banker customer relationship

Banker Customer Relationship

Banking is 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”

The essential characteristics of a banking business are:

– a) collecting cheques for customers;

– b) paying cheques drawn by customers;

– c) keeping different accounts for customers.

–

A person becomes a customer and a contract is created when an account is opened – Contractual relationship

Banker Customer RelationshipThe Contract

• When a customer pays money into his account

• the bank = a debtor

• customer = creditor. Foley v Hill (1848) 2 HL Cas 28 The money becomes the property of the bank; the bank has borrowed the money from the customer

• Balmoral Super market Ltd v Bank of New Zealand [1974] 2 NZLR 155 money stolen at the counter still the property of the customer;

• Chambers v Miller (1862) 13 CBNS 125 money drawn by a customer from overdrawn account belongs to the customer

Banker Customer RelationshipImplied Terms

• The bank will receive the customer’s deposits and collect cheques

• The bank will comply with written orders (i.e. cheques) issued by its customers assuming there is sufficient credit in the account;

• The bank will repay the entire balance on the customers demand at the account holding branch during banking hours - Libyan Arab Foreign Bank v Bankers Trust [1989] AC 80 PC

• The bank will give reasonable notice before closing a customer’s account if it is in credit

Joachimson v Swiss Bank Corporation [1921] 3 KB 110 CA

• The bank must only act on its customer’s valid instructions and not on any forgery of those instructions Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank [1986] AC 80 PC


Express Terms

• Must be made clear to the customer

• e.g. Electronic Banking and Charges


Implied Terms

A customer only has duties to:

• To exercise reasonable care when drawing cheques to prevent forgery and alteration; and

• To notify the bank if he actually knows of forgeries on his account London Joint Stock Bank v Macmillan and Arthur [1918] AC 777 HL and in Greenwoods v Martins Bank [1933] AC 51 HL


Termination of the Contract

• Termination by the Customer

• Termination by the Bank Prosperity Ltd v Lloyds Bank (1923) 39 TLR 372.

• Termination by Law

a) Death of the customer;

b) Mental incapacity of the customer

c) Bankruptcy or insolvency of bank or customer.


Duties of the Bank• Duty to collect cheques• Duty to honour cheques• Duty not to pay a cheque without authority• Duty to obey customer's countermands of cheques(Stop

Payment)• Duty to tell customer of forgeries• Duty to inform customers of the state of the account• Duty to act on notice of deathDuty of care and skill• the bank will carry out its services for the customer with

reasonable care and skill.


Duty of care and skill

• The customer has a duty to take reasonable care to prevent forgery and alteration of cheques.

• But if a cheque is altered without the customers authorisation the cheque is worthless . Therefore the bank will be liable if the bank pay out on a cheque where the sum is altered or the name of the payee is changed or added to without the authorisation of the customer - Smith v Lloyds TSB Bank [2000] 2 All ER (Comm) 693 CA


Duty of care and skill

• A bank pays or collects a cheque as an agent and should take all necessary precautions which a person of ordinary prudence should take Lipkin Gorman v Karpnale Ltd [1989] 1 WLR 1340 CA & [1992] 2 AC 548 HL

• The test to be applied to determine whether a bank is in breach of its duty as agent is: There should be reasonable grounds for the bank for believing that the customer's account was being operated fraudulently by another - Barclays Bank v Quinceare Ltd [1992] 4 All ER 363.


Bank as Trustee

A bank may be liable as constructive trustee if it either:

a) receives trust funds with actual or constructive notice that they are trust funds and that the transfer of the funds to any unauthorised person/purpose by the bank is a breach or trust, or

b) knowingly assists a trustee of the trust to dishonestly misapply trust funds.

"Knowingly" includes: actual knowledge, wilfully shutting one's eyes to the obvious, wilfully failing to make inquiries, knowledge of circumstances would indicate the facts to an honest and reasonable person or would put such person on inquiry. Belmont Finance Corporation v Williams Furniture Ltd (no.2) (1980) CA


Knowledge

• There are several degrees of knowledge, classified by Gibson J in Baden v Societe Generale [1983] BCLC 325 :

• 1. actual knowledge;

• 2. wilfully shutting one's eyes to the obvious (turning a blind eye);

• 3. wilfully and recklessly failing to make such enquiries as an honest and reasonable person would make;

• 4. knowledge of circumstances which would indicate the facts to an honest and reasonable person;

• 5. knowledge of circumstances which would have put an honest and reasonable person on inquiry.


Duty of Confidentiality

• A bank owes an implied duty to its customer not to divulge information about its customers to third parties.-Fidelity and Secrecy Act

• There are 4 exceptions Tournier v National Provincial and Union Bank of England (1924) CA


Duty of Confidentiality.1. Disclosure under Compulsion of Lawa) Court Order • Order to inspect entries in the Banker's books

- S 7 Banker’s Books Evidence act 1879 • To assist police with their enquiries - Police

and Criminal Evidence Act • Writ or Subpoena compelling bank employee

to give evidence


b) Request from an official

• Inland Revenue – Taxes Management Income :Under Income Tax/Other Tax Authorities bonafide orders

• Director of the Serious Fraud Squad – Serious Frauds and Investigation Office

Banker Customer Relationshipc) Bank liable to prosecution if information not revealed

Money Laundering Provisions

- It is an offence for someone to enter into or become concerned in an arrangement which knows or suspects facilitates the acquisition, retention use or control of criminal property. Disclosure must be made to the Criminal Intelligence Service Authorities

statutory protection given if

a) Information in the course of profession business or employment

b) The person knew, suspected or had reasonable grounds for knowing or suspecting that another person is engaged in money laundering

c) The disclosure is made as soon as practicable after the information comes to the discloser


d) Where the law compels the bank to disclose information and it is an offence not to do so

• It is an offence to fail to report a person's engagement in any kind of illegal money-laundering when the information is acquired in the course of business if the defendant has knowledge or suspicion or reasonable grounds for knowledge or suspicion.

• No offence is committed if the information is disclosed as soon as is reasonably practicable after the information came to the person's knowledge or there was a reasonable excuse for non-disclosure. It is also a defence for legal advisers if the information arose in privileged circumstances.

• e) Under Companies Act, 1956 :• When the Central Govt. appoints an Inspector to

investigate the affairs of a Joint Stock Company, it shall be duty of all officers and other employees and agents (including bankers) of the Company to

• (a) produce all books and papers of, or relating to, the Company, which are there in their custody or power, and

• (b) otherwise to give to the inspector all assistance in connection with the investigation which they are reasonably able to give.

• Thus the banker is under an obligation to disclose all information regarding the Company but not of any other customer, under the act.

• f) Under RBI Act, 1934 :• RBI under the act collects credit information from

the Banking Companies and prepares consolidated Credit Report but the information is kept confidential.

• After the enactment of RBI (Amendment Act, 1974), the banks are granted statutory protection to exchange freely credit information mutually among themselves.

• g) Under Banking Regulation Act 1949:• Under Section 26, every banking Company is

required to submit annually a return to RBI of all such accounts which have not been operated upon

• By the customer for the last 10 years. MOF has also assess to the information.

• h) Under Gift Tax Act:• Powers to obtain relevant information from Banks

is conferred on Gift Tax officials.• i) Disclosure to the Police: • Under Sec 94(3) of Criminal Procedure Code,

Bank is liable to produce books for inspection to authorised police officer for investigation, under Banker’s Books evidence act.

• j) Under Foreign Exchange Management Act (FEMA):

• Banking Companies dealing in Foreign Exchange

• Business are designated as Authorised Dealers in Foreign Exchange. The Act empowers the Directorate of Enforcement and RBI to inspect the books and accounts relating to all foreign exchange transactions.

2. Duty to the Public to Disclose

Disclosure can be made if public interest warrants so. The circumstances can be:

(a)Sufficient evidence that customer has commissioned some crime

(b)Sufficient evidence that the customer is involved in activities prejudicial to the interests of the Country


c) When the customer is contravening provisions of any law

d) Where sizable funds are received by the constituent from Foreign Country.

3. Disclosure in the Bank’s Interest

Bank dishonoured cheques of wife as insufficient funds in account and also concerned about gambling told Husband - held entitled to do so. Sunderland v Barclays Bank Ltd (1938).

4. Disclosure with the Customer’s Consent

It is now common for bank’s to request customers for permission to give a reference. Disclaimer clause – Opinion without any responsibility on the part of it or any of its officers


Banker's Opinions

• The Bank gives a reference to another bank or 3rd party

• Liability to the recipient of the reference

• If the reference is unduly favourable the bank may then be liable in tort for negligent misstatement (Banks normally include exclusion clause of its responsibility in the opinion report)

• Liability to the customer

• If the reference is adverse the bank may be liable by reason of breach of the bank's duty of confidentiality (Bank will obtain a letter from the customer for divulaging the information)


Rights of The Bank

Interest

Charges

Repayment on Demand

Appropriation of Payment

Combination of Accounts

Equitable Right of Set Off

Set Off following Insolvency


Appropriation of Payment

• Rule in Clayton's Case

The limitations on the rule are:

The rule only applies to running accounts;

In case of EMIs/Instalments, repayments are first appropriated to interest and remaining to principal amount.

Banker Customer RelationshipCombination of Accounts (Right of set-off)• Where a customer has two or more accounts with same bank the

bank has a common law right to combine them Garnett V Mc Kewan (1872) LR 8 Exch 10.(Debit balance in one a/c and credit balance in other a/c)-The account must be in same name & same right and a notice to exercise right of set-off is served on the customer. It is desirable to take set off letter from the debtor

• A bank's right to combine accounts is limited:• a) Where the debit balance is not yet due, Jeffrys v Agra

Masterman’s Bank (1866) LR 2 Eq 674.• b) There is an implied agreement to keep accounts

separately Bradford Old Office v Sutcliffe [1918] 2 KB 833 CA Halesown Presswork and Assemblies Ltd v Westminster Bank [1972] AC 785 HL

c) An express agreement not to combine accounts will negate the bank’s right to do so.

d) A trust fund cannot be combined with personal funds.

• The a/cs must be in the same name and in the same right.

• In case of a joint account, a debt due from one of the joint a/c holders in his individual capacity can not be set-off against an amount due to him by the bank in the joint account except, if the joint account is payable to former or survivor/Latter or survivor and debt is due from the former/Latter.

• In case of a sole properitor the account in his personal name and that of in the name of the firm are deemed to be in the same right and hence right of set-off can be exercised.

• In case of a partnership firm the debt balance can not be set off against the individual partners a/cs

• except partners have undertaken to be jointly and severally liable for the firm’s debt due to the banker.

• An account in the name of a person in his capacity as a guardian for a minor is not to be treated in the same right as his own account with the banker.

• The funds held in the trust account are deemed to be in different right as that of trustees.

• The right can be exercised in respect of debts due and not in respect of future debts or contingent debt.

• The amount of debts must be certain.• All branches of the bank constitute one entity for

exercising right of set-off.

Banker Customer RelationshipSet Off following Insolvency

Where bank or the customer is insolvent

a) A statutory set off may be applied to accounts on insolvency ies).

b) The statutory set off is automatic and unexcludable

c) Any right to extend set off is void.

d) Debts become due and payable as soon as the customer or bank are insolvent and are subject to statutory set off.

e) Debits on a customers account after the bank had notice will not be subject to set off and credits on a customer’s account after the customer has had notice of the banks’ insolvency will not be subject to set off.

f) Where the customer has 3 or more accounts the statutory set off will combine all of them but not preferential accounts (wages)

• PROBLEMS:• (1) ABC Udyog is a partnership concern having 3

partners A, B and C. It has availed of a Term Loan for P & M amounting to Rs.2 lacs and Working Capital in the form of Cash-Credit with outstanding balance of Rs. 3 lacs from Elite Bank Ltd. The firm has not been doing well. All the efforts by the bank to revive have failed. Partners are in the process of winding up the firm. Firm has also a deposit with the Bank for Rs.50,000/-. Partners A, B, and C have also Fixed deposit A/c with the Bank in another Branch for Rs.50,000/-, Rs.80,000/- and Rs.40,000/- resp. Partner A also has a joint A/c Fixed Deposit with his wife M for

• Rs.30,000/- with the Bank. Can Elite Bank exercise right of set-off for the outstandings of Partnership firm ABC Udyog. How much amount Elite Bank Ltd. will be able to recover if it is entitled to do so. Will it make any difference if Elite Bank Ltd. has also obtained ‘Joint and Several liability’ letter from the partners.

• (2) Hemant Udyog is a properitorship concern and has availed of working capital facility from KCIC Bank Ltd. with outstanding balance of R.1.50 lac. The firm has not been doing well. All the efforts by the bank to revive have failed. Bank has called

• Up the loan but even after repeated demands Mr. Hemant has not deposited any amount in the loan account. Mr. Hemant has also following deposit accounts with the Bank: (i) in the name of Mr. Hemant for Rs.20,000/- (ii) Joint A/c with his wife Mr.Hemant & Mrs.Shiela Hemant (E or S) for R.30,000/- (iii) Joint A/c Mr. Hemant & Mrs. Shiela Hemant (F or S) for Rs.20,000/- (iv) Master Dhiraj under Natural Guardianship (UNG) of Mr.Hemant. Can the Bank exercise right of set-off for the outstandings of Hemant Udyog. If entitled, how much amount Bank will be able to recover by exercising the right of set-off.

• (3) Mr. Puneet has an overdraft A/c with Elite Bank Ltd. with outstanding balance of Rs.80,000/-. He has defaulted repayment even after repeated demands from the Bank. Mr. Puneet has also a Fixed Deposit A/c with the Bank for Rs.40,000/- jointly with his wife Sushma (E or S). Can the Bank exercise right of set-off. Will it make any difference if operation mandate for the Fixed Deposit A/c with his wife is (F or S).

• (4) MR. Sushil and Mrs.Rita are Directors in Himanshu Udyog Private Ltd. which has defaulted loan account with outstanding balance of Rs.3 lac. Mr. Sushil and Mrs. Rita both have deposit a/cs with the Bank for Rs. 1 lac and Rs.2 lac resp. Can

• The Bank exercise right of set-off for the outstanding balance of Himanshu Udyog Ltd. If entitled how much amount Bank will be able to recover. Will it make any difference if Mr. Sushil and Mrs. Rita have furnished personal guarantees for sanctioning loan to Himanshu Udyog Ltd.


Banker's Lien

• A lien right to retain property belonging to another pending satisfaction of a debt owed by the owner of the property.

• A pledge is security, which carries the right to retain the property until the debt is paid or if unpaid after a certain time, carries the right to sell the property to satisfy the debt.


• A banker's lien is a special kind of lien that is the equivalent of the pledge in other words the bank may retain the property/security until the debt is paid, however, if it becomes apparent that the debt will not be paid then the property may be sold to satisfy the debt e.g. securities Brandao v Barnett (1846) 12 Cl & Fin 787 HL such as insurance policies/goods. Only thing is that bank should have possesed these securities/goods in ordinary course of banking business and not otherwise Re Bowes , Earl of Strathmore v Vane (1886) 36 ChD 586 and shares Re United Service Co., Johnstone’s Claim (1870) 40LJ Ch 286.

Banker Customer RelationshipThe limitations on the Banker’s Lien are:

1. The bank does not have a lien on Cash/cheques/Bill of Exchange or any other securities paid into the bank for collection for a specific purpose. However, bank may have a lien on a cheque it collects for a customer who has an overdrawn account but the payment is to an account in credit the bank may appropriate the cheque and pay it in to the overdrawn account.

2. The lien does not apply to securities kept in safe custody.

3. The lien does not apply to securities, which are held by the customer as a trustee

4. The lien does not arise if there is an agreement, express or implied to the contrary between the bank and the customer.

5. The lien can not be exercised over the goods and securities left with the banker by mistake or negligence.

• 6. The banker can not exercise his right of lien over the securities lodged with him for securing a loan, before such loan is actually granted to him.

• 7. In case of money deposited in the account, banker exercises right of set-off and not banker lien.


Safe Custody

• Voluntary bailment.

• This type of bailment is subdivided into

• Gratuitous bailment for which the bailee does not receive any payment and

• Bailment for reward for which the bailee is paid e.g. Bank

• Locker:

• Licensor & Licensee

banker customer relationship

Education

bank duty

customer termination

debtor customer

customer chambers

customer of forgeries

insolvency of bank

customer c bankruptcy

cheques duty