Syllabus

BANKING LAW AND PRACTICE

1. Definition of the term Banker and

customer. General and Special

relationship between them.

2. Types of deposits - Pass book.

3. Negotiable instrument - cheque

definition, Difference between

cheque and bill of exchange.

4. Endorsements.

5. Crossing and Marking of

cheques, Material alteration.

6. Payment of Customer's Cheques

- Protection to Paying banker -

Sec 85.
 7. Collection of Cheque-Protection

to Collecting banker - Sec 131.

8. Employment of funds-Liquidity,

Profitability and Safety.

9. Advances against Collateral

Securities.

10. Special types of Customers.

Text books

1. Banking Law and Practice,

Gordon & Natarajan (Himalaya

Publishing House)

2. Banking Law and Practice,

Varshney (Sultan Chand & Co.)

 CONTENTS

UNIT
TITLE
NO.

INTRODUCTION

DEFINITION OF THE TERM BANKER

AND CUSTOMER -GENERAL AND

UNIT-1
SPECIAL RELATIONSHIP BETWEEN

THEM

TYPES OF DEPOSITS AND PASS

UNIT-2
BOOK

UNIT-3 NEGOTIABLE INSTRUMENT

ENDORSEMENTS AND MARKING OF

UNIT-4
CHEQUES

CROSSING OF CHEQUES AND

UNIT-5
MATERIAL ALTERATION

UNIT-6 PAYING BANKER

UNIT-7 COLLECTING BANKER

UNIT-8 BANKER AS A LENDER

ADVANCES AGAINST COLLATERAL

UNIT-9
SECURITIES

UNIT-10 SPECIAL TYPES OF CUSTOMERS

 INTRODUCTION

Services sector occupies a

predominant role in the economy. Of

the services sector, the contribution

of the financial services providers are

inevitable. Employment opportunities

in these sectors also can't be under

estimated. Banking industry is one

of the most popular and modern

financial service provider.

The banking sector in India is passing

through a period of structural change

under the combined impact of

financial sector reforms, internal

competition, changes in regulation,

new technology, global competitive

pressures and fast evolving strategic
objectives of banks and their existing

and potential competition.

Indian banks made a late start in

the field of technology but now the

results are showing. IT is

transforming every aspect to the

nature of the products and services it

offers. In the advent of Information

Technology the concept of branch

banicing lost much of its meaning

with the onset of Internet Banking

or Virtual banking. As technology

juggernaut marches relentlessly, it is

difficult to visualize the changes it

would bring in the banking world.

A clear exposition of the concepts of

banking and the recent developments

is necessary for the students to

update them, practice it, to compete

in the job market and develop the

economy in tune with the developed

economic countries. Keeping these

objectives in mind, ‘Banking’has been

incorporated as a paper in the Course

Curriculum. The book has several

distinctive features. These include

the following:

• The subject matter has been

divided into convenient units, as

required by the course

curriculum.

• Written in simple and straight

style.
• Gives a lucid explanation of the

concepts of banking with

necessary case laws.

• Incorporates at the end of each

unit:

Objective type questions for

review, discussion and practice;

Essay type questions for review

and discussion for practice to

develop a sense of confidence

amongst the readers.

• Provides unit objectives at the

beginning of each unit to tell the

students that they will learn after

studying the unit.

• Defines key terms at the end of

each unit for recapitulation and

better grasp over the subject.

We are confident that with all these

POSITIVE features the readers will

find the book extremely useful and

rewarding for them. Their

constructive and helpful suggestions

for improvement in the book will be

gratefully acknowledged.
 UNIT 1

DEFINITION OF THE TERM

BANKER AND CUSTOMER-
GENERAL AND SPECIAL
RELATIONSHIP BETWEEN
THEM

Structure

1.0 Introduction

1.1 Unit Objectives

1.2 Banker-Meaning

1.3 Banker -Definition

1.4 Customer-Meaning

1.5 Views on Customer

1.6 General Relationship

between Banker and Customer-

Introduction
1.7 Banker and Customer as

Debtor and Creditor

1.8 Banker as a Privileged Debtor

1.9 Banker as Bailee in certain

cases

1.10 Banker as Trustee in certain

cases

1.11 Banker as Agent

1.12 Banker's Right to Combine

Several Accounts

1.13 Banker's Right to Close the

Accounts

1.14 Special Relationship

between Banker and Customer-

StatutoryObligation to Honour

Cheques
1.15 Consequences of Wrongful

Dishonour

1.16 Banker's Lien and

Exemptions to the right of Lien

1.17 Banker's Obligation to

Maintain the Secrecy of his

Customer's Accounts and the

exemptions to the duty of

Secrecy

1.18 Law of Limitation

1.19 Key Terms

1.20 Summary

1.21 Answers to ‘Check Your

Progress'

1.22 Questions/Exercises

1.23 Further Reading.

 1.0 INTRODUCTION

Banking industry today faces a sea-

change in its features in the advent

of globalization, technological

developments, global and internal

competition. Traditionally banking

was considered to be simply

accepting deposits and lending of

money to the public. But now the

concept has changed. This unit

attempts to analyse the meaning of

the terms:Banker, Customer and the

Relationships between Banker and

Customer
1.1 UNIT OBJECTIVES
• To introduce the terms banker

and customer.

• Explain the general and the

special relationship between

banker and customer and the

resultant obligation of the banker

to customer.

• Narrate the services offered by

the banker.

• To introduce various terminology

arising out of the general and

the special relationship between

banker and customer.

• To explain the various rights and

liabilities of banker and customer

arising out of the general and

 special relationship between

banker and customer and the

applicable exceptions.

1.2 BANKER-MEANING

Who are ‘Banker’ and ‘Customer’?

What kind of relationship does exist

between them in the regular course

of banking business? These questions

are answered in the unit. The law on

banking does not provide us with tiny

comprehensive definition for the two

terms banker and customer. While

it is silent on what constitutes a

customer of a bank, it only attempts

to define the basic concept of

banking business as such. Despite

this (or for the same reason),
many authorities on banking have

tried to define these terms in their

own ways.

BANKER

Modern bankers perform varied

functions in addition to what is

distinctive and characteristic of

banking business. Compressing all

these varied functions in a single

definition is almost an impossible

task. That is why, the definitions

given by eminent authorities too are

found to be incomplete or

unsatisfactory. However, a close

analysis of certain well known

definitions will give us a concrete

idea about the term banker.

 1.3 BANKER-DEFINITION
HART'S DEFINITION

Dr. Herbert L. Hart, in his well known

book-Law of Banking, defines a

banker as “one which in the ordinary

course of his business, honours

cheques drawn upon him, by

persons, from and for whom he

receives money on current account.”

Here, receiving of current deposits

agains which cheques may be drawn

is the essential function to enable a

person or firm or an institution to be

regarded as-a banker or bank. But a

modem banker performs many other

important functions also. This

definition does not speak about them

and therefore remains incomplete.

 SIR JOHN PAGET'S DEFINITION

Sir John Paget defines a banker as

follows: “no person or body corporate

or otherwise can be a banker who

does not (a) take deposit accounts

(b) take current accounts (c) issue

and pay cheques and (d) collect

cheques, crossed and uncrossed, for

his customers”. He further adds that

one who claims to be a banker must

profess himself to be a banker and

the public must accept him as such.

Moreover, his main business must be

that of banking which should enable

him to earn a living. This definition

is an improvement over Hart's

definition. But this is also incomplet

because this excludes from its scope

many services rendered by bankers.

For instance modem bankers render

(1) Agency services such as (a)

payment of subscriptions, premia,

rent etc, and collection of dividends,

salaries, pensions etc, (b) acting as

trustee and executor and (2) Utility

services such as (a) receiving of

deeds, valuables etc, for safe custody

(b) dealing in foreign exchange (c)

issuing letters of credit (d) serving as

references etc.
 STATUTORY DEFINITION

The Banking Regulation Act, 1949

defines a banking company as, “a

company which transacts the

business of banking in India”. The

term ‘banking’has been defined as,

“accepting for the purpose of lending

or investment of deposits of money

from the public, repayable on

demand or otherwise, and

withdrawable by cheque, draft, order

or otherwise” (Sections (b) and (c))

This definition explains how a

banking company raises its funds and

uses them. Mere money lending can

never be characterised as banking

business.
 1.4 CUSTOMER-MEANING

It is essential to understand the

meaning of the term customer as

used in the banking business.

Generally, the word “customer”

refers to “one” accustomed to

frequenting a certain place of

business”. Generally, a person who

has an account in a bank is

considered to be a customer of the

Bank. However, banking experts and

legal precedents in the past use to

lay emphasis on the period for which

such accounts had been actually

operated with that particular bank.

 1.5 VIEWS ON CUSTOMER

According to Sir John Paget “there

must be some recognisable course

or habit of dealing in the nature of

regular banking business to

constitute a customer and a single

transaction does not create a

customer”. It follows that a person

does not become a customer of a

bank on merely opening an account.

It means that the account should

have been operated for sometime.

This view is known as Paget's

“duration theory”. Later, this

duration theory was known as Paget's

duration theory”. Later, this duration

theory was exploded by Justice

Bailhache in the case of Ladbroke Vs.

Todd. It was held that even a single

transaction may constitute a

customer.

This view was confirmed by the Privy

Council in Commissioner of Taxation

Vs. English Scottish and Australian

Bank. It was held in this case that

a customer of a bank is one who

has an account with that bank. His

connection with the banker may be

of long or short standing. But a

customer must be presumed to deal

regularly with the bank in future and

the dealings must be relating to the

business of banking. Even a single

banking transaction may constitute a

customer.
 FACTS OF THE CASE

th
On6 June an Australian tax payer

delivered to the office of the

Commissioner of Taxation, in

Sydney, a cheque payable to the

bearer for $ 75 18S 6d, in payment of

outstanding taxes. The Commissioner

required all payments at his office to

be in cash and it was for this reason

that the cheque was made payable to

bearer. The cheque was stolen from

the office by an unknown person.

On 7th June, a person calling himself,

Stewart Thallon opened an account

with the respondent bank with a

deposit of $ 20 in cash and gave as

his address a well known residential
 th
chamber in the town. On 8 June, he

paid In the stolen cheque for $ 75

th th th
18S 6d. On 9 , 11 and 12 June

cheques were presented for $ 48 16S

6d, $ 26 1OS Od, and $50, 12S. 6d,

respectively. Thallon was not seen

again; the name was unknown at the

address given and was presumably

fictitious.

The commissioner of Taxation

brought an action against the bank

for conversion. The Commissioner

contended that (a) the bank had

been negligent and (b) Thallon was

not a customer within the meaning of

the Bill of Exchange Act.

The Judicial committee dismissed the

appeal holding that the bank had not

been negligent and Thallon was a

customer within the meaning of the

Act. While delivering the judgement

Lord Dunedin said:

“Customer” signifies a relationship in

which duration is not of essence. A

person whose money has been

accepted by a bank on the footing

that they undertake to honour

cheques up to the amount standing

to his credit is, in the view of their

Lordships a customer of the bank in

the sense of the statute, irrespective

of whether his connection is of short

or longstanding.
Mr.X (without having bank account in

his name) may remit money through

a bank draft, or encash uncrossed

cheque received by him from others

or pay money in the bank to be

credited to the account of other

persons. In these situations, X is not

a customer of the bank because the

dealings just mentioned above are

not in the nature of regular banking

business. These are only casual

dealings.

1.6 GENERAL RELATIONSHIP

BETWEEN BANKER AND CUSTOMER-
INTRODUCTION

The opening of an account results

in a contractual relationship by

implication. The relationship between

the banker and the customer is

primarily that of debtor and creditor.

But a banker can also act as an agent

or a trustee, if he is asked to do

so by his customer. Besides being

in the position of a debtor, a bank

can simultaneously act as an ‘agent

and trustee’in relation to specified

business transactions.

1.7 BANKER AND CUSTOMER AS

DEBTOR AND CREDITOR

When a person deposits money and

opens an account with a banker, the

banker assumes the position of a

debtor. Here, the banker is not a

mere depository or a trustee of the

money. A depository is one who
accepts something for safe custody

on condition that he will return the

same unused. Again, if a banker acts

as a trustee, he has to account in

detail for everything he does with

the money. A banker does not accept

depositor's money on such

conditions. In legal terms, money is

being lent by the customer to the

banker. It is up to the discretion of

the banker to use it as he pleases.

At any time, the customer, being the

creditor, has the right to demand

back his money from the banker. But

it is not obligatory for the banker to

repay the debt in identical currency

and coins. It is enough that the

repayment of debt is in terms of the

legal tender currency of the country.

As long as a customer's account

shows a credit balance, he is

construed to be a creditor. However,

he is an unsecured creditor in the

sense that he does not get a charge

over the assets of his debtor namely

the banker.

When the customer overdraws from

his account the banker becomes the

creditor and the customer becomes

the debtor. But generally such loans

and advances are granted by a

banker on the security of tangible

assets. Thus, a banker usually

becomes a secured creditor.

 1.8 BANKER AS A PRIVILEGED
DEBTOR

We have already seen that the

relationship between the banker and

the customer is primarily that of

debtor and creditor respectively. Of

course, the respective positions are

being determined by existing state

of the account But this relationship

between the borrower and the lender

differs as in the ordinary commercial

debts.

Demand by the creditor (customer)

is essential for the repayment of the

deposited money. In ordinary

commercial debt a request by

creditor for repayment may be
unnecessary. But in banking

business, a banker is not required

to repay the amount to his customer

unless the customer demands the

amount. The bank accepts deposits

with an implied obligation to honour

his customer's cheques as long as the

account is having sufficient, credit

balance. But when the customer

wants to withdraw money, be should

demand his money in the proper

manner. These have been pointed out

in Joachimson Vs Swiss Bank

Corporation case.

FACTS OF THE CASE

The plaintiff firm was under

partnership. There were three

persons in it Two were Germans and

one was an Englishman. The firm was
carrying on business at Manchester.

st
On 1 August 1914,one of the

Germans died. Consequently the

partnership was dissolved. Three

days later, war broke out between

Germany and England. Thus, the

other German became an enemy

st
alien. On 1 August the firm's

account with the defendant bank

showed a credit balance of $ 2321 in

its favour.
th
On 5 June 1949, the English partner

took action in the name of the firm.

He aimed to recover the sum from

the bank. It was argued that the

cause of action had arisen on or
st
before 1 Augustl 944 itself.
The case was dismissed. In the

appeal also, the case was decided in

favour of the bank. It was held that

the firm had not made any demand

on or before 1 st August 1914 for

payment of the amount in question.

It follows from this case law that

demand is a pre-requisite for

withdrawing money from a

customer's account.

1.9 BANKER AS BAILEE IN CERTAIN

CASES

The term bailment signifies the

delivery of goods by one person (the

bailor) to another (the bailee) on

terms that in due course they are

to be redelivered to the bailor or to

his order. The bailee should return

all the profits arising from the goods

bailed. Bankers are not acting as

bailees for the deposits of money as

they do not return the same currency

notes and coins of the customer.

But when a banker receives,

documents, articles or ornaments for

safe custody, he acts as a bailee.

In this case, he should return them

unused, in the like order and

condition in which he received them.

 1.10 BANKER AS TRUSTEE IN
CERTAIN CASES

Generally, the relationship between

banker and customer is primarily that

of debtor and creditor respectively.

But in certain circumstances the bank

acts as a trustee. For example, when

a customer pays into his bank a

cheque drawn upon another banker,

for collection the banker holds it as

a trustee untilt it is collected and

credited, to the customer's account.

If the bank fails before collecting the

cheque the customer will be entitled

to receive the cheque or its proceeds.

This is because when he acts as a

trustee, the ownership remains with

the customer concerned and the
general creditors cannot advance any

claim against the property held in

trust.

1.11 BANKER AS AGENT

Nowadays, a banker renders many

agency service to his customers. He

buys and sells securities on behalf of

his customers; he collects cheques,

dividends, bills, promissory notes

and pays rent and insurance premia

for his customers. But a banker can

act as an agent of his customer only

for those transactions which are

recognised as agency functions by

banking law or practice.

 1.12 BANKER'S RIGHT TO
COMBINE SEVERAL ACCOUNTS

In Gamet Vs Mckervan, it was held

that a banker could combine several

accounts kept by a customer unless

by agreement he was under

obligation to keep them separate.

This precedent was changed in,

Greenhalgh Vs. Union Bank of

Manchester case. It was observed in

this case that when a banker agrees

with his customer to open two

accounts, he has no right to move

either assets or liabilities from one

account to the other without the

assent of the customer.

However, the banker can overcome

this difficulty by taking a letter of

set-off from the customer who opens

more than one account in the same

capacity. This right to set-off enables

the banker to combine accounts

whenever necessary. But this right

can be exercises only for the existing

debts due from the customer and not

for the contingent debts of liabilities

which may arise at a future date

1.13 BANKER'S RIGHT TO CLOSE

THE ACCOUNTS

A customer can close his account

with the bank at any time, if he

wishes to do so Similarly the bank

has a right to close the account of
an undesirable customer, provided in

gives sufficient notice to the

customer.

1.14 SPECIAL RELATIONSHIP

BETWEEN BANKER AND CUSTOMER
STATUTORY OBLIGATION TO
HONOUR CHEQUES

We are aware that the deposits

accepted by the banker are his

liabilities which an repayable on

demand or otherwise. Hence, the

banker is under a statutory obligation

to honour his customer's cheques so

long as the balance in customer's

account is sufficient to allow the

banker to do so. But this statutory

obligation is subject to certain

conditions.
1. There must be sufficient funds

of the drawer (customer) in the

hands of the drawe (banker).

a. If the banker honours

cheques on some occasions

when there is no sufficient

fund to the credit of his

customer's account it

becomes an implied

arrangement to overdraw

the account The banker

should not discontinue such

practice without giving prior

notice to the customer.

b. Ordinarily, cheques sent in

for collection are not treated

as cash in the hands of the

drawer. The banker should

 be given enough time

to realise the amount of

the cheques sent for

collection. It was held in

Underwood Vs Barclays

Bank that when the

customer draws cheques

on such unrealised amount,

the banker will be

justified in dishonoring

the cheques with the

remarks “Effects not

cleared”.

c.
When there is no sufficient

amount of funds in the

account at the time of

presentation of the cheque

by his customer, the banker

 is under no obligation to
make part payment of the

cheque.

2. The banker is bound to honour

the cheques of his customer only

when the cheques are:

a. complete and in order,

b. presented at the branch

where the account is

maintained,

c. presented during the

banking hours of the branch

office and

d. presented within a

reasonable time after the

ostensible date of their

issue.
 3. The banker should honour

cheques of his customer if there

is no prohibitory order of the

Court standing against the

account of such a customer.

1.15 CONSEQUENCES OF
WRONGFUL DISHONOUR

According to section 31 of the

Negotiable Instruments Act, 1881 the

banker is liable to compensate the

drawer for any loss or damage

caused by default on his part in

dishonouring the cheques without

sufficient reason. Wrongful dishonour

of a cheque means a dishonor

committed by mistake or negligence

on the part of the banker. The
amount of compensation recoverable

from the banker in the case of

wrongful dishonour is not limited to

the pecuniary loss only, but the loss

of credit or injury to reoputation of

the customer will also be taken into

account.

In the case of traders, their

reputation or credit worthiness is the

foundation on which their business

structure stands. When his cheque

is wrongfully dishonoured by the

banker, the trader suffers a great

loss of reputation in his business

community. Hence, he is entitled to

claim not only general damages but

also substantial damages for such

loss of reputation.
In the case of non-trader customer,

he is not entitled to recover

substantial damages for the wrongful

dishonour of his cheque. But he can

claim nominal damages only. If he

proves that the alleged damage is

or some special nature, then, he can

also claim substantial damages.

It was held in Gibbs Vs Westminster

Bank that the plaintiff was entitled

to get only nominal damages. In that

case Mrs. Margaret Gibbons, a non

trader customer, paid a cheque for

$9-16- 0 drawn on Westminster

Bank, towards rent payable to her

landlord. The bank failed to take note

of the credit of a sum of money

already paid by her and consequently

dishonoured the cheque. She sued

the Bank for wrongful dishonour of

her cheque. The case was decided in

favour of the Plaintiff and accordingly

she was awarded only forty shillings

‘as nominal damages’because she

was only a non trader customer.

In Davidson Vs Barclays Bank, a

book-maker was awarded $ 250

damages for the wrongful dishonour

of his cheque for $12.5 Although the

value of his cheque was small, in

its dishonour, he might have lost his

reputation to a great extent. Taking

this fact into account he was awarded

substantial damages.
Thus, the banker must be very

prudent and cautious while

dishonouring the cheques of his

customers.

1.16 BANKER'S LIEN AND

EXEMPTIONS TO THE RIGHT OF LIEN

Lien means the right of the creditor

to retain the goods and securities

(which are in his possession) of the

debtor unit1 the debt is cleared.

Though he can retain them until his

debt is paid, he cannot sell them

away. Lien may be of two types:

1. General Lien

2. Particular Lien
A general lien is applicable in respect

of all amounts due from the debtor to

the creditor. Section 171 of Contract

Act 1872 confers on the banker the

right of general lien on all goods and

securities deposited with him in his

capacity as a banker for any money

due to him from the customer.

A particular lien, on the other hand,

can be exercised by a craftsman or

a person who has spent his time,

labour or money on the goods

retained. Moreover such goods are

retained on a particular debt only.

It follows from Brandao V, that two

conditions must be fulfilled to enable

the ‘banker’to exercise his right of

lien. They are: (I) the properties

(goods, securities etc)should have

reached the hands of the banker in

the course of his dealings as banker

and (2) there is no contract between

the banker and the customer, either

express or implied, which is

inconsistent with the right of lien.

This general lien of the banker is

regarded as something more than an

ordinary lien. It is an implied pledge.

When fully negotiable instruments

(such as bearer bonds, share

warrants, and coupons) come into

the possession of the banker as

securities for loans, the character of

pledge is implied. Hence, if the

money due remains unpaid even after

the expiry of the stipulated time, the

banker, can sell these securities and

realise the amount due to him. When

there is no fixed time limit, he can

sell them only after making a request

for repayment and after serving a

reasonable notice of his intention to

sell securities.With regard to other

non-negotiable securities, the

position of the banker is not clear.

It is better to realize such securities

after getting permission from the

Court of Law.

EXCEPTIONS TO THE RIGHT OF

LIEN

The right of lien cannot be exercised

in the following circumstances:

1. Safe custody of articles:

Ordinarily, the banker receives

valuables such as

jewels,securities, documents etc,

from their customers for safe

custody. Such articles are

regarded as those left in the

hands of the banker for a specific

purpose and as such they are

“not subject to the banker's

general lien.” Banker receives

these articles in the capacity of

a bailee or trustee. The purpose

behind such entrustment of

articles is to ensure safety from

theft, fire, etc. This situation is

inconsistent with the right of

lien. Therefore, the banker

 cannot exercise the right of

general lien on such articles.

2. The banker cannot exercise his

right of lien on a cheque or bill

of exchange entrusted with him

for a special purpose. It was held

in Green halgh Vs Union Bank

of Manchester that when a

customer directs the banker to

collect the proceeds of a bill of

exchange and utilise the

proceeds for honouring a bill of

exchange on his behalf the

amount so realised will not be

subject to the right of general

lien.

3. A general lien cannot arise in

respect of property of a customer

 pledged as security for a

particular debt.

4. No lien can arise in respect of

documents or valuables left

inadvertently or which are placed

in banker's hands to cover an

advance that is not granted.

5. No lien arises in case the credit

and liability are not in the same

capacity or right e.g. the banker

cannot exercise the right of lien

over securities or funds of a

partner for debts due from the

firm.

6. No lien arises on securities over

which the customer has no title,

7. The banker cannot exercise his

right of lien in respect of a

 separate account maintained by

the customer which is known to

the banker.

Note: Right of lien is not affected by

Law of Limitation.

Right of lien arises only for debts

actually due. It is not available to

cover contingent liability for bills

discounted by the banker.

1.17 BANKER'S OBLIGATION TO

MAINTAIN THE SECRECY OF HIS
CUSTOMER'S ACCOUNTS AND THE
EXEMPTIONS TO THE DUTY OF
SECRECY

Another special feature in the

relationship between the banker and

customer is that the banker has got
an obligation to maintain the secrecy

of the customer's account. This duty

of the banker is an implied term of

the contract between him and the

customer. According to this

condition, the banker should not

disclose the state of his customer's

account except on reasonable and

proper occasions. He should take

extraordinary care while disclosing

the state of the customer's account.

Under certain circumstances, the

disclosure of matters relating to the

customer's financial position may do

considerable harm to his credit and

business. This obligation does not

end even with the closing of the

account.
ILLUSTRATION

Tournier Vs National Provincial Bank:

The plaintiff Tournier banked with the

defendants (National Provincial

Bank). His account was overdrawn by

$ 9.8s 6d. Subsequently, he agreed

to payoff this amount by weekly

instalments of $ 1. On the document,

the plaintiff wrote the address of a

firm Kenyon & Co., in whose

employment he was about to enter.

When he failed to pay the instalments

the manager of the defendant branch

telephoned Kenyon & Co. to ascertain

the plaintiff's private address, and

there followed, conversation between

him and two of the company's

directors. In the course of the

conversation, the manager informed

them that the plaintiff's account was

overdrawn, and he had failed to keep

his promise to place funds and he

was suspected getting since cheques

drawn by him had been paid to book-

makers.

As a result of the conversation,

Kenyon & Co, refused to renew the

plaintiff's employment when the

contractual period of three months

had expired. The plaintiff sued the

defendant bank for slander and also

breach of an implied contract that

they would not disclose to third

parties the state of the account or

any transactions to it.

Decision: To Start with, the

judgement was in favour of the bank

and then the plaintiff appealed. In

the Court of Appeal it was held that

the defendants [National Provincial

Bank] were liable as they had failed

in their duty to the plaintiff to treat

his account and affairs as

confidential.

In the course of the judgement, the

judge said... It is not possible to

frame any exhaustive definition of

duty On principle, I think that the

qualifications can be declared wider

four heads:

a. Where disclosure is under

complusion by law,
b. where there is a duty to the

public to disclose,

c. where the interests of the bank

require disclosure,

d. where the disclosure is made by

the express or implied consent of

the customer.

EXCEPTIONS TO THE DUTY OF

SECRECY

1. The banker will be justified in

disclosing any information

relating to his customer's

account with the consent of the

customer. But in certain

circumstances, by implication,

the banker may disclose

necessary information. For

example, when a banker

 sanctions a loan to a customer on

the guarantee of a third person

the banker is justified in

disclosing his customer's account

to the guarantor to the extent to

which it may be necessary.

2. In case where the customer has

mentioned the banker as a

referee for trade references, the

latter (banker) is justified in

disclosing the relevant

information.
3. When the banker is compelled by

the court of law to disclose the

state of his customer's account,

he is justified in doing so. Here,

his duty to obey the court's order

overrides his duty to his

customer,
4. When the banker is under a

public duty to disclose the

secrecy of the accounts, he will

be justified in doing so. For

example, the prohibited trading

activity (which may be evident

from the bank account) of his

customer must be disclosed to

the government.

5. The banker may disclose the

state of the customer's account

in order to protect his own

interests legally. For example if

he has to recover money from

the customer or guarantor the

disclosure of necessary

information is justified.
 6. There is also a well recognised

practice among the bankers

which is commonly described as

common courtesy.

One banker may require

information from another banker

with regard to the credit worthiness

of the proposed guarantor or surety

or an acceptor of bill under

discount etc. In this situation, the

latter can disclose the state of the

customer's account to the former.

In doing so, he should do it

conditionally. So as to disclose not

more than the general position of

his customer.
In Sunderland Vs Barclays Bank, Mrs.

Sunderland's cheque for $ 2-15-0

was returned for want of funds. She

telephoned the bank in order to

complain and in the course of the

talk, her husband joined in the

protest. Thereupon he was advised

that his wife was betting.

Subsequently, Mrs. Sunderland sued

the bank for wrongful disclosure

about the account to her husband.

The court of Law accepted the

manager's evidence to the effect that

he had his customer's permission to

explain his action. The judge said

that the disclosure made was

probably a defence of their(bank's),

action in returning the cheque and

to rebut any charge of discourtesy.

He also referred to the special

relationship of husband and wife

though it would be inadvisible to talk

more fully to a husband about his

wife's account than in the case of

other people.

Precautions to be taken by the

banker in the disclosure of the state

of his customer's account.

a. The banker should disclose his

opinion about the customer's

account on the basis of the

records of the customer's

dealings with the banker. He

need not make further enquiries

to furnish information.
 b. He should give a general

statement of his customer's

financial position without

disclosing the actual figures. In

doing so, He should speak

neither too low nor too high of

the customer.

1.18 LAW OF LIMITATION

The period of limitation does not

begin till a demand for payment is

made by the customer. It does not

start from the date of deposit. This

was decided in Joachimson V The

Swiss Bank Corporation case.

In India, according to Article 21 of

the Limitation Act, 1963 the period of

limitation in respect of loans payable

on demand is three years from the

date of the loan.

According to Article 22 of Limitation

Act, in respect, of money deposited

subject To payment on

demand(including money so

deposited by a customer with his

banker) the period of limitation is

three years from the date of demand.

Overdraft is the loan granted by the

banker to the customer. The period

of limitation in this case will run from

the time overdraft is made use of

unless the period is extended by the

debtor or his agent.

1.19 KEY TERMS

One who does

• Banker : the business of

Banking in India.

One who has

some sort of an
• Customer :
account with the

Banker.

The relationship

that arises out of

the banker and

General
• : customer by the
Relationship
very nature of

banking

transaction.

The privileges

Privileged that banker

• :
Debtor enjoys as a

debtor.
 Banker's special

obligations to
Special
• : the customer are
Relationship
called Special

Relationship

Right of the

creditor to retain

the properties of

• Lien : the debtor until

the debt due to

him has been

repaid.

A debt will

become bad by
Law of
• : the end of three
Limitation
years from the

date of debt.
 1.20 SUMMARY

The term banking has undergone a

sea-change. Bank was originally

perceived as a place where the

banker and customer meet and

transacts the business of banking

during banking hours i.e, accepting

deposits and lending money was

considered as the main transactions

during 10 am to 5 p.m at the

branches where the account is kept

or opened. But today's banking is

virtual banking beyond the

boundaries of bank branches like

core banking, ATM, net banking,

mobile banking and the like.

 CHECK YOUR PROGRESS

1. State True or False

a. Modern Banker only

accepts deposits and lends

money.

b. Banker becomes a creditor

while lending money to the

customer.

c. To call a person customer

he must visit the bank
premises frequently.

d. Banker should not disclose

the details of the accounts

of a husband to wife and

vice-versa.

e. A debt will become bad

after the expiry of 3

months from the date of
debt.
2. The primary function of a

banker is to:

a. Accepts deposits and lends

money.

b. Collect customer's
cheques.

c. Honour customers

Cheques

d. Issue Drafts

e. Accepts valuables for safe-

custody.

3. Banker is not acting as an

agent when:

a. Collecting cheques of the

customers.
 b. Paying insurance premium

for the customers.

c. Accepting valuables for

safe-custody.

d. d) Collecting dividend
coupons of the customer.

e. Collecting rent on behalf of

the customers

4. A_________is right of a

person to retain the goods in

his possession until the debt

due to him has been settled.

5. A banker is acting as a

_____________ when he helps

in the preparation of project

proposal for his customer.

1.21 ANSWERS TO ‘CHECK YOUR
PROGRESS'

1. a. F,

b. T,

c. F,

d. T,

e. F.

2. (a)

3. (c)

4. Lien

5. Merchant Banker

1.22 QUESTIONS/EXERCISES

Section - A

1. Under what circumstances

banker is acting as a agent?

2. What do you mean by bankers

lien?

3. State the exemptions to the right

of lien?

Section - B

1. Define the terms Banker and

Customer. Explain the

relationship between banker and

customer.

2. State the exemption to the Law

of Limitation Act.

3. Why does a banker is called a

privileged debtor?

4. When a banker can exercise his

right to, close

customers’accounts and combine

two or more accounts?

1.23 FURTHER READING
1. Banking therory, Law and

Practice by Gordon and

Natarajan.

2. Banking therory, Law and

Practice by Sundaram and

Varshney.

3. Banking Law and Practice in

India by M.L. Tannan.

 UNIT 2

TYPES OF DEPOSITS AND

PASS BOOK

Structure

2.0 Introduction

2.1 Unit Objectives

2.2 Deposits-Introduction

2.3 Types of Deposits

2.4 Legal Position of Banker in

connection with Fixed Deposit

2.5 Advances against Term

Deposit

2.6 Features of Fixed Deposit

Receipt

2.7 Deposit Accounts opened in

Joint Names
2.8 Attachment of Deposit by

Garnishee Order

2.9 Pass Book

2.10 Effect of Entries in the Pass

Book

2.11 Confirmation Slips

2.12 Precautions to be taken by

the Banker and the Customer

2.13 Closing an Account

2.14 Key Terms

2.15 Summary

2.16 Answers to ‘Check Your

Progress'

2.17 Questions/Exercises
 2.0 INTRODUCTION

The impact of information technology

and the competition on the banking

industry made the introduction of

new and new products by the bankers

to suit the needs of the changing

needs of the customers. Banks do

business with the funds collected/

received from the customers as

deposits. As a token of

acknowledgement bankers issue pass

book to the customers entering the

transactions between them. This unit

makes an attempt to understand the

different types of bank accounts and

their salient features and the impact

of entries made in the pass book.

2.1 UNIT OBJECTIVES
• To introduce the various types

deposit accounts maintained by

the banker.

• To explain the salient features of

the deposit accounts.

• To explain the characteristics of

the Fixed Deposit Receipt (FDR)

• To explain the application of

Garnishee Order to Deposit

Accounts.

• To narrate the impact of entries

in the pass book and the effect of

Confirmation Slips.

• To explain how an account can

be closed by the Banker.

 2.2 DEPOSITS- INTRODUCTION

Business houses borrow money to

meet their financial needs and

commitments. But borrowing is a

vital part of any bank's business. By

definition, a banker deals in

borrowed money. Bankers borrow

money by accepting deposits, issuing

bank notes, debentures, cash

certificates and drawing bills of

exchange. In almost all countries the

note issue function has been made

the monopoly of the Central Bank of

the country concerned. Issue of

bonds, debentures and cash

certificate is by no means popular

with the commercial banks,

especially in India. The primary

source of borrowing funds for the

bankers in India is in the form of

deposits from the public.

A prudent banker is one who pays

interest on his borrowing at a rate

lower than that at which he receives

interest on his lendings. Bankers

earn a portion of their profits in the

forms of exchange, commission,

interest, and rent for safe deposit

vaults. But the major portion of their

profits accrues to them by employing

profitably the funds deposited by

their customers.

This is the most important function of

almost all modem banks. The power

of a bank to help business community

depends upon the amount it receives

by way of deposits.

By taking money on deposit, a bank

provides safe keeping for people's

money. But the money is not set

apart in strong rooms. The principal

together with interest is returned on

its being claimed in accordance with

the terms of the contract. Deposits

accepted by a bank are of different

types.

2.3 TYPES OF DEPOSITS

Broadly speaking, the deposit

liabilities of a banker are classified

into two categories, namely, (i) Time

Liabilities and (ii) Demand Liabilities.

The first category includes all those

deposits which are deposited with the

bank for a fixed period. Money cannot

be withdrawn from these deposits as

and when desired. The second

category includes deposits from

which money can be withdrawn as

and when desired. But customarily,

the bank deposits are classified into

four types. They are as follows:

1. Savings Deposits;

2. Recurring Deposits;

3. Current Deposits; and

4. Fixed or Time Deposits

 SAVINGS DEPOSITS:

Savings deposit are meant for the

people of the lower and middle

classes who wish to save a part of

their current income for future need

and also expect an income from their

deposited savings. The banks,

therefore, impose certain restrictions

on the savings bank accounts. There

may be certain restrictions on the

maximum amount that can be

withdrawn at a time. There are also

restrictions regarding the total

number of withdrawals that can be

done in particular period such as 25

withdrawals within a quarter or 5

withdrawals in a month. The bank

permits the use of cheques for

withdrawal of money from the

savings bank account if the customer

agrees to maintain a minimum

balance prescribed then and there in

the account. The banks render useful

service to the nation by the small

savings of the people which would

otherwise remain idle in the hands of

the people. A savings bank account

could be opened with rupees five

hundred now. It differs from bank to

bank.

Savings deposit accounts suit the

needs of lower income group and

middle class people. They can save

a part of their income in savings

accounts and earn additional income

from their savings in the form of

interest. Banks offer reasonable rates

of interest on savings deposits and

also impose certain restrictions on

the withdrawal of the savings

deposits. The need for keeping cash

reserves by the bank to meet the

demands of this kind of account

holders is comparatively larger than

in the case of fixed deposits.

Conditions with regard to the

operating of this kind of deposit

accounts differ from bank to bank.

1. Banks impose certain restrictions

on the right of the depositors to

withdraw money in a given

period.
2. According to the directives of RBI

presently enforceable, savings

deposits carry an interest @ -

per year. This uniform rate of

interest is now applicable to both

types of accounts viz, savings

accounts with cheque facility and

those without cheque facility.

3. Generally,interest is allowed on
the minimum balance in the
account during the period from
the tenth to the last day of each

calendarium.

4. No limit is fixed for the minimum

amount that can be held in

savings deposit accounts. But

banks normally allow interest on

a maximum balance of Rs. 2
lakhs only in one account.
 RECURRING DEPOSIT OR
CUMULATIVE DEPOSIT:

A variant of the Savings Bank

account is the recurring deposit or

cumulative deposit. This deposits

intended to inculcate the habit of

saving on a regular basis by offering

a comparatively higher rate of

interest. A depositor opening a

recurring deposit account is required

to deposit an amount chosen by him,

generally a multiple of Rs. 5 or 10 or

100 in his account every month for

a period selected by him. The period

of recurring deposit varies from bank

to bank. Banks open such accounts

for periods ranging from one year to

10 years. The rate of Interest offered

on recurring deposits are generally in

accordance with the rates prescribed

by the ‘Reserve Bank’for various term

deposits. Compound interest is

payable on recurring deposits and the

rate of interest is almost equal to

that of the fixed deposit accounts.

Any person who can save certain

amount of money regularly (e.g.

every month) can start a recurring

deposit account. It implies a regular

remittance of a fixed amount of

money on this kind of account.

Depending upon his financial

convenience, the depositor decide to

deposit a small fixed amount every

month until a fixed period is over.

After the expiry of the fixed period

he gets the principal amounts plus

interest in a lump sum.

Decision about the instalments as

well as the-period of deposit is taken

by the depositor with the help of the

banker.

In case, the depositor wants to close

the account before maturity, the

bank will pay no interest if deposits

were made for less than three

months and in other cases it gives a

minimum interest.

The recurring deposit account can be

opened by any person including a

minor. Instalments for each month

should ordinarily be paid before the

last day of that month.

CURRENT DEPOSITS:

A current account is a running and

active account which may be

operated upon any number of times

during a working day. There is no

restriction on the number and the

amount of withdrawals from a current

account. As the banker is under an

obligation to repay deposits on

demand, they are called demand

liabilities of a banker. Current

deposits are generally opened by

business houses, public institutions,

corporate bodies and other

organisations whose banking

transactions are numerous and

frequent. As these deposits are

payable on demand the banker is

obliged to keep larger cash reserves

than are needed in the case of fixed

and savings’deposits. That is why

banks do not pay any interest on

credit balances in current accounts.

Current Deposits Accounts suit the

needs of big business people, joint

stock companies, public

undertakings, public corporations

etc. By accepting current deposits,

the banker undertakes to honour his

customer's cheques as long as his

account is in credit. Thus, current

deposit account becomes a running

account. There is no restriction with

regard to the number and amount of

with drawls from a current account.

The banker has to keep sufficient

‘Cash Reserves’against such deposits

vis-a-vis the savings and the fixed

deposit accounts. The special

features of the current deposit

account are enumerated below:

a. This relieves big businessmen

and undertakings from the

botheration and risk of keeping

ready cash to meet their

obligations.

b. Banks generally do not allow

interest on current deposits.

 c. Customers are required to

maintain a minimum balance in

their current deposit accounts

failing which the banker will levy

incidental charges for the

customer.

d. Overdraft facilities are offered on

current deposit accounts against

sufficient securities.

FIXED DEPOSITS:

Bankers accept deposits of money for

a fixed period of time. Such deposits

are called Fixed Deposits. They are

repayable only after the expiry of the

fixed period which ordinarily varies

from 3 months to 5 years. As the

date of repayment is decided in

advance, the banker need not keep

more cash reserves on hand to meet

the demands and he can utilise the

deposit amounts more profitably in

many ways.

For opening a fixed deposit account,

the depositor is required to fill up

an application form mentioning the

amount of deposit and the period for

which deposit is to be made and hand

over the application to the banker.

He has to provide his specimen

signatures also. Then the banker will

issue a Fixed Deposit Receipt to the

customer, acknowledging the receipt

of the sum of money specified

therein, to be repaid at the expiry

of specified period along with the

interest at a rate mentioned therein.

The interest amount may also be paid

at regular intervals.

2.4 LEGAL POSITION OF BANKER

IN CONNECTION WITH FIXED
DEPOSIT

The Legal position of the banker in

connection with fixed deposit is that

of a debtor who is not bound to repay

the amount before its due date.

Withdrawal of interest or the

principal straight away through

cheques is prohibited by the banker.

But at the request of the customer,

the banker may credit the amount

of interest to his savings or current

account and there from, the

customer, can withdraw the money

through cheques. Usually, the

conditions which govern the deposit

are printed on the overleaf of the

fixed deposit receipt.

Demand by the customer is essential

for the repayment of the fixed

deposit. On or after the date of

maturity the depositor should

present the receipt for payment or

renewal. In case of renewal, the

banker will issue a fresh receipt as

per direction of the customer. When

the period fixed for the deposit has

expired and if the deposit is not

withdrawn, the banker will not pay

interest for the extra period up to

which it remains in his hands. Even

then, he does not become a trustee

but he remains to be the debtor

[case: Official Assignee of Madras Vs

Smith]. A third party has no right

to claim the money deposited with a

banker by giving notice to him.

INTEREST ON DEPOSITS - RBI'S

CLARIFICATION:

Interest on all types of deposits is

payable at quarterly or longer

periods.

The banks will pay an additional

interest of two per cent on deposits

of one year and above in non-

resident (external) accounts.

Scheduled commercial banks having

aggregate demand and time liabilities

of less than Rs. 25 crores can pay

a quarter per cent more on term

deposits of less than three years and

on savings deposits.

A term deposit is withdrawable after

the period contracted for. It also

includes deposits such as recurring/

cumulative, annuity/re-investment

deposits and cash certificates. For

premature withdrawal of term

deposit, the rate of interest should

be the one applicable to the period

for which the deposit remained with

the bank less than one percent as

penalty.
 DEPOSIT UNDER A RE-INVESTMENT
PLAN:

In the event of withdrawal of a

deposit under a reinvestment plan

providing reinvestment of the

interest, interest as permissible

should be paid on a compounded

basis for the period during which the

deposit remained with the bank.

A bank should pay interest on the

above lines without charging any

penalty if the premature withdrawal

of a deposit for a daily or recurring

deposit for immediate reinvestment

with it in another term deposit of a

longer maturity than the remaining

period of the original contract.

 2.5 ADVANCES AGAINST TERM
DEPOSIT

When an advance is granted against

a term deposit, the interest

chargeable should be two per cent

over the rate payable on the term

deposit standing in the name of the

borrower.

In the case of advances against term

deposits the interest chargeable

should be at the rate prescribed by

the RBI for advances to borrowers

belonging to different categories such

as agriculture, small-scale industry

and transport operators.

Generally, a fixed deposit cannot be

withdrawn earlier than the date of

maturity. In order to oblige the

customers, bankers now- a-days

allow them to withdraw fixed deposit

before their maturity. In such cases,

the customer forgoes the interest

accrued on the deposit. In practice,

the banker allows the depositor to

borrow money against the security

of his deposit at a rate of interest

which is slightly higher than the rate

allowed on the fixed deposit by the

banker.

When a customer wants to withdraw

the fixed deposit before its date of

maturity the rate of interest allowed

will be less than that allowed on their

fixed deposit that are withdrawn after

their date of maturity. In India,

according to the directive of the RBI,

the rate of interest allowed on such

deposits for the expired period

should be at least 2% less then the

usual rate applicable for the period

for which the deposit was actually

held by the bank.

The banker may grant loan to the

customer on the security of the Fixed

Deposit Receipt. In this connection,

the Reserve Bank of India directive

requires the banks to charge a

minimum of 2% above the rate

payable on such deposits.

 2.6 FEATURES OF FIXED DEPOSIT
RECEIPT

When a customer puts his money in

fixed deposit, he receives a Fixed

Deposit Receipt which acknowledge

the receipt of deposit by the banker.

Therein it will usually be marked as

‘Not Negotiable’.

Fixed Deposit Receipt not being a

negotiable instrument can be

transferred to third parties by

assignment only. But the amount can

be paid to a third party who is in

possession of the depositor's

authorized letter and duly discharged

receipt. The following case law will

throw light on these points.
In Abdul Rehman Hajj Osman Vs

Central Bank of India and others it

was held that fixed deposit receipt,

with the words “not transferable” on

the top of it was not a negotiable

instrument. Therefore it could not be

transferred by a mere endorsement

in blank.

In United Commercial Bank Ltd. Vs

Okara Grain Buyers Syndicate also

it was held that the fixed deposit

receipt was non-transferable.

POSITION OF THE DEPOSITOR IN

CASE OF LOSS OF RECEIPT:

Whether the return of the fixed

deposit receipt is a must or not for

the payment of the amount, depends

upon the terms and conditions of the

deposit. If the return of the deposit is

a condition for payment, no cause of

action would arise until then. In case

the depositor claims the amount and

report that the FDR is lost, generally

banker demands the customer to sign

an indemnity bond with a guarantee.

It will protect the banker against

losses in future. In extraordinary

cases, the customer may be asked to

go to the Court of

Law and seek its authorization.

Hence, to avoid troubles, the

customer is well advised to preserve

the receipt very carefully till he gets

the payment. This is so because

Fixed Deposit Receipt is not a

negotiable instrument moreover the

transferee will not get a better title

than that of the transferor.

DONATIO MORTIS CAUSA:

A fixed deposit receipt may be

subject to DONATIO MORTIS CAUSA

clause. This is a peculiar gift given by

a person who is too ill and believes

that he is going to die. The gift

becomes operative only when the

donor dies of the illness. On the other

hand, if he recovers from the illness,

this (the gift) has to be returned to

the donor.
 LAW OF LIMITATION WITH
REGARD TO FIXED DEPOSIT:M

Usually the fixed deposit receipt will

contain a clause that the Receipt

should be surrendered for claiming

payment. When the money is payable

on or after its due date the Fixed

Deposit Receipt should be produced

after duly discharging it on or after

the due date. The production of this

receipt is in the form of a demand

and the PERIOD OF LIMITATION for

filing a suit for recovery for deposit if

refused by the banker, will be THREE

YEARS FROM THE DATE OF

SUBMISSION OF THE RECEIPT.

For other types of deposits the

PERIOD OF LIMITATION for filing a

suit for the recovery of money

payable on demand is three years

from the date of demand, (Article 22

of the Limitation Act, 1963)

2.7 DEPOSIT ACCOUNTS OPENED

IN JOINT NAMES

When a deposit of money is made

with bank in the names of two or

more persons jointly, it is known an

Joint Fixed Deposit. It was held in

Husband Vs David, Citing Innes Vs

Stephenson that where money is paid

into a bank on the joint account of

persons who are not partners in

trade, the bank is not discharged by

payment to one of those persons

without the authority of the others.
Suppose, a deposit of money is in

the names of two persons. One of

them authorizes the other man to

get the payment of the deposit from

the bank. In such a situation, if the

banker pays the amount to the

person that banker is justified. But

such an authority may be revoked

before payment. In such a case

concurrence of all the joint

depositors is necessary to give a

valid discharge to the bank.

Where the joint depositors happen to

be husband and wife and there is a

provision for withdrawal by either of

the parties and if the wife happens

to survive, the survivorship cannot

be excluded (Foley Vs Foley). Such

an arrangement is made only for the

sake of convenience to the

customers.

The terms of operation form part of

the contract of deposit, in joint

deposits, conditions regarding

repayment are generally made in one

or other of the following ways.

a. Repayable to either or survivor

b. Repayable to former or Survivor

c. Repayable to No. 1 or survivors

or survivor

(If the joint deposit holders are more

than two).

If anyone of these conditions are

included in the deposit receipt, on

the death of -anyone of them, the

payment may be made to the

survivors or survivor.

2.8 ATTACHMENT OF DEPOSIT BY

GARNISHEE ORDER

Before understanding the application

of the Garnishee order, various types

of deposits, it is essential to

understand the meaning of the

Garnishee Order. According to Order

21 Rule 46 of the Code of Civil

Procedure, 1908 the obligation of a

banker to honour his customer's

cheques is extinguished on receipt

of a prohibitory order of the Court

of Law which is known as Garnishee

Order. Suppose, a debtor fails to
repay the debt to his creditor. Then
the creditor may apply to the court

for the issue of a Garnishee order on

the banker of ‘his debtor. When the

court passes this order, the account

of the customer with the banker

stands suspended. Thereby, it

becomes an obligation to the banker

not to make any payment from the

account to the depositor. The order

may attach, the credit balance in full

or in part.
The debtor, whose money is thus

frozen, is called the judgement

debtor, the creditor of whose request
the orders issued is called the

judgement creditor and the banker

who is the debtor of the judgement

debtor is called the Garnishee.
 APPLICATION OF THE GARNISHEE
ORDER TO VARIOUS TYPE OF
ACCOUNTS:

Whether a particular deposit (debt)

is attachable be a garnishee order in

full or part, depends on the terms

of the order. To be affected by the

order, it must be a debt, that is due

or accruing due at a definite date. It

must not be a claim that may ripen

into debt at some future date, The

entire balance standing to the credit

of the customer may be attached by

the garnishee order or only such part

of it as is necessary may be attached.

In the case of partial attachment, the

banker needs only to withhold that

amount specified in the order and

may honour a customer's cheques

out of the balance. If the order is

silent in respect of the amount, it

implies full attachment.

Joint Account:

A joint account is one which is

opened in the names of two or more

persons. If only one of them is a

judgement debtor, the joint account

cannot be attached. But a Granishee

Order issued on joint names covers

even the private account of either

party.
Partnership Account:

In the case of a debt taken by the

partnership firm the personal

accounts of the partners can be

attached in addition to the accounts

in the name of the firm. This is

possible because the liability of the

partners is be joint and several. But

the reverse is not possible.

Attachment of deposit by

Income-Tax Authorities:

A deposit account (whether, savings

or fixed) of a customer with a bank

can be attached by income-tax

authorities.

According to sub-section 3 of section

226 of the Income Tax Act 1961,

being the customer's debtor, the

bank is bound to comply with the

notice served by the Income-Tax

officer and pay the amount as

demanded.

If the notice of attachment is

received by the bank from the

Income-tax officer before the due

date of the fixed deposit, it cannot

be given effect immediately. But the

bank is bound to pay the amount

to the Income-tax Officer on the

maturity of the deposit.

Even the joint account can be

attached by the Income-tax

authorities, if there is any balance

due from even one of the joint

account holders. Suppose, the

account is in two names, the bank

is bound to pay 50 per cent of the

amount in the account, if the

assessee is one of them.

2.9 PASS BOOK

On opening a bank account a pass

book is supplied. The pass book is

a small handy book to record all

dealings between the banker and the

customer. This book contains a copy

of all the entries appearing in the

account of the customer maintained

by the banker. In fact it is an

authentic copy of the customer's

account with the banker. Issuing a

pass book to a customer is to
acquaint him periodically with the

state of affairs of his account with

the bank. The customer presents the

pass book periodically with the bank

for the purpose of recording entries

therein. The pass book meant for

savings bank account contains rules

and regulations. A pass book is very

important to a customer because it

enables him to know the exact

position and particularly the entries

made without his knowledge by the

banker in ledger account.

In advanced countries, banks send

statements of accounts to their

customers daily or periodically as

agreed upon. Even photostat copies

of ledger pages are sent to the

customers. This saves much time

involved in writing the statements of

accounts. Obviously, this is a costlier

practice.

SPECIMEN OF PASS BOOK

STATE BANK OF INDIA

Savings Bank, Palkalai Nagar Branch

Ledger

Folio______________________________A/
C. No________________

Name(s)
ofDepositor(s)_________________
 Withdrawals Deposits Balance
Date Particulars
Rs. Rs. Rs.

2008
Oct By Cash 1000 1000
16

Oct To
200 800
28 (Ch43721)

Nov To Y
100 700
1 (Ch43723)

Nov
By Cash 700 1400
10

Dec
To ATM 500 900
15

2.10 EFFECT OF ENTRIES IN THE

PASS BOOK

Sir John Paget opines, when he

speaks of the proper function of the

pass book, that “its proper function

is to constitute a conclusive and

unquestionable record of the

transactions between banker and

customer and it, should be

recognised as such”. Generally

speaking, when the pass book is

delivered by the banker, the

customer should examine the entries

in it and if there appears any

discrepancy or error or omission, he

should bring it to the notice of the

banker for rectification. If he does

not do so and remains silent after

the receipt of the pass book, his

concurrence with the correctness of

the entries is taken for granted. In

some of the legal judgements

especially in the United States this

viewpoint was upheld by the
Courts. (Morgan Vs United States
Mortgage and Trust Co).

The implied obligation on the

customer to examine the pass book

has not been supported in many
judicial decisions in England and

India. In the absence of such

obligation on the customer, the
entries in the pass book cannot be

treated as a conclusive proof of their

correctness and accuracy and as
settled account. After receiving the

pass book from the bank, the

customer is competent to point out

the mistakes or omissions in the pass

book at any time he happens to know

about them. Thus the entries in the

pass book do not form the
conclusive evidence of their

correctness and accuracy.

Sometimes, wrong entries may be

made in the pass book by the banker.

For example, an amount received for
the account of X, may wrongly be
credited to the account of Y.

Moreover, Y's pass book may be

given back detoured the error is

discovered. In this case the banker

is not estopped from proving that it
is an error and is discovered. In this
case the banker should endeavour to

correct any wrong entry in the pass

book immediately upon detection. As

observed by Sheldon, the longer
duration the item remains
uncorrected, the weaker becomes
the banker's chance of recovering

money credited.

The real effect of the entries in the

pass book has not yet been

satisfactorily determined. For

instance, in the case of Akroken

(Atlantic) Mines V. Economic Bank,

Justice Bigham observed that entries

in a pass book are statements on

which the customer is entitled to act.

This view may be valid in certain

events but not in all circum -stances.

For example, in the case of British

and North European Bank Ltd. V.

Zalzstein, it was held that the entries

are not in all cases conclusive and

binding on the banker or on the

customer but each case must be

judged on its own particular facts.

Of course, wrong entries in the book

may be either in favour of the

customer or in favour of banker.

Entries in favour of the

Customer:

When a customer issues a cheque

relying on an erroneous credit

balance as shown by the pass book,

the banker is not entitled to

dishonour it. If he dishonours it, he

will be held liable to pay damages for

wrongful dishonour. If the customer

had drawn out the cash and used

it, the banker cannot recover it

afterwards. In the circumstance, the

customer ought to have acted in good

faith relying upon the accuracy of the

entry in the passbook. If the

customer has the knowledge of the

erroneous credit and yet issues a

cheque, it can be dishonoured by the

Bank.

Skyring Vs Greenwood & Co. the

plaintiff was the administrator

(woman administrator of the

property of Major Skyring R.A.) The

defendants were paymasters of the

Royal Artillery. In error over a period

of years the defendants had credited

Major Greenwood with pay in excess

of the sums authorised. Early in 1821

a statement of running account

between the parties was rendered,

including pay not authorised. A few

month latter the defendants wrote

claiming repayment of the excess.

Major Skyring died in December

1822. The defendants rendered a

statement to the plaintiff, carrying

forward the balance from the

previous statement, but showing the

excess pay as debit against that

balance. But the case was held in

favour of the plaintiff.

Abbot G.J” in giving judgement for

the plaintiff, said it is of great

importance to any man and certainly

no less to military men than others,

that they should not be led to

suppose that their annual income is

greater than it really is. Every

prudent man accommodates his

mode of living to what he supposes

to be his Income. It therefore works

great prejudice to any man, if after

having had credit given to him in

account for certain sums, and having

been allowed to draw on his agent on

the faith that those sums belonged to

him, he may be called upon to pay

them back.

These (judgement and view) have a

great bearing on the discussion

relating to passbook and especially a

non-trader customer.

As a general rule, it is not easy for

businessman to prove that he has

viewpoint was upheld by the Courts.

acted in good faith taking advantage

of a wrong credit. Because, traders

are ordinarily presumed to know

what amounts they pay into their

accounts and what may be paid from

other sources. But the position would

be different in the case of non-trader

customers.

Entries in favour of the

banker:

Sometimes, wrong entries may be

made in the pass book, the effect

of which will be favourable to the

banker. But it is not possible to

define with certainty the extent to

which the customer is bound by

them. There are conflicting judicial

opinions about the effect of this sort

of entries in the pass book.

In Balakrishna Pramanik Vs

Bhowanipore Banking Corporation,

the customer used to examine the

entries in the pass book in an

intelligent way. He used to dispute or

call for explanation regarding them

often. Once, the bank charged

compound interest at monthly rates

and debited his account. After the

lapse of sometime, the ‘customer’,

complained of that item. But his

character of careful and intelligent

examination of the pass book and

the resultant perusal for explanation

led to the presumption that he had

agreed with that item and ultimately

his objection was overruled.

Suppose, a customer has deposited a

certain amount in his bank account,

and the banker might not have

entered this item in the pass book

and the customer also would not

have noticed and pointed out this

omission latter. In this circumstance,

the banker has no right to withhold,

the money which he has received

from the customer. At least, when

pointed out and proved by the

customer, the banker shall make the

payment of the amount.

The underlying concept regarding the

pass book is that “one will not be

permitted to profit by a mistake of

which he was well aware of’. In Rhind

Vs Commerical Bank of Scotland, a

sum of $ 80 had been entered twice

in the pass-book and the customer

refused to have the entry corrected

on the ground that passbook entries

were the conclusive evidence

between himself and banker. He filled

a suit against the banker claiming the

amount. But the case was held in

favour of the banker on the ground

that one will “not be permitted to

profit by a mistake of which he was

well aware.”

Thus, the pass book does not

consitute a binding acknowledgement

on the accuracy of the entries in the

pass book. As it is, would be incorrect

to consider the pass book as a

conclusive evidence of a settled

account between the banker and the

customer.

A contrary view was held in another

famous case Chetterton V. London &

County Banking Co., Ltd. According

to the rulings in this case a customer

has no duty to examine the pass

book. Even when he checks the pass

book, that checking does not stop

him from later claiming that the

entries are wrong.

 2.11 CONFIRMATION SLIPS

Since the pass book is not a

conclusive proof of a settled account,

banks nowadays periodically issue

confirmation slips to the customers.

It contains the balance of the account

of the customer on date. By putting

his signature on the confirmation

slip, the customer accepts and

confirms the balance mentioned in

the slip. The legal effect of a

customer's signing the confirmation
slip was considered by the Kerala

High Court in Esla Ismail Vs Indian

Bank Ltd., 1963. The court observed

that Òunless there is evidence to

show that the practice or the custom
indicated a stated or settled account,

the customer, is not prevented from

questioning the debit entries in the

pass book but the confirmation slips

are sent and signed by the customer,

he will be bound by the debits made.”

2.12 PRECAUTIONS TO BE TAKEN

BY THE BANKER AND THE
CUSTOMER

To be on the safer side, both the

banker and customer should take the

possible care through the following

steps:

1. The pass book must be sent by

the customer to the bank

periodically and regularly for

recording all the entries, so that
 mistakes, if any, may be
detected by the customer soon

thereafter.
2. The pass book must be initialled
by a responsible officer of the

bank who must ascertain the

accuracy of the balance in the
account of the customer on date.
3. The customer must compare the
entries with his own record and

tally the entries. Few examples

of records are account books,

counterfoils of pay-in-slips,
cheque book etc. If the customer
finds any inaccuracy, he must
inform the banker immediately.
4. While sending the pass-book to

the customer, the banker should

take steps to ensure the secrecy

of its contents.
 2.13 CLOSING AN ACCOUNT

Closing bank account implies the final

severance of relation ship between

banker and his customer either at the

discretion of the banker or on the

request of the customer.

The customer can close his bank

account on his own accord without

giving any sufficient prior notice to

the banker. But the banker ordinarily

will not be justified in closing without

reasonable notice. The period

depends upon the circumstances of

each case. In Prosperity Ltd Vs Lloyds

Bank Ltd, one month's notice in the

circumstances of that case was held

to be not sufficient.
Facts of the Case:

Prosperity Ltd., was formed in 1922

with the object of setting on foot a

“snow ball” insurance scheme. The

scheme was explained to one of the

branch managers of the Lloyds Bank.

The bank agreed to open an account

in the name of the company to

receive applications from subscribers

and to allot the money subscribed as

provided in the rules of the company.

The account was accordingly opened

and payments received until there

was a credit balance of $ 7000 on the

account.
The scheme attracted wide publicity.

Later, it was decided that it was

undesirable for the bank to be

associated with the project. A letter

th
was sent from the head office on 14
February, 1923, informing the
th
company that after 14 March the

bank would cease to act as bankers

to the company. The plaintiffs

brought action seeking (a) a

declaration that the bank was not

entitled to close the account without

reasonable notice; and (b) an

injunction restraining the bank from

closing the account.

Decision:

It was held that an injunction was

not an appropriate remedy in the

circumstances but the plaintiffs were

entitled to the declaration sought. In

his judgement Mccardie, J, said there

might be a special contract between

banker and customer which bond

both of them and that special

contract might provide that the

banking relationship should last for

a given period. It might, however,

provide that no notice should be

given at all. If however, there was no

special contract, it was the law that

the bank could not close an account

in credit without reasonable notice.
The judge came to the conclusion

that having regard to the knowledge

and approval in the first place by

Lloyds Bank of this scheme and

having regard to their knowledge as

to the extent to which the pamphlets

and forms were being sent

throughout the world, one month's

notice was not an adequate notice;

because it did not give the plaintiffs a

sufficient opportunity of dealing with

the position created by the decision

of Lloyds Bank to end the account.

The common reasons which

necessitate the banker (on his own

accord) to close his customer's

account are as follows:

 a. When the customer repeatedly

issues cheques without having

adequate funds in the account

b. When the customer frequently

countermands payment of

cheques.

c. When the cheques sent for

collection by the customer to the

bank are often dishonoured.

d. When the customer fails to cover

bills domiciled at the bank for

payment.

When the banker wants to close an

account of his customer it is

advisable for the banker not to

accept deposits. This indicates that

he is about to close his customers

account. In the meanwhile, he may

honour cheques drawn on his

customer's account and await the

exhaustion of the cheque leaves

supplied to the customer.

When the customer closes his

account, on his own accord, he may

withdraw the credit balance in his

account. Wherever possible, the

banker should ask the customer to

issue a cheque payable to himself in

order to close the account.

Further, a banker will stop the

operation of the account of a

customer in the event of:

a. the customer issuing a notice to

close the account

b. death of the customer

c. insolvency of the customer

d. insanity of the customer

e. a garnishee order served by a

Court of Law

f. the customer assigning the credit

balance in his accounts in favour

of anybody.

g. notice, in case of a company

customer, of the commencement

of winding up

h. knowledge that the customer

contemplates a breach of trust in

case where it is known that the

funds credited to the account are

trust funds.
2.14 KEY TERMS
The deposits which

were deposited for

Time a fixed period and

• :
liabilities money can't be

withdrawn as and

when required.

Deposits from

Demand which money can

• :
Liabilities be withdrawn as

and when desired.

The order issued

by the Court of Law

to the banker, in

favour of the
Garnishee
• : creditor, against
Order
the debtor's bank

accounts

maintained with

the banker.
 2.15 SUMMARY

The various features of the deposits

will enable the readers to choose

deposits of their own choice and the

bankers to advice the customers to

choose the accounts.

The case laws quoted will enable the

reader to understand the

circumstances of various instances.

The dual benefit of Term-Deposits

(advances against deposits) also

understood. The impact of entries

made in the pass book also

explained.
 CHECK YOUR PROGRESS

1. Say true or false

a. Savings account is more

suitable for business

people.

b. A fixed deposit maturing

on a Sunday will be paid

on the proceeding

Saturday.

c. No interest will be offered

to Current Account.

d. Longer the duration, lesser

the chances of rectifying a

mistake in a pass book.

e. A wrong entry in the pass

book favourable to a

customer constitute a
settlement of account
 provided, the customer

has acted in good faith and

altered his position by

relying upon it.

2. The minimum balance to be

maintained in a savings bank

account with a cheque facility

is :

a. Rs.500,

b. Rs.1000,

c. Rs.250,

d. Varies from bank to bank.

3. The best suited deposit for a

trading community is:

a. Savings Deposit

b. Fixed Deposit
 c. Current Account

d. Recurring Deposit

4. According to IBA, The

maximum period for which a
fixed deposit can be obtained
is:

a. No limit,

b. 5 Years,

c. 7 years,

d. 10 years.

5. Banker can close his

customer's account:

a. the customer is issuing a

notice to close the account

b. death of the customer

c. insolvency of the customer

d. All the three cases
2.16 ANSWERS TO ‘CHECK YOUR
PROGRESS'

1. a. F,

b. F,

c. T,

d. T,

e. T.

2. d;

3. c;

4. d;

5. d.
 2.17 QUESTIONS/EXERCISES

Section - A:

1. What are the salient features of

recurring deposit accounts?

2. Differentiate savings bank

account from current account.

3. Write a short note on ‘Loan on

Deposit’.

4. What is Donatio Mortis Causa

Clause?

Section - B:

1. Explain time liabilities and

demand liabilities with examples.

2. What is FDR? Explain it's

features.
3. Explain the salient features of

various types of deposit

accounts.

4. Narrate the circumstances under

which a wrong entry in a pass

book in favour of a banker bind

the customer.

5. What is the proper function of a

pass book according to Sir John

Paget?
 UNIT-3

NEGOTIABLE INSTRUMENT

Structure

3.0 Introduction

3.1 Unit Objectives

3.2 Cheque – Introduction

3.3 Advantages of cheque

3.4 Definition of Cheque

3.5 Requisites of a Cheque

3.6 Dating of Cheque- Anti-

Dating and Post-Dating

3.7 Characteristics of Negotiable

Instrument

3.8 Issuing a Cheque

3.9 Modes of Negotiation

3.10 Doctrine of Negotiability

3.11 Transfer of Negotiable

Instruments

3.12 Holder

3.13 Holder in-Due- Course

3.14 Bill of Exchange

3.15 Difference between Bill of

exchange and Promissory Note

3.16 Difference between Bill of

exchange and Cheque

3.17 Key Terms

3.18 Summary

3.19 Answers to ‘Check Your

Progress'

3.20 Questions/Exercises
 3.0 INTRODUCTION

In the execution of the role of

bankers, they come across negotiable

and non-negotiable instruments

which possess some salient features

and should be handled with caution

and care. The present unit makes an

attempt to identify the various

negotiable instruments, their salient

features and the precautions a

banker should exercise while dealing

with the negotiable instruments and

rights and liabilities of the holders of

the negotiable instrument.

3.1 UNIT OBJECTIVES
• To introduce the term negotiable

instrument.

• To perceive the characteristics of

the negotiable instrument.

• To narrate some of the

negotiable instruments.

• To explain the rights and

liabilities of the holder and

holder-in-due course of a

negotiable instrument.

• To explain the rights and

liabilities of the banker with

regard to negotiable instrument.

 3.2 CHEQUE – INTRODUCTION

On opening an account in the names

of a person, the banker supplies him,

among other things a cheque book.

The customer can make use of these

cheque leaves either to withdraw

money from the bank or to make

payments to others. These cheques,

drawn by customers on their banks,

are recognised by law as negotiable

instruments. The real forerunners of

this practice are the goldsmiths of

England who received deposits from

the merchants under “running

cashes” (similar to the present

current accounts). Orders drawn

against these goldsmiths or letters

addressed to them by the depositors,

finally took the present shape of

cheques drawn on modern bankers.

3.3 ADVANTAGES OF CHEQUE

Due to the spectacular development

of banking business and the growing

awareness of banking among the

people, the cheque system is

becoming a popular form of payment.

The law relating to cheque is mainly

embodied in the Negotiable

Instruments Act, 1881. The cheque

system carreis many advantages

over other forms of money.

1.
It is very convenient to make and

receive payment by means of

cheques. Specially crossed

 cheques almost completely

eliminate the risks which are

attendant upon money

payments.

2. Persons making payments need

not take the trouble of

maintaining and preserve record

of payments. If necessary the

payment can be proved through

the record kept in the bank.

3. Payment through cheque system

is not only easy but also costs

less.

4. When a cheque is lost or stolen,

it is possible for the holder to

stop payment of the cheque by

informing the drawer about the

same.
These advantages are not available in

the case of payments in other forms

of money. The cheque system is very

popular in European and other rich

countries of the world.

3.4 DEFINITION OF CHEQUE

There are certain procedures

according to which cheque should be

drawn, issued and negotiated.

Before explaining them, it is

essential to understand the

definition of a cheque. Section 6 of

the Negotiable Instruments Act,

1881 defines that “a cheque is a bill

of exchange drawn on a specified

banker and not expressed

to be payable otherwise than on

demand”. In order to understand this

definition thoroughly, this section

should be read together with Section

5 of the Negotiable Instruments Act

of 1881 which gives the definition of

a Bill of Exchange. It runs as follows:

‘A Bill of exchange is an instrument

in writing, containing an

unconditional order, signed by the

maker, directing a certain person to

pay a certain sum of money only to

or to the order of a certain person or

to the bearer of the instrument’.

Note: The person who draws a

cheque is the drawer; the banker on

whom the cheque is drawn is called

the drawee banker or the paying

banker; and the person to whom the

chequs is payable is the payee.

Sometimes the drawer may draw a

cheque payable to himself. In that

case he becomes the drawer as well

as the payee.

3.5 REQUISITES OF A CHEQUE

1. Instrument In Writing:

A cheque should be an

instrument in writing. Writing

may be done by (a) typing, (b)

printed character, or (c) pencil

or pen. But it is obvious that

alterations can be effected with

comparative ease in all the above

cases except handwriting. Hence,
 customers should always be

‘encouraged to draw their

cheques in ink’. However, law

does not lay down any restriction

regarding the usage of the

writing materials in the drawing

of a cheque.

2. Unconditional Order:

It is evident from Section 6 of

the Negotiable Instruments Act

that a cheque is a bill of

exchange and it is also clear from

Section 5 of the Act that a bill

of exchange is an unconditional

order. Therefore, it is needless to

point out that a cheque should

contain an unconditional order.

If the banker is asked to do

 something in addition to the

payment of money the order

becomes conditional and the

instrument cannot be regarded

as a cheque. Suppose, an

account holder directs his banker

to pay the value of his cheque

to a particular person on arrival

through a particular ship at the

port. The person's arrival

through ship becomes a

condition attached to the

instrument and as such it ceases

to be a cheque.

3. Signed by the Person Issuing it:

A cheque should be signed by the

person issuing it. After giving an

indemnity to their bankers, large

 companies and corporations

sometimes issue cheques with a

printed facsimile reproduction of

the signature of some busy

officials. The question may arise

is whether such instruments are

valid cheques and whether the

‘so called’drawers could be held

liable thereon.

4. By One Person to Another:

To be a valid cheque, it should be

made payable to or to the order

of a certain person or bearer. It

should be noted that persons in

law are not necessarily human

beings. Joint stock companies,

local authorities, clubs, colleges

and institutions and cheques

 payable to the principal of a

college or the secretary of an

association are to be regarded as

payable to a certain person who

remains in that capacity.

5. A Certain Sum of Money Only :

The order must be for the

payment of a certain sum of

money only. If the amount stated

in words differs from the amount

stated in figures, the amount

would seem to be uncertain.

However, the Indian Banks

Association has advised its

member banks not to dishonour

cheques on the ground of

discrepancy if the amounts

expressed in words and figures

 written on a cheque. Banks have

been advised to pay the amount

written in words in conformity

with Section 18 of the Negotiable

Instruments Act. This uniform

practice has come into effect

from May1,1979.

6. On a Particular Branch of a Bank

Only:

The instrument must be drawn

on a specified banker and not on

any other person. Moreover, the

name and address of the banker

should be specified so as avoid

any mistake regarding the bank

from which the payment of the

cheque is to be demanded.
 7. Payable on Demand:

The order must not be expressed

to be payable otherwise than on

demand. According to Section 19

of Negotiable Instruments Act, it

is payable on demand provided

certain conditions are satisfied.

Hence, the drawee should pay

the amount as and when

payment is demanded.

3.6 DATING OF CHEQUE- ANTI-

DATING AND POST-DATING

The drawer of a cheque is expected

to date it before it leaves his hands.

Otherwise, it will be difficult to

determine whether or not the cheque

has been in circulation for an

unreasonable length of time. But the

cheque does not become invalid

merely because the date is

submitted. If the drawer has not

dated the cheque, the holder of the

cheque has prima facie authority to

fill in the date. This authority must

be exercised by the holder within a

reasonable time (Griffthst Vs Dalton).

The drawee banker also may insert

the date. However, in practice,

undated cheques may be returned

unpaid by most of the banks with the

remarks “date required”.

Ante-Dating and Post-Dating:

The drawer can date a cheque earlier

or later than the ostensible date of

issue. If it is dated earlier it is known

as ante-dating and if it is dated later

it is known as post-dating. Suppose,

Mr.X issues a cheque in September

14,2002. But he may date it as

September 2,2002. This is ante

dating. On the other hand, if he dates

it as September 25,2002, it is post

dating. When a post-dated cheque is

presented on or after the date written

on it the paying banker should have

no objection to honour it merely on

the ground of his knowledge of the

cheque being originally post-dated.

The Payee

Sir. John Paget is of the opinion that

“the normal cheque is one in which

there is a drawer, a drawee banker

and payee or no payee but bearer”. A

cheque may be made payable to the

order of a specified person or to the

bearer thereof. According to Section

7 (1)of the Negotiable Instruments

Act” where a cheque is not payable to

bearer the payee must be named”.

Cheques are sometimes made

payable to fictitious person

[imaginary persons]. In such cases

they are treated as bearer cheques.

Cheque in favour of impersonal payee

such as wages, petty cash etc., are

used to be generally cashed as

bearer cheques. It was held in North

and South Insurance Corporation Ltd

Vs. The National Provincial Bank Ltd

that a cheque drawn in favour of

impersonal payee [such as

‘cash’‘wages’etc, or “order'] was not

a cheque but a mere mandate to the

banker to pay cash to the person who

presents the document containing

the mandate.

If it is desired that the payment of a

cheque should reach only a particular

payee, it is important to add the

world ‘only’after the payee's name

and strike off the words ‘bearer or

order’.

3.7 CHARACTERISTICS OF
NEGOTIABLE INSTRUMENT

By virtue of Section 13 (1) of

Negotiable Instruments Act, 1881

‘Negotiable Instrument means a

promissory note, bill of exchange or

cheque payable either to order or

bearer.

A Negotiable Instrument possesses

the following characteristics:

i. It is a contract for the payment

of money.

ii. The rights which it embodies are

capable of being transferred by

mere delivery or endorsement

and delivery.

iii. A holder - in - due - course is not

affected by defects in the title of

the immediate transferor or any

previous holder of the instrument

provided he takes it in good faith

and without any sufficient cause

 to believe that any defect existed

at the time of negotiation.

iv. It can be transferred any number

of times within the period of

limitation.

v. Consideration is presumed to

have passed between the

parties. Consideration is used in

the sense of quid pro quo i.e.,

something that a person gives

for something he receives.

vi. The holder - in - due - course can

sue in his own name and without

any notice to the transferor of his

having become such a holder.

The Negotiable Instruments Act

primarily applies to promissory note,

bills of exchange and cheques only.

But there are certain other

instruments which are held to be

negotiable, according to some local

usage by judicial decisions. Dividend

warrants, beare bonds, debenture

payable to bearer, share warrants

payable to bearer and treasury bill

are negotiable instruments like

promissory notes, bills of exchange

and cheques. But posta orders,

money orders, dock warrants,

warehouse receipts and bills of lading

are no negotiable instruments in the

strict sense of the term. Although

instruments like bill of lading railway

receipt, etc., have been held to be

negotiable by mercantile practice,

the transfer of such instrument

cannot acquire a better title than that

of the transferor.

3.8 ISSUING A CHEQUE

A cheque possesses its legal

characteristics only when it is issued.

‘Issue’mean the first delivery of a

cheque complete in form to a person

who takes it as a holder. W have to

understand the meaning of two terms

namely, holder and delivery.

a. Holder refers to the bearer or

the payee or the endorsee of a

cheque who is in possessio of it,

b. Delivery refers to the transfer of

possession, from one person to

 another. Delivery ma be either

actual or constructive.

Actual delivery involves the physical

handing over of a cheque by one

person to another. But constructive

delivery is not so. Constructive

delivery does not require physic

handing over of the instrument and it

can be effected by the mere intention

of the transferred. Thus, if the

drawer completes a cheque leaf and

informs the payee that he is holding

it of behalf of the payee, it is

constructive delivery, and

accordingly the cheque becomes a

due issued one.

 3.9 MOPES OF NEGOTIATION

When a promissory note, bill of

exchange or cheque is transferred to

any perse so as to constitute that

person the holder thereof the

instrument is said to have been

negotiated.

I. Bearer Instrument:

A bearer Instrument is said to be

negotiated when it is transferred

from one person to another by

mere delivery.

II. Order Instrument:

An instrument payable to the order

of a certain person is said to be

negotiated when it is endorsed by the

payee and delivered to the party.

Thus, negotiability of an instrument

refers to the power to transfer the

instrument free from equities

(defects) so as to enable the

transferee to derive a better title

than that of the transferor.

3.10 DOCTRINE OF
NEGOTIABILITY

Suppose, a clerk of an employer

decides to defraud his employer. He

prepares a cheque and makes it

payable to a purely imaginary

person, say, X. Then, he ‘succeeds in

persuading his employer to sign the

cheque by falsely representing that

money is payable to that party by the

employer. The clerk then endorses

the cheque with the name of the

imaginary payee (X) and passes the

cheque on to a third party who gives

value in good faith. In these

circumstances, the innocent third

party obtains a good title to the

cheque. The absence of a genuine

endorsement does not prevent the

third party from obtaining a good

title because the cheque is payable to

a fictitious or non-existing person.

Ultimately the drawer has to suffer

the loss. He (the drawer) could not

have avoid that loss by ordering the

bank not to pay the cheque. Even if

it were so, the innocent \ third party

would be able to obtain judgement

against him.
 3.11 TRANSFER OF NEGOTIABLE
INSTRUMENTS

Negotiable instruments can be

transferred in two ways. They are:

a. By negotiation under the

Negotiable Instruments Act; or

b. By an assignment under the

Transfer of Property Act.

Bills of exchange, promissory notes

and cheques can be transferred by

assignment from one person to

another by a separate deed as well.

But, by such an assignment, the

transferee acquires only the rights of

his transferor and will be subject to

defects that may be found against

his transferor. On the contrary, if the

transfer had been made by

negotiation the transferee can get

the rights of a holder - in -due -

course – i.e., the transferee's title

will be better than that of the

transferor.

3.12 HOLDER

Section 8 of the Negotiable

Instruments Act 1881 defines a

holder as follows: The ‘holder’of a

promissory note, bill of exchange or

cheque means any person entitled in

his own name to the possession

thereof and to receive or recover the
amount due thereon from the parties

there to.

Where the note, bill or cheque is lost

or destroyed, its holder is the person

so entitled at the time of such loss or

destruction.

Position of the Holder:

1. The holder may be the payee or

endorsee or bearer of a cheque.

While occupying any of these

three positions, one may sue on

a negotiable instrument in case

of any dispute.

2. A finder of a lost instrument may

be in possession of it It does

not mean that he is the holder

 of it. Thus mere possession of

an instrument will not make a

person, the holder thereof.

3. The title of the person who is

claiming to be holder must be

acquired lawfully.

3.13 HOLDER IN-DUE-COURSE

A holder -in -due course is one who

gets an instrument in good faith and

for value in the course of its

circulation. He not only protects

himself against all defects of persons,

through whose hands it might have

rolled on but also the subsequent

holders. In his own name, a holder in

due course can sue all parties liable

thereon. He is in a paramount
position. In short he holds the

instrument free from any defect

Section 9 of the Negotiable

Instruments Act, 1881 provides

thus - ‘Holder in due course’means

any person who for consideration

became the possessor of a

promissory note, bill of exchange or

cheque, if payable to payee, or the

payee or endorsee thereof, if payable

to order, before the amount

mentioned in it became payable

without having sufficient cause to

believe that any defect existed in the

title of the person from whom he

derived his tide.

To be a holder-in-due course, one

should have taken an instrument

which fulfills the following conditions:

A. Holder: The first requirement to

be satisfied before a person can

be holder in due course of a

cheque is that he must be a

holder.

B. Complete and Regular: As to

completeness, all requisites of a

cheque should be present in it

in order to make it a complete

instrument. As to regularity, it

is clear that if a cheque bears

any unauthenticated erasure or

interlineations in any material

part, a transferee cannot be a

holder in due course. Thus, it

 should be complete and regular

in every respect. Even if an

endorsement does not appear to

be regular, it will prevent a

transferee from becoming holder

in due course. In the case of

order cheques endorsement in

favour of the holder is essential.

A post dated cheque is not

deemed to be irregular.

C. Before Becoming Overdue: A

cheque is ordinarily payable on

demand. It will be deemed to be

overdue when it appears on the

face of it to have been in

circulation for an unreasonable

length of time. In India if a

cheque is in circulation for more

 than six months from its

ostensible date of issue it

becomes overdue. When it is

over due the transferee, if any

will fail to become a holder in

due course.

D. No Notice of Dishonour: A

cheque might have been

previously presented to the

banker who might have

dishonoured it for the reason

written upon the same. If such

a cheque with banker's note of

dishonour is further negotiated,

the transferee cannot become

holder in due course.

E. In good faith: The cheque must

have been received in good faith.

 A thing is deemed to be done

in good faith when it is done

honestly whether it is done

negligently or not.

F. For Value: Transfer of a

negotiable instrument must be

for valuable consideration. It

may relate to any antecedent

debt or liability. Value must be

apparent, and not illusory. There

is no obligation of payment, if

a negotiable instrument is

accepted and endorsed without

consideration. However, the

burden of proving absence of

consideration rests on the party

alleging it.
 G. Deliverable State: The

instrument should have been in

a deliverable state. A bearer

instrument is always in a

deliverable state. But an order

instrument is put in a deliverable

state when it is endorsed by the

payee.

There cannot be a holder in due

course under the following

circumstances:

a. When an instrument is marked

Not Transferable or

b. Payable to a specified person

only (e.g. Pay Kavitha only)

c. When it bears the forgery of

essential signature.
 3.14 BILL OF EXCHANGE

A bill of exchange is an instrument

in writing containing an unconditional

order, signed by the maker, directing

a certain person to pay a certain sum

of money only to, or to the order of,

a certain person or to the bearer of

the instrument (Sec. 5). There are

three parties to a bill of exchange,

viz., drawer, drawee and payee. The

person who gives the order to pay

or who makes the bill is called the

drawer. The person who is directed to

pay is called the drawee. The person

to whom the payment is to be made

is called the payee. In some cases,

the drawer and the payee, or when

a principal draws on his agent, the

drawer and the drawee, may be one

and the same person. The drawer or

the payee who is in possession of the

bill is called the holder. The holder

must present the bill to the drawee

for his acceptance. When the drawee

accepts the bill, he is called the

acceptor. Essential Elements: The

essential elements of a bill are more

or less the same as of a promissory

note and are subject to some

formalities as regards date, place,

stamp, signature, etc. These

essential elements are as follows:

1. It must be in writing.

2. It must contain an order to pay.

 3. The order must be unconditional.

4. It requires three parties, i,e.,

drawer, drawee, and payee.

5. It must be signed by the drawer.

6. The sum payable must be

certain.

7. It must contain an order to pay

money.

8. The formalities relating to

number, date, place and

consideration, though usually

found in bills, are not essential in

law.

A bill as originally drawn cannot be

made payable to bearer on demand.

SPECIMENS OF BILL OF EXCHANGE

A buys goods on credit from B for

Rs. 500 to be paid three months after

date. B buys goods from C on similar

terms. Now B may order A to pay the

sum of Rs. 500 to C. This order will

be a bill of exchange.
3.15 DIFFERENCE BETWEEN BILL
OF EXCHANGE AND PROMISSORY
NOTE

1. In a note there are two parties-

the maker and the payee. In a

bill there are three parties -the

drawer, the drawee and the

payee.

2. A note contains an unconditional

promise to pay. A bill contains an

unconditional order to pay.

3. The maker of a note is the debtor

and he himself undertakes to

pay. The drawer of a bill is the

creditor who directs the drawee

(his debtor) to pay.

4. The maker of a note corresponds

in general to the acceptor of a

 bill. But the maker of the note

cannot undertake to pay

conditionally whereas the

acceptor may accept the bill

conditionally because he is not

the originator of the bill.

5. The liability of the maker of a

note is primary and absolute, but

the liability of the drawer of a

bill is secondary and conditional

(Secs. 30 and 32).

6. A note cannot be made payable

to the maker himself whereas in

a bill, the drawer and the payee

may be one and the same

person.

7. A note requires no acceptance as

it is signed by the person who is

 liable to pay. A bill payable after

sight or a certain period must be

accepted by the drawee before it

is presented for payment.

8. A note cannot be drawn payable

to bearer. A bill can be so drawn.

But in no case can a note or bill

be drawn “payable to bearer on

demand”.

9. The maker of a note stands in

immediate relation with the

payee, the drawer of a bill stands

in immediate relation with the

acceptor and not the payee

(Explanation: 1 to Sec. 44).

10. Certain provisions like (a)

presentment for acceptance

(Sec. 61), (b) acceptance (Sec.

 7), (c) acceptance for honour

(Sec. 108), and (d) bills in sets

(Sec. 132) do not apply to notes.

11. Foreign bills must be protested

for dishonour when such protest

is required by the law of the

place where they are drawn (Sec.

104). No such protest is required

in the case of a note.

12. In case of dishonour of a bill

either by non-acceptance or by

non-payment, duenotice of

dishonour must be given to all

the persons who are liable to

pay. This includes the drawer

and the prior endorsers. But in

the case at dishonour of a note,

no such notice is required to be

given to the maker.

3.16 DIFFERENCE BETWEEN BILL
OF EXCHANGE AND CHEQUE

1. A bill may be drawn on any

person, including a banker, but

a cheque is always drawn on a

banker.

2. A bill must be accepted before

the drawee can be called upon to

make payment upon it. A cheque

requires no acceptance.

3. A bill which is not expressed to

be payable on demand is entitled

to three days of grace. A cheque

is not entitled to any days of

grace.
4. A bill may be payable on demand

or after the expiry of a certain

period after date or sight. A

cheque is always payable on

demand.

5. A bill must be duly presented for

payment to the acceptor or else

the drawer of the bill will be

discharged from liability. The

drawer of a cheque is not

necessarily discharged from his

liability by the delay of the

holder in presenting it for

payment. He is discharged only

to the extent of the damage, if

any, suffered by him.

6. A cheque may be crossed but not

a bill.
7. A cheque does not require any

stamp where as a bill, except in

certain cases, must be stamped.

8. The payment of a cheque may

be countermanded by the drawer

but the payment of a bill cannot

be countermanded.

9. A cheque is not required to be

noted or protested for dishonour.

A bill may be noted or protested

for dishonour.

3.17 KEY TERMS

Negotiable

Instrument

Negotiable means promissory

• :
Instrument note, bill of

exchange and

cheque payable

either to order or

bearer.
 A bill of exchange

• Cheque : drawn on a

specified banker.

A cheque will

become stale on
Stale
• : after the expiry of
cheque
six months from

the date of issue.

Issue means the

first delivery of

the cheque
Issue of
• : complete in form
Cheque
to a person who

takes it as a

holder.

A bill of exchange

Bill of is an instrument
• :
Exchange in writing

containing an

unconditional
 order, signed by

the maker,

directing a certain

person to pay a

certain sum of

money only to, or

to the order of, a

certain person or

to the bearer of

the instrument

(Sec. 5).

There are two

parties to a Pro

note -the maker

• Pro note : and the payee

and it contains an

unconditional

promise to pay.

Any person

entitled in his own

• Holder : name to the

possession

thereof and to
 receive or recover

the amount due

thereon from the

parties thereto.

Holder-in-due

course is one who

gets an
Holder-in-
• : instrument in
due course
good faith and
without
negligence.

3.18 SUMMARY
Even though the term banking has

under gone sea-change the

understanding of the term Negotiable

Instrument is same. Better

understanding of the concepts enable

the reader/ prospective bankers and

customers to familiarise with the

negotiable instruments and deal with

them carefully.
 CHECK YOUR PROGRESS

1. Say true or false

a. Banker can honour a

cheque which does not

bear drawer's signature.

b. Banker can return the

cheque on the ground of

amount in words and

figures differs.

c. The holder-in-due course

can sue in his own name

only with the information

of the transferor or

previous holders.
 d. A bearer instrument is

always in deliverable

state.

e. There are two parties to

a bill of exchange i.e, the

maker and the payee.

2. _____must be noted and

protested against dishonour.

a. promissory note

b. foreign bills of exchange

c. cheque

d. all the above

3. Negotiable instrument means:

a. promissory note

b. bill of exchange

c. cheque

d. all the above

4. The title of___________ is not

affected by the title of the

immediate transfer or any

other previous holder

a. drawer

b. holder

c. holder for value

d. holder-in-due course

5. A cheque which bears a date

prior to the date of its issue is

called______

a. anti-dated

b. post-dated

c. stale-dated

d. none of these
3.19 ANSWERS TO ‘CHECK YOUR
PROGRESS'

1. a. F;

b. T;

c. F;

d. T;

e. F.

2. b;

3. d;

4. d;

5. a.

3.20 QUESTIONS/EXERCISES

Section - A:

1. Define cheque and State its

advantages.
2. How can an illiterate person sign

a cheque?

3. Write a note on anti-dated, post-

dated and stale cheques.

4. What are the characteristics of

Negotiable Instrument?

Section - B:

1. Explain the requisites of a

cheque.

2. Assume you as a banker and

narrate how will you treat an un

dated cheque?

3. “All cheques are bills but all bills

are not cheques”- Discuss

4. Explain the terms holder and

holder-in-due course.
 UNIT 4

ENDORSEMENTS AND
MARKING OF CHEQUES

Structure

4.0 Introduction

4.1 Unit Objectives

4.2 Endorsements -Meaning and

Definition

4.3 Who May Endorse?

4.4 Effect of Endorsements

4.5 Kinds of Endorsements

4.6 Marking of Cheques

4.7 Key Terms

4.8 Summary

4.9 Answers to ‘Check Your

Progress'

4.10 Questions \Exercises

 4.0 INTRODUCTION

Everyday banks deals with enormous

negotiable instruments, as agents for

collection and holder for value. A

clear understanding of the term

endorsement and its legal impact will

enable the reader to handle the

negotiable instrument with care and

caution. This unit explains the

meaning of term endorsement, types

of endorsements and their legal

implications and marking of a

cheque.
 4.1 UNIT OBJECTIVES
• To explain and define the terms

endorsement and marking of

cheques.

• To explain the persons who can

make a valid endorsement.

• To narrate the effect of

endorsements

• To analyse the different types of

endorsement.

4.2 ENDORSEMENT –MEANING

AND DEFINITION

A bearer cheque can be negotiated

by mere delivery. However, an order

cheque can be negotiated only by

endorsement and delivery.

Endorsement means writing of a

person's name on the back of a

negotiable with a view to negotiating

the same. Endorsement (or

indorsement) is a term derived from

the Latin term Indorsum meaning

‘upon the back’which indicates that

the usual place for an endorsement is

the back of the instrument. If these

is no sufficient space for making

endorsements on the cheque, the

subsequent endorsements are made

on a piece of paper attached there to.

That piece of paper is known as an

allonge.
Definition:

Sec. 15 of the Negotiable

Instruments Act, 1881 defines

endorsement as follows: “When the

maker or holder of a negotiable

instrument signs the same, otherwise

than as such maker for the purpose

of negotiation on the back or face

there of or on a slip of paper annexed

thereto he is said to endorse the

same and is called the endorser”.

The person who makes the

endorsement is called the

‘endorser’and the person in whose

favour it is made is called the

‘endorsee’.
 4.3 WHO MAY ENDORSE?

The payee of an instrument is the

rightful person to make the first

endorsement There after, any party

who, has become the holder of the

instrument can do it. In general, the

maker of a note and the drawer of a

bill cannot endorse. But if anyone has

become the holder in his own right,

he may endorse the instrument

4.4 EFFECT OF ENDORSEMENTS

When a negotiable instrument is

endorsed and delivered to the

endorsee, the property therein,

together with the right of further

negotiation passes to the endorsee.

There is difference between transfer

by endorsement and transfer by

assignment (e.g. by a transfer deed

executed by the transferee) of a

negotiable instrument. In the former

case, the transferee by endorsement

would have all the rights and

advantages of a holder in due course

except in the case of any restrictive

endorsement. But in the latter case,

the assignee will get the same rights

as the assignor had.

4.5 KINDS OF ENDORSEMENTS

Endorsements are of various kinds

such as ‘blank endorsement’‘full

endorsement’, ‘conditional
endorsement’, ‘restrictive
endorsement’, ‘endorsement sans

recourse’and ‘partial endorsement’.

1. Blank Endorsement:

If the endorser simply signs on

the back of an instrument

without mentioning the name of

any ‘specified person as the

endorsee, he is said to make an

endorsement in the blank. Such

an endorsement makes it

payable to the bearer. This

instrument can be negotiated by

mere delivery subsequently.

When a cheque drawn in Mr. X's

name is signed on its back by

Mr. X himself, it gets a “blank

endorsement”.
2. Full Endorsement:

In addition to his signature, if

the endorser adds a direction to

pay the amount mentioned in the

instrument to or to the order of

a specified person the

endorsement is said to be in full.

For example if Mr. X (endorser)

adds the words ‘Pay to Y’or ‘Pay

Y or order’it becomes a full

endorsement. This instrument

becomes payable only to Y or his

order. If Y wants to endorse it,

he can do so.

A blank endorsement may be

converted into a full

endorsement. The holder of a

negotiable instrument endorsed

 in blank, may, with out signing

his own name, write above the

endorser's signature a direction

to pay to or to the order of

himself or some other person

and there by the holder does not

incur the responsibility of the

endorser. Nevertheless, he may

be liable as a transferor by

delivery.

3. Conditional Endorsement:

If the endorser of a negotiable

instrument likes, he may make

the instrument subject to a

condition. If he does so the

endorsement is termed as a

conditional endorsement. The

conditions thus added may be

either conditions precedent or

conditions subsequent. Suppose,

the endorsement is “Pay to Mrs.

Uma, if she returns from Canada

within three months.” In this

case, the right to receive

payment becomes absolute only

if Mrs. Uma arrives within three

months from the date of

endorsement on the instrument.

If she does not arrive from

Canada within the stipulated

period, the instrument will not

be honoured and she (endorsee)

cannot sue any of the parties.

Conditional endorsement does

not make the instrument-non

 transferable. However, such
endorsements are not used

generally.

4. Restrictive Endorsement:

Generally, an endorsee of a

negotiable instrument is fully

competent to negotiate it

further. But the endorsee's right

of negotiating the instrument

may be restricted or excluded by

express words. This is known as

‘Restrictive Endorsement’. For

example, one Mr, Chandra

endorses an instrument payable

to bearer as follows:

a. Pay the contents to Surya

only.

b. Pay Surya for my use.

 c. Pay Surya or order for the

account of Chandran.

d. The amount must be

credited to Surya.

5. Endorsement ‘Sans recourse

An endorser of negotiable

instrument may, by express

words in the instrument, exclude

his own liability thereon. This is

known as Endorsement ‘Sans

Recourse’. The following are the

instances of such endorsement.

Suppose Radha endorses a

cheque to Sundari thus:

i. Pay to Sundari or order at

her own risk.

ii. Pay to Sundari without

recourse to me.
 In these cases, Radha will not be

liable to Sundari or subsequent

endorses, if the bank dishonours

the cheque subsequently. But

the endorsees, may sue the

endorser, if any, prior to Radha.

6. Partial Endorsement:

An instrument cannot be

endorsed for a part of its

amount. For example, a cheque

for the value Rs. 100 only. But

if the amount due has already

been partly paid a note to that

effect may be endorsed on the

instrument and it may be

negotiated for the balance.

 4.6 MARKING OF CHEQUES

A person may not like to part with

goods in return for a cheque from a

party not well known to him. In such

a context, the banker on whom the

cheque is drawn may be asked by the

customer to mark the cheque as good

for payment. This implies that the

cheque was drawn in good faith and

on funds sufficient to meet it. When

such marking by usage amounts to

an undertaking by the banker to

honour it, it adds to the

creditworthiness of the drawer.

In this connection attention is invited

to the famous ruling of the Privy

Council in the case of Bank of Baroda
Ltd Vs The Punjab National Bank Ltd.

The conclusive legal observations in

this respect were

1. the certification was not an

acceptance within the meaning of

the Bills of Exchange Act 1882 or

the Negotiable Instruments Act

or Common law.

2. there was no consideration for

any promise between the Punjab

National Bank and the Bank of

Baroda and therefore the

certification did not amount to a

contract.

3. there was no estoppel because

the doctrine under which the

Punjab National Bank claimed

 was limited to a representation

as to an existing fact. Here the

representation related to the

future and

4. the ostensible authority of the

manager of Bank of Baroda did

not extend to cover the certifying

of post-dated cheques nor did he

have the actual authority to do

so.

In view of the above decision,

the practice of making cheque

could not be looked upon with

favour by bankers. Such a

practice except for clearing

purposes, should be put an end

to. Instead of marking the

customer's cheque, bank can

 offer its own draft or its own

cheque provided the customer

has sufficient balance or credit

limits. (Ref. Leading cases in the

Law of banking. Lord Chorley and

P.E. Smart; Banking law and

Practice in India M.L. Tannan)

4.7 KEY TERMS

The person who

makes the

• Endorser : endorsement

(transferor) is

called endorser.

The person in

whose favour

(transferee) the
• Endorsee :
transfer is made

is called the

endorsee.
 Assignment

means the

transfer of legal
• Assignment :
title to a property

without assuming

liability.

The banker on

whom the cheque

is drawn, on the

• Marking : request of the

drawer, mark the

cheque as good

for payment.

4.8 SUMMARY

Endorsement enables the holder,

transfer of a negotiable instrument

without making a fresh instrument.

Assignment means the transfer of

legal title to a properly without

assuming liability. The persons who

can make a valid endorsements are

the payee of an instrument at the

first instance and the holder

subsequently. Explanation as to the

types of endorsement help the holder

to choose an endorsement to suit his/

her needs.

CHECK YOUR PROGRESS

1. Say true or false

a. An order cheque can be

negotiated only by

delivery.

b. Endorsement means

writing of a person's name

on the back of a negotiable

 with a view to negotiating

the same.

c. The person who makes the

endorsement is called the

Endorsee.

d. The payee of an

instrument or the holder of

the instrument is the

rightful person to make

the endorsement.

e. The maker of a note and

the drawer of a bill can

endorse.

2. An order cheque can be

converted into a bearer cheque

by means of:
 a. Sans recourse

endorsement

b. Special Endorsement

c. Blank Endorsement

d. Sans fra is Endorsement

3. Negotiability gives to the

transferee__________title of

the transferor

a. the same title

b. no title

c. no better title

d. better title

4. Endorsement Signifies that

the________________
 5. Which of the following

endorsement is not a valid

one:

a. partial endorsement

b. restrictive endorsement

c. facultative endorsement

d. conditional endorsement

4.9 ANSWERS TO ‘CHECK YOUR

PROGRESS'

1. a. F,

b. T,

c. F,

d. T,

e. F

2. c ;

3. d;
4. d;

5. a.
4.10 QUESTIONS\ EXERCISES

Section-A:

1. What is an “Allonge”?

2. How a negotiable instrument be

transferred from one person to

another?

3. Who can make an endorsement?

Section-B:

1. Define Endorsement and explain

the types of Endorsements.

2. What is the implication of

marking a cheque?
 UNIT 5

CROSSING OK CHEQUES
AND MATERIAL
ALTERATION

Structure

5.0 Introduction

5.1 Unit Objectives

5.2 Crossing –Meaning

5.3 Types of Crossing and their

Significance

5.4 Who can cross a cheque

5.5 Protection when crossing is

obliterated

5.6 Who can open crossing

5.7 Bank drafts

5.8 Material Alteration

 5.9 Signature of a cheque

5.10 Key Terms

5.11 Summary

5.12 Answers to ‘Check Your

Progress'

5.13 Questions\ Exercises

5.0 INTRODUCTION

In the fast developing globalised

economy, the impact of information

technology can't be under estimated.

Incorporating safety measures to the

banking products will be a value

addition which will enable the

customers free from fear. This unit

explains how the negotiable

instruments can be protected to

ensure safe payments, the various

types of crossing and their

significance and the consequences of

material alteration.

5.1 UNIT OBJECTIVES

• To explain the meaning and

significance of various types of

crossing.

• To analyse the protection

available to a crossed cheque.

• To inform the persons who can

cross a cheque and who can

cancel the crossing.

• To introduce the concept of

material alteration and its

consequences.
 5.2 CROSSING –MEANING

Crossing of a cheque is a method,

developed over these years, to

ensure safety in cheque payments by

making it more difficult to

misappropriate the amount of cheque

than it would be otherwise.

When a cheque is crossed, the payee

is not allowed to get the amount

across the counter of the bank. It

implies that a crossed cheque can

be collected only through a bank

account. By this practice, the

recipient of the proceeds can be

easily traced later on because, the

amount would have been paid only

to the holder of a bank account and,
therefore, if anyone steals or

misappropriates a cheque, he can be

easily identified through his account.

Thus, crossing of a cheque has a

direction to the paying banker that

the amount of the cheque should only

be credited to a bank account and

should not be paid across the

counter.
 5.3 TYPES OF CROSSING AND
THEIR SIGNIFICANCE

Crossing is of two kinds,viz., General

crossing and Special crossing. If a

cheque is generally crossed, its

amount is payable to any banker (of

course only through a bank account)

and if a cheque is specially crossed,

its amount is payable only to that

banker specified in the crossing.

How are cheques crossed generally or

specially? What is the significance of

each type of crossing? The Negotiable

Instruments Act, 1881 fully answers

these questions. The relevant

sections of this Act are quoted and

explained below.
General Crossing:

Section 123 of the Negotiable

Instruments Act, defines general

crossing as follows “where a cheque

bears across its face an addition of

the words ‘and company’or any

abbreviation thereof between two

parallel transverse lines or of two

parallel transverse lines simply either

with or without the words ‘not

negotiable’that addition shall be

deemed a crossing and the cheque

shall be deemed to be crossed

generally”.
Specimen Of General

Crossing:

Significance Of General

Crossing:
General crossing is a direction to the
paying banker to make payment
through a banker, i.e., through a
bank account. Hereby a person is
prevented from receiving the

payment directly across the counter.

A thief would be unable to obtain

payment for a cheque by presenting

it at the counter.
The words ‘&Co’ are written on the

cheque when the drawer does not

know the name of the payee's

banker. But this addition does not

form part of the crossing.

Special Crossing:

Section 124 of the Negotiable

Instruments Act defines special

crossing as follows “where a cheque

bears across its face an addition of

the name of a banker with or with

out the words “not negotiable”, that

addition, shall be deemed a crossing

and the cheque shall be deemed to be

crossed specially and to be crossed to

that banker”
Specimen of Speical Crossing

Significance of Special

Crossing:

Two parallel lines are not necessary

for a special crossing. A special

crossing makes the cheque safer. A

person having no claim will find it

very difficult to obtain payment The

recipient should get the payment of

the cheque only through the bank

mentioned in the special crossing. If

he does not have an account in his

name, he should open an account.

It enables the banker named in the

crossing to know the recipient who is

his customer.

Not Negotiable Crossing:

The words “not negotiable” can be

added to a general crossing or special

crossing. When these words are

added to a general crossing on a

cheque, it can be paid only to a bank.

If these words are added to a special

crossing on a cheque, it can be paid

only to the bank mentioned in the

crossing.
When the words “not negotiable” are

added to a crossing on a cheque it

will lose its negotiability. However,

it does not lose its character of

transferability. That is to say, it can

be transferred from one person to

another but a transferee cannot have

a better title than that of the

transferor.

Such a crossing materially diminishes

the negotiable value of the cheque.

The person taking it shall get only the

rights of the transferor, but no better

rights. He cannot become the holder

in due course. If there is nothing

wrong with the title of the prior

parties, he may recover the amount.

If something is wrong anywhere, he

will be affected by it. Thus the

cheque remains transferable, but

“every one who takes such a cheque,

takes it at his own risk”. In Great

Western Railway Company Vs London

and County Banking Company, a

person obtained a cheque by false

pretensions. The cheque was marked

“& Co” and “not a negotiable”. He

obtained payment from the banker.

It was held that the banker's title

was affected by fraud and he was

accountable to the true owner for the

amount of the cheque.

Account Payee Crossing:
The words Account Payee can be

added either to a general crossing or

to a special crossing. If these words

are added to a general crossing, the

cheque can be paid only to a bank;

and if they are added to a special

crossing the cheque can be paid only

to that bank which is mentioned in

the crossing.

When these words are added to a

crossing it means that the amount of

the cheque should go to the credit of

the account of the payee and no one

else. Thus, these words serve as a

direction to the collecting bank (and

not to the paying bank) to collect

the proceeds of the cheque for the

benefit other payee's account only.

A cheque crossed “account payep”

remains transferable. But this

crossing in practice hinders the

negotiability of the cheque. Hence no

bank would like to collect it on behalf

of any other person. But the

transferee can recover the amount

from the transferor and, if there is

nothing wrong in the title of the

previous parties, from them also as

assignees of the actionable claim.

Not Negotiable “ Account

Payee” Crossing:

This combination of “not negotiable”

crossing with the words account

payee” is clearly prudent. The drawer

derives a two fold advantage from

this combination of words and it is

referred to as the safest method of

crossing.

“Not negotiable” crossing takes the

cheque out of the category of

negotiable-instruments. This is to say

that such a cheque can be

transferred from one person to

another. But such a transferability is

not free from defects.

The “account payee” crossing does

not take the cheque out of the

category of negotiable instruments.

In effect, it is a direction to the

collecting banker to collect the

cheque and credit the proceeds to

the account of the payee only. If he

collects it for someone other than

the payee, he will be liable to pay

damages to the person who is

entitled to it.

Double Crossing:

When a cheque is crossed specially,

the banker in whose favour it is

crossed may again cross it specially

to another banker. In such a context,

the latter will act as an agent for

collection to the former.

5.4 WHO CAN CROSS A CHEQUE

According to Section 125 of the

Negotiable Instruments Act:

1. “A cheque may be crossed

generally or specially by the

drawer”.
2. “Where a cheque is uncrossed,

the holder may cross it generally

or specially”.

3. “Where a cheque is crossed

generally or specially the holder

may add the words ‘not

negotiable’.

4. “Where a cheque is crossed

specially the banker to whom it

is crossed may again cross it

specially to another banker as

his agent for collection” ‘Where

an uncrossed cheque or a cheque

crossed generally is sent to the

banker for collection, he may

cross it specially to himself.

In the last case, the collecting banker

cannot avail himself of the statutory

protection when he is used for

conversion.

5.5 PROTECTION WHEN CROSSING

IS OBLITERATED

Under the Section 89 of the

Negotiable Instruments Act, where a

cheque is presented for payment,

which does not at the time of

presentation, appear to be crossed

or to have had a crossing which had

been obliterated, payment by the

banker of such a cheque discharges

him from all liability and he cannot

be questioned for having paid the

crossed cheque. Contrary to the

instruction in the crossing, the

statutory protection under Sec. 89 is

available to the banker only, when

the following conditions are satisfied.

1. The obliteration of crossing

should not be apparent.

2. The banker is liable to pay the

instrument.

3. The payment is made in due

course.

5.6 WHO CAN OPEN (CANCEL)

CROSSING

The drawer alone has the right to

open the crossing in a crossed

cheque by writing the words ‘please

pay cash’and adding his signature
thereto. But this sort of opening a

crossing does not have any legal

authority behind it. It is dependent

upon the custom of bankers. In this
connection, Sheldon's observation

deserves mentioning; if the drawer's

opening and signature or initials were

forged, and when the forger

succeeded in cashing the cheque, the

banker would undoubtedly be unable

to debit his customer, and will also be

liable to the true owner.

Stoppage of Payment of Lost

Cheque:

When a holder of a cheque happens to

lose a cheque and instruct the drawee

banker to stop payment of

the particular cheque the latter, may
not cany out that instruction. In the

absence of instruction from the

account holder or depositor, he has

no means of knowing how far the

statement of a person representing

himself to be the holder of a cheque

is correct. Because, the paying

banker is as if between the deep sea

and the devil. If he honours a cheque

through oversight, when there are no

funds to the credit of the drawer, he

may lose his money. If he dishonours

it through inadvertence, he may be

called upon to pay damages for

wrongful dishonour. In these

circumstances, the holder of a

cheque who loses it should ask its

original drawer to instruct the banker

to stop payment of the particular

cheque.

5.7 BANK DRAFT

Bank drafts are issued by one branch

of a bank upon another branch of the

same bank. These drafts are known

as demand drafts. They are ordinarily

payable to a named payee or bearer

on demand. As such drafts are useful

in remitting money from place to

place. The party who wants to send

money will approach the bank for the

issue of the draft. He is called

purchaser. He has to make an

application in this regard and he will

be charged a nominal commission for

the bank's services. The bank issuing

the draft will be sending a credit

advice to the drawee branch about

this. In this process of transmitting

money from one place to another,

the bank occupies the position of a

transmitting agent Hence the

relationship between the purchaser

and the bank is that of a principal

and agent respectively. Bank issues

such drafts to any party (need not be

a customer) on the application after

collecting the full value plus a small

commission.
 5.8 MATERIAL ALTERATION

Material alteration of a cheque refers

to that alteration which causes the

cheque to speak a different language

in legal effect from that which it

originally spoke or changes the legal

character of the cheque either in

terms or in the relation of parties

thereto. The cheque so altered may

not be regarded as a cheque at all. It

is void under Indian Law.

Examples of Material

Alteration

A common type of material alteration

to a cheque is the fraudulent raising

of the sum payable. This is usually

done by the insertion of an additional

digit e.g. Rs. 40 raised to Rs. 140,

Rs. 99 raised to Rs. 999 and so on.

The following are the important

instances of material alterations:

a. any alteration of the date of the

instrument with the intention of

accelerating or postponing the

time of payment.

b. alteration of the place of

payment

c. alteration of the sum payable

and

d. alteration affecting the number

or relation of parties or their

legal characters.
Material alteration should be

evidenced by the full signature of the

drawer. If the cheque has been

drawn by two or more persons

jointly, it requires the full signatures

of all drawers.

Slings by and others Vs District Bank

Ltd is the remarkable case law which

illustrates the point, material

alteration:

The plaintiffs, who were executors of

an estate had, as solicitors, a firm

Cumberbirch and Potts, who assisted

them in work connected with the

estate. The partner Cumberbirch was

the acting partner. The plaintiffs had

an account with the defendant bank

(District Bank). Cumberbirch, who

regularly drew cheques for the

plaintiff's signatures, drew one

cheque for 5000 representing an

investment of trust funds in the form

“Pay John Trust & Co or order”, with a

space between the word “Co” and the

word, “or”. The executors signed the

cheque and Cumberbirch then added

in the blank space the words “per

Cumberbirch and Potts”. The whole of

the cheque with the exception of the

signatures being in Cumberbirch's

writing there was not apparent

evidence of the alteration or addition.

He then endorsed the cheque

“Cumberbrich and Potts” and paid it

to the credit of an account with the

Westminster Bank in the name of the

Palatine Industrial Finance Go Ltd., in

which he was interested. The cheque,

was fully collected and paid.

The plaintiffs brought action against

the District Bank, the paying bank.

The Judge Weight held the case in

favour of the plaintiffs (Slingsby) and

others. Then the Bank preferred an

appeal and the Court of Appeal

upheld Wright's decision, holding,

inter alia, that:

i. the cheque having been

materially altered, it was avoided

as between the plaintiffs and the

defendants and the latter

therefore lost the statutory

protection.
 ii. if the description of the payee

as altered was a permissible one,

the endorsement without

mention of John Trust & Co, was

invalid and defendants, District

Bank were negligent in

honouring the cheque.

In the course of his judgement,

Scrutton said:

“ ...and the cheque when presented

to the District Bank was invalid,

avoided, a worthless piece of paper,

which the District Bank was under

no duty to pay. This invalidly comes

before any question of endorsement.

Secondly, I am of opinion, as already

stated, that if valid, the cheque was

not properly endorsed. The

endorsement should have been “John

Trust & Co, per pro Cumberbirch and

Potts”.

In Suffel Vs Bank of England the

Judge said: “Any alteration of any

instrument seems to me to be

material which would alter the

business effect of the instrument...”

5.9 SIGNATURE OF A CHEQUE

A cheque should be properly signed

by the drawer or by any persons or

person duly authorised by him.

Otherwise, the instrument will

become invalid. The signature or

signatures on the cheque should tally

with the specimen signatures of the

account holder or the authorised

persons as the case may be. When

an agent is appointed by power of

attorney, the power must be

registered with the banker before he

draws cheque on the latter [banker].

The cheques carrying the facsimile

signature should not be honoured.

When a person is too ill to put his

signature he may have his thumb

mark witnessed by his medical

attendant and another person. In the

case of illiterate person, cheques can

be signed or endorsed by means of

a thumb impression witnessed

preferably in the banker's presence

by a person known to him (banker).

5.10 KEY TERMS

Cancellation of

crossing is called

opening of

crossing. The

drawer alone has

Opening of
the right to open
• Crossing :
the crossing by

writing the words

‘please pay

cash’and adding

his signature

thereto.

Bank drafts are

issued by one

branch of a bank
• Bank Draft :
upon another

branch of the same

bank.
 Material alteration

of a cheque refers

to that alteration

which causes the

cheque to speak a

different language

in legal effect from

Material
• : that which it
Alteration
originally spoke or

changes the legal

character of the

cheque either in

terms or in the

relation of parties

thereto.

A cheque, to be

valid, should be

properly signed by
• Signature :
the drawer or any

person authorized

by him
 5.11 SUMMARY

Crossing protects the negotiable

instruments and ensure safety of

payments by making

misappropriation more difficult

Different types of crossing gives

different meaning to the banker. So

to get protection under Negotiable

Instruments Act bankers should be

very careful dealing with the crossed

cheque.

CHECK YOUR PROGRESS

1. State true or false

a. A general crossing can be

converted into special

crossing.
 b. Two parallel transverse

lines are not essential for

a special crossing.

c. Double crossings except

for the purpose of

collection, is not valid

d. Crossing a cheque without

the knowledge of the

drawee is a case of

material alteration.

e. Alteration of the date does

not amount to a material

alteration.

2. __________crossing is

direction to the paying banker:

a. general crossing

b. special crossing
 c. account payee crossing

d. double crossing

3. The following one is absolutely

essential for a special

crossing:

a. two parallel transverse

lines

b. the words ‘and company'

c. the words ‘not negotiable'

d. name of a banker

4. Not negotiable crossing is a

warning to the:

a. paying banker

b. collecting banker

c. holder

d. (a) and (b) together

 5. The paying banker can get

protection for a materially

altered cheque provided:

a. the alteration is not

apparent

b. he makes payment in due

course

c. the alteration is

immaterial

d. (a) and (b) together.

5.12 ANSWERS TO ‘CHECK YOUR

PROGRESS'

a. T;

b. T;

c. T;

d. F;
e. F

f. c;

g. d;

h. c;

i. d;

5.13 QUESTIONS/EXERCISES
Section - A:

1. What do you mean by Double

Crossing?

2. Who can a cross a cheque?

3. Who can open a crossing?

4. What you mean by bank draft?

Section - B:

1. What is crossing? Explain its

different kinds with examples

and bring out their significance.

2. Differentiate material alteration

from immaterial alteration.
 UNIT 6

PAYING BANKER

Structure

6.0 Introduction

6.1 Unit Objectives

6.2 Paying Banker –Meaning

6.3 Duty of the Paying Banker

6.4 Paying Banker's Position With

Regard to InstrumentsCarrying

Endorsements
6.5 Statutory Protection to the

Paying Banker

6.6 Payment-in-Due-Course

6.7 When can the Banker Refuse

Payment of a Cheque?
 6.8 Key Terms

6.9 Summary

6.10 Answers to ‘Check Your

Progress'

6.11 Questions/Exercises

6.0 INTRODUCTION

Making payment of cheques, drafts

and other negotiable instruments are

the prime duties of bankers. This

chapter explains the meaning of

paying banker, the duties of paying

banker, precautions to be taken by

the paying banker while making

payment of cheques under various

circumstances and the protection

available to the paving banker.

6.1 UNIT OBJECTIVES
• To inform the meaning of the

term paying banker.

• To narrate the duties of the

paying banker.

• To explain the statutory

protection available to the

paying banker.

• To explain the term payment-in-

due-course.

• To quote the circumstances in

which banker can refuse

payment of a cheque.
 6.2 PAYING BANKER –MEANING

Paying banker is the banker to whom

the order to pay, where the order

takes the form of a cheque, is

addressed. It means that the paying

banker is the banker on whom the

cheque is drawn.

6.3 DUTY OF THE PAYING BANKER

The duty to honour customer's

cheque is statutorily imposed on the

paying banker. Negotiable

Instruments Act, 1881 defines duty

as follows: “The drawee of a cheque,

having sufficient funds of the drawer

in his hands, properly applicable to

the payment of such cheque, must

pay the cheque when duly required

to do so and, in default of such

payment, must compensate the

drawer for any loss or damage

caused by such default”.

Thus, the duty to honour cheque is

qualified. The paying banker should

honour the cheque drawn upon him

only when certain conditions are

fulfilled.

They are

1. the balance standing to the

credit of his customer must be

sufficient to pay the cheque

a. The cheque should be signed

by the drawer himself or by

his authority.
 b. It should not be stale or

post-dated.

c. The amount must be

expressed both in words and

in figures.

d. It must be properly

endorsed, if an endorsement

is required.

e. It must bear the drawer's

confirmation of an material

alteration.

2. There should not be any

prohibitory order on payments

out of the account. The following

are sufficient causes to justify a

banker in not paying a cheque:

a. notice from the customer to

stop payment,
b. notice of a granishee

order or other order

restraining his customer

from operating the account,

c. knowledge of any defect

in the title of the

person presenting the

cheque,

d. notice of the presentation

of an insolvency petition by

or against his customer

and, possibly in the case of

third party cheques, notice

of an available act of

insolvency of his customer,

e. notice of a customer's

death or mental incapacity,

f. notice, in the case of

company customer, of the

commencement of winding

up,

g. notice, in the case of

company customer, of

appointment of a receiver

and

h.
knowledge that the

customer contemplates a

breach of trust in cases

where it is known that

the funds credited to

account are trust funds.

Risks:

A paying banker's position in respect

of cheques drawn upon him is not
enviable, if he honours a cheque
through oversight when there are no
funds to the credit of the drawer,

he may lose his money; or he

dishonours the cheque inadvertently,

he may be called upon to pay

damages for wrongful dishonour.

On presentation of the cheque, a

bank must either honour the cheque

or refuse its payment at once.
Ordinarily, it may not even have a
chance to consult its legal adviser
or its customer or anyone else. In
such a context, the banker has to be
cautious so that the risk in honouring
cheques is considerably lessened.
Precautions:

The first thing that a banker should

do when a cheque is presented to

him for payment at the counter, is

to see whether it is open or crossed;

if crossed, whether it is crossed

generally or specially.

Paying banker and open

cheques:

If a cheque is open (uncrossed) and

is made payable to bearer, the

banker can pay the amount across

the counter. But cash payment

should not be made to stranger

whose appearance and demeanour

raise suspicion.
If an uncrossed order cheque is

presented for payment the person

who claims to be the payee or

endorsee should be asked to endorse

the cheque prior to payment.

Paying banker and crossed

cheques:

The duties of paying banker with

regard to crossed cheques are laid

down in Sections 126,127 and 129 of

the Negotiable Instruments Act.

If a cheque is crossed generally, it

should be presented and paid only to

a banker.

If a cheque is crossed specially, if

should be presented by paid only to,

the banker named in the crossing or

to his agent for collection being a

banker.

If a cheque is crossed specially to

more than one banker except when

crossed to an agent for collection,

the banker on whom it is drawn shall

refuse payment thereof

Any banker paying a cheque

crossed generally otherwise than to

a banker, or a cheque crossed

specially otherwise than to the

banker to whom the same is

crossed, or his agent for

collection being banker, shall be

liable to the true owner of the

cheque for any loss he may

sustain owing to the cheque having

been so paid.

Secondly the cheque should be drawn

on the particular branch at which it is

presented.

Thirdly, the banker should satisfy

himself before honouring the cheque

that it is not mutilated, cancelled or

torn. If a cheque is tom accidentally,

the drawer must confirm it by writing

words such as ‘accidently tom by

me’and affixing his signature thereto.

But if the instrument is tom by the

customer in such a way as to give

sufficient evidence of his intention to

cancel it the banker should not

honour it. When its payee or holder

happens to treat it by mistake the

banker must either get confirmation

from the drawer or ask the payee's

banker to guarantee the payment. A

cheque tom into two or more pieces,

is generally returned with the remark

‘mutilated cheque’. But a cheque tom

at the corners is generally paid, if it

does not appear that the portion off

was carrying the crossing.

Fourthly, the instrument drawn

should be in proper form. If should

conform to all the requisites of

cheque. If the cheque has been

drawn on a slip paper it may give

rise to ambiguities. In order to avoid

them, banker supply printed cheque

leaves and withdrawal slips.

Fifthly, the banker should see that it

is not a post-dated cheque or a stale

cheque.

Post-Dated Cheque:

a. If the banker honours it before it

is due for payment, the banker

may lose his money, because,

there is every chance of the

customer stopping payment

before the due date of payment.

b. If a banker pays post-dated

cheque of his customer and

dishonours his subsequent

cheques, which would otherwise

have been paid he will be liable

to pay damages to his customer

for wrongful dishonour.

c. When the banker pays a post-
dated cheque before it is due and
holds it until it matures, the
customer may die in the

meantime or become insolvent or

insane. In these circumstances,
the banker would have no right
to debit the amount to his
customer's account.

d. A banker paying such a cheque

cannot claim the statutory
protection because such a

payment cannot be regarded as

having been made in due course.
But the banker should not have
an objection to honour a post-

dated cheque which is presented

to the banker on or after the date

of issue.
Stale Cheque:

A ‘stale cheque’is one which is

overdue and appear on the face of

it to have been in circulation for an

unreasonable length of time.

In India, a cheque is regarded to be

stale when it has been outstanding

for more than six months. But a stale

cheque may also be honoured by the

bank after getting it confirmed by the

drawer.

Risk in Payment after

Business Hours:

A banker is required to honour

cheques drawn on him provided they

are presented on a working day and

during “banking hours”. A banker
runs risks in paying cheques after

business hours.

If the bank pays for the cheque out

of business hours it will fail to obtain

the ‘statutory protection’extended by

Section 85 of Negotiable Instruments

Act, 1881. Since, the payment is not

a payment-in-due-course. This

payment after banking hours, will not

apply to the cheques already

presented before the closing time

which may be paid in accordance with

the usual banking practice.

Difference in Words and

Figures:

Section 18 of the Negotiable

Instruments Act, 1881 provides that

where the sum payable is expressed

in figures, and also in words and

there is a discrepancy between the

two, the sum denoted by the words

is the amount payable. The usual

practice of bankers is to return the

cheque with the reason marked on a

slip attached to the cheque, “Amount

in words and Figures Differ”.

However, as per the guidelines issued

by the Indian Banks Association (I

BA), the cheque may be honoured on

the basis of the amount expressed in

words.
Fraudulent Raising of the

Amount:

When the amount of a cheque has

been fraudulently raised and the

banker had paid the amount failing

to notice the alteration a question

will arise whether or not he can debit

customer's account with the amount

paid. If the alteration is of the nature

that it can be detected by the

exercise of reasonable care and

deligence on the part of the banker

and if he has failed to exercise this,

the loss will devolve on him. But if

the customer intentionally or

negligently facilitates the fraudulent

raising of the amount (by leaving

blank space before or after the words

and figures expressing the amount)

which leads to the banker being

defrauded, the customer's account

can be debited with the amount paid.

In London Joint Stock Bank Vs

Macmillan and Arthur it was held that

when he draws cheques in a manner

which facilitates fraud, he is guilty

of breach of duty as between himself

and the banker.

But in Slings by and others Vs The

District Bank Ltd the learned Judge

did not consider the leaving of space

after the payee's name as unusual

and held there was no breach of duty

by the drawer to take him.

Cheque with Material

Alteration:

The cheques having any material

alteration will be usually paid after

getting confirmation from the

drawer. In India, Section 89 read

with section 10 of the Negotiable

Instruments Act, 1881 protects the

paying banker completely in this

regard. This protection to the paying

banker is available only on two

conditions:

a. that the alteration should not be

apparent and

b. that the payment should be a

payment-in-due-course.
 EXAMPLES OF MATERIAL
ALTERATIONS ARE AS FOLLOWS

1. Alteration of the date of the

cheque

2. Alteration of the place of

payment

3. Alteration of the amount of the

cheque

4. Substitution of the word

‘bearer’in the place of ‘order'

5. Alteration of crossing on a

cheque.

Appropriation of Payment:

Where there are several debts

outstanding between a creditor and

a debtor, and the debtor makes a

payment which, is not enough to

discharge all the debts, it is

important to ascertain which of the

debts is to be discharged. In such

cases the rules stated below will

apply as given below:

1. The debtor has first choice and

can appropriate any payment to

settle any debt, provided he

makes his appropriation at the

time of payment.

2. If the debtor does not, the

creditor appropriated and also

when there is an unbroken

current account which continues

or goes into credit, the first item

on the credit side is reduced by
the first item on the debit side
and,
3. a. When neither the debtor nor

the creditor appropriates

and also when there is an

unbroken current account

which continues or goes into

credit, the first item on the

credit side is reduced by the

first item on the debit side

and,

b. where an account continues

or goes into debit, the first

item on the debit side is

reduced by the first item on

the credit side.

The third rule was

enunciated in Devaynes Vs
 Noble Clayton case and it

has come to be known as the

Rule in Clayton's case.

Facts:

A customer Mr. Clayton had a current

account with a banking partnership.

Even after the death of a partner

the surviving partners continued to

carry on the banking business under

the former partnership name despite

having received written notice from

the son and other trustees of the

deceased partner against such a

practice. On the date of partner's

death, Mr. Clayton had a credit

balance of 1,713 in his account with

the firm. He continued to operate the
account and at a later date the bank

failed. Between the date of the

partner's death and the date of the

failure of the bank, Mr. Clayton was

withdrawing the amount. He had also

been paying in sums sufficient to put

the account more in credit that it

has been when the partner died. Thus

before the failure of the bank more

than the sum of 1713 was withdrawn.

It had at one stage stood reduced to

453 within a few days of the death of

the partner. Mr. Clayton claimed that

the payments should be appropriated

against the withdrawals so as to

leave in tact the original balance (at

the time of partner's death) as a

claim against the partner's estate.

However, it was held that the credit

balance being a liability of the firm

(bank) had been extinguished by

withdrawals.

In a current account, the first item

on the debit side of the account, is

reduced, or discharged by the first

item on the credit side. Hence, Mr.

Clayton was left with no claim against

the estate of the deceased partner.

6.4 PAYING BANKER'S POSITION

WITH REGARD TO INSTRUMENTS
CARRYING ENDORSEMENTS

Bearer Cheque:

When a bearer cheque is presented

for payment across the counter, the

person who presents the cheque is

required to sign on the back of the

cheque. The banker insists on his

signature which constitutes an

acknowledgment of the amount.

Though the bearer of the cheque is

not legally bound to sign on the

cheque, he signs it because he will

otherwise be required to give a

stamped receipt.

Order Cheque

If an order cheque is presented to

the banker for payment by the payee

himself, he need not endorse the

cheque. However he signs on the

back of the cheque acknowledgment

of the receipt of money. If he wants

to negotiate the instrument in favour

of somebody else, he has to endorse

the instrument

Cheque Endorsed in Blank:

A negotiable instrument endorsed is

blank is payable to the bearer there

of, though ordinarily payable to

order. An order cheque becomes

bearer cheque by an endorsement in

blank. In such a case, it is not

necessary to insist on an

endorsement of the instrument in

order to obtain a transfer of the

property therein.

Conditional Endorsements:

One of the requirement, of a cheque

is an unconditional order. When a

cheque bears a conditional

endorsement, the banker cannot

honour it until the condition is

fulfilled.

Guaranteed Endorsement:

Sometimes, a cheque paid into the

credit of a respectable customer is

illegibly or irregularly endorsed. In

such case, bankers usually do not

object to the defective endorsement,

provided, it is guaranteed by the

customer himself.

Instrument Payable to ‘Wages

or Order’ ‘Cash or Order’:

Occasionally customers draw cheques

such as ‘cash or order’or ‘wages or

order’. Branson J. held that such an

instrument is not a cheque at all but
a mere mandate (order) to pay the

bearer thereof. Moreover, the words,

‘or order’can be ignored because

‘cash’is not a specified person. It

cannot endorse itself. Hence, it can

be treated that the document offers a

good direction to pay to the bearer.

Anyhow, it is, desirable in cases of

doubt to return it with the remarks

“irregularly drawn”

Regularity of Endorsements:

The banker must verify whether the

endorsements on order cheques are

regular or not. If the endorsement

is irregular and the banker pays the
cheque, it will not amount to

payment in due course. The banker

will lose his statutory protection.

Instruments Payable to

Fictitious Persons:

Sometimes cheques are made in the

names of fictitious persons such as

‘Lord Krishna or order’, ‘Pay Income

Tax or order’. These cheques can be

treated as bearer cheques. But in

Cole Vs Milsomes it was held that

such documents cannot be treated as

cheques as they do not satisfy the

requisites of a cheque.
Endorsement on Cheques

Payable to Public Bodies:

Whenever cheques are drawn in

favour of public bodies, the bankers

will insist on the endorsement of the

public functionaries concerned. Thus,

cheques payable to “The Madurai

Kamaraj University” should be

endorsed by the “Registrar of

Madurai Kamaraj University”.

Complimentary or Courtesy
Titles:

Complimentary prefixes, suffixes and

other courtesy titles such as Mr.,

Esq., Sir etc., do not form part of

endorsements. If the name of the

payee or endorsee is spelt incorrectly

then endorsement must be with that

of the miss spelt name-e.g. A cheque

payable to “Maruthi”. But the correct

spelling of the person's name is

“Maruthy”, When the payee

(Maruthy) endorses the cheques he

should use the miss spelt spelling

‘Maruthi”. But if he wishes, he may

add the correct spelling of his name

within brackets.

6.5 STATUTORY PROTECTION TO

THE PAYING BANKER

The banker has ‘to honour his

customer's cheque on demand and

hence he cannot elaborate enquiries

about the person who present the
cheque for payment. Moreover, he

has to make the payment to the right

person according to the instructions

of his customer. If he happens to

make the payment to a wrong person

he may have to bear the loss. Thus,

the payment of cheque involves risks

to the paying banker. With a view

to minimising such losses likely to

be suffered by the paying banker,

the Negotiable Instrument Act, 1881

provides him statutory protection.

Section 85 of the Act offers Statutory

protection to the paying banker in

case of order cheques. The Act

provides protection to the paying

banker, if he makes payment of an

order cheque with forged

endorsement on behalf of the payees.

It is clear that this sections does not

protect the paying banker when he

makes payment on subsequent

forged endorsements.

Section 16 of the Act, extends the

protection to the paying banker in

respect of cases of forgery of an

subsequent endorsements. The

paying banker cannot be ordinarily

be expected to know the signatures

of each and every endorser. But two

conditions must be fulfilled to enjoy

this protection. They are:

1. The endorsements must be

regular

2. The payment made should be

labour
The statutory protection is available

to the banker in case of forged

signature of endorser and not of the

drawer. When the statutory

protection is available, both the

drawer and the drawee banker are

discharged from liability.

6.6 PAYMENT-IN-DUE-COURSE
The paying banker can claim

statutory protection afforded to him

only when he pays a cheque drawn

on him “in-due-course” i.e., the

payment must have been made in

due course. Section 10 of the

Negotiable Instruments Act, 1881

defines the term Payment-in-due-

course.
The main requisites of payment-in-

due-course are:

a. that the payment should

be made in accordance with

the intention of the parties

as it appears on the face

of the instrument.

b. that such payment should

be made in good faith and

without negligence.

c.
the person to whom

such payment is made should

be in possession of the

instrument under circumstances

which do
 not offer a reasonable ground for

believing that such person is not

entitled to receive the amount

there of.

Payment of post - dated cheques

cannot be regarded as payment in-

due-course. The paying banker will

be deprived of the statutory

protection, if he fails to see whether

or not all the endorsements are

regular. In the case of per pro

endorsement, the paying banker

must satisfy himself that the person

signing the per pro has the authority

to do so. In Madras Provincial Co-

operative Bank Ltd Vs South Indian

Match Factory Ltd, it was held that

the bank failed to observe this. It was

construed to be an act of negligence

and liable to compensate the true

owner for the loss.

Facts of the Case:

The official liquidator, Mr.

Ramachandra Rao of the South

Indian Match Factory which was in

liquidation induced the Madras

Provincial Co-operative Bank Ltd., to

cash a crossed cheque across the

counter. The cheque was drawn in

favour of the official liquidator.

Instead of depositing the proceeds

of the cheque in an account to be

opened under the name of official

liquidator the amount was paid into

his private account. As the bank

failed to observe the provisions of

law in this respect it was held to be

negligent and liable to compensate

the true owner for the loss.

1. Protection against Bearer

Cheques:

The paying banker need not even

verify the regularity of the

endorsement on bearer cheques,

even in the case of endorsement

in full. But the payment must

have been payment in due

course, even such a cheque is

stolen and the banker makes

payment for it without the

knowledge of such theft, he will

be discharged from his obligation

and protected by virtue of

 Section [85(2)]. Thus a bearer

cheque is always a bearer

cheque.

2. Protection against Crossed

Cheques:

Where a cheque is crossed

generally the banker on whom

it is drawn shall not pay it

otherwise than to a banker.

Where a cheque is crossed

specially the banker on whom it

is drawn shall not pay it

otherwise than to the banker to

whom it is crossed or his agent

for collection.

The banker who fails to make

payment in accordance with the

direction as found in the crossing

of the cheque will not be entitled

to debit his customer's account

with the amount of such cheque.

The paying banker is discharged

of his obligation on the crossed

cheque irrespective of the fact

that the payments was received

by the collecting banker on

behalf of a person other than the

true owner e.g., a cheque in the

name of ‘P’is stolen by ‘O’and he

endorse it in his own favour by

forging the signature of ‘P’and

deposits in his bank for

collection. If the paying banker

makes the payment accordingly,

 he shall not be liable to pay the
same to ‘P’the true owner of the

cheque.

3. Protection with Regard to Drafts:

Drafts are not cheques. They are

analogous to cheques and are

handled likewise. In the ordinary

course of business, Section 85

provides that “where draft, that

is an order to pay money drawn

by one office of the same bank

for a sum payable to order on

demand, purports to be endorsed

by or on behalf of the payee, the

bank is discharged by payment in

due course”.
Customer's Signature:

The paying banker must satisfy

himself that the cheque is really an

order of his customer because he is

bound to pay the customer's money

only with his authority. He should

make himself sure about two points

namely-(1) the cheque bears the

signature f his customer or of the

customer's agent duly authorised for

the purpose and (2) the signature on

the cheque is genuine.

In the case of joint accounts and in

the absence of clear instructions as

to the operation of the account from

each of the parties concerned, the

banker should safeguard himself by

insisting upon the cheque being
signed by all the parties to the

account.

The Customer and Forged

Signature:

A banker must know the signature

of his customer and his authorised

agent if any. He should never honour

a cheque on which the drawer's

signature differs from the specimen

signatures supplied to him. Even

when he cannot debit his account

with the amount of the cheque. Here

it is not a question of the negligence,

a cheque, with the conduct of the

customer causes the banker to debit

the account of the former
(customer) with the amount of

the cheque so paid.

We can cite the case between

Keptigalla Rubber Estates Ltd, Vs

National Bank of India Ltd. in this

connection. In this case, the

signatures of two directors of the

company were forged by the

company's secretary on a number of

cheques. The banker honoured these

cheques from company's account.

This forgery went on for two months.

The directors had not examined the

company's pass book during the

period. In this case, it was held that

the company was entitled to recover

the amount of these forged cheques

from the bank.

Customer's Subsequent

Negligence:

It is the duty of the banker to report

to his customer if a cheque carrying

a forged signature is presented.

Likewise, the customer has the

corresponding duty to inform his

banker, if he comes to know that

cheques are being presented to his

banker with his signature forged. We

can cite the case of Greenwood Vs.

Martins Bank in this connection. The

customer was deprived of making any

claim against the bank because of

his negligence which facilitated the

perpetuation of forgery.
Facts of the Case:
Mr. Greenwood had an account with a
branch of defendant bank. Somehow,
his wife acquired his cheque book and

forged forty-four cheques. On

Greenwood's discovering the fact, his
wife persuaded him not to inform the
bank of this and promised that she

will not ask for money thereafter.

Taking upon her word, he did not

inform the bank. Later, when she

asked him for some money, he had

to report the matter (her forgery) to

the banker. This led her to commit

suicide. Then he field a suit against
the banker, relying on a
contemporary decision, namely, that
a banker was prima facie liable to a

customer, if he had paid away the

money on a customer's forged

cheque. Quite contrary to this, it was

held that the customer also owed a

corresponding duty to the bank to

take reasonable care in the drawing

of cheques.

If this negligence facilitates forgery,

he might be deprived of remedy

against the bank. Hence, in this case

of the customer was stopped from

making any claim. This estoppel was

based on his silence and inaction

where there was a duty to speak.

6.7 WHEN CAN THE BANKER

REFUSE PAYMENT OF A CHEQUE?

The statutory duty of a banker to

honour his customers cheque is

terminated under certain

circumstances. These circumstances

are:

1. The Countermanding of Payment

by the Customer:

If the customer instructs the

banker not to make payment of

particular cheque the banker is

bound to comply with such

instruction. The instruction

regarding stopping of payment of

cheque must be in writing signed

by the drawer. He should give

the number, the date, the name

of the payee and the amount of

the cheque so as to enable the

banker to identify exaptly the

particular cheque and stop its

payment. If the drawer

communicates such notice to

countermand payment through

telegram or telephony the

banker should postpone payment

till he gets confirmation from the

customer in writing.

The countermand order shall be

binding on the banker provided;

if it is duly served on him before

he actually makes payment of

the cheque. However, for the

cancellation of countermand

order all those persons entitles

to sign cheques, must sign such

a request to the banker. This

means that a countermand order

can be revoked before its

 execution by the drawer

concerned.

2. Death of the Customer:

Payment of cheques should be

stopped when the banker comes

to know of the death of the

customer. Because, upon the

death of a customer, the title to

his property including the bank

balance passes on to his

representatives. But when the

banker is actually unaware of the

death of his customer, he may

honour a cheque drawn by that

customer.

3. Insolvency of the Customer:

When a person is adjudicated to

be an insolvent by the court of

 law, his entire property including

the bank balance will vest in the

official receiver. Therefore, the

banker should refuse payment of

the cheques presented after the

issue of such an order. Under

the Provincial Insolvency Act,

insolvency commences from the

date when the petitions is filed in

the court of law.

4. Insanity of the Customer:

The banker should not honour his

customer's cheques on receipt of

the notice that the latter

(customer) has become insane or

of unsound mind. But payment of

a cheque drawn at a time when

the customer was capable of

 acting rationally, is valid. It is

a must for the banker to have

confirmed knowledge from

reliable sources of the insanity

of the customer before he refuse

payment on this basis.

5. Garnishee Order:

A banker is bound to comply with

the garnishee order issued by the

court restricting him from paying

money from a customer's

account. He must refuse

payment of a cheque presented

after the receipt of a Garnishee

Order or any other order of the

court of law attaching the

customer's money.
6. Notice of Assignment:

If the banker has received a

notice from the customer to

assign the balance in his

account, he must refuse payment

of the subsequent cheques drawn

by the customer.

7. Defective Title of the Party:

If the person presenting the

cheque has a defective title to

the cheque and banker is award

of this fact, he can refuse

payment of such cheque.

8. Breach of Trust:

If the banker comes to know that

the customer, who is operating

a trust account, contemplates to

use the funds of the trust

 account in breach of trust, the
banker must stop the payment of
cheques.

Answer in the Case of

Dishonoured Cheques:

When a banker decides not to honour

a cheque, he should return it with

a slip giving the reason for the

dishonour. But this is not a statutory

obligation upon a banker. However,

the banker should take care in giving

such answer that he does not damage

his customer's credit or mislead the

party presenting the cheque by an

unwarranted answer.The banker's

remark on the slip should be brief

and short. The following

abbreviations are generally used.

a. R.D.: ‘Refer to drawer’. This

generally conveys to the holder

that he should refer to the

drawer for payments. This means

that the banker does not have

sufficient funds in the customer's

account. But many judicial

decisions hold the view that this

term has got defamatory effect

upon the customer. Therefore

this term should be used with

caution.

b. N.S.: ‘Not sufficient'

N.E.:‘No effects'

N.F.:‘No funds'

These terms serve the same

purpose as the term ‘R.D’. But

the abbreviations ‘R.D’is less

 definite. Hence, it is generally

used.

c. E.E. : “Endorsement irregular”.

When an endorsement on a

cheque is not in order, the

cheque is returned with this

answer.

d. E.N.C. : “Effects not cleared”.

Immediately after the drawers

has paid in cheques or bills for

collection, he cannot withdraw

the money, the cheques or bills

may be in the course of

collection. In such a context,

cheques drawn against them can

be returned with this remark.

e. D.D. : ‘Drawer - deceased’. When

the banker comes to know of the

 death of the customer, he should

no longer pay his cheques drawn

prior to his death.

f. W&F.D - ‘ Words and Figures

differ”. When the banker wants

to return the cheques on the

ground that the amount stated in

words differs from that given in

figures, this term can be used.

Honouring of Bills:

It is the statutory obligation of the

banker to honour his customer's

cheques when there is sufficient

credit balance” in his account. But

in the case of bills accepted by the

customer and made payable by his

banker, no such obligation arises.
Hence, it is desirable that

there should be an agreement,

express or implied, authorising ing

the banker to do this work for

a particular customer. We can infer

now, that it is not a statutory

obligation to honour bills accepted

by the customer and made payable

by his banker.

Honouring of Domiciled Bills :

Domiciled bills refer to those bills

accepted by the customer and made

payable by his banker.

Note: Drawer of the Bill K.R.Moorthy

Acceptor of Bill: R. Gurusamy

Acceptor's Bank: Modern Bank (the

paying bank)

Many of the considerations in

connection with the payment of

cheques apply equally to the

payment of domiciled bills.

When honouring a cheque, the

banker has to make sure that the

drawer's signature is genuine. When

making payment for a bill, the banker

has to make sure that the acceptor's

signature is not forged. The banker

will be held liable to the customer,

if he honours a cheque bearing the

forged signature of the drawer.

Similarly, he will be held liable when

he make payment for a bill which

carries the acceptor's forged

signature. It is no part of the

banker's duty to see that the

drawer's signature on such bills is

genuine or not. It may not be feasible

also because he might not have had

any dealings with him. _

6.8 KEY TERMS
Payment made

in good faith

and without

negligence to

Payment-in- the apparent

• :
due-course tenor of the

instrument is

called

payment- in-

good faith.

refer to those

bills accepted

Domiciled by the
• :
bills customer and

made payable

by his banker.

A banker has

the write to

Appropriation appropriate the

• :
of payments money

deposited by a

customer to
 anyone of the

lean accounts

due by him.

The question of

appropriation

arises only

when a

customer has

more than one

account, one of

which is

showing a

credit balance

and others

showing debit

balance.

6.9 SUMMARY

The paying banker gets protection

under Sec. 85 of Negotiable

Instruments Act, when the payment

is ‘Payment-in-due-course’. It also
gives the circumstances under which

the banker can refuse payment.

CHECK YOUR PROGRESS

1. State true or false

a. A banker is required to
honour cheques drawn on

him provided they are

presented on a working

day after business hours.

b. Banker while making

payment of a bearer

cheque insist the person

who presents the cheque

to sign on the back of the

cheque.

c. Section 85 of the

Negotiable Instrument Act

 offers Statutory protection

to the paying banker in

case of order cheques.

d. The statutory protection is

available to the banker in

case of forged signature of

endorser and not of the

drawer.

e. The paying banker is not

discharged of his

obligation on the crossed

cheque if the payment was

received by the collection

banker on behalf of a

person other than the true

owner
2. Payment of___cheques cannot

be regarded as payment in-

due-course,

a. post-dated

b. anti-dated

c. Stale

d. all the three

3. A banker must know the

signature of his__________

a. customer

b. customer's authorized

agent

c. endorser

d. (a) and (b)

4. Banker can refuse payment of

a cheque on:
 a. the death of the customer

b. receipt of notice of

assignment

c. the insanity of the

customer

d. all the three

5. When Garnishee order is

issued by the court attaching

the account of a customer, the

bank is called:

a. judgement debtor

b. judgement creditor

c. Garnishee

d. Garnishor
6.10 ANSWERS TO ‘CHECK YOUR
PROGRESS’
1.

a. F;

b. T;

c. T;

d. T;

e. F

2. d;

3. d;

4. d;

5. c.

6.11 QUESTIONS/EXERCISES
Section - A:

1. Who is the paying banker?

2. What do you mean by stale

cheque?

3. Define payment-in-due-course.
4. Write short notes on (a) RD (b)

DD (c) ENC and (d) NF

Section - B:

1. Narrate the duties and liabilities

of the paying banker.

2. Explain the rules as to the

‘Appropriation of Payment’.

3. Critically examine the Statutory

Protection of the Paying Banker

under Sec. 85 of the Negotiable

Instruments Act.

4. Discuss position of the paying

banker with regard to the

following:

i. a cheque containing the forgery

of endorsement of the payee.

ii. a cheque containing the forgery

of the drawer's signature.

 UNIT 7

COLLECTING BANKER

Structure

7.0 Introduction

7.1 Unit Objectives

7.2 Collecting Banker-Meaning

7.3 Collecting Banker as Holder

for Value

7.4 Collecting Banker as an

Agent

7.5 Statutory Protection

7.6 Basis of Negligence

7.7 Collecting Banker's Duties to

his Customers

7.8 Collection of Bills

 7.9 Collecting Banker and

Presentation for Acceptance

7.10 Noting and Protesting

7.11 Notice of Dishonour

7.12 Key Terms

7.13 Summary

7.14 Answers to ‘Check Your

Progress'

7.15 Questions \ Exercises

7.0 INTRODUCTION

Bankers collect the cheques of their

customers as an agent for collection

and as holder for value. This unit

attempts to explain the

circumstances in which the banker

acts as agent and circumstances in

which the banker acts as holder for

value and the duties and

responsibilities of the banker in such

cases and the statutory protection

available to the collecting banker also

explained.

7.1 UNIT OBJECTIVES

• To explain -banker as agent for

collection.

• To explain- bankers as holder for

value.

• To analyse the duties and

responsibilities of collecting

banker.

• To explain the terms noting and

protesting against dishonor.

 7.2 COLLECTING BANKER-
MEANING

Collection of cheques (crossed and

uncrossed) for his customer was

stated as one of the important

functions of a bank, in the definition

of bank as given by Sir John Paget.

When acting in this capacity he is

called a ‘Collecting banker’. However,

it is not obligatory for a banker to

collect cheques and bills on behalf of

a customer. But the collection of

cheques and bills on behalf of

customers has become a usual

function of almost every modern

banker. In performing this function,

he should be careful, otherwise, he

may get into difficulties.

Before considering the precautions

which a collecting banker should

take, we have to distinguish between

the position of the banker (a) When

he is a mere agent for collection and

(b) when he is collecting a cheque as

a holder for value.

7.3 COLLECTING BANKER AS

HOLDER FOR VALUE

Collection of cheques consumes some

time, especially, in the case of out

station cheques. If the collecting

banker pays to the customer the

amount of the cheque or credits such

amount to his account and allows him

to draw it, before the cheque is

actually realized from the drawee

banker, the collecting banker, is

deemed to be its, ‘holder for value’.

With reference to a cheque sent for

collection, a banker becomes a

‘holder for value’under the following

circumstances:

1. Where the banker pays cash

immediately for the cheque

received for collection.

2. Where the cheque is accepted

towards specific reduction of an

overdraft.

3. Where the banker has impliedly

or expressly permitted the

 customer to draw against the

value of uncleared cheques paid

in for collection.

4. Where the banker credits the

account of the customer with the

amount of the cheque before its

5. Where the banker lends further

on the strength of the cheque

received for collection.

7.4 COLLECTING BANKER AS AN

AGENT

When the collecting banker credits

his customer's account with the

amount of the cheque after it is

actually realised from the drawee

banker, he occupies the position of

an agent of the customer. The
customer is entitled to draw the

amount of the cheque after his-

account has been duly credited with

the amount of the cheque.

As an agent for collection, the banker

has no better title than that of his

customer. If the customer has no title

thereto or his title is defective, the

collecting banker cannot have good

title to the cheque. Thus a banker,

collecting for his customer a cheque

belonging to another person, can be

held liable for conversion of money.

Therefore, the collecting banker

should exercise due care in collecting

such cheques in order to avoid the

liability for conversion.

True Owner

1. The expression “true owner”

appears to mean the person who

would have been entitled to sue

upon the instrument as holder in

due course, The holder in due

course cannot sue the parties in

case of necessity, if the

instrument had been made void

by any material alteration.

2. The true owner is the payee.

3. When the cheque has been

negotiated, the person who is

last in the history of the

instrument can establish his title

as holder and become the true

owner,
 4. Payment must have been

received ‘in good faith and

without negligence’. The most

essential pre-requisite for

availing himself of statutory

protection is that the banker

must collect the cheque in good

faith and without negligence.

We always presume that a banker

acts in good faith. But he should

never be negligent in receiving

payment. The onus of proof that he

was not negligent lies with the

banker himself. We cannot make a

list of ‘acts’which are treated or

construed to be the ‘act of

negligence’. The judicial expostion of

the term negligence is couched in

wide terms. Hence they can never
be regarded as working principles. As
Paget says, “it would be futile to try

and formulate particular conditions or

circumstances which might or might

not establish negligence”. Generally

speaking, negligence indicates lack of
care which is necessary to be taken
in any circumstances by the

collecting banker. In. W. Walbank &

Co Ltd Vs Westminster Bank Ltd., it

was defined that negligence is the

doing of that which a reasonable man

under all the circumstances of the

particular case in which he is acting
would not do, or the failure to do
something which a reasonable man

under those circumstances would

do”.
Conversion:

‘Conversion’is a wrongful

interference or meddling with the

goods of another.For example, taking

or using or destroying the goods or

exercising some control over them

in a way that is inconsistent with

the owner's right of ownership. The

term ‘goods’includes bill of exchange,

cheque or promissory note.

Conversion may be committed

innocently. Conversion is a wrong

that renders the person committing it

personally liable. This liability exists

even when a person acts merely as

an agent.
Banker's Liability:

Hence, if a collecting banker however

innocent he may be, has converted

the goods of another, he will be held

personally liable. This liability exists

because the banker is acting as an

agent and not as a holder of value. If

it is so, no banker will be in a position

to collect cheques for his customers.

In those days, the position of a

collecting banker was far from

satisfactory. Therefore, the statutory

protection was granted by Sec 131

of the N.I. Act against conversion.

Sec.131 of the N.I. Act, 1881

corresponds to Sec.82 of the B/E Act,

1882.
 7.5 STATUTORY PROTECTION

According to Sec. 131 of the

Negotiable Instruments Act, “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.” Thus, Sec.

131 protects the collecting banker

against an action of conversion. Of

course, this is a very high privilege

given to the collecting banker. Here,

the banker is protected to a certain

extent even against the equity

principles of law, i.e., the object of

law is always to protect the rights of

the true owner.

The above statutory protection is

available to the collecting banker

only if he fulfills the following

conditions:

1. The cheque he collects must be a

crossed cheque.

2. He must collect such crossed

cheques only for his customer as

an agent and not as a holder for

value.
3. He must collect such crossed

cheques in good faith and

without negligence.

1. Crossed cheques only: Statutory

protection can be claimed by a

collecting banker only for

crossed cheques. It is so

because, in the case of an open

cheque, it is not absolutely

necessary for a person to seek

the service of a bank. So, a

banker, when collecting an open

cheque, in which his customer

has no title, becomes liable for

conversion.

Protection can be claimed only

for those cheques which are

crossed before they reach the

 hands of a banker. If a cheque is

crossed only after it has reached

the hands of a banker, protection

under Sec, 131 cannot be

claimed because it cannot be

called a crossed cheque within

the meaning of the Sec. 131.

2. Collections on behalf of

customers as an agent: The

above protection can be claimed

by a banker only for those

cheques collected by him as

agent of his customers. If he acts

as a holder for value, he will

acquire a personal interest in

them, and so, he cannot claim

protection under Sec. 131. So

also, if he collects a cheque for

 a person other than a customer,

he will not be protected. That is,

if the stranger (other than the

customer) for whom he collects

a cheque has no title, then the

banker will be liable for

conversion.

3. In good faith and without

negligence: In order to get the

protection under this Section, a

collecting banker must act in

good faith and without

negligence. This applies to the

whole transaction from the

receipt of the cheque from the

customer to the receipt of the

proceeds from the paying

banker. The question of good

 faith is not very material

because, joint stock banks do not

act otherwise than in good faith.

7.6 BASIS OF NEGLIGENCE

The statutory protection to the

collecting banker in a way affects the

rights of true owner. The collecting

banker cannot, therefore, enjoy this

right without any responsibility.

Hence, this statutory protection is

made conditional.

A duty to take care may arise from

a contract between the parties as

between banker and customer or

from the general law of torts. A

person who has suffered damage

from the negligence of another may

successfully proceed in an action

against him. But he should prove that

the negligent person was under a

duty to him to take care of. Thus, a

true owner of a cheque can proceed

against the collecting banker in case

he has offered a loss due to the

negligence on the part of the latter

(collecting banker).

The circumstances which surround

the operation of receiving payment

are too varied and numerous.

Therefore, all the possible instances

of negligence cannot be listed out

here. However, it may be divided into

a few groups as explained below.

I. Opening an Account for a

Stranger without Proper

Reference or Introduction:

The banker must open a bank

account only after getting a

proper introductory letter.

Otherwise, he will be held

negligent for having failed to

know the true identity and

respectability of the customer.

Because, there are instances in

which the customers deposited

stolen cheques that were

withdrawn. Then the true owners

of the cheques, claimed the

amounts from the collecting

banks. Had the collecting

banker-insisted on proper
 introductory letter, this sort of

misappropriations could have

been minimised or avoided.

Therefore, before opening an

account in the name of a person,

the banker must insist that the

person is introduced to him by an

existing customer.

II. Collection of Cheques or other

Instruments payable to the

Customer:

A cheque may be in the name of

a customer. When collecting such

a cheque, the banker should be

cautious in all activities ancillary

to the collection of cheques.

Otherwise, he may land himself

in trouble. In Marquess of Bute

Vs Barclays Bank Ltd., the

plaintiff Marquess of Bute, had

Mr. McGraw as manager of three

sheep farms in the Island of

Bute. McGraw resigned in April,

1949, but in September, 1949,

the Department of Agriculture for

Scotland sent him three warrants

totalling $ 546 in respect of hill

sheep subsidy which McGraw had

quite properly claimed on behalf

of the plaintiff four months

before his resignation. The

plaintiff had not notified the

Department of Agriculture of the

termination of McGraw's

employment.
The warrants were readdressed

by the local post office and

McGraw who was then living at

a different place received them.

Then, he opened an account with

the defendant bank (Barclays

Bank Ltd). The bank received the

three warrants as the first credit

on the account and after

references had been taken up,

allowed him to draw against

them.

The warrants were expressed to

be payment of his sheep subsidy,

and were drawn payable to Mr.

Me Graw,

(Kerrylamount,Rothesay) Bute.

This name and address were in

a printed rectangle and outside

this box in brackets, were the

words “for Marquees of Bute.”

The Plaintiff claimed the amount

of the warrants as damages for

conversion.

The judge rejected all defences

put forward and held the case

in favour of Marquees of Bute,

the plaintiff. The judge opened

inter alia, that in any event the

test as to true ownership is the

intention of the drawer, and here

the Department of Agriculture

knowing that the subsidy was

due to the plaintiff had indicated

their intention in the words in

parenthesis.
III. Collection of Cheques Payable to

Third Party:

It is impossible to devise any

simple test for determining

whether or not the collection of a

third party cheque would amount

to negligence on the part of the

banker. But many decisions

seem to support the view, that

the collection of a third party

cheque may amount to

negligence on the part of the

banker.

It would be negligence to collect

without inquiry a cheque or other

instrument for a third person

[private person who is not a

customer] when the amount is

intended for one other than the

customer in question.

It would be negligence to collect

without inquiry a cheque or other

instrument for a third person

[private person who is not a

customer] when the amount is

intended for one other than the

customer in question.

In House Property Co., of London

Ltd., and others Vs London

Country and West Minister Bank

Ltd the plaintiff company (House

Property Company) were dealers

in real property, the other

plaintiffs being the trustees for

the time being of a trust known

as the Bingley Trust, to which the

plaintiff company in the course

of their business, had mortgaged

certain property. In 1912,

Norman, the solicitor to the

trustees wrote to the company

calling in the mortgage of

depreciation. This was done

fraudulently, no instruction

having been given to him. After

negotiation, the plaintiff

company arranged to repay $800

of the mortgage money and sent

to the solicitor a cheque for the

amount payable to the trustee.

“or beares” and crossed “account

payee”. The solicitor paid the

cheque to the credit of his

account at the Westminster Bank

Ltd., and it was collected for him.

An action was brought on the

grounds that the bank had been

negligent in collecting a cheque

crossed, for one who was not the

named payee. The bank

contended that as the cheque

was a bearer cheque they had in

fact collected for the payee.

Decision: It was held that the

bank had been negligent. In his

judgement the Judge observed:

Counsel for the bank, [the

defendants] argued that the

cheque was made to Hanson and

others or bearer and that

Norman was the bearer and that

the defendants in collecting it for

his account were collecting it for

the payee. That was a shallow

argument ‘payee’did not mean

the owner of a cheque at the

time it was presented, but the

name written across the face of

the cheque, in this case, Hanson

and others.

When a cheque carrying “account

payee” crossing is presented for

collection, the collecting banker

would like to collect it and credit

the proceeds only in an account

of the payee. Thus, in practice, it

becomes necessary for the payee

to have an account in his name.

IV. Collection of Cheques Payable to

Customer's Employer:

When opening a new account for

a new customer, a banker shall

ascertain the name of the

intending customer's employer.

If the intending customer

happens to be a married woman,

the name of her husband's

employer is also important.

Failure to take this precaution

may account to negligence if the

customer subsequently pays into

the account, cheques which are

the property of his employer or

his wife's employer.

In A.L, Underwood Ltd, Vs

Barclays Bank Ltd. Underwood

was the director of what was in

effect, a one man company. He

held all the shares of the plaintiff

company except one belonging to

his wife. The company's account

was kept at another bank. The

defendants knew of the existence

of the plaintiff company but were

unaware of its separate account.

The sole director possessed of

various cheques payable to the

company which he endorsed on

the company's behalf and paid

into his own account with the

defendant bank which collected

the cheques and credited the

proceeds to his account and he

afterwards misappropriated
 them. The company later went

into liquidation and the

liquidator. brought this action

against the bank for conversion

to recover the amount of the

cheques in question. The

defendant bank claimed to be

holder in due course.

It was held that by collecting

these cheques the bank had been

guilty of conversion and was

liable to the plaintiffs.

V. Customer has Failed to Make

Provision for Cheques:

In Motor Traders Guarantee

Corporation Vs Midland Bank

Ltd., a certain motor trader in

Bristol by name Turner, had an

account, with the Midland Bank.

He induced the plaintiffs (Motor

Traders Guarantee Corporation)

to make out a cheque for $

189-5- 0,crossed “not

negotiable” to a firm of car

dealers in Bristol, Welsh & Co,

representing that this sum was

the purchase price of a car which

was to be let on hire purchase

to him. Turner forged the

endorsement of Welsh &Co.,

added his own name to it and

paid it into his own account with

the Midland Bank, saying that it

had been negotiated to him. The

cashier asked for an explanation,

and the explanation seemed to

be satisfactory to him. The

cashier examined Turner's

account in the ledger and found

that there had been several

previous transactions with Welsh

& Co., including one payment to

them of $ 484.10s. He stated

that the amount was in

connection with the present

transaction. In these

circumstances, the cashier

accepted the cheque for Turner's

credit, and it was duly presented

and paid.

Within six months after the

account was opened some thirty

five cheques had been

dishonoured, only some of them

being paid on presentation.

The learned judge, in the course

of his judgement, said that his

mind had fluctuated considerably

in the course of the argument,

and had it not been a fact that

had been disclosed at a very late

stage, his judgement would have

been in the bank's favour. The

fact was that during the six

months after the opening of the

account had immediately prior to

the payment of the cheque for

collection, thirty-five cheques

drawn by the customer had been

dishonoured for lack of funds. In

the view of the learned judge,

further enquiries should have
been made concerning the

matter to the third party cheque.

The cashier ought to have

referred to the manager in

accordance with bank's

regulations. Accordingly, the

case was held in favour of the

Motor Traders Guarantee

Corporation.

It does provide a precedent for

the view that a number of unpaid

cheques on an account is a factor
to be decided whether a

particular cheque can safely be

collected without further inquiry

a suggestion which had not
previously appeared in the

negligence cases.
 7.7 COLLECTING BANKER'S DUTIES
TO HIS CUSTOMERS

A banker's duties in relation to the

collection of cheques may be

considered under the following

headings Viz., the choice of clearing

channel, time allowed for presenting

a cheque for payment and giving the

notice of dishonour.

i. Choice of Clearing Channel: The

collecting banker, as the

agent of his customer is bound

to use reasonable care and

diligence in presenting and

securing payment of cheques

sent in for collection. In the

process of collection, he must

always choose the speediest

mode and present the

instruments to the drawee

banker within a reasonable time.

If he fails in this duty or neglects

to use the recognized channels

for the purpose, his customer

may suffer a loss. In such a case,

the banker is liable to pay

damages to the customer.

Formana Vs Bank of England

serves as an illustration in this

connection.

Facts of the case -The plaintiff

was a customer of the Law courts

branch of the Bank of England.

He paid into his account before 3
st
p.m. on 21 May, 1901 a cheque

for $ 500 payable to himself. It

was drawn by the Norwich Union

Life Insurance Society upon

Barclays Bank Ltd., at Norwich or

Head office, 54, Lambard Street,

London. When the cheque was

paid in, the plaintiff had a credit

balance of $103-6-10. It was a

rule of the defendant bank [Bank

of England] that if cheques

drawn on city banks were paid

in before 3 p.m. they could be

drawn against the next day. On

22nd May, the plaintiff drew a

cheque upon defendant bank for

$ 239 in favour of a third person.

It was presented on 23rd May

and dishonoured, owing to the

fact that the defendants had

treated the Norwich Union

cheque as being payable at

Norwich. As a result, the amount

had not been collected when the

cheque for $ 239 was presented.

The plaintiff brought an action

the defendants for breach of

contract in dishonouring his

cheque for $ 239 or damages for

delay in collecting the cheque for

$ 500 and placing the proceeds

to his credit

At the trial, expert witness from

various banks were examined by

the court. Lord Alverston, C.J.

 left the following questions to the

Jury, (a) was the cheque on a

city bank? (b) was there a

recognised and general custom

amongst London bankers that

the cheque in this form should be

treated as London cheque? The

Jury answered both questions in

the affirmative and assessed

damages at $ 75 and, thus, held

the case in favour of Forman.

ii. Time for presenting Cheque for

payment:

A banker to whom a cheque is

delivered for collection is under

a duty to his customer to use

reasonable diligence in

presenting a cheque for

payment. But time allowed for

presenting a cheque for

collection by collecting banker is

not laid down by the statute. The

banker's duty in this respect

would seem to depend upon the

current usages of bankers and

the facts of the particular case. If

the banker puts the cheques sent

for collection by his customer in

his drawer and forgets about

them for several days, it will

definitely amount to a failure to

use reasonable diligence in

presenting the cheques for

payment. There is authority for

the view that a collecting banker

is not bound to transmit cheques

 to the day he receives them.

However, he has to transmit it at

least the next day so that it is

cleared on that day itself - Hare

V s Henry.

iii. Giving Notice of Dishonour:

A collecting banker must always

give prompt notice to his

customer, if any cheque sent to

drawee bank for collection is

returned dishonoured. The safest

course to follow, is to send a

written notice of dishonour to the

customer on the same day he

receives the communication of

dishonour from the drawee

banker.
 Sometimes, the drawee banker

may return cheques with

remarks such as “refer to

drawer”, “please re-present” etc.

Even in such cases the collecting

banker should duly send a notice

to the effect to the customer.

Failure to do so will result in a

loss to the collecting banker.

iv. Position when the Collecting and

Paying Bank is the same :

When the cheque paid in

happens to be drawn on the

same branch of the bank, it can

legally hold it till the close of

the following day - Boyd Vs

Emmerson. But generally such

cheques are honoured or

 returned before the close of

business on the day they are

paid in for collection.

7.8 COLLECTION OF BILLS

Bankers are not legally bound to

collect bills for customers. But almost

all modem banks perform this

function. The extension of this facility

is not only convenient to customers

but also acts as a source of profit-

to banks. Also this will lead to the

attraction of new deposit accounts.

While collecting customer's bills, the

banker does not get any statutory

protection given by section 131 of

Negotiable Instruments Act, 1881.

But he may be held liable
for collecting a bill on which

the customer's title proves defective.

7.9 COLLECTING BANKER AND

PRESENTATION FOR ACCEPTANCE

When a bank receives an unaccepted

bill for presentation on behalf of a

customer, he should present it for

acceptance as early as possible with

a view to safeguarding his customer's

interests. The banker is expected to

exercise reasonable care and skill in

presenting the bill for acceptance. If

the customer suffers a loss owing to

the banker's failure to present a bill

for acceptance or payment, the

banker may be held responsible. The

banker must not take a qualified
acceptance, without the consent of

his principal.

7.10 NOTING AND PROTESTING

When a promissory note or bill of

exchange has been dishonoured by

non-acceptance or non-payment, the

holder of the instrument can get the

fact of dishonour noted by a notary

public. Noting is done upon the

instrument or upon paper attached to

the instrument or partly upon each.

Such noting must be done within a

reasonable time after the dishonour.

The note should specify the date of

dishonour and the reason, if any,

assigned for such dishonour. If the

instrument is not expressly

dishonoured the noting should

contain the reasons for its being

treated as dishonoured. The note

should also mention the notary's

charges.

PROTEST

The holder of a dishonoured

promissory note or bill of exchange

can also cause such dishonour to be

noted and certified by a notary

public. Such a certificate is called

protest It should also be done within

a reasonable time. The advantage of

noting or protesting is that it affords

authentic and satisfactory evidence

of dishonour. When a bill is

dishonoured on presentation for

payment the collecting banker should

return it to the customer. It is not

generally considered to be the duty

of the collecting banker to get it

noted, unless he has specific

instructions from the customer to

that effect. However, where a foreign

bill is dishonoured the banker must

get it protested.

7.11 NOTICE OF DISHONOUR

Suppose, the banker has discounted

the bill and when the later presents

it for payment, it is dishonoured, in

this case, he should give notice of

dishonour to one or more of the

parties liable on the bill, if he is not

sure of recovering the amount from
his customer. However, if the

customer is good enough for the

amount, the banker should return the

bill to him and ask him to pay the

amount of the bill and interest and

other charges.

When a bill is returned dishonoured

to the customer, it serves as a notice

of dishonour. But it is desirable that

a separate notice to that effect is

sent along with it. The banker should

also see that the notice is properly

addressed and posted.

7.12 KEY TERMS

If the collecting
Holder for
• : banker pays to
Value
the customer the
 amount of the

cheque or credits

such amount to

his account and

allows him to

draw it, before

the cheque is

actually realized

from the drawee

banker, the

collecting banker,

is deemed to be

its, holder for

value.

When the

collecting banker

credits his

customer's

account with the

• Agent : amount of the

cheque after it is

actually realised

from the drawee

banker, he

occupies the
 position of an

agent of the

customer.

A true owner of a

cheque can

proceed against

the collecting

banker in case he

has offered a loss

due to the

negligence on the

part of the latter

(collecting

banker).
• Negligence :
Negligence is the

doing of that

which a

reasonable man

under all the

circumstances of

the particular

case in which he

is acting, would

not do, or the

failure to do
 something, which

a reasonable man

under those

circumstances

would do.

When a

promissory note

or bill of exchange

has been

dishonoured by

non-acceptance or

• Noting : nonpayment, the

holder of the

instrument can

get the fact of

dishonour noted

by a notary

public.

The holder of a

dishonoured

promissory note
• Protesting :
or bill of exchange

can also cause

such dishonour to
 be noted and

certified by a

notary public.

Such a certificate

is called protest.

7.13 SUMMARY

The collecting banker will get

statutory protection under Sec.131,

of the Negotiable Instruments Act

when 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. Thus a

banker should be cautious and he

must exercise due care and diligence

in collecting the cheques.

CHECK YOUR PROGRESS

1. State true or false

a. Collecting a cheque

crossed ‘A/C Payee’to any

person other than the

payee is a case of

contributory negligence.

b. The statutory protection is

available to the collecting

banker only when he is

acting as a holder for

value.

c. It is the duty of the

collecting banker to note

 and protest a foreign bill,
in case it is dishonoured.

d. The wrongful interference

with the goods of another

is called ‘conversion'

e. The banker's rights as a

holder for value is similar

to that of a holder in due

course

2. When a banker allows his

customer to withdraw money,

even before a cheque sent for

collection is collected, he is

said to act as :

a. an agent for collection

b. holder for value

c. both (a) and (b)

d. holder –in-due course
3. Under the ground of ___

banker escapes from liability.

a. gross negligence

b. negligence connected with

immediate collection of

cheque

c. negligence under remote

grounds d) contributory

negligence

4. A collecting banker gets

protection only when he

collects:

a. an order cheque

b. a bearer cheque

c. a crossed cheque

d. mutilated cheque
 5. Collecting a cheque payable to

the firm to the private account

of a partner without enquiry

constitutes:

a. gross negligence

b. negligence connected with

immediate collection of

cheque

c. negligence under remote

grounds

d. contributory negligence

7.14 ANSWERSTO ‘CHECK YOUR

PROGRESS'

1. a. F;

b. F;
c. T;
 d. T;

e. T

2. b;

3. d;

4. c;

5. b.

7.15 QUESTIONS/EXERCISES

Section - A:

1. 1. What do you mean by

conversion?

2. 2. Give any two instance under

which a banker can act as holder

for value.
3. 3. State the conditions to be

fulfilled to get statutory

protection under Sec. 131 of the

N I Act

4. 4. Give any two examples for

negligence under remote ground.

Section - B:

1. Explain the Statutory Protection

available to a collecting Banker.

2. Narrate the duties and liabilities

of a collecting banker.
 UNIT 8

BANKER AS A LENDER

Structure

8.0 Introduction

8.1 Unit Objectives

8.2 Loans and advances

8.3 Principles of Lending

8.4 Forms of Lending

8.5 Secured and Unsecured

Advances

8.6 Methods of Creating Charges

8.7 Key Terms

8.8 Summary

8.9 Answers to ‘Check Your

Progress'

8.10 Questions/Exercises
 8.0 INTRODUCTION

The prime function of bankers is to

accept deposits and lend money in

the form of loans and advances.

Since the bankers are dealing with

the public money, they have to be

very cautious in making lending

functions. This unit makes an

attempt to analyse the various forms

of loans and advances and the basic

principles of lending that the bankers

should follow while making loans and

advances.
 8.1 UNIT OBJECTIVES
• To explain the principles of good

lending followed by bankers.

• To explain the various forms of

lending.

• To differentiate secured loans

and unsecured loans.

• To analyse various methods of

creating charges.

8.2 LOANS AND ADVANCES

Profit is the pivot on which the entire

business activity rotates. Banking is

essentially a business dealing with

money and credit. Like every other

business activity, banks are profit

oriented. A bank invests its funds in

many ways to earn income. The bulk

of its income is derived from loans

and advances.

Banks make loans and advances to

traders, businessmen and

industrialists against the security of

some assets or on the basis of the

personal security of the borrower. In

either case, the banks run the risk

of default in repayment. Therefore,

banks have to follow a cautious policy

and sound lending principles in the

matter of lending. Banks in India

have to consider the national interest

along with their own interest while

determining the lending policy.

 8.3 PRINCIPLES OF LENDING

Lending money to different kinds of

borrowers is one of the most

important functions of a bank. Most

of the loans granted by banks in

India are generally secured by, the

tangible security of valuable

collaterals such as bonds, shares and

merchandise deposited either in the

bank's god own or in the god owns

of the borrowers under letters of

hypothecation and immovable

property. But nowadays rules have

been changed and loans are granted

even without any security.

There are a few general principles

of good lending followed by bankers
while considering proposals for

advances. They are as follows:

1. SAFETY: The first guiding

principle of sound lending is

safety. The very existence of a

bank depends on the safety of its

advances. Safety should never

be sacrificed for profitability. The

failure of a single advance will

affect a good portion of bank's

profits. Scrumptious care should

be taken to see that the funds

lent out to the right type of

borrower and are utilised in such

a way that they remain safe and

that the repayment is made in

the normal course.

 Safety depends upon two factors

namely:

i. the security offered by the

borrower, and

ii. the willingness and the

repaying capacity of the

borrower.

2. LIQUIDITY: Bulk of bank's

deposits are repayable on

demand or at short notice. So,

a banker should see that the

money he is lending is not going

to be locked up for a long time.

It is always better on the part

of the banker to grant short-term

loans so that they can meet their

obligations in time. A sizable

portion of bank advances are

 therefore granted to meet the

capital requirements of the

borrowers. Of late, commercial

banks in India have evinced

interest in providing equipment

finance. The refinancing facilities

provided by the Industrial

Development Bank of India have

been helpful to banks in

providing liquidity in their long

term loans.

3. PURPOSE: Closely connected

with the principles of safety and

liquidity is the purpose for which

an advance is required by a

borrower. If the funds borrowed

we employed for unproductive or

speculative purpose, the

repayment in the normal course

will become uncertain. Banks,

therefore, discourage advances

for hoarding stocks and refuse

advance for speculative

activities. Analysis of purpose

enable the banker to assess the

requirement of the borrower and

grant need based loans. If the

banker is satisfied with the

integrity and capacity of the

borrower to employ the funds

properly, he may not, in

deserving case, insist on a

security from the borrower. The

banker should advance loans

only for purposes determined to

be worthwhile by the RBI and the

 Govt. of India. In India, Sec.2

of the Banking Companies Act,

1949 empowers the Reserve

Bank of India to determine the

policy to be followed by banks

regarding the purposes for which

loans are to be granted by banks.

4. PROFITABILITY: Banking is

essentially a business which aims

at earning a good profit. The

bank has to pay interest for the

deposits received and has to

meet considerable amount of

expenditure to maintain the

office and operate the business

of banking. The difference

between the interest received on

advances and the interest paid

 on deposits constitutes a major

portion of the banker's income

from which most of the

expenditure has to be met. The

bank will not enter into a

transaction unless a fair return

from it is assured.

5. SECURITY: The security offered

for an advance is a cushion to fall

back upon in case of need. The

security offered may vary from

a piece of land or a building to

a commercial paper or bullion.

There may be cases where is no

security except the personal

security of the debtor. Of course,

the security, if accepted must be

adequate, readily marketable,

 easy to handle and free from

encumbrance. A banker would

not normally like to recover the

advance from the sale of the

security. A banker would prefer

an advance to come back from

the normal sources.

6. DIVERSIFICATION OF RISK: A

prudent banker must avoid

lending the major portion of his

funds in meeting the needs of

anyone industry. Similarly,

advances should not be

concentrated in the same group

of borrowers or against the same

type of advances against

different securities, industries as

well as areas. By diversification

 of his advances a banker will be

able to spread his risk and

considerably improve the safety

of his outstandings.

Therefore a bank should follow

the wise policy of ‘do not lay all

the eggs in the same basket’.

The bank must advance

moderate sums to a large

number of customers spread

over a wide area and belonging

to different industries.

7. NATIONAL INTEREST: Banking

industry has a significant role to

play in the economic

development of a country. The

savings of the people which are

mobilised by banks must be

 distributed to those sectors

which require development in the

country's planning programme.

With this end in view,

commercial banks have

formulated schemes to finance

agriculture, small scale

industries, exports and small

borrowers.

8. SAFE MARGIN: The banker, while

accepting securities for a loan

has to consider the following two

aspects:

A. Economic Aspect: Estimation

of the probable market value

of the security at the time of

its realisation.
 B. Legal Aspect: Determination

of the validity of the security

offered. This principle is

followed for two reasons,

namely:

i. to arrive at the maximum

amount which can be safely

advanced and

ii. to leave a sufficiently safe

margin, both for fluctuations

in the value and the interest

accumulation.

9. SOURCE OF REPAYMENT: A

banker should also consider the

source from which repayment of

loan and its interest will be made

by the borrower.
10. LAW OF LIMITATION: Since the

period of limitation for an

ordinary debt and a banking debt

differs, the banker should be

aware of the Law of Limitation.

The period of limitation for a

banking debt begins to run from

the date on which the demand

for repayment of the loan has

been made. So, the bankers,

should make a demand for

repayment.

11. RESTRICTIONS IMPOSED BY

LAW: Even when all the

principles are satisfied, a banker

should not make an advance

when the Reserve Bank of India

direct him not to make such

advances.
 8.4 FORMS OF LENDING

A banker knows from experience that

all depositors do not withdraw all

their money at the same time.

Moreover, as and when there are

withdrawals, bank get deposits from

the existing as well as new

depositors. Again a banker makes

proper judgment while employing the

funds. A small portion of the funds

is kept in cash while another good

portion there of is employed in

readily realisable securities, mainly

Government promissory notes. The

balance is employed in different

forms of lending. Bank money is lent

to business organisations for the

purposes of:

1. Working capital and

2. Development

A bank may make advances to

traders, industrialists and others in

many ways. But the main forms in

which money is advanced by the

banks are:

1. Loans

2. Cash credit

3. Overdrafts and

4. Purchasing and discounting of

bills and cheques.

1. LOANS:

When a banker grants an

advance in lump sum, which is
drawn by the borrower at one
time and it to be repaid likewise
or by pre arranged installments,
the advance is called a loan. The
money advanced is debited to
the loan-account of the

borrower. No subsequent debit is

ordinarily allowed except by way
of interest and or incidental
charges. As and when the
customer returns part of the
amount borrowed, it is credited
to the account. If the borrower
desires to have further funds,

the money advanced is usually

treated as a separate loan and
 another, loan account is opened.

The usual securities offered

against loans are Government

promissory notes, shares, life

insurance policies, fixed

deposits, immovable property

and machinery.

2. OVERDRAFTS:

This facility is allowed to

customers having current

account. Under this method, the

customer is allowed to overdraw

his current account up to a

certain limit against some

collateral securities of on the

personal security of the

borrower. Business people use

this facility as a temporary

 financial accommodation. This

arrangement is advantageous to

the customer since interest is

charged only for the amount

actually used by him. (i.e.

interest is charged on the daily

debit balance only.) Although

this form of bank credit is

supposed to be occasionally

made use of, banks these days

setup regular limits for overdraft

facilities.

3. CASH CREDITS:

In practice, we do not find much

difference between overdraft and

cash credit facilities, since under

both the methods the banker

allows his customer to borrow

money up to a certain limit.

Perhaps, the only major

difference between them is that

an overdraft facility is allowed

in a current account while cash

credit is an operative account

against a credit limit granted

separately by the bank. Large

commercial and industrial

concern in India are increasingly

using this facility, the advantage

is that while a customer is

assured of credit facility up to

a limit he need not borrow the

whole amount at a time but can

draw such amounts as and when

required. He can also put back

surplus amounts in the account.

 As in the case of overdrafts,

interest is charged by the banker

only on the amounts actually

used by the customer. However,

the banker may stipulate a

special condition that he shall

charge interest on at least one-

half or one-quarter of the total

cash credit granted if the full

amount sanction is not utlised.

The borrower is required to

provide tangible assets as

security to cover the amount

borrowed from the banker.

4. PURCHASING AND DISCOUNTING

OF BILLS AND CHEQUES:

This is another form of short-

term bank credit available

especially for traders and

industrialists. Genuine trade bills

are discounted or bought by

commercial banks and a

substantial part of banker's

funds is employed in this form

of lending. Still this practice in

India is not as popular as in the

European countries. The

overwhelming use of overdraft

and cash credit facilities is an

important factor responsible for

the restricted use of bills in

India. However, there are certain

definite advantages of bankers in

discounting bills.

They are: 1) the banker is almost

certain that-he can recover his

money on the maturity of the

bills since businessmen generally

will not risk their credit by

dishonouring their bills 2) the

banker employs a specific

amount for a specific period and,

therefore, he can judiciously plan

his investment 3) the banker also

enjoys liquidity in this form of

investment because, in case of

need, he can rediscount the bills

with the Reserve Bank of India

4) the yield from this form of

investment is slightly higher than

from loans and advance. This is

because discount is realised by

the banker at the time of

purchasing the bill itself while

the interest on loans and

advances is recovered only at the

time of repayment of the

principal amount by the

borrowers. Thus, the banker can

advantageously invest his money

in bills, provided, they are fully

backed by documents of title to

goods. Bankers have to exercise

sufficient precaution against

accommodation bills (called

‘kites’) which are without any

real backing. Bankers have also

to see that the documents of title

to goods are not bogus or forged.

 8.5 SECURED AND UNSECURED
ADVANCES

Various advances granted by a

banker include loans, overdrafts,

cash credit etc. These advances may

be granted either with tangible

security or without security. On the

basis of the security against which

advances are granted, they may be

classified as secured advances and

unsecured advances.

Secured Advances:

By secured advances we mean those

advances which are granted against

some tangible securities apart from

the promissory note of the borrower.

According to Section 5 (i) (n)of the

Banking Regulation Act, “a secured

loan or advance means a loan or

advance made on the security of

assets, the market value of which is

not at any time less than the amount

of such loan or advance”.

Collateral means additional and such

securities are called collaterals. They

are offered in addition to the

personal security of the borrower.

They can be disposed of only in the

event of the failure of the borrower to

repay the loans promptly. A collateral

security may take either the form of

lien or pledge or mortgage.

The value of the securities is to be

taken at market price and not at the

cost price or book value for the

purpose of making an advance. The

market value of the securities should

be equal to or more than the amount

of advance throughout the loan.

Unsecured or Clean Advances:

When advances are granted by the

bank on the personal security of the

borrower without any tangible

security they are called clean or

unsecured advances. Unsecured

advances are granted against the

promissory note of the borrower.

Unsecured advances are granted only

to those customers with

unimpeachable reputation and sound

financial position. In the case of an

unsecured advance, the character,

capacity and capital of the borrower

have to be of a higher order. A

banker would prefer a clean advance

to be given jointly to two or more

borrowers instead of an individual or

prefer a guarantee to support it. A

clean advance is generally granted

for a short period. The Reserve Bank

of India has stipulated that

unsecured advances should form only

a small proportion of the total

advances of a bank.

8.6 METHODS OF CREATING

CHARGES

There are three methods of creating

charges on an asset, which a banker

may avail himself as a security to

cover for advance. They are: (1) lien

(2) pledge (3) hypothecation and (4)

mortgage. In any case, he does not

become the absolute owner of the

property, but he has rights over the

property until the debt due to him is

repaid.

A. LIEN:

Lien is a right to retain the

properties belonging to a debtor

until the debt is paid back. It is

of two kinds viz., particular lien

and general lien. Bankers have

a general lien on all types of

securities (barring a few items)

deposited with bankers by their

customers. But there shall not be

any express or implied contract

between the banker and the

customer inconsistent with the

right of lien. This right of general

lien is conferred on bankers by

the Contract Act, 1872, (Section

171).

As far as fully negotiable

instruments are concerned, the

banker may exercise this right

of lien after reasonable notice to

the customer. In the case of

other than fully negotiable

securities, the banker can sell

and realise the dues only after

obtaining sanction from a court

of law. Since it gives the right

to sell the securities and goods

 of the customers, banker's lien

is also known as an “Implied

Pledge”.

B. PLEDGE:

According to section 172 of the

Contract Act, a pledge is a

bailment of goods as security for

the payment of a debt or the

performance of a promise. Under

a pledge, the pledgee (e.g. the

banker) is entitled to the

exclusive possession of the

property (goods etc.,) until the

debt is discharged. Under certain

circumstances, the pledgee has

the power of sale but the

ownership remains with the

pledger. Under pledge, it is not

essential that the thing pledged

should actually be owned by the

pledger; it is sufficient, if he

pledges it with the owner's

consent.

It is to be noted that delivery of

goods or articles to the pledge

is necessary in order to complete

a pledge. But delivery need not

be actual. When the properties

(goods etc.) are physically

transferred, it is called actual

delivery or transfer. Constructive

delivery (such as delivery of the

transferable warehouse warrants

to the goods) is also sufficient.

The banker may redeliver the

goods pledged with him, for a

specific purpose. He is the

pledgee in possession thereof,

and can entrust (redeliver) the

goods to the pledger for the

special purpose of selling them

on behalf of the pledgee. The

pledge is not lost by such

delivery.

Who can create pledge?

Apart from the owner creating

charge by way of pledge, law

permits a pledge by a non-owner

under certain circumstances.

They are enumerated below:

A mercantile agent may create

a valid pledge provided he is in

possession of the goods or

documents relating to the goods

with the consent of the owner.

Further, a valid pledge may be

created even when the

mercantile agent is acting

without a specific authority of

the owner, provided, the pledgee

acts in good faith.

A person who is in possession

of the goods under a voidable

contract (on the ground of say,

fraud, misrepresentation or

coercion) may create a valid

pledge provided the contract is

not rescinded at the time of

pledge. However, a thief cannot

create a valid pledge of stolen

goods.
A seller who continues to be in

possession of the goods, after

sale, with the consent of the

buyer can pass a valid title in

favour of the pledgee.

A buyer may create a pledge free

from all equities available of the

original seller.

A pledger who has only a limited

interest in the goods which he

pawns (pledges) may create a

valid pledge to the extend of

such interest.

One of the joint owners in sole

possession of the goods, with the

consent of the other owners may

create a valid pledge.

Rights of the Pledgee
In case of default, by the pledger

in making payment of the debt

within the stipulated time, the

pledgee has the right either:

a. to file a civil suit against the

pledger for the amount due

and retain the goods as a

collateral security; or

b. to sell the goods pledged

after giving the pledger

reasonable notice of sale,

not withstanding any

contract to the contrary. The

notice of sale, should be

clear and specific in

language, indicating the

intention of the pledge to

sell the security.

If the sale proceeds are not

sufficient to meet the debt, the

pledger is bound to make it good

to the pledge. But when there is

any surplus, the pledgee should

account for the same to the

pledger.

Advantages of Pledge

A pledge is the most satisfactory

method of creating charge

because of the following reasons:

a. Since the possession of

goods remains with the

banker, he can dispose them

easily when the borrower

defaults.

b. In the event of loss or

damage, to the pledged

 goods, the banker can

recover the amount from the

insurance company.

c. Manipulation of stocks is

difficult when the goods are

taken into the custody of the

bank.

C. HYPOTHECATION

Hypothecation has been, defined

by Hart as, “a charge against

property for an amount where

neither ownership nor possession

is passed to the creditor”.

There is another method of

creating charges over movable

assets. Under this, both

ownership and possession

remain with the owner (debtor).

But an equitable interest is

created in favour of the creditor.

The borrower binds himself

under an agreement to extend

possession of the property to the

creditor or banker, whenever the

latter requires him to do so. Thus

hypothecation resembles pledge.

The banker or hypothecatee

enjoys powers and rights of a

pledge. The creditor permits the

borrower to retain possession

either on behalf of or in trust for

himself.

In the strict sense, the term

mortgage is used only in

connection with the pledge of

immovable properties.
 In the case of movable

properties, the term pledge or

hypothecation is used in general.

When a charge on a movable

property is created by delivery

of possession, it is known as
pledge. When no possession is

given, it is termed as

hypothecation.

It is always risky for a banker to

extend advances on the basis of

hypothecation. Such an advance

is like a clean advance.

D. MORTGAGE

When a customer offers

immovable properties like land

and building as security to the

banker, a charge thereon is

created by mortgaging it. Section

58 of the Transfer of Property

Act, 1882 defines mortgage as

follows:

“A mortgage is the transfer of

an interest in specific immovable

property for the purpose of

securing the payment of money

advanced by way of loan, an

existing or future debt for the

performance of an engagement

which may give rise to a

pecuniary liability”.

The transfer is called the

mortgage and the transferee is

called the mortgagee. The

instrument by which the transfer

is made is called the mortgage

deed.
Legal Mortgage and

Equitable Mortgage

From the point of view of transfer

of title to mortgaged property

mortgages are of two types.

These are:

1. Legal Mortgage and

2. Equitable Mortgage

In Legal Mortgage the legal title

to mortgaged property is

transferred to the mortgagee by

means of a registered document.

This involves expenses in the

form of stamp duty and

registration charges. According

to Section 59 of the Transfer of

Property Act, 1882, a legal

mortgage can be effected only

by a registered document, if the

mortgage money is Rs. 100 or

more. On repayment, the

mortgaged property is re-

transferred to the mortgager.

Under an equitable mortgage,

the debtor deposits title deeds

with creditor with an intention to

create a mortgage. The evidence

of the fact that the title deeds

are deposited only to create

mortgage, he executes a

memorandum of deposit This

does not require any registration

as in the case of legal mortgage.

In case the ‘mortgager (the

debtor) does not clear off the

loan, the mortgagee (the

creditor) can treat it as legal

mortgage and acquire all the

rights which a legal mortgage

confers.

The name equitable mortgage is

used under English Law. But

under Indian Law it is known as

mortgage by deposit of the title

deeds.

Merits of Equitable

Mortgage

1. This requires no registration.

2. In the absence of

registration, information

regarding the mortgage may

 be kept confined to the

banker and customer alone.

3. On repayment of the debt,

the documents of title are

returned to the customer so

that he himself may simply

redeposit the same for

effecting another mortgage,

in the case of legal

mortgage.

Demerits of Equitable

Mortgage

In the case of an equitable

mortgage, the banker should

carefully retain, his possession

over the documents. If the

mortgagee hands over the

documents to the mortgager

even for a short span of time

there is every chance for the

latter to mortgage the same

property with another person. If

it happens so, the second

mortgagee shall have priority

over the first mortgagee.

A careful analysis of the merits

and demerits of this type of

mortgage will reveal that the

advantages exceed the risk

involved therein.

Sec. 58 of the Transfer of

Property Act recognises the

following 6 kinds of mortgages.

a. Simple mortgage

b. Mortgage by conditional sale

c. Usufructuary mortgage
d. English mortgage

e. Mortgage by deposit of title

deeds

f. Anomalous mortgage

a. Simple Mortgage or Non-

Possessory Mortgage: In a

simple mortgage, the

mortgager binds himself

personally to pay the

mortgage money. He does

not deliver the possession of

the property but agrees,

expressly or impliedly, that

if he fails to pay according to

his contract, the mortgagee

shall have a right to cause

the mortgaged property to

be sold and the proceeds of

 sale to be applied in

payment of the mortgage

money.

b. Mortgage by Conditional

Sale: Under this form of

mortgage the mortgager

ostensibly sells the

mortgaged property to the

mortgagee with anyone of

the following conditions.

i. that the buyer shall

transfer the property to

the seller, if the latter

makes payment of the

mortgage money

ii. the sale shall become

absolute if the

mortgagee fails to pay

 the mortgage money on

a certain date.

iii. that the sale shall

become void if the

mortgager pays the

mortgage money

c. Usufructuary Mortgage: In

case of usufructruary

mortgage the mortgager

delivers the possession of

the property to the

mortgagee until the loan is

rapid. The mortgager also

authorizes the mortgagee to

receive rents and profits

accruing from the property

and to appropriate the same

in lieu of interest or in
 payment of the mortgage

money or both.

d. English Mortgage: In case of

English mortgage the

mortgager transfer the

mortgaged property
absolutely to the mortgagee

on condition that the

mortgagee will re-transfer

the same to the mortgager

on repayment of the

mortgagee money. The

mortgagee also binds

himself to repay the

mortgage money on a

certain date.

In case of default by the

mortgager, the mortgagee is

 entitled to sell the property

without seeking the

permission of the court in

special circumstances

mentioned in Sec 69.

e. Mortgage by deposit of title

deeds or Equitable

Mortgage: It is a mortgage

where documents of title to

immovable properties are

delivered to the mortgagee

with the intent to create a

security thereon. Such

mortgages are restricted to

Calcutta, Madras, Bombay

and other towns notified, in

this behalf by the State

Government concerned.
 f. Anomalous Mortgage:
According to Sec. 58 (g) of
the Transfer of Property Act,

anomalous mortgage is “a
mortgage which is not a
simple mortgage; a
mortgage by conditional
sale, an usufructuary

mortgage, an English
mortgage or a mortgage by
deposit of title deeds”

The rights and liabilities of the

parties to an anomalous
mortgage are determined by

their contract.
E. GUARANTEE

A guarantee is a promise made

by one person to be collaterally

liable for the debt, default or

miscarriage of another.

Guarantees play a dominant role

when the bankers advances are

not secured by means of

collateral securities and the

personal security of the borrower

is inadequate.

According to section 126 of the

Contract Act, 1872 ‘guarantee is

a contract to perform the

promise or discharge the liability

of other person in case of his

default. It may be either oral or

written.’For example: A wants a

loan for Rs. 1000 from B. He may

induce his friend C to promise

to repay the money to B in case

he defaults to settle the loan.

Thus, there will be three parties

in a contract of guarantee. (In

the example, A is a debtor, B the

creditor and C the guarantor).

Speaking generally the guarantor

or surety is liable only when the

principal debtor defaults in

making the payment.

Types of Guarantees

When the guarantee is to a

specified transaction, it is called

a specific guarantee. It becomes

void on repayment of the

advance by the customer If it

is so worded as to cover, with

an agreed limit, the fluctuating

debit balance of an account from

time to time during the

continuance of the guarantee, it

is known as continuing

guarantee.

If a specific guarantee is taken,

the advance must be made on a

separate loan account and not by

current account so as to avoid

the operating of the rule in

Clayton's case. It becomes void

on repayment of the advance got

by the customer-e.g. if X had got

an advance of Rs. 1000 from Y

on specific guarantee, he will not

be liable after he repays the

advance and other dues thereon.

In a continuing guarantee, the

guarantor will be liable for the

balance irrespective of the

payments made by the principal

debtor as they would go towards

the payment of earlier advances.

Thus, the object of continuing

guarantee is to secure the final

debit balance. This liability of the

guarantor to be answerable for

the balance must be expressly

stated in the guarantee. If it is

not expressly stated so, the law

assumes that the guarantee will

cover only the debt due at the

time of the guarantee.

We shall not describe the money

covered by continuing guarantee

as ‘a debt due or owing from’the

principal debtor. If we describe it

so, and when the principal debtor

becomes insolvent, here may

arise some chances for the

guarantor to evade liability by

contending that the insolvency

annulled the debt. To avoid all

risks of such a repudiation, the

guarantor's liability shall be

expressed in term, that it

includes all moneys advanced to,

paid for, or incurred by the bank

on behalf of the customer,

including interest and all other

charges that may be payable

thereon. A guarantee may be

taken up either for a fixed sum

or for the whole debt also.

Precautions to betaken by

a banker before granting

advances:

A banker should take the

following precautions before

granting advances against

guarantees:

1. The banker must satisfy

about the credit-worthiness,

integrity and capacity of the

borrower.

2. The bank should accept the

guarantee only, when the

surety is credit-worthy and

his financial position is

sound.
3. The banker must examine

the capacity of the parties,

that is, principal debtor and

the surety to enter into a

contract. If the debtor is a

minor, the liability will fall

on the surety. So, a banker
should not accept the
guarantee of a minor or any

other person incompetent to

enter in to a valid contract.

4. The banker should explain to

the guarantor the nature and
implications of a contract of

guarantee so that the

guarantor can not plead later

that he did not properly

understand the terms of the

guarantee.
5. Guarantee given by a

married woman can be

accepted only if she has

separate property in her own

with a right to sell.

6. When two or more persons

join together in executing a

guarantee, the banker

should see that their liability

is joint and several.

7. In certain cases the

power of the guarantor

to give guarantee to the

bank has also to be

examined. A partner of a

firm may apply for a loan.

The bank must

 enquire from all the partners

in writing whether they had

authorised the said partner

to borrow money for the firm

on the guarantee of a third

person. If the firm wants to

stand surety for a third

party, it is advisable for the

bank to take the signatures

of all the partners.

8. If a loan is to be guaranteed

by join stock company, the

bank must satisfy itself

whether the company has

got this power by studying

its memorandum and articles

of association. Besides, it

must obtain a certified copy

 of the Board's resolution

authorising the company to

be a surety.

9. A contract of guarantee may

be written or oral and it may

be express or implied. But

to be on the safer side, the

bank should enter into a

contract with the surety in

writing on the printed form

drafted by legal experts of

the bank.

10. The contract of guarantee

must be carefully drafted so

that it may not contain any

loop-hole because of which

the surety may avoid his

liability. It should contain

 the terms and conditions of

the contract of guarantee.

11. The guarantee bond should

be signed in the presence of

bank officials in the premises

of the bank.

12. The banker must insist upon

a running guarantee which

will cover all the advance to

be made to the principal

debtor. In case, the

guarantee is for a specific

debt, the bank should be

very careful.

13. The banker should not alter

the terms of the contract of

guarantee without the

agreement of the guarantor.

 14. On the death or insolvency

of the borrower, notice of it

must be given to the

guarantor so that the banker

can demand the debt, if the

debt is undischarged by the

borrower.

8.7 KEY TERMS

Overdraft is a

temporary

arrangement

between a

banker and

customer by

• Overdraft : which the

latter is

allowed to

withdraw over

and above his

credit balance

in the current

account up to

an agreed limit
 Cash credit is

an

arrangement

by which the

customer is

allowed to

borrow money

up to a certain

limit. It is an
• Cash Credits :
active and

running

account to

which deposits

and

withdrawals

may be

effected

frequently.

When

Clean advances are

• :
Advances granted by the

bank on the
 personal

security of the

borrower

without any

tangible

security they

are called

clean or

unsecured

advances.

Bailment of

goods as

security for

payment of a
• Pledge :
debt or

performance

of a promise is

called pledge.

Mortgage is a

method of

creating
• Mortgage :
charge on

immovable

properties like

land and

building.
 The mortgage

of movable

property for

securing loan

is called

hypothecation.

In case of

hypothecation,

a charge over

movable

• Hypothecation : properties like

goods, raw

materials,

goods-in-

progress is

created and

neither

possession nor

ownership is

passed to the

creditor.
 A guarantee is

a promise

made by one

person to be

• Guarantee : collaterally

liable for the

debt, default

or miscarriage

of another.

8.8 SUMMARY

The sound principle of lending depicts

the bankers’social responsibility i.e.,

the bankers are supposed to lend

advances to productive purposes

only., and also must contribute to the

economic development of the country

by showing a national interest while

making loans and advances. The

various methods of creating charges

and their significance also explained.

CHECK YOUR PROGRESS

1. State True or False

a. In case of ‘Loan’, the

entire amount is paid on

an occasion either by cash

or by credit in his current

account.

b. Discounting of bills of

exchange is a clean

advance.

c. In the case of a secured

loan or advance, the

market value of assets is

 less than the amount of

such loan or advance.

d. In the case of

hypothecation both

ownership and possession

remain with the debtor.

e. Pledge deals with

immovable assets.

2. The confidence in the

borrower, in the case of an

unsecured advance, is judged

by the banker by considering:

a. character of the borrower

b. capacity of the borrower

c. capital of the borrower

d. all the three

3. Lien is a right of the__to retain

the properties of_until the debt

is paid back.

a. creditor, debtor

b. debtor, creditor

c. banker, debtor

d. banker, creditor

4. Mortgage is a method of

creating charge on_____.

a. Movable properties

b. immovable properties

c. both movable and

immovable properties

d. none

5. As per the Contract Act 1872,

a guarantee can be :
 a. in written form only

b. in oral form only

c. in oral form accompanied

by written form

d. d) (a) or (b)

8.9 ANSWERS TO ‘CHECK YOUR

PROGRESS'

1. a. T;

b. T;

c. F;

d. T;

e. F

2. d;

3. a;

4. b;

5. d.
8.10 QUESTIONS/EXERCISES

Section - A:

1. What do you mean by a loan?

2. Write short note on discounting

of bills and cheques?

3. Define secured and unsecured

loans.

4. What is pledge?

5. Define hypothecation.

Section - B:

1. Explain the sound principle of

lending.

2. Critically evaluate the various

forms of lending.
3. Differentiate cash credit from

overdraft.

4. Explain the various methods of

creating charge.

5. Give an account of different

types of mortgage.
 UNIT 9

ADVANCES AGAINST
COLLATERAL SECURITIES

Structure

9.0 Introduction

9.1 Unit Objectives

9.2 Advances against Collateral

Securities-Introduction

9.3 Advances against Goods

9.4 Advances against Documents

of Title to Goods

9.5 Advances against Life Policy

9.6 Advances against Stock

Exchange Securities

9.7 Advances against Book Debts

 9.8 Advances against Jewellery
and Bullion

9.9 Advances against Fixed

Deposit Receipts

9.10 Advances against

Government Securities

9.11 Advances against

Immovable Property

9.12 Key Terms

9.13 Summary

9.14 Answers to ‘Check Your

Progress'

9.15 Questions/Exercises

9.0 INTRODUCTION
The main source of income for the
bank is the interest it charges on

the loans and advances. The bankers

lend its funds on the security of

various assets both movable and

immovable. This unit explains the

types of securities lodged with

banker for securing advances. The

precautions that a banker should

follow while advancing against these

securities also discussed.

9.1 UNIT OBJECTIVES

• To give an account of the

important types of collateral

securities lodged with banker for

securing advances.

• To explain the precautions to be

taken by the banker before

granting advancing against these

securities.
 • To illustrate the various merits

and demerits of advancing

against these securities.

9.2 ADVANCES AGAINST

COLLATERAL SECURITIES-
INTRODUCTION

A prudent banker ensures that

advances given to the businessmen

and the industrialists are backed by

sufficient collateral securities. These

securities must be tangible and easily

marketable so that the bank may sell

them for realising the debt in case

of default by the borrower. The most

important types of securities lodged

with banker for securing advances

are:
 1. Goods

2. Documents of title to goods

3. Life polices

4. Stock Exchange Securities

5. Book Debts

6. Bullion and Ornaments

7. Fixed deposit receipts

8. Government securities and

9. Immovable properties

9.3 ADVANCES AGAINST GOODS

Goods or merchandise are accepted

as securities by the banks for

granting loans to the borrower. The

goods may be agricultural products

like paddy, rice wheat, tobacco,

cotton, oil seeds and raw jute,

industrial raw material and finished

products, plantation products, mining

products and so on. The essential

characteristic of all these goods is

that they are movable.

Precautions:

A banker should take the following

precautions while granting advancing

against the security of goods:

1. The borrower should be

trustworthy. He should have

experience in dealing with the

goods offered as security.

2. Advances should not be granted

for speculative purposes.

3. The banker should have

a working knowledge of the

special features of commodities

offered to him as security.

He must study the market

trends on various commodities

in order to protect his interest.

4. The banker should accept only

those commodities as securities

which are readily saleable.

5. The banker should verify the

ownership and title of the goods

offered as security. The banker

should deal only with the owner

of goods or the agent in

possession.
 6. The banker should make proper

valuation of the goods offered as

securities.

7. The banker should not accept

goods which are liable to

deterioration by storage for a

considerable time.

8. The banker should decide about

the nature of the charge to be

created on the goods offered as

security such as pledge or

hypothecation.

9. The banker should decide about

the margin to be kept against the

value of the goods.

10.
In order to safeguard his interest
it is necessary for the banker to
 see that the goods are
delivered to him before the

grant of the loan.

11. The banker should take

constructive possession of the

goods charged. It is not

necessary to have the goods

removed from the customers god

owns to that of the banker. The

handing over of the key of his

god own by the customer to the

banker and transferring the

services of the customer to the

banker and transferring the

services of the watchman if any,

by the customer to the banker

constitute constructive delivery

or transfer of possession.
12. Great care should be taken in

the produce and goods not only

to avoid their deterioration but

also to guard against risks or

pilferage etc.

13. In case, it is difficult on the part

of the pledger to hand over the

key of the warehouse to the bank

when the goods have to be

processed, the physical

possession or handling of the

goods may be allowed to the

pledgee under delegated

authority. In such case, it is

advisable for the banker to have

its name plate displayed in the

god own indicating that the

goods are pledged to it in order

 to prevent the subsequent

fraudulent pledge of the same

goods.

14. When it is not practicable to have

constructive possession of the

goods at the time of the grant of

the loan the banker may ask the

customer to enter into a contract

of hypothecation by which he

should undertake to pledge the

goods subsequently when he is

required by the banker to do so.

15. Goods should be insured against

and other risks unless insurance

is specifically waived.

16. Goods must be periodically

inspected as to quality, quantity

and condition and advances

 should be granted for short

period.

17. Dealers are required by

Government to take licences for

trading in certain commodities.

The banker should ensure that

these licences are obtained by

borrowers.

The security documents must be

correctly executed.

Reserve Bank of India issues

directives from time to time imposing

restrictions on advances against

certain commodities. Banks should

follow these directives.

Merits of this Security.

1. Most of the goods have a ready

market and can be easily sold

than other kinds of securities.

2. In the case of necessaries like

rice, wheat, etc. the price is

fairly stable.

3. For most of such goods value can

be easily ascertained because

prices of these commodities are

published in newspapers, reports

etc.

4. The banker gets tangible

securities and the procedure

involves minimum formalities.

Demerits

1. Goods are liable to deterioration

in quality over a period of time

 which reduces the value of the

security.

2. Cost of transportation from the

place of borrower to that of the

bank may be prohibitive.

3. There may be problems in

warehousing the security.

9.4 ADVANCES AGAINST

DOCUMENTS OF TITLE TO GOODS

With the growth and expansion of

trade and commerce new kinds of

securities have got recognition and

documents of title to goods are

among such securities. They are

subject to negotiation by custom. The

document of title to goods is a

transferable security. But it may not
be a ‘negotiable instrument’ as

defined in Sec. 13(1) of Negotiable

Instrument Act, 1881. In the case

of a document of title to goods, the

transferee will have a title subject to

defects, if any, of the transferor.

A document of title to goods, includes

a Bill of Lading, Dock Warrant,

Warehouse keeper's Certificate,

Wharfinger's Certificate, Railway

Receipt etc. These documents used in

the ordinary course of business are

proof, for the possession or control of

goods. In the case of advance against

documents of title to goods, it should

be borne in mind that the ultimate

security is the stock of goods they

represent and not the document

themselves. As the real security are

the goods, the usual precautions with

regard to advances against goods

must be kept in mind at every stage.

A. BILL OF LADING

A bill of lading is a document

issued and signed by the

authority of a ship's captain

acknowledge that the goods

described in the bill have been

duly received on board. It also

contains an undertaking to

deliver the goods to the

consignee or to his order

provided that the freight and

other charges specified in the bill

of lading have been duly paid.

The endorsement and delivery of

this document operates as a

symbolic delivery of the cargo. It

is usually drawn in sets of three.

In order to avoid risk in transit,

the shipper (The seller or the

sender) sends one copy by mail

to the importer, another by the

following mail while he himself

retain the third copy.

A bill of lading is not a negotiable

instrument. It is a symbol of

goods while at sea. It represents

goods and not money. As in the

case of a negotiable instrument,

a transfer of a bill of lading can

be made in his own name. A

bonafide transferee gets a better

title than that of the transferor

in the case of negotiable

instrument It is not so in the

case of bill of lading. As such,

a bonafide transferee of a stolen

bill of lading gets no title to it

When a banker advances money

against a bill of lading he has to

bear in mind the above details.

Moreover, the bill of lading

contains a clause to the effect

that the weight and contents are

unknown. Hence, he can protect

his interests by insisting on an

invoice indicating the value and

description of the goods are

shipped in good order and

condition. Another important

consideration of the banker is to

see that the goods are covered

by proper insurance policy. He

should insist that the bill of

lading should be delivered along

with the insurance (marine)

policy. The description of the

goods in the insurance policy

should tally with the contents

found in the bill of lading. And

the value stated in the invoice

and the amount for which the

goods insured will act as guide

for determining the value of the

shipment.

It is always advisable to get the

bill of lading endorsed in blank.

It is advisable to get a letter of

 hypothecation, or memorandum

in support of all his claims. It

will protect the banker from any

liability for freight and other

charges incurred on the goods.

B. WAREHOUSE RECEIPT

The All India Rural Credit Survey

Committee set up by the Reserve

Bank of India in 1954 pointed

out the need for setting up

warehouses in the public sector.

When goods are deposited in a

public warehouse, the warehouse

keeper issues a document stating

that certain goods are held in

this warehouse which will be

delivered to the person

mentioned therein. Unlike other

documents of title, this

instrument is ordinarily not

transferable except in some

States like Bombay.

In practice, bank advances

against the security of

warehouse receipt are restricted

to the depositor or the first

endorsee or transferee only.

When a banker advances money

on the basis of a warehouse

receipt, he has to take the

following precautions:

Precautions:

1. The warehouse receipt is a

document of title to goods.

As such it should not be

forgotten that the receipt

 itself is not a security and

the real security lies in the

goods themselves with all

the attendant risks there to.

2. The banker should see

whether the warehouse

issuing the receipt is

licenced in the particular

State or not.

3. It is better to get a

declaration from the person

approaching the banker to

the effect that the goods

evidenced by the receipt are

his absolute property.

4. The bank should verify the

receipts as to its

genuineness.
5. He should take serious note

of part delivery, if any. If

there was any part delivery,

the warehouseman is

required to make a suitable

endorsement on the receipt

itself.

6. As soon as the receipt is

deposited as a security, he

should send an intimation of

such lodgement in duplicate

to the warehouse man. He

may be requested to

acknowledge the intimation

by returning the duplicate,

duly signed.

7. If there is any difficulty in

the adornment (point 6) a

 wiser course would be to

arrange for the surrender of

the receipt. Then he can

issue a fresh receipt in the

bank's name where upon the

advance may be made.

8. A declaration should be

obtained from the depositor

of the receipt that he will not

take delivery by furnishing

indemnity etc.

9. He should see whether

insurance premia, rent or

other charges for the

warehouse, if any, properly

paid in time.

10. He must take care of the

proper storage of the goods.

 11. He should periodically verify

the stock.

C. DOCK WARRANT

A dock warrant is a document

given by dock authorities for

goods deposited. The document

describes the goods,

acknowledge the receipt of them

and undertakes to deliver them

to the depositor or his order by

endorsement. The document can

be transferred by endorsement

and delivery.

PRECAUTIONS

1. When a banker accepts such

a security for advance he

should make it a point of

register himself as the owner

 of the goods. He should also

register with the dock

authorities a ‘stop order’, so

as to prevent unauthorised

dealings with the goods.

2. He should take all the

general precautions

mentioned in connection

with the document of title to

goods. (Here the general

precautions refer to the

general precautions

mentioned under warehouse

receipt.)

D. DELIVERY ORDER

A delivery order is a document

addressed to the proprietor of

the warehouse where the goods

are lodged by their owner. It

purports to convey his (owner's)

instructions regarding their

owner. A delivery order can be

transferred by endorsement and

delivery. The owner or his

assignee can fill in the name of

person who is authorised to take

delivery of the goods.

It is advisable for the banker

when he advances money to

have the goods transferred to his

name. Where a borrower wants

to sell the goods which are under

the banker's control, the former

(the borrower) will have to apply

to the latter (the banker) for a

delivery order. When the

borrower pays the amount due
from him the banker will have to

issue necessary instructions by

means of a delivery order
addressed to the warehouse
keeper with whom the goods

remain stored. In case of

indebtedness of the borrower, he

will be required to sign a trust

receipt promising to pay the sale

proceeds of the goods to be

delivered. The borrower shall be

required to give full particulars

regarding the net amount, due
date of payment etc.

Precautions

1. A banker who accepts a

delivery order as the

security against his

 advances shall take into

account the financial

standing and reputation of

the person or the company

which has issued the

delivery order.

2. The order should stand

registered in the name of the

pledger (the borrower).

3. As soon as it is lodger with

the banker, it should be sent

to the company pledging for

registration. Advances

should be made only when

it is received back from the

company registered in the

name of the banker.

 4. He should not advance

money on the basis of

delivery order which remains

unduly old.

5. Valuation of the goods

mentioned in the delivery

order must be done with

utmost care.

6. When goods are to be

shipped, the banker still

insist that shipping

instructions are passed on

through.

E. RAILWAY RECEIPT

Railway receipt is a document

acknowledges the receipt of

goods described therein, by

Railway authorities for the

purpose of transportation to a

place mentioned therein. It can

be transferred by endorsement

and delivery. But it is not a

negotiable instrument.

In India, the railway receipt has

acquired much importance in

commercial transactions. In

practice, it is more or less

negotiated as a Bill of Lading.

Generally, the consignor of the

goods draws a bill on the

consignee for the price of the

goods consigned. The consignee

will accept it and send it back

to the consignor. When he (the

consignor) is in need of money,

he may discount the bill or the

hundi with the banker. When

such bills are accompanied by

the railway receipt, they are

known as documentary bills. The

banker releases the railway

receipt to the consignee against

payment or acceptance of the bill

depending upon previous

agreement. The railway receipt

is to be produced before the

railway authorities to clear the

goods at destination. Usually,

advances granted against such

receipt are for very short

periods.

Precautions

1. When the railway receipt is

pledged, it will be of value

 only when it stands in the

name of the borrower or

endorsed in favour of the

banker. A railway receipt in

the name of a third party is

of no value to the banker.

2. The banker has to satisfy

himself about the value of

the goods described in the

railway receipt in order to

cover the accommodation

sought for. Otherwise, he

may be easily defrauded. He

can ascertain the value from

the consignor or through

invoice accompanying the

bills.
3. The risk notes issued by the

railways should also be

carefully examined because

goods are carried either at

the risk of the railways or at

the owner's risk.

4. The banker shall inform the

railway authorities about his

interest in the goods.

5. It is better for the banker

to advance money against

freight paid railway receipts;

or else a letter of lien has to

be taken from the borrower

pledging the goods in transit

to the bank.

6. The railway receipt should

be complete in form; its date

 should be carefully

examined. It should not be

an old one. It should not be

forged, if it is so, then, the

railway authorities will

escape liability.

7. Advance against railway

receipt can be granted only

to persons of repute and

integrity.

9.5 ADVANCES AGAINST LIFE

POLICY

A Life policy is taken for two

purposes:

1. It provides protection for the

dependents of the assured in

case of his death.

 2. It is also a type of saving and

loans can be raised on the

policies in times of need.

A life policy is a contract which is

entered into between a certain

person and an insurance corporation.

Under this contract, the latter agrees

to pay a lump sum of money to the

assured on payment of premia for

a fixed number of years throughout

the life of the assured. The policy is

called a whole life policy when the

amount is to be paid on the death

of the assured. It is called an

endowment policy when the payment

is to be made on the death or on the

attainment of a certain age by the

assured whichever is earlier.

 PRECAUTIONS

The following precautions should be

taken by a banker while accepting life

policies as cover for advances.

1. The banker should prefer the

endowment policies because they

have a fixed date of maturity.

2. The banker should satisfy that

the party who has taken life

insurance policy has an insurable

interest.

3. The insurable interest should be

present at the time of taking a

policy.

4. The banker should satisfy that

the premia have been paid up to

date. For this purpose the banker

 should call for the latest

premium receipt from the

borrower.

5. The banker should satisfy that

the life insurance policy offered

as security has been inexistence

for a minimum period of three

years to have ‘surrender value’.

6. The surrender value of the policy

should be ascertained from the

Life Insurance Corporation. The

amount of advance to be granted

should be on the basis of

surrender value. A margin of

10% is usually maintained.

7. It should be ensured that the age

of the assured has been admitted

by the L. I.C. If the age has not

 been admitted, complications

may arise as the claim will not

be settled before this formality is

completed.

8. The policy should be handed over

to the bank duly assigned by the

assured in its favour. The

assignment may be made either

on the policy itself or on a

separate stamped paper.

9. The assignment takes effect only

on its being registered with the

L.I.C. Hence, the notice of

assignment should be given to

L.I.C.

10. Assignment supersedes

nomination, if any, made by the

policy holder.
11. While assigning, all parties

having an interest in the policy

must sign the deed of

assignment. If the policy taken

out by the assured is for the

benefit of his wife then she also

must sign. If any of the children

interested in the policy is under-

aged the policy is not assignable

as a minor has no power to

assign.

12. When a banker makes advances

against a life policy, the banker

should see to that the assured

pays the premia as and when

they fall due. The value of the

policy also depends on the

continued payment of the

 premia. The covenant should

stipulate that the premia shall

punctually be paid by the owner

of the policy; or, in the event the

owner fails to pay the premium

it should empower the banker to

pay the premia and debit the

debtor's account in this regard.

13. After the advance is repaid, the

policy should be reassigned in

favour of the assured and

returned to him.

Advantages

1. As Life Insurance has been

nationalised in India, the banker

need not doubt the policies

issued by Life insurance
 Corporation of India. The policies

can be realised without any

difficulty if claims are in order.

2. The assignment of the policy in

favour of the banker can be

effected easily with perfect title

to the banker

3. The security can be realised

immediately on the borrower's

default of payment.

4. The policy is a tangible security

in the hands of the bank. All that

the banker should do is to ensure

the regular payment of premium.

Disadvantages

1. Policy lapses, if premium is not

paid regularly. The procedure for

 reviving the policy is

complicated.

2. The person who has obtained the

policy must have insurable

interest in the life of the assured.

Otherwise, the contract is void.

3. Insurance contracts are

contracts of utmost good faith.

Therefore, non-disclosure of any

particulars will make the policy

void.

9.6 ADVANCES AGAINST STOCK

EXCHANGE SECURITIES

Stock exchange securities include all

securities issued by public and

private enterprises, public authorities

and governments. They refer to the
different kinds of shares and

debentures issued by them. Bankers

readily accept stock exchange

securities as to cover for their

advances.

Advantages of Stock

Exchange Securities

1. The value of security can be

easily ascertained.

2. Gilt edged securities (those

which are issued by the

government) are less susceptible

to violent price fluctuations.

3. There are only a few formalities

to be observed when stocks and

shares are taken as security for

the advance. This does not

 involve any complicated

investigation title to them.

Moreover, stamp duty upon

mortgage of stocks and

debentures is small.

4. If stocks and debentures remain

as securities for the overdraft or

the advance extended by the

banker and in case the customer

fails to repay his dues, the

former can easily sell the

securities in the market and

realise his dues.

Disadvantages

1. Although, nowadays a very few

partly paid up shares exist there

are additional drawbacks to
 partly paid up shares, as banking

securities. Suppose, a customer

has borrowed against the

security of a partly paid up share

and not able to meet a call made.

Then, the banker may be faced

with difficulties either to advance

more money to enable the call to

be paid or the failure will result

in the forfeiture of shares.

2. The shares of private companies

are not quoted on stock

exchange. It will be very difficult

to ascertain the market value of

such share and at times may

have to lose his money.

3. There are wide fluctuations in the

prices of certain kinds of stocks.

 If the banker does not make

sufficient care in this regard, he

may have to lose his money.

4. Generally, the Articles of

Associations will have a clause

which may empower the

company with a first right over

its shares. Therefore, the banker

accepting the stocks as covers

for his advance should inform the

company concerned his interest

over the particular stocks.

Otherwise, he may lose his

priority claim over them.

5. The banker as a transferee of

stocks, may have to indemnify

the company for any less which
 the company may sustain
in regard to a forgery in

the transferor's title.

Stock Exchange Securities as

Banker's Securities

Prices of stock exchange securities

are liable to fluctuations. But

generally prices of government

securities do not vary widely. The

margin required by the bankers for

securities of industrial concerns

should be higher than in the case of

government securities. The margin in

the case of equity will be higher than

in the case of preference shares.

In the case of the debentures of

industrial enterprises the margin will

depend upon the financial position

and status of the company. However,

the margin for them will be higher

than for government bonds. High

interest rates of debentures should

never be taken to indicate their good

worth. Share of foreign companies

cannot be regarded as ideal banking

securities.

9.7 ADVANCES AGAINST BOOK

DEBTS

A customer of a bank may seek an

advance against the security of his

book debt which will either become

due or accrue due in the near future.

In other words the debt which the

customer has to realise from his
debtor is assigned to the banker. The
Transfer of Property Act of 1882

permits the assignment of an

actionable claim to anyone except to

a judge, a legal practitioner or an

officer of a Law of Justice.

“Actionable claim” means a claim to

any debt or any beneficial interest

in movable property not in the

possession of the claimant. A debt

secured by mortgage of immovable

property or by hypothecation or

pledge of movable property is not

included in actionable claim. The

person who assigns an actionable

claim is called the assignor and the

person to whom it is assignor is

called the assignee. Assignment
of debts may be with or

without consideration.

Precautions

A banker should take the following

precautions before granting a loan on

the security of a book debt:

1. The banker must inquire into the

solvency of the party owing debt

to the customer and also the

validity of the debt.

2. The assignment of a book debt

must be effected by the

execution of an instrument in

writing, signed by the transferor

or his duly authorised agent

clearly expressing his intention

 to pass on his interest in the debt

to the assignee. If the debt is in

the form of a promissory note,

the assignment must be made on

the note itself.

3. The assignor must pass an order

to his debtor to pay the assigned

debt to the banker.

4. Notice of assignment must be

served on the debtor by the

banker so as to make the debtor

to be liable to make payment to

the assignee.

5.
The banker should also take an

undertaking from his customer to

pass on to him the amount

received by the customer from

 his debtor in respect of the

assigned debt.

6. After the assignment of the debt,

all rights and remedies of the

transferor, whether by way of

damages or otherwise, shall vest

in the transferee and the later

may sue or institute proceedings

for the same in his own name

without obtaining the

transferor's consent and without

making him a party thereof.

7. The transferee of an actionable

claim shall take it subject to all

the liabilities and equities to

which the transferor was subject

in this respect at the date of the

transfer.
 9.8 ADVANCES AGAINST
JEWELLERY AND BULLION

When a banker advances money on

the security of jewellery, he has to

take the following Precautions:

1. He should get a declaration from

the pledger according of 125/D

of Defence of India (Fourth

Amendment) Rule, 1966.

2. He should carefully take into

account the purity of the

jewellery. He can even get the

assistance of a goldsmith in this

connection.

3. He can readily lend money up

to 45% of the value of the

jewellery. This margin will vary
 from time to time. This is at the

discretion of banker concerned

subject to directions from the

Reserve Bank of India.

4. The pledger should be the

bonafide owner of the jewellery

pledged. The banker should get

a declaration to this effect from

the pledger.

5. When stone-studded ornaments

are pledged, the banker should

take serious note of the value of

the stone contents. To be on the

safer side, he can approximately

reduce the value of the stone

contents from the total value of

the jewellery.
 6. When he delivers the jewellery to

the pledger, the banker should

get an acknowledgement from

the pledger, as to the details of

the jewellery delivered.

7. When the banker allows part

delivery, much care and caution

should be exercised.

8. Advance against such securities

shall be made only to people of

honesty and integrity.

No banker in India will advance

money on the security of bullions.

When we assume that a banker

advances money on the security of

bullions, then, he has to take all

precautions mentioned above in

connection with jewellery.

 9.9 ADVANCES AGAINST FIXED
DEPOSIT RECEIPTS

Banks grant advances against their

own fixed deposits. As a rule no

advance is granted against a fixed

deposit receipt issued by another

bank. The advance against banks

own receipt is usually in the form of a

loan. Sometimes, an overdraft is also

granted.

Precautions:

A banker should take the following

precautions before granting advance

against fixed deposit receipt.

1. The depositor should make an

application for the advance. In

the case of fixed deposit receipts

in the names of more than one,

all the depositors should jointly

make the application for the

advance.

2. The signature / signatures must

tally with the specimen

signatures kept with the bank.

3. The borrower should surrender

the fixed deposit to the bank.

4. The borrower should give a letter

authorising the bank to

appropriate the proceeds of the

receipt on due date towards

repayment of the advance.

5. The advance should be given to

the person in whose name the

receipt is issued.

6. A margin of 25% on the amount

of deposit should be maintained

as security.

7. Generally the interest on

advances against fixed deposit is

at least 2% higher than the

interest allowed on the fixed

deposit.

8. In the case of advances

granted against the fixed deposit

receipts issued in the name of

a minor, a declaration should

be obtained from the

guardian that the amount of

advance is being
 utilised for the benefit of the

minor.

9. The lien must be noted on the

related account in the fixed

deposit ledger and the register

as well as on the face of the fixed

deposit receipt.

10. Usually, the advance is adjusted

from the proceeds of the deposit

receipt on maturity and the

surplus, if any, is refunded to the

borrower.

11. While receiving a fixed deposit

receipt as security, the banker

should have it signed by the

depositor over a revenue stamp

in the discharge of the

instrument so that the bank gets

 the authority to appropriate the

amount of the fixed deposits

towards the repayment of the

loan.

9.10 ADVANCES AGAINST

GOVERNMENT SECURITIES

Government securities also known as

gilt-edged securities are considered a

very good security by bankers. They

are easily marketable and do not

suffer from wide price fluctuations.

Their value can always be verified

from newspaper or stock exchange

quotations.

Government Securities may be in the

form of inscribed stock or promissory

note. Inscribed stock are securities

issued by the Government in the

name of the owner of the stock. His

name is registered in the book of

the Public Debt Office of the Reserve

Bank of India. These certificates

contain particulars like the amount,

rate of interest, date of redemption

etc. There is a transfer form printed

on the reverse of the certificates.

This transfer form has to be

completed by the transferor and the

transferee for getting the inscribed

stock transferred to the latter.

Inscribed stock is not very popular as

a security because of the procedure

involved in its transfer.

Government promissory note

contains a promise by the President

of India in the case of Central

Government loans and by the

Governor in the case of State

Government loans to pay the holder

the amount mentioned on the face of

the promissory note on a particular

date after certain notice according to

the issue. A Government promissory

note is transferable by endorsement

and delivery.

Precautions

The following precautions should be

taken before granting advances

against Government Securities.

1. The banker should grant advance

only against the pledge of

 Government promissory note.

The borrower should execute the

agreement of pledge.

2. The Government promissory note

should be duly endorsed in

favour of the bank.

3. The banker should decide about

the margin to be maintained.

Generally, banks fix a margin of

10% to 15% on the market value

of Government promissory note.

4. When the Government

promissory notes belongs to

partnership firm, the constitution

should be registered with the

Public Debt Office.

5. If the borrower is a limited

company the lending banker

 should ensure that the power of

the officer of the company

endorsing the promissory notes

is registered with the Public Debt

Office.

6. When semi-Government

securities like bonds and

debenture issued by Port Trusts,

Municipal Corporation etc., are

offered as security the banker

should make proper enquiries

about their marketability and

fluctuations in prices.

9.11 ADVANCES AGAINST

IMMOVABLE PROPERTY

Though immovable property, e.g.,

land and building, is legally sound

and valid security for advances by

a bank, it is not popular because of

the difficulties involved in. Hindu and

Mohammedan customs and laws

relating to succession and transfer

to property plays serious obstacles

to the banker in accepting them as

security for financial accommodation.

Further there is difficulty in

ascertaining the title of the customer.

The valuation of a property is also

very difficult. Another problem is the

delay and difficulty in the realisation

of such security. The banker has also

to incur costs on the repair and up

keep of the property.

 PRECAUTIONS:

A banker should take the following

precaution before accepting the

immovable properties as securities

for granting advances.

1. Borrower's title to the immovable

property must be clear beyond

doubt. The banker should satisfy

that there is no encumbrance

against the immovable property

to be mortgaged.

2. In the case of leasehold property

the lease deed of the borrower

should be examined for the

unexpired period of lease and

whether there are any terms in

the lease deed requiring the

 permission of the lessor before

the borrower can mortgage the

property.

3. When the buildings are situated

within the municipal limits

house-tax receipts may be called

for to ensure that there are no

arrears of tax. The borrower

should also be asked to produce

the latest receipts of revenue or

any other Government dues.

4. The property should be valued

properly by any of the following

ways:

a. By employing recognised

valuers such as architects or

engineers.
 b. Sale transactions of

neighbouring properties.

c. Valuation of the property by

local authorities such as

municipalities and municipal

corporation.

d. Making enquiries with real

estate agents.

5. When a limited company creates

a simple or equitable mortgage

on its immovable property, the

charges required to be filed for

registration with the Registrar of

companies within 30 days of its

creation.

6. The bank should never part with

the title-deeds to the borrower

 or his representative during the

pendency of the mortgage.

7. When buildings become

securities for banks advances,

the bank should get it insured for

their full value at the customer's

expense. There shall not be any

under- insurance. The policy

should also be endorsed and

assigned in favour of the bank.

The borrower should undertake

to renew the policy regularly till

the loan is repaid.

8. With egalitarian attitude, the

State Governments are often

enacting Tenancy and Land

Reform Acts. These invariably

affect the mortgage. Hence,

 when the banker advances

money against land and

buildings, he has to take serious

note of the present policy of the

government in general and land

in particular. While enacting new

legislations safeguard are always

provided to protect banks

involved in such transactions.

9. The property should be valued

and inspected periodically.

9.12 KEY TERMS

Goods or

merchandise

accepted as
• Goods :
securities by the

banks for

granting loans to
 the borrower,

may be

agricultural

products like

paddy, rice

wheat, tobacco,

cotton, oil seeds

and raw jute,

industrial raw

material and

finished

products,

plantation

products, mining

products and so

on.

The document of

title to goods is

a transferable

Documents security But it

• of Title to : may not be a

Goods ‘negotiable

instrument' as

defined in Sec.

13(1) of
 Negotiable

Instrument Act,

1881. A

document of title

to goods,

includes a Bill of

Lading, Dock

Warrant,

Warehouse

keeper's

Certificate,

Wharfinger's

Certificate,

Railway Receipt

etc.

Stock exchange

securities

include all

securities issued
Stock
by public and
• exchange :
private
securities
enterprises,

public

authorities and

governments.
 They refer to the

different kinds of

shares and

debentures

issued by them.

Government

securities also

known as gilt-

edged securities

which are easily

marketable and

do not suffer
Government
• : from wide price
Securities
fluctuations.

Their value can

always be

verified from

newspaper or

stock exchange

quotations.
 9.13 SUMMARY

This chapter presented an account

of the various collateral securities

available and their salient features

and the precautions a banker should

take while advancing against these

securities.

CHECK YOUR PROGRESS

1. State True or False.

a. The banker may create

charge over goods by way

of mortgage.

b. Advances against goods

are granted for short
period.
 c. Bill of lading is usually
drawn in sets of three.

d. A dock warrant can be

transferred by mere
delivery.

e. Banker is safe while

advancing against partly

paid up shares.

2. Semi-Government securities

include:

a. bonds and debentures

issued by companies

b. bonds and debentures

issued by Port Trusts,

Municipal Corporations
etc.

c. bonds issued by banks

d. all the three
3. Banks grant advances against

their own:

a. shares -

b. safe-custody articles

c. fixed deposit

d. all the three

4. A customer may get loanson

the security of book debts

by___________.

a. hypothecating the debt

b. mortgaging the debt

c. creating lien on the debt

d. assigning to the banker.

 5. A delivery order is a document

addressed to the_of the

warehouse.

a. proprietor

b. hirer

c. banker

d. none.

9.14 ANSWERS TO ‘CHECK YOUR

PROGRESS'

1. a. .F;

b. T;

c. T;

d. F;

e. F
2. b;

3. c;

4. d;

5. a.

9.15 QUESTIONS/EXERCISES

Section-A:

1. What is a bill of lading?

2. What do you mean by quasi-

negotiable instrument?

3. What precaution a banker should

take while advancing against the

security of jewellery and bullion?

 Section-B:

1. Examine the advisability of

lending by a banker against

goods.

2. Examine the advisability of

lending by a banker against

document of title to goods.

3. Discuss the pros and cons of

advancing a gains the stock

exchange securities.

4. What are the merits and

demerits of advancing against

the security of Life Policy?.

5. Bankers can advance against the

Fixed Deposir Receipt issued by

another bank-Discuss.
 UNIT 10

SPECIAL TYPES OF
CUSTOMERS

Structure

10.0 Introduction

10.1 Unit Objectives

10.2 Introduction-Opening of

Bank Account

10.3 Special Types of Customers

10.4 Minor

10.5 Partnership

10.6 Joint Stock Companies

10.7 Married Women

10.8 Lunatics

10.9 Drunkards
10.10 Joint Account

10.11 Joint Hindu Families

10.12 Trustees

10.13 Executors and

Administrators

10.14 Clubs, Societies,

Charitable Institutions etc.

10.15 Mohammedan Customer

10.16 Key Terms

10.17 Summary

10.18 Answers to ‘Check Your

Progress'

10.19 Questions/Exercises

10.20 Further Reading.

 10.0 INTRODUCTION

Bankers deal with different types of

customers like minors, partnership

firms, joint stock companies, clubs

and societies, joint hindu families,

mohammedan customer, trust

accounts, drunkards, lunatics and the

like. There are various Laws which

govern these types of special

customers. The bankers while dealing

with these types of customers must

be familiar with the precautions to

be followed for each and every type

of customers. This unit attempts to

explain the general precautions to be

followed by the banker while opening

an account and also the specific
precautions to be followed in the case

of special types of customers.

10.1 UNIT OBJECTIVES

• To illustrate the general

precautions to be followed by the

banker while opening an account

• To give an account of the special

types of customers who will deal

with the bankers.

• To explain the precautions to be

taken by the banker while

dealing with these special types

of customers.
 10.2 INTRODUCTION - OPENING
OF BANK ACCOUNT

A banker has to observe certain

formalities before opening an account

in a person's name. He should be

careful while opening an account

because the special features of the

relationship between himself and the

customer impose several obligations

on him. Any negligence on the part

of the banker may result in serious

consequences not only to the banker

concerned but also to other banker

and the public. Therefore, the banker

reserves the right to open an

account. The procedure for opening a

bank account is discussed below.

1. Letter of Introduction or

Reference:

Anyone who is desirous of

opening a savings account or

current account in a bank has to

make a request in the prescribed

form to the bank. If he is not

known to the banker he has to

mention the name of references

from whom the banker can get

information relating to his

integrity and status. An account

will be opened if the banker is

satisfied as to the integrity and

status of the applicant.

Opening of accounts

without proper
Introduction carries the

following risks:

i. Risks in the case of

Overdrafts:

For instance, when there is

no credit balance in the

name of the customer and

the bank clerk may misread

the balance and honour the

customer's cheque. If he

does so, it will amount to

the grant of an overdraft and

can be realised only if the

customer is a gentleman and

not a characterless cheat.

Similarly, if a credit item

belonging to a particular

customer is placed to the

credit of another customer's

account, the latter may

unscrupulously draw the

amount and close the

account. Here, too the

banker will suffer a loss.

If the customer is a

respectable person, the

banker can collect back the

amount over paid. In such

circumstances, the

introduction or reference will

protect the banker against

such inadvertent overdraft

and fraud.
ii. Risk in the case of
Undischarged Insolvent:
When a person is declared as
insolvent all his assets and
funds are attachable until he
is discharged. The deposits

received by a banker from

such a undischarged
insolvent without proper

introduction carries the risk

of attachment.

iii. Risk of issuing bogus

cheques:

When a person who is not

properly introduced is
allowed to become a
customer, he may defraud
the public by issuing
cheques without having
sufficient credit balance in

his account

Some years ago in Delhi, a

well dressed person

requested a bank manager

to open an account in his

name. He further told that

he forgot to bring the box

containing the currency and

persuade the bank manager

to give him a cheque book

containing sixteen stamped

cheques for which he paid

the stamp duty of one rupee.

He also promised to send the

money on the following day.

Then he succeeded in

persuading certain
 merchants to part with their

goods, in exchange for his

cheques. Later it was found

that the cheques were

useless as the drawer had

no account at the bank. All

these were as a result of the

failure on the part of the

banker to make the

necessary inquiry regarding

the person's integrity. Such

a negligence may enable

dishonest persons to cheat

the public.

iv. The banker may be deprived

of the statutory protection

that can be claimed by the

collecting bankers only for

 those cheques collected on

behalf of a “customer”. The

term ‘customer’is to be

understood in the sense in

which it is used in banking

business. Again, he should

have acted without

negligence.

v. The bankers may have to

answer enquiries from his

fellow bankers regarding his

customers financial standing

and credit- worthiness. This

is possible only when the

banker is in possession of

such information.
2. Specimen Signature:
The intending customer has to

give his specimen signatures on

a prescribed form, generally in a

card, for the purpose of banker's

record. If the signature of the

customer on any cheque differs

from the specimen signatures

given, the banker can refuse to

honour his cheque and thus the

specimen signature safeguard

the banker against forgery.

3. Mandate for the Operation of the

Account

If the customer desires that his

account to be operated by
another person, a mandate in

writing to that effect, as well as

the specimen signatures of the

 person in whose favour the

mandate is given should be

obtained by the banker. Power to

draw and endorse cheques does

not include power to accept bills

or overdraw the account. If the

customer wishes to allow his

agent to overdraw the account

and to accept bills drawn upon

him, he should have instructed

the banker accordingly.

4. Opening the Account:

When the above formalities are

over, the banker can open the

account in the name of the

applicant The applicant should

deposit at least the minimum

amount at the time of opening

 an account. Then the banker

provides the ‘customer’with

a. the paying in-slip books;

b. the cheque book; and

c. the pass book

Thereafter, that person is

authorised to operate the

account as a customer of the

bank.

Note: Money may be paid into the

customer's account by a third person.

In the absence of notice, explicit or

implied, the banker is not concerned

with the question of the customer's

title to the money paid in by him or

any third party._

 10.3 SPECIAL TYPES OF
CUSTOMERS

A bank is an institution which solicits

deposits of money from the public.

Every person is legally capable of

opening an account with a banker, if

the latter is satisfied to the former's

bonafides. But the banker can reject

an application to open an account, if

the intending person seems to be an

undesirable person.

The capacity of certain classes of

persons such as minors, lunatics,

drunkards, married women,

undischarged bankrupts, trustees,

executors, administrators etc, to

make valid contracts is subject to
some restrictions in dealing with

these types of special customers, the

banker has to take extra care. It is

discussed in detail below.

10.4 MINOR

According to Sec. 3 of the Majority

Act, 1875 a minor is person who has

not completed eighteen years of age.

If a guardian (for him or for his

property) is appointed by a court

before the completion of his

eighteenth year, he remains to be a

minor until the completes his twenty

first year.

According to the Contract Act, 1872

a minor is not capable of entering

into a valid contract and a contract

entered into by a minor is void. But a

contract for the supply of necessities

of life to the minor is, however, a

valid contract. In all other contracts

a minor may repudiate his promise or

consent. Therefore, a banker should

be very careful and should take the

following precautions while dealing

with a minor.

1. A banker may open deposit

accounts in the name of a minor.

There is no risk involved as long

as the accounts is not overdrawn

by the minor. But if an overdraft

or advance is granted, even by

mistake, the banker, has no legal

remedy to recover the amount

from the minor.

2. A minor may be appointed as an

agent to act on behalf of another

person. Even though a minor is

incapable of entering into

contracts in his own name, he

can do so, as an agent. With

proper authority from the

principal, he can draw, accept

and endorse cheque and bills of

exchange and even overdraw,

the principal's account; provided

the principal is competent to

contract. For instance, a minor

son can operate bank account of

his father, if his father has duly

authorized him to do so.

3. A minor can be admitted to the

benefits of a partnership with the

consent of the other partners.

But he will not be personally

liable for the loss or debt of the

firm. Within six months after

attaining the age of majority he

should expressly repudiate the

contract of partnership.

Otherwise, he will be assumed

to have affirmed it and will be

liable as a general partner of all

debts incurred by the firm from

the date he was admitted to the

benefits of partnership.

4. The assets of a minor pledged

with the banker as security for

the advance taken by the minor

 are not legally available to the

banker. Such a pledge itself is

invalid.

5. If an advance is granted to a

minor on the basis of guarantee

of a third party, such an advance

also cannot be recovered from

the guarantor. Because, the

contract between the creditor

(banker) and the principal debtor

(minor) is void on the ground of

the latter's minority status.

6. A joint account in the name of

a minor and an adult can be

opened in the usual manner. But

the minor cannot be made

personally liable for any

overdraft or loan granted by the

banker.
 7. A minor may draw, endorse or

negotiate a cheque or bill. He

cannot be sued in respect of a

bill accepted him during his

minority. Nevertheless, such bill

or cheque, will be a valid

instrument and all other parties

will be liable in their respective

capacities (Sec. 26 of the

Negotiable Instruments Act,

1881)

10.5 PARTNERSHIP

According to Sec 4 of the Partnership

Act, 1932, “a partnership is the

relation between persons who have

agreed to share the profits of a

business, carried on by all of any of

them acting for all”. Thus, a firm is

not regarded as a separate entity.

A banker should take the following

precautions while opening and

dealing with in account in the name

of a partnership firm.

1. A firm's account should be

opened in the name of the firm

and not in the name or name of

the partners. An account in the

name of the firm may be opened

by the banker only of receipt of

an application signed by one or

more of the partners. In general

every partner has an implied

authority to open a bank account

 in the name of the firm except

when he is expressly prohibited

from doing so.

2. Before opening, of such account,

a clear mandate should be

obtained as to the partners who

are authorised to draw cheques

or borrow money and accept bills

of exchanges and those who

have the power to mortgage any

property belonging to the firm.

3. The authority given to operate

the firm's account to a partner

may be withdrawn by any of the

other partners by giving a notice

to the banker. A partner of a firm

has got the implied authority to

stop the payment of a cheque

 issued by any other partner on

the firm's account

4. If a cheque which is payable to

the firm is deposited by a partner

to the credit to his personal

account, the banker should

enquire the other partners

regarding it. The banker should

be more careful in the case of

a cheque sent in response to

pressure for repayment of an

overdraft on the ‘partner's

private account’.

5. In the case of retirement of a

partner the liability of partner

ceases in respect of all

transactions subsequent to the

date of his retirement. If no

notice is given to the bank of

such retirement, the retiring

member will continue to be liable

for the advance made even after

his retirement. However, on the

retirement of a partner and on

the admission of a new person in

his place the banker will release

the retiring partner and accept

the newly constituted firm as his

debtor in the place of the old

firm. If the banker does not want

to relinquish his claim against

the retiring partner, he will close

his account and open a new

account in order to avoid the

application of the rule in

Clayton's case.
6. When a notice of insolvency of

the firm is received, the bank

must stop the operation of the

account whether it is in credit

or debit. In case it is in credit

it must be handed over to the

official receiver. If it is in debit,

the debt should be proved, for

obtaining the dividend from the

receiver.

7. In the case of insolvency of a

partner and when the account

shows a debit balance, it must be

closed to prevent the operation

of the rule in Clayton's case. The

debt should also be proved

before the official receiver. In

case of credit balance, the other

 partner may continue the

account but the bank should

obtain a new mandate to that

effect. A cheque

drawn previously by an

adjudicated insolvent can be

honoured only on confirmation of

the same by the remaining

solvent partners.

8. On the death of a partner and

when the account is in credit the

other partners may continue to

operate the account on giving a

fresh mandate to the banker. If

the account is in debit, the

account must be closed to

determine the liability of the

deceased partner's estate. When

 an unpaid cheque issued by the

deceased partner is presented, it

can be paid on confirmation by

other partners.

9. Money can be transferred from

the private account of a partner

to the account of the firm at the

request of the partner

concerned. On the contrary, a

partner's private account shall

not be allowed to be set off

against the firm's account.

Rules in Clayton’s Case

1. The debtor has first choice and

can appropriate any payment to

settle any debt, provided he

makes his appropriation at the

time of payment.
2. If the debtor does not make

appropriation at the time of

payment the creditor may make

any appropriation he chooses.

3. a. When neither the debtor nor

the creditor appropriates

and also when there is an

unbroken current account

which continues or goes into

credit, the first item on the

credit side is reduced by the

first item on the debit side

(the sum first paid in is first

paid or drawn out) and

b.
Where an account continues

or goes into debit, the first

item on the debit side is

 reduced by the first item on

the credit side (the sum first

paid in is first paid or drawn

out) and

c. Where an account continues

or goes into debit, the first

item on the debit side is

reduced by the first item on

the credit side (the first

payments out of the account

are repaid or reduced by the

first payments in).

10.6 JOINT STOCK COMPANIES

A joint stock company is an artificial

person, with perpetual succession,

brought into existence under the

provisions of the Companies Act,

1956. It enjoys a good many of the

attributes of person. Its’entity is

separate from that of its share

holders. It can own property in its

own name, carry on lawful business

and incur liabilities. While opening

and dealing with a joint stock

company's account, the banker

should be very cautious.

1. Verification of Documents:

A Memorandum of Association is

the charter of the company. It

lays down the objects for which

the company is formed, the

name of the company, the place

of business, the liability which

each member will undertake and

the amount of capital with which

it proposes to commence the

business. Anything done beyond

the scope of the objects of the

Memorandum of Association is

ultra vires and cannot be ratified

even by a unanimous vote of the

shareholders.

Articles of Association contain

information relating to the

appointment and powers of the

officers and directors, shares and

share certificates, calling of

meeting, quorum, passing of

resolutions, voting rights etc.

But in all matters, the articles

are subject to the memorandum.

Certificate of Incorporation and

the Certificate of

Commencement of Business will

serve the banker to ascertain

whether the company is a duly

incorporated body and all the

formalities regarding the

formation of company have been

fulfilled by the promoters. The

banker should ensure that the

company (applying for opening

an account) is for duly registered

and incorporated body by

examining these documents.

A public limited company has to

obtain both the certificate of

incorporation and certificate of

commencement of business. But

a private limited company is not

required to get the certificate of

commencement of business.

Every person, including the

banker, who is dealing with the

company should examine the

Memorandum of Association and

Articles of Association

completely. They should take

care to see that their dealings

with the company do not go

against the provisions of these

documents. Therefore, the

banker should scrutinise the

documents very carefully in

regard to the following:

 a. the powers of directors in

conducting the affairs of the

company.

b. the procedure for borrowings

and the limitation of

borrowings, if any.

c. the power vested in the

directors to borrow money

for the company and to

mortgage the assets of the

company.

d. the procedure and authority

to draw and endorse

cheques, bills etc, on behalf

of the company.

The banker should also obtain

the printed and certified copies

of the Memorandum of
 Association and Articles of

Association for the purpose of his

own records. It the banker has

any doubt he can inspect the

company's file in the office of

the Registrar of Joint Stock

Companies. In the case of a new

company, the banker should see

whether the first directors are

named in the Articles of

Association.

2. Copy of the Board's Resolution:

The banker should obtain a

certified copy of the Board's

resolution:

a. appointing the bank

concerned as the banker of

the company;
b. naming the persons or

persons who are authorised

to operate the bank account

on behalf of company;

c. stating the names of persons

who are authorised to

execute the documents on

behalf of the company; or in

whose presence the seal of

the company will be affixed

to the documents;

d. authorising to make advance

and stating all the details of

such advance, (e.g). limit of

security, rate of interest etc,

and

e. stating the names of the

persons who are authorised

 to deposit the title deeds in

the case of equitable

mortgage.

3. Private Company and Banker's

Special Care:

i. There are three

distinguishing features

between a private limited

company and a public limited

company. In a private

limited company:

a. the right to transfer its

shares is restricted,

b. the maximum number of

members is limited to

fifty.

c. the right to invite the

public to subscribe for

 shares or debentures is

prohibited.

The banker should bear

these points in his mind. But

these limitations are not

imposed on a public limited

company.

ii. Bankers should exercise

caution before sanctioning a

loan to a private limited

company which is a recent

conversion of a sole traders

concern. Because there will

be transfer of properties

from the sole traders

concern to the private

company; and later, the

creditors of the sole traders

concern cannot proceed

against the company's

property as the company

has a separate legal

existence. If the sole trader

was heavily indebted

before the formation of

the company, the transfer

may be held to be a

fraudulent one made with

the intention of

defrauding his creditors.

Such a transfer itself is in

an act of insolvency. There

is a danger in dealing with

such companies.
4. Registration of Charges Under

Companies Act:
Companies are treated

differently from individuals and

firms in regard to the

requirements regarding the

registration of certain types of

securities to be charged by them.

Section 125 of the Companies

Act gives a list of nine specific

types of mortgages and charges

that require registration. These

charges (such as a floating

charge on land, a charge made

for securing an issue of

debentures etc.) are of special

interest to bankers.
5. Consequences of Failure to

Register:
The charges are required to be
registered within thirty days

after the date on which they are

actually signed or sealed. The

date of registration may not be

the same as the date of

execution. The registration of the

charges safeguards the interest

of the creditors, including the

bankers. Failure to register the

charge will make the security
void against a liquidator or any

creditor of the company.

Moreover, priority will be given

to the charge registered earlier.
Suppose, a company borrows

from X bank on 1st April and

 th
from Y bank on 15 April and
mortgages the same property to

both. If the charge in favour of Y

th
is registered on 16 April while

that in favour of X is registered

th
on 20 April the charge in favour

of Y will have priority over the

charge created in favour of X

because the former was

registered earlier.

Subsequently registered charges

also will have priority over the

unregistered charges even if the

person in whose favour the

subsequent charge is created has

express notice of the prior

unregistered charge.
The Registrar may allow a

further period of seven days

following the expiry of the said

period of “thirty” days, if the

company satisfies the Registrar

that it had sufficient cause for

not fixing the particulars and

instrument or copy within

that period. The filing may be

allowed even after longer delay

on payment of penalty.

In fact, several companies are

not interested in registering the

charges created by them for

reasons of prestige unless the

creditors request for registration.

As such it is not obligatory for

the company to register the

 charge or mortgage. But

bankers register their claims

generally through their solicitors.

If a charge or mortgage which

requires registration is not

registered, it does not mean that

the transaction is altogether void

or the debt is irrecoverable. The

only consequence is that the

security becomes void as against

the liquidator and other

creditors.

10.7 MARRIED WOMEN

Married women are fully competent
to enter into contracts. They stand

on the same footing as a spinster so

far as property rights are concerned.

In olden days, they were not

independent of their husbands; they

could not acquire or hold property

and enter into contract. But at

present a married women can open

a current account in her own' name.

She can draw cheques against it. Her

bonafied dealings with deposit

accounts cannot be questioned by the

banker or her husband. However,

married woman cannot make her

husband responsible for debts

incurred by her except in the

following circumstances:

i. When she acts as her husband's

agent?

ii. When she borrow money for her

necessities of life or for the

necessities of the household in

 case the husband defaults in

supplying them.

The banker should be cautious

in granting an overdraft to

married women. In case of

default in the repayment of

overdraft, the banker will have no

remedy against her if she has no

separate property in her own name

with the right to sell.

In view of these difficulties

the banker should be cautious in

dealings with the application of

married women for overdrafts,

otherwise, he may suffer loss.

 10.8 LUNATICS

According to Sec. 11 of the Contract

Act, 1872, a person of unsound mind

is not competent to enter into a valid

contract. But this qualification does

not apply to contracts entered into

or ratified by Lunatics during the

periods of their sanity. However,

under Indian Laws, contracts with

persons of unsound mind are void

(Machianna Vs Usman Beari).

This being the law of the land, the

banker should not open an account

in the name of a person who is of

unsound mind. But when a banker

has discounted a bill duly written or

accepted or endorsed by a lunatic, he
can realise the money due thereon

from him unless it can be proved that

the banker knew the lunacy of the

person concerned at the time of

discounting the bill. The banker

should suspend all operations on the

account of the person as soon as he

comes to know of his lunacy. It

should remain so suspended until he

gets an order from the court or

definite proof of customer's sanity.

But bankers should not act on

hearsay reports. Transactions on the

account are valid in so far as the

banker acts in good faith and without

the knowledge of the customer's

lunacy.
Sometimes for instance customer

‘A’may authorise ‘B’to operate his

account. If ‘A’becomes of unsound

mind, B's authority to operate his

account will also cease. When the

principal himself cannot act

rationally, the agent whom he has

appointed can no longer act on the

strength of authority delegated to

him. A power of attorney, even if

expressed irrevocable, is revoked by

the customer's insanity.

10.9 DRUNKARDS

The law recognises contracts only

when the parties to the contracts are

of sound mind at the time of entering

into contracts. A person can escape
from liability arising out of a contract

if he proves in a court that at the

time of entering into the contract, he

was under the influence of liquor and

could not form a rational judgement

as to its effects and this fact was

known to the other parties to the

contract. This provision, prevents

people from taking any undue

advantage of a drunken person. In

case the instrument has passed into

the hands of a holder who takes it

in good faith and for value, the

instrument will remain valid even

against a drunken person.

When a drunken customer tenders a

cheque and demands payment, the

banker will have a witness to the

signature and payment of the

amount.

10.10 JOINT ACCOUNT

When two or more persons open an

account jointly, it is known as joint

account. Generally, banks make their

joint account holders sign a

comprehensive mandate covering all

possible transactions. The bankers

take the following precautions in

opening and dealing with joint

accounts:

1. The application for opening a

joint account must be signed by

all the intending persons.

2. The banker must obtain clear

instructions in writing, signed by

all the joint account holders as

to the operation of the account.

That mandate should include the

name or names of the persons

who are authorised to take

advances and pledge securities

etc., In the absence of such

instructions the banker should

honour only those cheques which

bear the signatures of all the

persons in whose names the

account stands.

3. The insolvency of even a single

joint holder puts an end to the

mandate and the operations

 of the account will cease.

Payments from the account

should be made on the joint

direction of his trustee of the

insolent party and the solvent

parties.

4. The authority given to one or

more persons to withdraw from

joint account is automatically

revoked by the death,

bankruptcy or insanity of the

person who has given the

authority. Likewise, the party

giving the authority has the right

to revoke the authority at any

time.

5. The mandate will also deal with

the question of survivorship. On

 the death of one of the joint

account holders, the survivors

are entitled to the whole amount.

6. The instructions in the mandate

should make it clear whether the

person or persons authorised to

draw the cheques are also

authorized to overdraw the

account. If so, it is essential for

the banker to establish separate

individual liability of joint

account holders in addition to

their joint liability. In such case,

the banker can recover the

amount from all the joint account

holders or from one or more of

them.
7. There should be clear

instructions regarding the

powers of the person relating to

withdrawal and pledging of

securities.

8. A common example of joint

account is that of a husband and

wife. It was held in Marshall Vs

Curtwell that where an account

is opened by a husband for his

convenience, the balance cannot

be claimed by his widow but has

to be brought into the deceased

person's (then husband's)

estate. In S.K. Panickar Vs

Travancore National and Quilon

Bank Ltd it was held that under

the prevailing law in India a

 deposit by a Hindu husband in

the name of himself and his wife

payable to either or survivor

must, in the absence of evidence

to the contrary, be presumed to

belong to the husband. On the

other hand, it is clear that the

intention of the husband is to

provide for his wife in case of his

untimely death, the widow will

receive the money. This was held

in Foley Vs Foley.

10.11 JOINT HINDU FAMILIES

All the members in a joint Hindu

family acquire a right in the ancestral

property by birth. This right dates

from conception.
In order to charge a Joint Hindu

Family's estate, it is necessary that

all the members of the family should

join in the execution of the deed or

give their consent or that the deed

should be made by the head of the

family in his capacity as Karta or

manager. The head of the Joint Hindu

family is known as ‘Karta’is

authorised to do certain acts [which

are beneficial to the family] on behalf

of the family. The charge created by

the Karta is binding on the family

only if the loan for which the charge

created is taken for a necessity or

benefit to the family or is in

discharge of lawful antecedent debt

due from the family. Before granting

loan to the Karta, the banker should

satisfy himself that the loan is taken

for purposes beneficial to the family.

Otherwise, he will run into

difficulties.

Powers of a Manager

The powers a manager are more

extensive than those of the Karta.

The manager of a trading Hindu

family may be such a person as the

family appoints or who holds out as

its accredited representative. He

used not be the Karta and there can

be more than one manager, if the

business is carried on at different

places.
The manger has got all powers

required for carrying on the family

business. He can contract debts for

the purpose of business. He can

pledge the property of the family for

the purpose of its ordinary business;

but not for any speculative

transaction. He can bind the

members of the family including

minors by negotiable instruments

executed in name of the firm. But he

cannot embark on a new venture.

10.12 TRUSTEES

According to the Trust Act, 1882 a

trust is an obligation annexed to the

ownership of property and arising out

of a confidence reposed in and
accepted by the owner or declared

and accepted by him for the benefit

of another or of another and the

owner [Sec. 8]. The person who

reposes the confidence is called the

Author of trust or ‘Settler’. Trustee

is the person in whom the confidence

is reposed. The person for whose

benefit the trust is formed is called

the Beneficiary. A trust is usually

formed by means of a document

called the ‘Trust Deed’. While

opening an account for a person in

his capacity as a trustee the banker

should take the following precaution:

1. The Trust Deed contains the

terms and conditions of the trust,

the names of the trustees, the

 power vested in them for

administering the Trust Property

etc. The trustees are authorized

to act jointly and are not

competent to delegate their

powers unless there happens to

be any provision to this effect

in the Trust Deed. The banker

should completely examine the

Trust Deed to ascertain the

powers and functions of the

Trustees.

2. In the case of two or more

trustees, the banker should ask

for clear instructions regarding

the person or persons who shall

operate the account. In the

absence of such instructions, all

 the trustees must sign the

cheques, etc.,

3. If a trustee expires, or retires,

the authority of the remaining

trustees depends upon the

provisions of the Trust Deed.

4. The insolvency of the trustee

does not affect the trust

property. The creditors of the

insolvent trustee cannot recover

their claims from the trust

property.

5. The banker should take all

possible precautions to

safeguard the interests of the

beneficiaries of a trust

otherwise, he shall be liable to

 compensate the latter for any

fraud on the part of the trustee.

6. The banker can grant loans to

the trustee only after having

examined their borrowing powers

as given in the trust deed. To

be on the safer side, the banker

should grant advance for a trust

only when the trustees are

respectable persons and give

personal guarantee also apart

from creating a charge on the

assets of the trust.

10.13 EXECUTORS AND

ADMINISTRATORS

There are persons who are appointed

to conduct the affairs of a person

after his death. If the latter (known

as testator) appoints the former

through a will, he is known as

executor. If the will of the testator

does not mention the name of the

executor or if the executor also dies

or refuses to act, the court appoints

a person who is known as

Administrator. The duty of the

executor or the administrator is to

realize the assets of the deceased

and payoff his debts.

The executor is appointed by will.

His power and authority are vested

therein. He has to act according to

the directions given in the will but he

has to obtain probate from the court

of law.
The administrator is appointed by the

court by a letter of administration

and is directed, in the absence of the

will, to settle the affairs according

to the provisions of law. When two

or more persons are appointed as

executors or administrators, they

shall have joint interest in the

property of the deceased.

The banker should take the following

precautions while dealing with the

executors and the administrators.

1. On the death of a customer the

banker must stop payments from

his account. The executor should

be permitted to operate the

account at the deceased after he

 has obtained the probate from

the court of law. The

administrator is authorised to do

so after obtaining the letter of

Administration. The banker

should examine these documents

before the appointed person

operates the account.

2. In the case of two or more

executors or administrators, the

banker should take clear

instructions regarding the

operation of the account

3. If the executor requires a loan or

overdraft he obtains the probate

(official confirmation of the will)

in order to make necessary

payments, bankers may insist

 that such loans shall be granted

on the personal security of the

executor.

4. After the court grants the

probate or issues the letter a

administration, the executor or

the administrator may pledge

specific assets of the testator to

obtain an overdraft from the

banker. But if the will specifically

forbids such power, the executor

cannot do so.

10.14 CLUBS, SOCIETIES,

CHARITABLE INSTITUTIONS ETC.

Often accounts are opened in the

names of clubs charitable

institutions, religious institution,
societies, libraries, schools, colleges

etc. But they are not engaged in

trading activities. The banker should

observe the following precautions in

dealing with these types of accounts

of non-trading organisation.

1. There are provisions in the

Societies Registration Act, 1860

for the registration of institution

formed for the promotion of

literature, science, fine arts or

charitable purposes. Such

institution may also be

registered under the Companies

Act or the Co-operative Societies

Act. A society gets the legal

recognition as a separate entity

from its members only after its

 incorporation under any of these

Acts. An unregistered society

cannot be sued in law. The bank

should, therefore, ensure that

the applicant society is a

properly incorporated body.

2. A registered society will be

governed by the provisions of the

Act under which it has been

registered. But it may have its

own charter or bye-laws. The

banks should not do anything

contrary to these provisions.

3. For opening a bank account, the

managing committee must pass

a resolution:
 a. appointing the bank

concerned as the banker of

the society.

b. mentioning the name or

names of the persons or

person who are authorised to

operate the account

c. giving any other instruction

as to the operation of the

account and

d. the bank should receive

authenticated copy of the

resolution passed by the

society.

4. When a registered society

intends to borrow from the

banker, the latter must ascertain

the borrowing powers of the

 society and the purpose of

borrowing from its charter or bye

laws. A resolution should have

been passed by the Managing

Committee and copy of the same

should be sent to the banker.

5. In the case of death or

resignation of the person

authorised to operate the

account, on behalf of the society,

the banker should stop the

operation of the society's

account till the society

nominates another person to

operate its account.

6. If the person authorised to

operate the society's account

had his personal account also

 with the same bank, the banker

should see that no money of the

society finds its way into the said

person's personal account.

10.15 MOHAMMEDAN
CUSTOMER

A Mohammedan can informally bind

his property by verbal words or

trusts. Therefore, the banker should

be cautious in dealing with

Mohammedan customers. In a

Mortgage suit against a

Mohammedan, the defence will

usually be that the mortgage

property is subject to religious

endowment. Moreover, a

Mohammedan cannot transmit, to

posterity, more than one third of his

property by will. While dealing with

a Mohammedan customer, the banker

will insist that the party (who claims

the money or property) must produce

a probate or a Letter of
Administration from a competent

court.

10.16 KEY TERMS

When two or

more persons

Joint open an account

• :
Account jointly, it is

known as joint

account.

According to Sec.

3 of the Majority
• Minor :
Act, 1875 a minor

is person who has

 not completed

eighteen years of

age. If a guardian

of his person or

property is

appointed by a

court before the

completion of his

eighteenth year,

he remains to be

a minor until he

completes his

twenty first year.

According to Sec

4 of the

Partnership Act,

1932, “a

partnership is the

relation between
• Partnership :
persons who have

agreed to share

the profits of a

business, carried

on by all or any

of them acting for

 all”. Thus, a firm

is not regarded as

a separate entity.

A banker should

take the following

precautions while

opening and

dealing with in

account in the

name of a

partnership firm.

10.17 SUMMARY

This chapter presented an account

of the special types of customers

and their salient features and

the precautions a banker should

take while opening an account.

 CHECK YOUR PROGRESS

1. State True or False.

a. A guarantee given by an

adult in respect of a

minor's debt is valid.

b. An account can be opened

in the name of a partner

on behalf of a firm.

c. The duty of the banker is

over as soon as particulars

regarding creation of

charges are sent to the

Registrar within 30 days of

their creation.

d. Probate is the official copy

of the will.
 e. The greatest risk in

opening a Trust account is

Breach of Trust.

2. Contracts by lunatics in India

are:

a. always void

b. always valid

c. always voidable

d. at times voidable

3. The best procedure for opening

an account in the name of a

minor X and the guardian Y

would be under the style:

a. ‘X’Account

b. ‘X’Account -Minor

c. ‘Y’in trust for Minor ‘X'

d. ‘Y’Account- Minor
4. The balance of a joint account

in the name of X, Y, and Z

should be paid on the death of

X to:

a. the legal representative of

‘X '

b. to Y and Z

c. to Y or Z

d. the legal representative of

X, Y and Z

5. A customer's letter of

instructions, without any

stamp, in connection with the

operations of his account is

known as:
 a. power of attorney
b. authority letter

c. probate

d. mandate

10.18 ANSWERS TO ‘CHECK

YOUR PROGRESS'

1. a. aF;

b. F;

c. T;

d. T;

e. T

2. c;

3. c;

4. d;

5. d.
10.19 QUESTION S/EXERCISES

Section - A:

1. What do you mean by ‘Rule of

Survivorship'?

2. List down the important risks in

opening an account in the name

of a minor.

3. How will operate the accounts of

lunatics and drukards.

4. Explain the precautions the

banker should take while opening

account in the name of Joint

Hindu Family.

5. Explain the precautions the

banker should take while opening

account in the name of Trust.
 Section - B:

1. What steps should a banker take

on receiving information

regarding the death of a partner

in a partnership firm.?

2. As a banker, what will you do

when an existing customer

becomes insane?

3. What are the precautions should

a banker take while opening an

account in the name of:

4. a) a minor b) a married woman

c) executors d) joint stock

companies
10.20 FURTHER REAPING
1. Banking Theory, Law and

Practice by Gordon and

Natarajan.

2. Banking Theory, Law and

Practice by Sundaram and

Varshney.

3. Banking Law and Practice in

India M.L. Tannan

 MODEL QUESTION

I209/BA3 _________________MAY

2007

BANKING LAW AND PRACTICE

(For those who joined in July

2003 and after)

Time : Three Maximum : 100

hours marks

SECTION - A (4*10=40 Marks)

Answer any FOUR questions.

All questions carry equal marks.

Answer not exceeding 1 page.

1. What are the obligations of a

banker towards his customer?

2. Discuss the legal position of a

banker regarding fixed deposit?

3. Define a cheque and bring out its

salient features.

4. What is meant by crossing? What

are various types of crossing?

5. What is payment in due course?

What are its essentials?

6. Discuss the legal aspects of

entires in a pass book.

7. Explain the special features of a

negotiable instruments.

8. What are the duties of a

collecting banker?
 SECTION - B (3*20=60 Marks)

Answer any THREE questions.

All questions carry equal marks.

Answer not exceeding 3 page.

1. “The relationship between a

banker and customer is primarily

that of a debtor and creditor”. -

Discuss.

2. What is an Endorsement? Explain

the essentials of a valid

endorsement.

3. Enumerate the instances in

which a collecting banker in India

may loose his statutory

protection on the ground of

negligence.
4. Explain the various types of

securities against which a banker

grant advances.

5. Define bill of exchange and state

its essentials? How does it differ

from a promissory note?

6. What precautions should a

banker take while opening

current accounts in the names of

a (a) Joint Account (b) Executers

and Administrators.