
Judgment of Visram J.
The facts in this case are that a Mr. James Kanyita Nderitu was a director of 4
companies Intercom Services Ltd, Inter State, Swiftair, and Kenya
Continental Ltd. In 1985 Mr. Nderitu received a cheque for 17 Million
shillings drawn by Customs & Excise in favour of his company Intercom
Services Ltd. And he banked it on the persuasion of the Branch Manager of
Standard Bank Westlands and it was common ground or it was conceded
that, that cheque represented a substantial amount of money in those days.
One Saturday Mr. Nderitu went to Westlands Branch of Standard Chartered
Bank and deposited that cheque there. The account was relatively new
having been opened some 8 days prior to the depositing of the cheque. The
bank accepted the cheque without raising any questions as it appeared to be
proper on the face of it. The cheque was specially cleared and on the
following Monday the Bank manager telephoned Mr. Nderitu and informed
him that his superiors thought the deposit was somewhat unusual and he
was requested to provide some documentary proof of payment.
The bank has no business asking for proof at this stage. But anyway Mr.
Nderitu obliged and produced a payment voucher from the Customs &
Excise, for money paid under the Export Compensation Scheme. The bank
noticed from the payment voucher what it considered significant
discrepancies on the payment voucher not on the cheque namely the
amount shown in words in the payment voucher does not tally with the
amount shown in figures and this raises eyebrows at the bank. Mr. Nderitu
was in fact allowed to use some of the funds in the Intercom account and he
drew some of the money and transferred 15 Million shillings to the account
of Swiftair Kenya Ltd in the same Bank. Meanwhile the bank commenced a
series of enquiries. The first enquiry was to Kenya Commercial Bank upon
which the cheque was drawn and KCB confirmed that the cheque was good
and hence they made the payment. The enquiry does not end there as the
bank calls the department of customs and excise and speak to the first
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signatory of the cheque who assured them of the legitimacy of the cheque.
They called the 2nd signatory who also assured them that the cheque was
legitimate. The suspicion did not end there and they spoke to a Police
Officer in the Fraud section of the Central Bank of Kenya. Mr. Nderitu was
ultimately arrested and charged with a criminal offence of obtaining money
by false pretences and all his accounts were frozen. He was finally acquitted
after a very long battle.
Cheques
Guarantees
Electronic banking
1. Undue Influence
2. Misrepresentation
3. Illegality
4. Duress
CIBC Mortgages PLC V. Pitts & Another (1993) Vol. 4 All E.R. 433
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This is an illustration as to how a problem can arise when securities are
being taken.
The facts in this case were that a husband and wife jointly owned a
matrimonial home which was valued at £275,000 in 1986. There was an
encumbrance on that property in favour of a building society for £16700. In
1986 the husband told the wife that he would like to borrow money on the
security of the home and to use the loan to buy shares in the stock market.
The wife was most reluctant but as a result of pressure, brought upon to bear
on her by the husband, she eventually agreed. Both the husband and wife
signed an application for a loan from the plaintiff in the amount of a
£150,000 for a period of twenty years. And the purpose of the loan was
expressed in the application to be for the purpose of paying off the existing
mortgage with the building society and for the Purchasing of a Holiday
Home. The Plaintiff agreed to advance the £150,000 for 19 years and the
husband and wife signed the Mortgage offer and the legal charge prepared
by the Plaintiff’s solicitors. The wife did not read those documents before
signing them neither did she receive separate advice about the transaction
and nobody suggested that she should in fact seek advice. She did not know
the amount that was being borrowed, the bank then proceeded to disburse
the loan, the existing mortgage with the building society was paid off and the
balance of the amount of the loan was paid into a joint account in the names
of the husband and wife. The husband then utilised that money to speculate
on the stock market and was in fact at some stage at least in the books able
to convert himself into a Millionaire through his stock dealings. The stock
market then crashed in October of 1987 and the husband was then unable to
keep up the Mortgage repayments and the Plaintiff then applied for an order
for possession of the matrimonial home.
The wife contested the application for possession of the matrimonial home
on the ground that she had been induced to sign the mortgage by
misrepresentation, duress and undue influence on the part of the husband.
The judge held that the husband had exercised actual undue influence on
the wife to procure her agreement and that the transaction was manifestly
disadvantageous to her. But since the husband had not acted as an agent of
the Plaintiff and the fact that there had been a joint advance to both the
husband and the wife, the wife’s claim failed. She appealed to the court of
appeal and the appeal was dismissed on the grounds that the transaction
was not manifestly disadvantageous and therefore the wife could not
succeed on undue influence. And furthermore the Plaintiff had neither actual
or constructive notice of any irregularity.
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She then appealed to the House of Lords which held that a claimant who
proved actual undue influence was not under the further burden of proving
that the transaction induced by undue influence was manifestly
disadvantageous but was entitled as of right to have it set aside as against
the person exercising the undue influence since actual undue influence was
a species of fraud and a person who had been induced by undue influence to
carry out a transaction which he did not freely and knowingly enter into was
entitled to have that transaction set aside as of right. However the House of
Lords went to hold, although the wife had established actual undue influence
by the husband, the Plaintiff was not affected by it because the husband had
not in a real sense acted as its agent in procuring her agreement and that
the Plaintiff had no actual or constructive notice of the undue influence. So
far as the Plaintiff was concerned there was a joint application by both
husband and wife, the loan was advanced to both husband and wife and
there was nothing to indicate that this was anything other than a normal
advance to a husband and wife for their joint benefit and for that reason the
appeal was dismissed.
Look at the Judgement of Wilkinson J. and his discussion of the law in that
case.
Under our statutes the requirements is that the signatures of the chargees
must be witnessed by an advocate and he must say that he has agreed.
1. UNDUE INFLUENCE
2. DURESS
3. UNCONSCIONABLE TRANSACTIONS
4. MISREPRESENTATIONS
UNDUE INFLUENCE
The doctrine also extends to cases outside of such relationships in which the
court will uphold the plea of undue influence if satisfied that such influence
has been in fact exerted based on the evidence. These will be cases of
actual undue influence and the basis of the doctrine is the principle that the
court is justified in setting aside a transaction for undue influence a
transaction that is based on the victimisation of one party by another.
30
In the case for presumed undue influence it has to be established that a
relationship of influence exists between the parties and that a transaction
has taken place between those parties which was wrongful in the sense that
the party in the position of influence has obtained an unfair advantage from
the party subject of the influence.
Under what circumstances will the Bank be hit with the notice of undue
influence. When is the bank affected by undue influence.
Undue influence exerted by a third party over the giving of security will
generally not have effect on the validity of the security given by a bank.
There are circumstances however when the bank may be affected by such
undue influence
1. Where the Bank has constituted the 3rd Party its agent for purposes
of procuring the execution of the security; (Agency)
Paget argues that before this decision, there was a tendency on the part of
the courts to utilise and widen the concept of agency for this purpose. In a
typical situation where a bank to which the husband was indebted sought
security in the form of a guarantee from the wife or a legal charge in the
joint names of husband and wife and the bank then left it to the husband to
procure his wife to execute the security but did not take steps to
communicate with the wife, it was then sufficient to constitute the husband
the agent of the bank. This theory is artificial and the authority is the case of
31
BANKING LAW Lecture 9
CHEQUES
How relevant are cheques considering the inroads that have been made
technology wise? Now there are credit cards, ATM Machines, Debit Cards
There are more ways of accessing the funds in the bank than merely the use
of the cheque. In future a cheque might not be as important as it is today.
WHAT IS A CHEQUE?
When you link section 3 and 17 the definition of a cheque becomes a cheque
is an unconditional order in writing addressed by a person to a banker.
Signed by such person and requiring the banker to pay on demand a sum of
money to the order of a specified person or bearer. When you break down
that definition, it gives one certain prerequisites as to what must constitute a
cheque
London City & Midland Bank Ltd V. Gordon [1903] A.C. 240
What is conditional?
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CROSSED CHEQUES
The general crossing is where the crossing assures payment through a bank
without specifying a bank. But where the bank is specified that is special
crossing or the cheque is said to be crossed specially. Section 76 (1) (a )
provides that where a cheque bears across its face an additional of the
words and company or an abbreviation of those words between two parallel
transverse lines with or without the words not negotiable, that addition
constitutes a crossing and the cheque is crossed generally.
Section 76 (1) (b) of the Bills of Exchange Act provides that where a cheque
bears across its face an addition of simply two parallel transverse lines either
with or without the words “not negotiable” the additions also constitute a
crossing and it is a general crossing.
Section 76 (2)
Special crossing: It stipulates that where a cheque bears across its face an
addition of the name of a Banker either with or without the words “not
negotiable”, that addition constitutes a crossing and the cheque is specially
crossed.
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BANKERS LIEN
Lien is a right to retain property belonging to a debtor until the debtor has
discharged the debt due to the creditor. This form of protection known as
the general lien of bankers arose from usage of trade from time immemorial
and is judiciary recognized.
The nature of the securities Subject to the lien must come to the bank in its
capacity as a banker and in the course of banking business. Securities held
by a bank or deposited with a bank for safe custody are not subject to the
lien unless there is an agreement between the parties to the contrary.
Does a lien give the bank the right to sell? a mere lien gives no power of
sale, neither does it give a ground for applying to court to grant the power of
sale. The method that appears open to a banker for realising securities held
under a lien would seem to be to sue for the debt obtain injunction for the
debt, and then take the securities in execution of that judgment.
The right of lien extends only to the customers own property and not to
property held in trust by the customer for their clients.
GUARANTEES
Extent to which a guarantor remains bound under the guarantee even after
the terms of the principal lending have been varied.
What is a guarantee?
It is a written promise by the guarantor to answer for the debt of another and
that other is the principal debtor made to a person namely the lender to
whom that other is already or is about to become liable.
Under the Law of Contract Act Cap 23 the guarantee must be in writing or
there must be a Memorandum of it in writing signed by the guarantor.
The banks will ordinarily or as part of their requirements for lending purposes
require that the principal borrower should furnish security by providing a
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guarantor. This is a common method by which bankers seek to protect
themselves against loss on advances.
To effectively protect itself the banks will usually frame the bank guarantees
so as to apply to all accounts of the principal debtor whether such accounts
are solely in the name of that principal debtor or whether such accounts are
joint accounts or partnership accounts so that if the principal debtor has two
accounts with outstanding facilities at the bank, the bank will ensure that the
language of the guarantee covers both accounts for instance.
There are situations where the guarantee is given by more than one person
i.e. where there is more than one guarantor to the guarantee. In that event
the guarantee should stipulate whether the obligation of the guarantors is
several or joint and several. If the obligation be joint only, it means that if
the lender sues one of the guarantors and obtains judgment against that
guarantor, he cannot subsequently bring an action under the same
guarantee against the other guarantor. But in the case of the guarantee
being several the remedy by the bank can be pursued against both
guarantors at different times. The caution is that when one is dealing with a
joint guarantee one has to sue all the guarantors.
The banks invariably provide in the language of the guarantee that the
liability of the guarantors is joint and several.
The other measure that a guarantor should take or the other factor that a
guarantor should be alive to is whether the guarantee is limited or unlimited.
If it is intended to be limited meaning that the liability of the guarantor
should not exceed a certain limit, then the guarantor should ensure that the
instrument of the guarantee so provides.
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Most guarantees will provide that a guarantor wishing to determine the
guarantee must give notice to the lender and pay into the bank the amount
that may be due. The guarantee may simply provide that the liability of the
guarantor will cease upon the expiry of a specified notice to be given by the
guarantor to the bank and upon payment of all outstanding sums notified by
the bank upon receipt of such notice.
The bank has to be careful coz the effect of this is that the guarantor can
give notice to the bank should the bank receive notice that is responds by
stating the amount that is outstanding.
DEATH OF A GUARANTOR
This is authority for the proposition that where the creditor releases the
principal debtor, the guarantee is discharged.
The other way in which the guarantor may be released is where the creditor
agrees to vary the terms of the lending with the principal debtor to the
prejudice of the guarantor.
In this case, Standard Bank advanced a facility to the principal debtor which
was secured by a guarantee of the wife of the principal debtor. That was in
1955. in 1962 the Bank was dissatisfied in the way in which the account was
being operated and it then required the principal debtor to open another
account which was always to be in credit and from which an amount would
be transferred on a monthly basis to the initial account towards the
repayment of the facility then. Notice of this arrangement i.e. the
arrangement where the principal debtor was to open a second account was
not given to the guarantor i.e. the guarantor was not consulted and neither
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was she aware and subsequently the bank then sued both the principal
debtor and the guarantor. The guarantor defended the action by the bank
on the basis that the variation of the terms of lending by the bank without
the consent of the guarantor had the effect of discharging the guarantee.
The High /court dismissed the argument but on Appeal the court held:
That the opening of the second account without the consent of the guarantor
discharged the guarantor from all liability under the guarantee.
The principle that underlies this holding is found in the judgment of Charles
Newbold at page 509 president of the East Africa Court of Appeal at the time
“if there is any agreement between the principals with reference to the
contract guaranteed, the surety ought to be consulted if there is to be an
alteration to his prejudice to that agreement.”
Patel & Others v. National & Grindlays Bank Ltd [1970] EA 121
Abraham Kiptanui v Delphis Bank Ltd H.C. No. 1864 of 1999 H.C. Milimani
In this case Justice Ransley also suggested that the instrument of guarantee
can be worded in such broad language to allow the lender to vary the terms
of the lending without thereby discharging the guarantee. In other words the
language can be so broad as to allow the bank to do that.
The other way that a guarantee could be discharged is where the lender
releases the security that he holds for the debt.
Polak v. Everet [1876] 1 QBD 669
CO-GUARANTORS
Read on Guarantees
This is a transfer of funds in which one or more steps in the process of that
transfer was previously done by paper based techniques but is now done by
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electronic techniques. That is the definition given to the expression
electronics transfer by the United Nations Commission on International Trade
Law (UNCITAL)
In the category of consumer it is the consumer who selects and activates the
system that is to be used in a transaction. Examples are the ATM, Point of
Sale Electronic Fund transfer systems i.e. debit cards and home banking.
In the non consumer activated systems it is the bank that activates the
system by selecting and activating that particular system for a particular
transaction and the example is given of a system called SWIFT system which
is the Society for Worldwide Interbank Telecommunications. This is a system
that operates a message transfer system so that if a customer of a bank in
Kenya wishes to instruct its bank to transfer money to another country or to
a payee in another country, the customer or the consumer will hardly be
concerned as to how that is achieved and so it will be the bank that activates
the system to effect that transfer.
All of these systems whether they are consumer activated or not are systems
that facilitate transfer of funds either between bank accounts or between
banks.
The system involves the adjustment of balances of the payers account and
the payee’s account at their respective banks.
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VISRAM, J.
The 5th plaintiff was the managing director of various companies (IS, IC, SK
and KC) of which his wife was the other shareholder. He received an export
compensation cheque for Kshs.17 million from Customs & Excise in the name
of IS and deposited it with the defendant bank in a one-week old account.
The defendant was subsequently requested by the bank to obtain the
payment voucher accompanying the cheque issued by the drawee
(Commissioner of Customs and Excise). The voucher was made out to IC, not
IS, and had a minor discrepancy of Kshs.70,000 on its face. The defendant
made inquiries with the paying bank and the signatories of the drawee. It
was confirmed that the cheque was in order.
The funds were collected and credited to IS’s account. Shortly thereafter,
Kshs.15 million was transferred to SK’s account in the same bank. The 5th
plaintiff then instructed the bank to transfer the moneys to SK’s account with
another bank. Meanwhile, the bank inquired with the Central Bank regarding
the export compensation payment. The Central Bank’s investigation officers,
who happened to be police officers, acquired various documents from the
defendant as a result of which the 5th plaintiff was charged with various
counts of obtaining by false pretences. He was convicted on trial but
eventually acquitted on appeal.
Shortly after instituting the criminal case, a police officer obtained orders
freezing the accounts of SK and IS. The orders were quashed by the High
Court. The drawee then filed a suit against the Plaintiffs for recovery of the
funds. He obtained ex-parte orders of attachment before judgment. By
39
consent, the Kshs.15 million in SK’s account was deposited into a joint
interest-earning account and the remaining amounts released. The suit was
later settled by consent and all the money released to the Plaintiffs.
The 5th Plaintiff’s companies therefore brought this suit against the bank
seeking more than 600 million shillings in damages, on ground of breach of
fiduciary relationship through the disclosures to Central Bank, which resulted
in freezing of the accounts and eventual closure of the business of IS, IC and
SK. The 5th Plaintiff’s case was that his arrest in his capacity as managing
director of the aforesaid companies resulted in restriction of his movement
and crippled day-to-day operation of the Plaintiffs.
The issue for determination herein was the question of liability, quantum
being reserved for later. In essence, did the bank breach its duty of
confidentiality by making the disclosures it did to Central Bank? Further, was
the bank liable to the 5th Plaintiff, the managing director of the first four
Plaintiffs, because its actions resulted in his arrest and the crippling of his
family businesses?
Held:
40
Tournier v National Provincial & Union Bank of England [1923] All ER
550 adopted.
3. A paying bank has a similar duty as a collecting bank to act in good faith
and without negligence. Karak Rubber Co Ltd v Burden & others (No.2)
[1972] 1 All ER 1210 adopted. The only difference is that the collecting
banker has a positive burden of proof to establish that he collected without
negligence while in the case of the paying bank the burden is shifted to the
customer to prove negligence. Lipkin Corman v Karpnale Ltd & anor
[1992] 4 All ER 409 adopted.
4. The collecting banker need only inquire with the true owner of a cheque to
avail himself the statutory protection conferred by section 3(2) of the
Cheques Act (Cap 35). The fact that the cheque in this case represented a
statutory payment made by a government agency did not imply a higher
duty of care. The bank is not entitled to inquire what the moneys are that are
paid into or drawn out of the account. Bodeham v Hoskins [1843-60] All
ER 692 adopted.
5. In the circumstances of this case, the inquiry made to the Central Bank
breached the duty of disclosure. The bank’s duty to prevent a crime does not
imply a duty to investigate the funds in a client’s account. Further, the
bank’s responsibility to the true owner of a cheque ceases when the bank
allows the customer to make use of that money; the bank should therefore
not have continued with enquiries after that moment.
6. While the 5th Plaintiff was not a customer of the bank, he was the sole
signatory of the company accounts. The bank’s own conduct shows that it
intended to deal with the 5th Plaintiff personally, and was treating the
aforesaid accounts as the 5th Plaintiff’s accounts. It therefore must have had
the 5th Plaintiff in contemplation as the person who would suffer damages as
a result of its irregular actions.
Per curiam: The true owner of a cheque is the person who would be kept out
of his money were the proceeds to be paid out to the wrong person. Where
the cheque is not a forgery, the true owner is the intended payee or
endorsee of the cheque or the bearer of it. If the cheque is forged, the true
owner is the drawer thereof.
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