dessertation on specialization of customer service for banking

8/9/2019 Dessertation on specialization of customer service for banking

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AMITY GLOBAL BUSINESS SCHOOL

MUMBAI

MASTERS OF BUSINESS ADMINISTRATION

SPECIALISED CUSTOMERS OF BANKS

NAME HERSH LILARAMANIROLL NO 106

NAME OF THE PROFESSOR Mrs. LATIKA LODHA

DATE 15/12/2008

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DECLARATION

I, HERSH. S. LILARAMANI, AMITY GLOBAL

BUSINESS SCHOOL (SEMISTER 1) HEREBY DECLARE

THAT, I HAVE COMPLETED THIS PROJECT ON

SPECIALISED CUSTOMERS OF BANKS IN ACADEMIC

YEAR 2008-2009. THE INFORMATION SUBMITTED IN THIS

PROJECT IS TRUE AND ORIGINATE TO THE BEST OF

STUDENT.

SIGN OF STUDENT.

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CERTIFICATE

I, PROF. MRS. LATIKA LODHA HEREBY

CERTIFY THAT HERSH.S.LILARAMANI OF AMITY GLOBAL

BUSINESS SCHOOL (SEMISTER 1) HAS COMPLETED THE

PROJECT ON SPECIALISED CUSTOMERS OF BANKS IN

ACADEMIC YEAR 2008-2009. THE INFORMATION

SUBMITTED IS TRUE AND ORIGINATE TO THE BEST OF

MY KNOWLEDGE.

SIGN OF PROJECT SIGN OF

STUDENT

CO-ORDINATOR

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INDEX

Sr

.

Chapter

No.

Particulars Page

No.1 ACKNOWLEDGEMENT 5

2 EXECUTIVE SUMMARY 6

3 1 A BANK, A CUSTOMER BASICS 7

4 2 SPECIAL TYPES OF CUSTOMERSWHO

ARE THEY?

10

5 3 THE MINOR CUSTOMER 13

6 4 LEGAL STATUS MARRIED WOMAN 21

7 5 A LUNATIC 24

8 6 TRUSTEES-EXECUTORS-ADMINISTRATORS 26

9 7 CUSTOMERS ATTORNEY 28

10 8 JOINT-HOLDING------JOINT ACCOUNT 30

11 9 JOINT HINDU FAMILY BUSINESS 3612 10 THE PARTNERSHIP FIRM 38

13 11 A JOINT STOCK COMPANY 47

14 12 NON-TRADING INSTITUTIONS CLUBS,

SOCIETIES & CHARITABLE INSTITUTIONS

55

15 CASE STUDY HSBCS PREMIER

CUSTOMER

57

16 APPENDIX 66

17 BIBLOGRAPHY 70

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ACKNOWLEDGEMENT

I wish to mention a special thanks to all those who have helped me

shape this project and guided me throughout. I specially thank my

project guide and my Professor, Mrs. LODHA who have always

willingly helped me and solved my queries. This project would also

not have been possible without the help of some professionals andfriends who have provided with vital inputs and first hand

information. Among them are Mr. Niraj Kumar Vice President of

Premier Account HSBC Bank, Mr Hussain Electricwala Premier

Customer of HSBC Bank who I owe my gratitude. I am also

extremely thankful to; MR. SURESH LILARAMANI, for helping

me gather the required matter for my project. It is due to the co-

operation received from these people, which has made this project

possible and meaningful.

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EXECUTIVE SUMMARY

A banking institution solicits deposits of money from the

members of the public. An account in a bank for this purposemay be opened by any person who (a) is legally capable of

entering into valid contract, (b) applies to the banker in the

proper manner, i.e., he follows the procedure laid down by the

banker, and (c) accepts the terms and conditions stipulated by the

latter.

The banker, however, possesses the right to reject an application

for opening an account, if the latter is deemed to be an

undesirable person.

Some persons like the minors, lunatics and drunkards are notcompetent to enter into valid contracts.

Some persons who act on behalf of others have limited powers to

contract e.g., the agents, trustees, executors etc.

Institutions like school, colleges, clubs, societies and corporate

bodies are impersonal customers of a banker.

The authority, powers and functions of the persons managing

these institutions are embodied in their respective constitution.

The banker should, therefore, take special care and precautions to

ensure that the accounts of these institutions are being conducted

in accordance with the provisions of their respective charters.

When a banker opens an account in the name of a customer,

there arises a contract between the two.

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This contract will be valid one only when both the parties are

competent to enter into contracts.

Since the banker has to deal with different kinds of persons with

different legal status, he ought to be very careful about the

competency of the customers. Any carelessness on his part may land him in troubles.

Hence, different kinds of customers need different treatments at

the hands of the banker.

A few special types of customers and their treatment have been

discussed in the following chapters.

Ch 1

A BANK, A CUSTOMER - BASICS

Definition Of Banking

A banking company is defined as a company, which transacts the

business of banking in India. The Banking Regulation Act defines the

business of banking by stating the essential functions of a banker. Italso states the various other businesses a banking company may be

engaged in and prohibits certain businesses to be performed by it.

The term banking is defined as, accepting, for the purpose of lending

or investment, of deposits of money from public, repayable on demand

or otherwise, and withdraw able by cheque, draft, order or otherwise

Salient Features Of The Definition Of Banking

1. A banking company must perform both of the essential functions,viz., (a) accepting of deposits, and (b) lending or investing the

same. If the purpose of accepting of deposits is not to lend or

invest, the business will not be called banking business. The

explanation to section 5(c) makes it clear that any company

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which is engaged in the manufacture of goods or carries on any

trade and which accepts deposits of money from the public

merely for the purpose of financing its business as such, the

manufacturer or trader shall not be deemed to transact the

business of banking.

2. The phrase deposit of money from public is significant. The

banker accepts deposits of money and not of anything else. The

word public implies that a banker accepts deposits from anyone

who offers his/her money for such purpose. The banker,

however, can refuse to open an account in the name of the

person who is considered as an undesirable person, e.g., a

thief, robber, drunkard, lunatic etc. Acceptance of deposits

should be the known business of a banker. The moneylenders

and indigenous bankers depend on their own resources and do

not accept deposits from the public. If they ask money from theirfriends and relatives in case of need, such money is not deemed

as deposit accepted from public.

The definition also specifies the time and mode of withdrawal of the

deposits. The deposited money should be repayable to the depositor on

demand made by the latter or according to the agreement reached

3. Between the two parties. The essential feature of banking

business is that the banker does not refund the money on his own

accord, even if the period for which it was deposited expires. The

depositor must make a demand for the same the Act also

specifies that the withdrawal should be effected through an order,

cheque, draft or otherwise. It implies that the demand should be

made in a proper manner and through an instrument in writing

and merely by verbal order or a telephonic message.

Definition Of A Customer

Law does not define the term customer of a bank. Ordinarily, a person

who has an account in a bank is considered its customer. Banking

experts and the legal judgments in the past, however, used to qualifythis statement by laying emphasis on the period for which such account

had actually been maintained with the bank.

In Sir John Pagets view to constitute a customer there must be some

recognizable course or habit of dealing in the nature of regular banking

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business. This definition of a customer of a bank lays emphasis on the

duration of the dealings between the banker and the customer and is,

therefore, called the Duration Theory. According to this viewpoint a

person does not become a customer of the banker on the opening of an

account, he must have been accustomed to deal with the banker before

he is designated as a customer.

The above-mentioned emphasis on the duration of the bank account is

now discarded. According to Dr. Hart, a customer is one who has an

account with a banker or for whom a banker habitually undertakes to

act as such.

Broadly speaking, a customer is a person who has the habit of

resorting to the same place or person to do business. So far as banking

transaction are concerned he is a person whose money has been

accepted on the footing that the banker will honour up to the amount

standing to his credit, irrespective of his connection being of short orlong standing

An important consideration, which determines a persons status as a

customer, is the nature of his dealings with the banker. It is evident

from the above that his dealings with the banker must be relating to the

business of banking. A banker performs a number agency functions and

tenders various public utility services besides performing essential

functions of the banker, i.e., accepting of deposits and lending of

money, but avails of any of the services rendered by the banker, is not

called a customer of the banker. A customer of a banker need not

necessarily be a person. A firm, Joint Stock

Company, a society or any separate legal entity may be a customer,

which can rightly be called Special Types Of Banks Customer.

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CH - 2

SPECIAL TYPES OF CUSTOMERSWHO ARE THEY?

Who Are They?

A banking institution solicits deposits of money from the members of

the public. An account in a bank for this purpose may be opened by any

person who

(i) Is legally capable of entering into valid contract,

(ii) Applies to the banker in the proper manner, i.e., he follows

the procedure laid down by the banker, and

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(iii) Accepts the terms and conditions stipulated by the latter.

The banker, however, possesses the right to reject an application for

opening an account, if the latter is deemed to be an undesirable person.

Some persons like the minors, lunatics and drunkards are not competent

to enter into valid contracts. Some persons who act on behalf of others

have limited powers to contract e.g., the agents, trustees, executors etc.

Institutions like school, colleges, clubs, societies and corporate bodies

are impersonal customers of a banker. The authority, powers and

functions of the persons managing these institutions are embodied in

their respective constitution. The banker should, therefore, take special

care and precautions to ensure that the accounts of these institutions are

being conducted in accordance with the provisions of their respective

charters.

Example Of Standard Chartered Bank

The Standard Chartered Bankfollows the following procedure to

open an account for a customer:

1. The Bank will provide you with details of various types of

accounts that you may open with the Bank.

2. You can have your choice on what type of account would best

suit you, based on your needs and requirements

3. The Bank will, prior to opening an account, require

documentation and information as prescribed by the "Know Your

Customer" (KYC) guidelines issued by RBI and or such other

norms or procedures adopted by the Bank prior to opening the

account.

4. The due diligence process that the Bank would follow, will

involve providing documentation verifying your identity,

verifying your address, and information on your occupation or

business and source of funds. As part of the due diligence

process the Bank may also require an introduction from a personacceptable to the Bank if they so deem necessary and will need

your recent photographs.

5. The Bank is required by law to obtain Permanent Account

Number (PAN) or General Index Register (GIR) Number or,

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where you do not possess such registration, declaration in Form

No. 60 or 61 as specified under the Income Tax Rules.

6. In the event that the account opening process is likely to take

longer than normal, the Bank will inform you of the revised

timeline.

7. You can also call your branch or the executive for any queries

that you may have and the branch / executive will revert on the

query at the earliest.

8. The Bank will provide you with the account opening forms and

other relevant material to enable you open the account. Bank

personnel will advise you on the complete details of information

that would be required by the Bank for the verification process.

9. The Bank reserves the right, at its sole discretion, to open any

account and at such terms as the Bank may prescribe from time

to time.

On the other hand if for example the customer were illiterate or blind

which is a bankers special type of customer the procedure to be

followed by Standard Chartered Bankwould be as follows:

1. The Bank may at its sole discretion, open deposit accounts, not

being Current Accounts, in the name of an illiterate person.

Subject to such terms and documents that the Bank may

prescribe from time to time.

2. The account of such person may be opened provided he/she calls

on the Bank personally along with a witness known to both the

depositor and the Bank, and after due completion of KYC

requirements.

3. No cheque book facility is provided for such Savings Bank

Account therefore at the time of withdrawal/ repayment of

deposit amount and/or interest, the account holder should affix

his / her thumb impression or mark in the presence of the

authorized Bank officer who would verify the identity of the

person.4. The Bank may explain the need for proper care and safe keeping

of the statement given to the account holder. The Bank official

may explain the terms and conditions governing the account to

the illiterate / blind person prior to opening the account.

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The Arising Of Contract

When a banker opens an account in the name of a customer, there arises

a contract between the two. This contract will be valid one only when

both the parties are competent to enter into contracts. Since the banker

has to deal with different kinds of persons with different legal status, he

ought to be very careful about the competency of the customers. Any

carelessness on his part may land him in troubles. Hence, different

kinds of customers need different treatments at the hands of the banker.

A few special types of customers and their treatment have been

discussed in the following chapters.

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Ch 3

THEMINOR CUSTOMER

A person who has not completed 18 years of age is a minor. If a

guardian of his person or property is appointed by the court before he

completes 18th year, he remains minor till he completes his 21st year.

According to the Indian Contract Act, 1872, a minor is not capable of

entering into valid contract and a contract entered into by a minor is,

however, a valid contract. In case of all other contracts, a minor may

repudiate his promise or consent.

The Privileges Of A Minor Guaranteed by Law

1. As per Sec. 11 of the Indian Contract Act, a contract entered intoby minor is void. Hence a minors contract is not at all

enforceable. A contract entered into by a minor is absolutely void

as was decided in the case of.2. Even if he borrows money by falsely representing himself as an

adult, he cannot be compelled to repay the loan since the contract

is a void one.

3. An Adult, who gives a bill of exchange for the debt contracted

during the period of his infancy, cannot be sued.

4. It was established that even a guarantee given in respect of a

minors debt is not valid since the primary contract between the

banker and the customer is void.

5. A minor who borrows money cannot be compelled to repay,

unless it is for the necessaries of his life as per Sec. 11 of the

Indian Contract Act.

6. A minor has the right to get back the securities pledged for the

purpose of securing a loan even without repaying the loan, which

is not for the necessaries of his life.

7. A minor can recover even a third partys securities pledged

without repaying the debt.8. A minor can even be appointed as a trustee.

9. A minor can enjoy the benefits of a partnership firm. But, he is

not liable for the debts of the partnership firm. According to Sec.

30 of the Indian Partnership Act, 1932 a minor must expressly

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repudiate the contract of partnership within six months of his

attaining the age of maturity. If he does not do so, he will be

regarded as having ratified the agreement and will be thereafter,

regarded as a full-fledged partner and his liability commences

from the date of joining the firm.

10. A minor can act as an agent of an adult who has given the

necessary authority to him. Thus he can draw, endorse and

discount a bill and obtain a loan on behalf of the principal

provided such powers have been delegated to him in writing.

11. Sec. 26 of the Negotiable Instruments Act permits a minor to

draw and endorse any cheque, bill or promissory note. It will be

valid against all parties excepting a minor.

12. A minor can be appointed as an executor, but he can commence

his work only after his coming of age.

13. Even a guarantee given by a minor is not valid.14. A minor cannot be judged as an insolvent either on his own

petition or of other.

In short, minors are regarded as pet children of law. The above

privileges have been given to a minor just to protect his own interest.

Law protects the minor because he is not matured enough to form a

rational judgment to things and so some unscrupulous persons may take

advantage of that. But, a minor cannot take Law into his hands. This is

why Lord Kenyon has rightly pointed out that the above privileges

should be used as a shield and not a sword.

Bankers Duty

As it has been mentioned earlier, a minor at times may try to exploit the

above privileges and hence, a banker should be very careful while

dealing with him. He must observe the following precautions:

1. Saving account and not Current Account The banker may

open a saving bank account (and not a current account) in the

name of a minor, in any of the following ways:(a) In the name of the minor, to be operated upon by the

natural guardian of the minor or the guardian appointed by

the Court. Such account can also be opened in the joint

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names of two or more minors, to be operated upon by the

guardian.

(b) In the name of the minor, to be operated upon by himself,

if he has attained the age of 12 years. Two such minors

can jointly open such an account, to be operated upon by

them jointly.

2. On majority The bank records the date of birth of the minor as

given by the minor or his/her guardian. On the attainment of

majority, the account of the minor in the name of the guardian

should be closed and the balance paid to the minor (then major)

or be transferred to a new account in his/her own name. In case

of a joint account the minor is also permitted to operate the

account and his signature is taken on the account opening form.

3. Guardians If the father of a Hindu minor dies, his mother

becomes his natural guardian. After the death of the mother,during the minority of the boy there is either the testamentary

guardian or the guardian appointed by the court. The banker may

return the money to such guardian.

4. Death of minor In case the minor dies, the balance in the

account is permitted to be withdrawn by the guardian and in case

of joint account the balance will be held at the absolute disposal

of the guardian.

5. Overdraft granted to the minor No risk is involved if an

account is opened in the name of a minor so long as the account

is not overdrawn by the minor. But if an overdraft or advance is

granted to a minor, even by mistake or unintentionally, the

banker has no legal remedy to recover the amount from minor.

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 because such pledge itself is invalid. The banker shall

have to return these securities to the minor and he cannot

exercise his right of sale in case of default by the minor.

6. In case of contract of guarantee If an advance is granted to a

minor on the guarantee of a third party, such advance cannot berecovered from the guarantor also because the contract of

guarantee is invalid on the ground that the contract between the

creditor and the principal debtor (minor) itself is a void contract.

According to Sec. 128 of the Indian Contact Act, 1872, the

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liability of the surety is co-extensive with that of the principal

debtor, unless it is otherwise provided by the contract. The

surety, therefore, cannot he held liable on a guarantee given for

default by a minor. According to the law a minor cannot enter

into a valid contract and he cannot undertake a liability upon

himself. Thus he cannot default. Suretys liability is a secondary

one and does not arise, if the liability of the primary debtor does

not arise. The liability of a surety is ancillary. It materializes if

there is a valid obligation on the part of the debtor whose debt or

obligation is guaranteed. However, if the contract of guarantee

specially provides contrary to the above, the guarantor may be

held liable for the debts of a minor.

But if a minor enters into an agreement by representing himself

as major and later on claims such a contract as void on account

of restore the benefit derived by him under the agreement.According to Sec. 65 of the Indian Contract Act which states that

when an agreement is discovered to be void or when a contract

becomes void, any person who has received any advantage under

such agreement or contract is bound to restore it or to make

compensation for it to the person from whom he recovered it.

7. In case of Negotiable Instruments A minor may draw endorse

or negotiate a cheque or a bill but cannot be held liable on such

cheque or bill. He cannot be sued in respect of a bill accepted by

him during his minority. Such bill or cheque, nevertheless, will

be a valid instrument and all other parties will be liable in their

respective capacities (Sec. 26 of the Negotiable Instruments Act,

1881). The banker should, therefore, be very cautious in dealing

with a negotiable instrument, to which a minor is a party.

8. When a Minor is a partner A minor can be admitted to the

benefit of partnership with the consent of all the partners but he

will not be liable for the losses or debts of the firm. Within six

months after he attains majority he should repudiate his liability

as partner otherwise be will be held liable as a partner of the firm

from the date he was admitted to the benefit of the partnership[Sec. 30 (7) (a) of the Indian Partnership Act, 1932].

9. Minor agent A minor may be appointed as an agent to act on

behalf of his principal. According to Sec. 184 of the Indian

Contract Act, 1872, as between the principal and third person,

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any person may become an agent; but no person who is not of the

age of majority and of sound mind can be appointed as an agent,

so as to be responsible to his principal. Thus a minor agent

cannot be held responsible to the third parties in respect of the

acts of his minor agent. Therefore, all his dealings with the

banker will be valid and binding on his principal. The banker

should obtain written authority of the principal specifying the

power and the extent of authority entrusted to the agent in this

regard and should see that the minor-agent does not deal beyond

such delegated powers.

Legal Provisions Regarding Guardianship Of A Minor

The guardian of a minor may be either

1. a natural guardian, or

2. a testamentary guardian, or

3. a guardian appointed by the court.

The first two types of guardians are governed by the provisions of the

Hindu Minority and Guardianship ACT, 1956, whereas a guardian is

appointed by a Court under the Guardians and Wards ACT, 1890.

1. Natural guardian- According to section 6 of the Hindu Minorityand Guardianship Act, 19556, in case of a minor a boy or an

unmarried girl, his/her father and after him the mother shall be

the natural guardian. In case of a married girl (minor), her

husband shall be the natural guardian. The terms father or mother

does not include stepfather or stepmother. If the father becomes a

sanyasi or does not remain Hindu, he shall not be entitled to

remain as guardian. If the father is alive and is not removed from

guardianship, the mother does not become the natural guardian of

her minor child.

2. Testamentary GuardianA Hindu father, who is entitled to actas the natural guardian of his minor legitimate children may, by

will, appoint a guardian for any of them in respect of the minors

person or property. Such guardian acts after the death of the

father or the mother.

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3. Guardian appointed by court A guardian may be appointed bythe court under the Guardians and Wards Act, 1890, but the

Court shall not be authorized to appoint or declare a guardian of

the person of the minor, if his father is alive and is not, in the

opinion of the court, unfit to be guardian of the person of a

minor. Similar is the case with the minor girl, whose husband is

not, in the opinion of the court, unfit to be guardian of her

person. Thus the father (or the husband in case of a married girl)

is exclusively entitled to be the guardian. The welfare of the

minor shall be a paramount consideration of the court while

appointed a guardian.

Mother As A Natural Guardian

In a landmark judgment on the guardianship of a minor under the above

mention two Acts, the Supreme Court has held that the mother can also

act as natural guardian of a Hindu minor even during the lifetime of the

father. The Supreme Court held that in all situations where the father is

not in actual charge of the affairs of the minor either because of his

indifference or because of an agreement between him and the mother of

the minor (oral or written) and the minor is in the exclusive care and

custody of the mother or, the father for any other reason is unable to

take care of the minor because of his physical and/or mental incapacity,

the mother can act as natural guardian of the minor.

The court further held that the definition of guardian and natural

guardian do not make any discrimination against the mother and she,

being one of the guardians mentioned Section 6 of the 1956 Act, would

undoubtedly be a natural guardian, as defined in that Act. The

Supreme Court further clarifies that the words the father, and afterhim, the mother, need not necessarily mean after the lifetime of the

father. Rather the word after means in the absence of and the word

absence refers to the fathers absence from the care of the minorsproperty or person for any reason whatever.

Reserve Bank has advised the banks to allow opening of minors

accounts (fixed, saving and recurring deposit accounts) with mother as

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guardian. Thus banks are now permitted to open account of minors in

the guardianship of the mother, even if the father of the minor is alive.

Documentation Required (ICICI Bank)

Documentation of Parent/Guardian

Applicants must satisfy the following documentation requirements

1. Identity proof

2. Proof of communication address

3. Self cheque (if the applicants are not visiting the branch for

opening account)

4. Proof of date of birth of the minor

Identity proof (any one of the following)

1. Original letter of introduction from existing bank along withKYC cheque of the same Bank.

2. Driving License, Book type or laminated & embossed.

3. Voter Identity Card with KYC cheque for operating accounts.

4. Employee Identity Card.

5. PAN Card.

6. Defence Dependent's card.

7. Ex-Service Man Card.

8. Bar Council/Indian Medical Association Card/Senior Citizen

Card.

9. PIO Booklet for returning NRIs.

10.MAPIN card

Proof of communication address (any one of the following)

1. Introduction by an existing and satisfactory customer as address

proof.

2. Latest Electricity Bill.

3. Certificate from the postal office confirming address of

applicant.

4. Original Letter from Employer certifying the residential addressof applicant. Signature of the employee has to be attested on the

letter.

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5. Telephone bills from any telephone service providers and mobile

service providers (KYC cheque mandatory for mobile service

providers).

6. Consumer gas connection card/book/Pipe Gas bill (same as

electricity bill).

7. Certificate from the ward/equivalent rank officer, maintaining

election roll, certifying address of the applicant.

8. Registered and valid Lease/ Leave agreement with copies of

utility bills.

9. Post Office Savings Pass Book with KYC cheque.

10.Statement of account or Pass Book of a scheduled commercial

bank with entries of at least last 3 months along with KYC

cheque.

11.Premium Receipt from any life insurance company.

12.Certificate by Village Extension Officer (VEO)/Village Head orequal rank officers.

13.Domicile Certificate with communication address and

photograph.

Identity and Address proof (any one of the following)

1. Passport.

2. Arms License issued by State/Central Government of India

authorities.

3. Freedom fighter's pass issued by Ministry of Home affairs,

Government of India with photograph of applicant.

4. Pension payment order/book/Card issued by State/Central

Government of India.

5. Printed Ration Card with Photograph of applicant.

6. House hold Card with photograph issued by Govt. of Andhra

Pradesh.

7. ID card with photograph issued by Govt. of Jammu and Kashmir.

8. Bank Pass Book with photograph issued by SBI and its

subsidiaries or Nationalized Banks.9. Photo Social Security Card (Smart Card) issued by Central/State

Govts. or Union territories.

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Proof of age of Minor

1. Passport.

2. Birth Certificate issued by Municipal or Zilla Parishad or Gram

Panchayat or Private Nursing Home or Church.

3. Transfer Certificate issued by School/ College/ University.

4. Passing Certificate issued by School/College/Examination

boards/University.

5. Mark sheet issued by Educational

institutions/college/Examination Board /University Baptism

Certificate issued by church.

Ch 4

LEGAL STATUS MARRIED WOMAN

A married woman is competent to enter into valid contracts. The banker

may, therefore, open an account in the name of a married woman. Incase of a debt taken by a married woman, her husband shall not be

liable except in the following circumstances:

1. If the loan is taken with his consent or authority; and

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2. If the debt is taken for the supply of necessaries of life to the

wife, in case the husband defaults in supplying the same to her.

The husband shall not be liable for the debts taken by his wife in any

other circumstances. The creditor may in that case recover his debt out

of the personal assets of the married woman. While granting a loan to a

married woman, the banker should, therefore, examine her own assets

and ensure that the same are sufficient to cover the amount of the loan.

Position Of Married Woman Earlier

A banker would open an account in the name of a married woman. Like

other customer she had the power to operate her account herself and the

bonafide dealing with the account cannot be questioned. But, there wasa time when married women were allowed to open accounts only after

getting the consent of their husbands. Moreover, all her properties

became the properties of her husband on her marriage. She was not

allowed to hold property in her own name. So, the position of a married

woman was far from satisfactory in those days.

The Present Position Of Married Woman

1. Now the position of a married has considerably improved. She

can open and operate an account even without the consent of her

husband.

2. She can own properties in her name even after marriage.

According to Hindu Marriage Act, 1956 a Hindu married woman

can have separate properties in her own name. Moreover, the

Indian Succession Act, 1925 and the Married Womens Property

Act, 1874 permit the other women to have properties in their own

names.

3. Even though she can own properties, in certain cases theproperties would have been settled in such a way that she can

enjoy only the income from those properties and the ownership

would not have been transferred. If a banker was to lend under

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those circumstances, he could not attach the property for non-

payment of money.

4. But, under certain circumstances, she can make her husband

liable for the overdraft enjoyed by her. They are:

(a) If she borrows money for the necessaries of her life.

(b) If she borrows for the necessaries of her household.

(c) If she acts as the agent of her husband.

However, the husband can escape from his liability if he proves that, he

has already supplied her with the necessaries of life and household and

he never allowed her to act as his legal agent.

5. Further a married woman enjoys certain privileges under law.

They are:

(a) She cannot be imprisoned for non-payment of a judgment

debt, and

(b) She cannot be made an insolvent, unless, she carries onsome trade or business.

Pardanashin Woman

A pardanashin woman observes complete seclusion in accordance with

the custom of her own community. She does not deal with the people,

other than the members of her own family. As she remains completely

secluded, a presumption in law exists that:

1. Any contract entered into by her might have been subject to

undue influence; and

2. The same might not have been made with her free will and with

full understanding of what the contract actually means.

Thus a contract entered into by a pardanashin woman is not a contract

free from all defects. The other party to the contract shall have to prove

that the contract with her was free from the above-mentioned defects in

order to enforce the same. The banker should, therefore, take due

precaution in opening an account in the name of a pardanashin woman.

As the identity of such a woman cannot be ascertained, the banker

generally refuses to open an account in her name.

Bankers Duty

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1. Safety of banker A banker can very well open an account in

the name of a married woman. A banker is safe as long as her

account shows a credit balance.

2. Bank overdraft But, in case she applies for an Overdraft., the

banker should see that she owns separate property in her own

name. In addition to this, he must see that her husband is also

made liable for the repayment of the loan for which he should

obtain his consent.

3. Illiterate In, case of illiterate women, their left hand thumb

impression should be obtained on the account opening form.

Ch 5

A LUNATIC

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According to the Indian Contract Act, 1872, a person of unsound mind

is not competent to enter into valid contact. A person is said to be of

sound mind for the purpose of making a contract if he is capable of

understanding it and of forming a rational judgment as to its effect upon

his interest (section 12). It is important that he should be of a sound

mind at the time he enters into a contract. If a person is usually of

sound mind but occasionally of unsound mind, he cannot enter into a

valid contract when he is of unsound mind. A contract entered into by a

person of unsound mind is a void contract according to the Indian

Contract Act, 1872.

The banker should, therefore, not open an account in the name of a

person who is of unsound mind. But if a banker as discounted a bill

duly written, accepted or endorsed by a lunatic he can realize the

money due on the same from such person except in the circumstances

where it is proved that the banker was aware of the lunacy of the personconcerned at the time he discounted the bill. The banker should suspend

all operations on the account of a customer as soon as he receives the

news of his lunacy till he gets the proof of his sanity or is served with

an order of the Court.

The Position Of Lunatic Under Law

1. A lunatic is a person of unsound mind. He cannot form a national

judgment on matters. Hence, he has no capacity to enter into a

contract. According to Sec. 12 of the Indian Contract Act 1872,

persons of unsound mind are disqualified from entering into a

valid contract.

2. However this disqualification does not apply (a) to contracts

entered into by lunatics during the period of sanity, or (b) to

contracts, which are ratified during such periods.

3. In England, the contract with a lunatic is voidable whereas it is

void in India. Obviously, such contracts have inherent defects in

India.

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Bankers Duty

1. Opening of account Since a lunatic has no capacity to enter

into a contract, no banker will knowingly open an account in a

lunatics name.

2. Void Contract But, it may so happen that an existing customer

may become insane. Under such circumstances, a banker must

immediately stop the operation of the account. It is so because

the banker has no right to debit his account for payment made out

of his account. From the moment the bankers knows the fact

about the lunacy of his customer, the contract between him andthe lunatic becomes void.

3. Definite proof of lunacy A banker must not be carried away

by hearsay information or rumours. He must get a definite proof

for the lunacy of his customer. When a banker is informed that a

particular customer has been detained in a lunatic asylum, he can

presume that the customer is insane. In doubtful cases, it is

advisable to wait till he gets a written proof. If a customer is

judicially declared as insane, it is an official proof.

4. Bankers liability So long as a banker has no knowledge of his

customers insanity, he can go on honouring his cheques and the

operation of the account cannot be questioned. If a banker

dishonouors a cheque in a hurry without having any proof of the

lunacy, he will be liable for wrongful dishonor of the cheque.

5. Receiver appointed by Court Usually the court appoints a

receiver when a customer becomes insane and the banker can

safely deal with that receiver and can honour the cheques drawn

by him. It is the usual practice to pay the balance to the

guardian/receiver appointed by the competent court.

6. Removal of temporary suspension If the alleged insane-customer is declared to be sane by a competent authority, the

banker can allow him to operate his account and the temporary

suspension to the account should be removed.

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Ch 6

TRUSTEES EXECUTORS ADMINISTRATORS

According to the Indian Trusts Act, 1882, a trust is an obligation

annexed to the ownership of the property, and arising out of a

confidence reposed in and accepted by the owner, or declared and 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 owner

(Section 3). The person in who reposes the confidence is called the

author of the trust. Trustee is 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 calledTrust Deed.

Executors and administrators are persons who are appointed to conduct

the affairs of a person after his death. When a person known as testator

appoints another person for this purpose through a will, he is known as

an executor. If the will of the testator does not mention the name of the

executor, or if the person appointed as executor dies or refuses to act,

the Court appoint a person for the purpose who is know as

administrator. Both the executor and the administrator perform the

same duties, i.e., to realize the assets of the deceased and to pay off his

debts. The executor is appointed by the will. His powers and authority

are vested therein. He has to act according to the directions given in the

will, but he is required to obtain a probate appointed by the court

through a Letter of Administration and is directed, in the absence of the

will, to settle the affairs according to the provision of the law.

Bankers Duty While Dealing With Trustees

1. Trust Deed The banker should thoroughly examine the Trust

Deed appointing the applicants as the Trustees. The Trust Deedcontains the names of the trustees, power vested in them and

conditions. The trustees are authorized to act jointly and are not

competent to delegate their powers unless the Trust Deed

authorizes them to do so. The banker should thoroughly examine

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the Trust Deed to ascertain the powers and functions of the

Trustees.

2. Joint charge of trustees In case of two or more trustees, the

banker should ask for clear instruction regarding the person or

persons who shall operate the account. In the absence of such

instruction, all the trustees must sigh the cheques, etc., because

the estate is placed under their joint charge.

3. Death of trustee(s) If one or more of the trustees dies or

retires; the authority vested in the remaining trustees depends

upon the provisions of the Trust Deed. When all the trustees are

dead, new trustees any be appointed by the court.

4. Insolvency The insolvency of a trustee does not affect the trust

property and the creditor of the trustee cannot recover their

claims from such property.

5. Beneficiaries of trust The banker should take all possibleprecautions to safeguard the interest of the beneficiaries of a

Trust, falling, which he shall be liable to compensate the latter

for any fraud on the part of the trustee. For example, if the

banker permits the transfer of Trust money to the personal

account of the trustee, already overdrawn, with clear knowledge

and understanding, the banker shall be liable to refund the money

to the Trust account. The banker is, thus, placed in the same

position in which the trustee is, so far as the use of Trust money

is concerned. He shall be held liable for the misuse of the Trust

money if it is within his knowledge.

6. Loans to the trustees The trustees may borrow money from

the banker and pledge or mortgage the Trust property only if the

trust Deed specifically confers such power on them. The banker

should, therefore, grant loans to the trustee after thorough

examination of the borrowing powers as given in the Trust deed.

To be on safer side, the banker should grant on 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.

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Ch 7

CUSTOMERS ATTORNEY

A customer may appoint an attorney to deal with his bank account. The

power of attorney is a general notice and an authority for this purpose.

It is different from an ordinary mandate authorizing a person to operate

his bank account.

The power of attorney may be special or general. In the former case the

person so authorized gets powers in regard to certain matters only, e.g.,

sale or purchase of property, etc. In case of the general power of

attorney, the grantor of such power authorizes the other person

generally, to act on his behalf in al matters concerning business.

Bankers Duty

While opening an account in the name of an Attorney for a person the

banker should take the following precautions:

1. Duly Stamped And Registered The power of attorney should

be duly stamped and registered with the Registrar of documents

or attested by a Notary Public. The banker must retain with him

its attested copy for his own record.

2. Period Of Power Of Attorney The power of attorney must be

in force at the time of opening the account. The power ofattorney may be granted for a specific period or for a particular

purpose. The banker should ensure that such specific period has

not expired or the specific purpose not fulfilled at the time of

opening the account. The period for which authority has been

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granted must be noted at the top of the account so that the

account does not continue beyond such period.

3. Terms The banker should note all the terms of the Power of

Attorney, which are likely to be concerns to him at any time in

future.

4. Specific Powers The banker should find out what specific

powers have been entrusted by the principal to the attorney, i.e.,

to open accounts, to draw and endorse cheques and to overdraw

the account. If the power to overdraw is not entrusted, the fact

should be specifically recorded.

5. Identified Person The person presenting the power of attorney

for opening the account must be properly identified and his

address noted.

6. Other Formalities The account opening form should be signed

as far as possible by the principal. He should attest the signatureof the attorney. If the power of attorney authorizes the attorney to

open a bank account, the bank may open an account at his

request. Confirmation from the principal must be obtained before

actual operation of the account is allowed.

7. Name Of The Principal The account should be opened in the

name of the principal with the following heading:

XYZ (principal) by his agent ABC

Inclusion of the words constituted attorney are not necessary, if

the agent signs Per Pro XYZ it indicates that the agent has

limited authority only to sign such cheques. The banker should

ensure that the act of the agent is not beyond the powers

conferred upon him.

8. Condition Clause The banker should also see that the Power

of Attorney does not contain any condition or event on the

occurrence of which it will be enforceable. A condition like

During my absence from India implies that the power of

attorney is automatically cancelled as soon as the principal

returns to India. The banker should not accept such condition.

9. Termination Of Agency According to Section 201 of theIndian Contract Act, an agency is terminated in the following

cases:

a. If the principal revokes his authority;

b. If the agent renounces the business of the agency;

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c. If the agent business of agency is completed; and

d. If the principal or the agent dies, becomes insolvent or of

unsound mind.

It is to be noted that the death, insolvency or insanity of the principal

revokes the authority vested in the agent and the latter ceases to act as

agent of the principal.

Ch 8

JOINT HOLDING ---------JOINT ACCOUNT

When two or more persons open an account jointly, it is called a joint

account. Such an account may be opened by any persons for the sake ofconvenience of operation of account and also for withdrawal of money

after the death of any one of them. The banker should take the

following precautions in opening and dealing with a joint account:

1. Signature The application for opening a joint account must be

signed by all the persons intending to open a joint account.

2. Mandate The banker should obtain clear instruction in writing,

signed by all the joint account-holders, regarding the operation of

the account. The joint account may be operated in any of the

following ways:

(a) By all the depositors jointly

(b) By either or survivor of them

(c) By former or survivor of them.

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The mandate must include the name or names of the persons who are

authorized to operate the joint account and must specify the extent to

which they are authorized to take advance or to pledge the securities,

etc. in the absence of such instructions, the banker should honour only

those cheques which bear the signature of all the persons in whose

names the account stands.

3. Appointment Of Attorney The joint account-holder, who is

authorized to operate joint account, himself alone cannot appoint

an agent or attorney to operate the account an his behalf. Such

attorney or agent may be appointed with the consent of all joint

account-holders.

Example: A, B and C open a joint account with SBI and authorize C to

operate the account. After some time C wants to go abroad and wants to

appoint D as his agent to operate the joint a/c. C himself alone cannotdo so. He shall to seek the written consent of both A and B for this

purpose.

4. Stopping Of Payment Of Cheque Any joint account-holder

(including the one who is not authorized to operate the account)

can stop payment of a cheque issued on a joint account. Banker

must honour such order even if an agent or attorney has been

appointed to operate the account.

5. Name The full name of the account must be given in all

documents furnished to the banker, even if the account is to be

operated upon by one or a few of the joint account-holders.

6. Several Liability The banker should also take a mandate to

ascertain whether the persons operating the joint account are also

authorized to overdraw the account. If so, it is desirable to

establish separate individual liability of all the joint account-

holders in addition to their joint liability. This is secured by

asking the customers to sign a joint and several promissory note

and also by declaring such separate and joint liability in all

documents executed by them. In case the several liability is also

established, the banker can recover the amount from all the jointaccount-holders individually or from one or more of them. He

can file suits against all of them individually. Further, the banker

can exercise his right of set-off against the credit balances in the

accounts of the joint account-holders, if they have established

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their several liability also. But in case of joint liability only, a suit

may be filed against all of them jointly and if any of them dies,

his legal heir will not be liable for the same.

7. Revocation The authority to operate the account can be

revoked by any of the persons giving such authority. It is

automatically revoked if any of the joint account-holders dies,

becomes bankrupt or of unsound mind. The banker must stop

payment in such cases.

8. Securities The banker should be given clear instructions

regarding the withdrawal of securities on the joint account and

the power conferred upon the person operating the account to

pledge the securities. In case the shares are in the joint names, all

such persons must sign the transfer form.

9. Alterations A joint account may be operated by either of the

joint account-holders. But if a cheque is drawn and signed by oneof them, any alterations therein should also be done by the same

person and not the other one. The alterations should bear the

signature of the drawer.

10.Balance Payable The person opening a joint account are also

required to give a mandate, in the application form itself,

specifying the person to whom the balance in the account shall

be payable to

(a) Both or all of them or the survivor or survivors of them; or

(b) Either or any one or more of them or the survivor or

survivors of them.

The balance in the joint account shall be payable to all the joint

account-holders together, if the instruction is given in form (a) above,

and to any one of them if it is in form (b). In both the cases, if one of

the joint account-holders dies, the balance is payable to the survivor or

survivors.

The above instruction is given by all the joint account-holders. Hence

any one of them is competent to revoke it in writing. Thereafter thebanker will treat the account as one without such instruction and the

amount from the account will be payable on the discharge of all the

joint account-holders.

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Death Of A Joint Account-Holder

In case of a joint account, the bank happens to be a debtor to two or

more creditors jointly and promises to repay the same to them. The

Indian Contracts Act, 1872, provides for the devolution of the joint

rights in such cases as follows:

When a person has made a promise to two or more persons jointly,

then, unless a contrary intension appears from the contract, the right to

claim performance rests, as between him and them, with them during

their joint lives and after death of any of them, with the representative

of such deceased person jointly with the survivor or survivors, and,

after the death of the last survivor, with the representatives of all

jointly.

The above section implies that if there is no agreement to the contrary,

on the death of one of the joint account-holders, his representative and

the surviving account holder are jointly entitled to claim money from

the bank. If all joint account-holders die, the legal representatives of all

of them can jointly claim amount.

When a joint account is opened by a bank with the instruction either or

survivor, these words imply an agreement contrary to the provision of

Sec. 45. In such a situation, the banker is not bound to repay the

amount to the representatives of the deceased and the

survivor/survivors jointly; but the mandate given in the words either or

survivor permits him to repay the money to the survivor alone.

Thus in the event of death of any one or more of the joint account-

holders, the balance becomes payable to the survivor without reference

to the representatives of the deceased person or persons. Generally, the

banker asks the surviving account-holders to withdraw the balance in

the joint account and deposits it in a new account opened in the names

of the surviving joint account-holders. The banker should not honourthe cheques drawn by the deceased joint account-holders before his

death obtaining instructions from the surviving joint account-holders.

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If he joint account shows a debit balance at the time of death of a joint

account-holder, the banker must close the account so as to determine

the liability of the deceased joint account-holder. If it is not done, the

rule in the Claytons case becomes applicable, i.e., the subsequent

deposits will be adjusted against the debit balance in the account and

thus the estate of the deceased joint account-holder will not be held for

the debt.

The position of the banker in case of death of a joint account-holder is

quite obvious. He gets good discharge from his obligation if he pays the

amount to the survivor or survivors, as per the mandate of the joint

account-holders. He need not investigate into the fact whether the

survivor is really entitled to the amount in question. The legal

representatives of the deceased may seek legal redressal to their claims

in the court of law.

Sometimes, banks do encounter difficulties in giving effect to the terms

of contract with the customer when there are conflicting claims on

balance held in joint account. In Nagarajamma vs. State Bank of

Hyderabad (AIR 1962 A.P. 260), the bank issued a fixed deposit receipt

in the joint names of one D and lady N who claimed to be his wife.

After Ds death, another lady, contending to be his real wife, claimed

the amount from the bank. The Bank instead of paying the amount to N

as per the contract, filed an interpleaded suit though it could have got

discharge by paying the money to N. on the basis of the facts of the

cases the Court held that N, the survivor, was not entitled to the amount

and the other lady, being his real wife, was his heir to receive the

amount. Thus is case of conflicting claims, the banks may ask for the

production of legal representation.

In Krushandas Nagindas Bhate vs. Bhagwandas Ranchhoddas and

others (A.I.R. 1976 Bom. 153), the Bombay High Court, upholding the

above, observed that

In respect of a joint account opened in the bank, the law seems to be

settled that on the death of one, there is a resulting trust in favour of his

heirs and legal representatives, unless there are special facts and

circumstances to show contrary intension. The High Court further held

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that if from the facts and circumstances of the case it could be held

that the intension was to make the survivor the owner of the amount

lying in the account, then he and not the heirs would be entitled to

recover the amount. If the facts and circumstances of the case do not

establish and such intension, although the holder of the joint account

may be authorized to withdraw legal representatives of the deceased

joint holder. The bank may be discharged by payment to the survivor.

But the survivor may in the absence of an intension to make him the

owner, be accountable to the heirs of the deceased joint holder.

In Padmanabhan Bhawani & Others vs. Govindan Bhargava 7 Another

(A.I.R. 1975 Kerala 83), the High Court held that on the death of the

depositor the amounts deposited in the joint names, payable to rather or

survivor, could not be treated as a gift to the survivor, because the

depositor continues to be the owner of the amounts in question till hisdeath. In such cases without any declaration of trust, there is a resulting

trust in favour of the depositor in the absence of any contrary intension

or unless it can be proved that an actual gift of the amount was

intended. The burden of proving a contrary intension of gift is on the

person who seeks to rebut the resulting trust in favour of the person

who makes the deposit.

About the rule of the banks that on the death of one, the account would

be converted into a single account to be operated by the survivor, the

High Court observed that such provisions were designed only to

regulate easy operation of accounts and payments of money to the

survivor. The provisions did not touch the rights inter se among the

depositors of the rights of inheritance.

Facility Of Nomination

The Banking Laws (Amendment) Act, 1983, has inserted a new section

45 ZA, which provides for the facility of nomination by depositors.

Such facility shall also be available in case of joint account. In suchcases, all the joint-depositors together may nominate, in the prescribed

manner, one person to whom in the event of death of al the depositors,

the amount of deposit may be returned by the banking company. Such

nominee shall become entitled to all the rights of the depositors in

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relation to such deposit. The banking company shall be discharged of

its liability in respect of the deposit by making payment to the nominee.

Insolvency

In case of insolvency of one or more of the joint account-holders, the

mandate jointly given by them to the banker ceases to operate. The

banker should, therefore, stop payment from the account to determine

the liability of the insolvent person. Payment from the joint account

may be made on the instructions jointly signed by the solvent account-

holders as well as the Official Receiver of the insolvent one. Preferably,

a new account should be opened to record all receipts and payments

after the declaration of insolvency.

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Ch 9

JOINT HINDU FAMILY BUSINESS

A joint Hindu family possesses ancestral properties and carries on

ancestral business. The ownership of such property passes on to the

member of the family according to the Hindu Law. In case of joint

Hindu family governed by the Mitakshara School of Hindu Law, every

male member of a family acquires an interest in the joint property by

birth. After the enforcement of the Hindu Succession Act, 1956, theshare of a deceased coparcener, who was member of the joint Hindu

family, is also divisible amongst his wife, daughters and other female

relatives as given in the Act. While dealing with the account of a joint

Hindu family and granting it a loan, the banker is naturally faced with a

difficult task of ascertaining the right of the coparceners in the joint

family.

Bankers Duty

1. Karta The family business and its assets are managed bythe eldest male member as the karta. According to the law, the

karta has an implied authority to take loan, execute necessary

documents and pledge the securities on behalf of the family

for the purpose of the business of the family. However, to be

on the safe side, the loan documents should be executed by all

the adult members of the family or with their consent by the

head of the family in his capacity as its karta or manager.

2. Power of Karta The power of the karta to borrow money

on the security of the family property is subject to one

limitation, i.e., the loan is taken for the purpose necessary foror beneficial to the family. He can take a loan and pledge the

property of the family for the purpose of meeting the needs of

the usual business of the family and not for any speculative

business or for starting a new business. Other coparceners will

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not be liable for a loan contracted for a purpose other than that

in the interest of the family business. The principles of a law

which govern borrowing by the karta of a joint Hindu family

were clearly enunciated by the Rajasthan High Court as

follows:

(a) The manager of a joint Hindu family has power to

alienate (i.e., transfer for value) joint Hindu family

property, so as to bind the interest of both adult and

minor coparceners in the property, provided that the

alienation is made for legal necessity or for the benefit

of the estate. The payments of debts incurred for

family business or other necessary purpose constitute a

legal necessity.

(b) The burden of proving legal necessity to supportalienation is upon the alienee (transferee).

(c) The alienee can succeed in (b) above, not only on proof

of legal necessity but also on the proof that the alienee

made reasonable enquires and was satisfied as to the

existence of legal necessity. In case of a dispute on this

point, the burden of proof that the bank was satisfied,

before granting a loan, that the loan was sought for the

benefit of the family business lies on the banker

himself. He should, therefore, be very careful in

ascertaining the purpose of the loan sanctioned on the

security of joint family assets.

3. Coparceners liabilityThe coparceners liability in case of

loans granted to a joint Hindu family is limited to the extent

of their interest in the joint property. But if the adult

coparceners themselves contract along with the karta or ratify

the contract entered into by the karta they become personally

liable for the loan.

If a suit is brought in a representative capacity as a manger of the jointfamily, and a decree is granted in pursuance thereof, other members of

the family are held to be substantial parties to the suit through the

manger of the joint family. The fact that they are not co-nominee

parties to the suit will not render the decree in the suit any the less

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binding on them. A decree against the manger in such a suit will be

binding on the undivided coparceners and the entire joint family

properties can be taken in execution of such a decree even if the junior

coparceners is not a party to the suit.

4. Minor Coparcener If there is a minor coparcener in a joint

family, his guardian must sign the documents on his behalf.

When the minor coparcener attains majority, he should also

sign the documents to give his assent to the undertaking given

by major coparceners.

Ch 10

THE PARTNERSHIP FIRM

A partnership is not regarded as an entity separate from the

partners. The Indian partnership Act, 1932, defines partnership as

he relation between parsons who have agreed to share the

profits of the business, carried on by all or any of them acting for

all. A partnership firm is thus established by an agreement

amongst the partners. This agreement may be oral or written. The

object of constituting a partnership firm must be to

(a) Carry on a business which may be conducted by all the

partners or by any of them on behalf of the rest, and

(b) To share the profit of such business amongst themselves.

The partnership deed contains the details of the agreement

reached between the partners. The Indian Partnership Act,

1932, lays down the general provisions, which govern a

partnership business.

Bankers Duty

1. Number Of Partners The banker should very carefullyexamine the Partnership Deed, which is the charter of the firm, to

acquaint himself with the constitution and business of the firm.

The banker should see that the number of partners does not

exceed the statutory limit. According to section 11 of the

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Companies Act, 1956, a partnership firm consisting of more that

10 persons for the purpose of carrying on banking business and

of more than 20 persons for the purpose of carrying on and other

business for the acquisition of gain on profit, shall be an illegal

association unless it is registered under the Companies Act,

1956, or is a joint Hindu family carrying on such business. If the

number of partners exceed these limits, the partnership becomes

an illegal association of persons, which cannot enter into any

contract, and cannot sue or be sued. The banker must refuse to

open an account in the name of a firm in such cases. The

minimum number of partners in a firm must be two, excluding a

minor partner, who is not competent to enter into a contract. A

minor may be admitted into the partnership with the consent of

all other partners but he shall not be liable for the losses or debts

of the firm. The banker should note the date when the minorpartner will attain majority so that a fresh partnership letter

signed by him and other partners is obtained by the banker.

2. Title Of The Firms Account A firms account should always

be opened in the name of the firm and not in the name or names

of the individual partner/partners.

3. Opening Of An Account An account in the name of a firm

may be opened by a banker on receipt of an application from one

or more of the partners. Banks, however, insist that all the

partners should join the partners. If any partner has gone out of

the country, the rest of the partners can open a bank account in

the name of the firm. Specimen signatures of all the partners

should also be taken for the purpose of record. Bit if any of the

partners is deprived of the right to open an account in the firms

name and this fact is within the knowledge of the banker, he

should not open the firms account at the request of such partner.

The banker should, therefore, confirm the right of the

applicant/applicants to open an account in the name of the firm

from the partnership deed or from any other available evidence,

e.g., the authority letter signed by all other partners.4. The Partnership Letter Or Mandate The banker should take

a letter signed by all the partners stating:

(a) The names and addresses of the partners;

(b) The nature of the business undertaken by the firm; and

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(c) The name/names of the partner/partners who will operate

the account on behalf of the firm and will have the

authority to draw and accept bills etc., and to sell and

mortgage the property of the firm.

The banker should honour the cheques signed by al the

partners or b those partners who are authorized too operate the

account.

5. Revocation Of Authority To Operate The Account The

authority given in favour of a particular partner/partners to

operate the firms account may be withdrawn by any of them by

giving a notice to the banker. In such a circumstance, the banker

should stop payment of cheques signed by such partner and pay

the cheques, which are signed by all the partners. A partner can

also stop the payment of a cheque issued by any other on the

firms account.The power to revoke the authority to operate the account is vested in

any partner who is sleeping partner or is not authorized to operate

the account.

6. Power Of Attorney A partner authorized to operate the firms

account cannot delegate his authority to another person without

the consent in writing of all other partners. Is such consent is

given by all of them; the authorized partner may execute a Power

of Attorney in favour of such other person.

7. Endorsement Of Cheque If a cheque payable to the firm is

endorsed by a partner in his own favour and is deposited by him

to be credited to his personal account, the banker should do so

after making inquiry about it from there partners and after being

satisfied about it. Otherwise, he will bear the risk of loosening

the statutory protection granted to the collecting banker under

Negotiable Instruments Act, 1881. The collecting banker should

be particularly careful in this regard if the partner sends such a

cheque in response to a request from the bank to repay overdraft

taken by him from the bank.

Implied Authority Of A Partner

A partner acts as agent of the firm for the purpose of the business of the

firm and binds the firm by his acts and deeds. According to section

19(1) of the Indian Partnership Act, 1932, the act of a partner which is

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done to carry on, in the usual way, business of the kind carried on b the

firms binds the firm. This authority of a partner is called the implied

authority. Every partner is liable both individually and jointly with

other partners for all the acts of the firm or the instruments executed

provided the same are done

(a) In the name of the firm; and

(b) In connection with the business carried on by the firm.

The High Court observed that from the very definition of partnership

itself it follows tat there is implied mutual agency to each of the

partners of a registered firm. When an amount was borrowed by a

partner on behalf of the partnership firm, that act of his was binding on

the firm as well as on the members of he firm. Similarly, when a

promissory note is executed on behalf of a firm b its managing partner,

and the money is utilized for the purpose of the firm, every partner isliable for the debt incurred.

It is to be noted that while one of the partners can bind the firm for the

debts incurred by him on behalf of the firm, it is not necessary that

documents for the debt are signed by all the partners. Signature of only

one partner will be sufficient. However, as a precautionary measure,

banks take the signatures of all the partners on loan documents.

If a partner signs an instrument on behalf of the firm, his intension to

do so must be apparent from the form in which he has signed.

The liability of a partnership firm in respect of a promissory note

signed by a partner was considered in the Madras High Court in m/s

M.M. Abbas Bros. And Others vs. Chethandas Fateh Chand and

Another (A.I.R 1979, Madras 272). In this case a partner of the firm

signed a promissory note in his name and thereafter added the words

Partner M.M. Abbas and Bros. The Court held that the words

Partner M.M. Abbas and Bros. represented only a description and did

not indicate that he had signed the instrument as a partner. If the saidpartner had the intension of binding the firm, then he would have

signed for and on behalf of the firm. On another promissory note the

partner had signed for and on behalf of the firm. Pointing out the

difference between the two, the court held that it is true that different

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legal result follows from the mere change in the collocation of the

words. But it is inevitable as difference are produced in law by the

change in the collocation (position or arrangement) of the words. The

pronote in question was thus not binding on the firm.

The general principle of law, the High Court held, is that every one of

the partners in a mercantile firm is liable upon a bill drawn by a partner

in the recognized trading name of the firm for a transaction incidental

to the business of the firm, although the particular partners name does

not appear on the face of the instrument and although he is a sleeping

and secret partner. Partners are mutual agents and can bind the firm by

their acts. Even in the absence of an indication under the signature that

a person was singing as a partner, it may be possible to infer a liability

on the firm provided it is found on the face of the instrument that the

borrower is the firm and not he individual partner who signed theinstrument. A person merely describing himself as a partner cannot

bind the firm. There must be some indication in the instrument to show

that he was signing on behalf of the firm.

If a partner does something, which is not related to the kind of business

carried by the firm, other partners and the firm will not be liable for the

same. For example, if a partner of a firm dealing in cotton textiles

enters into a contract for the purchase of food grains, the latter will not

be binding on the firm unless other partners have authorized the said

partner to undertake such business on behalf of the firm. The partner

undertaking such unauthorized business will himself remain liable for

such transaction. Similarly, if a letter of guarantee or an indemnity band

is to be executed by a firm, it must be signed by all the partners unless

the normal business of the firm is to give guarantees. One of the

partners, in the normal course, is to give guarantee on behalf of the

firm, because such an act is not within the implied authority of a

partner.

In Porbander Commercial Co-operative Bank Ltd. Vs. M/s Bhanji Lavji& Other (A.I.R. 1985 Gujarat 106), a loan from bank was guaranteed

by two firms and bonds was signed by one partner of each firm. The

court held that merely by signing as sureties on behalf of their

respective firms, the concerned two partners as sureties on behalf of

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their respective firms, the concerned two partners could not bind any

other partner of the firm or the firms themselves for the purpose of

repayment of the dues of the bank. The signatories to the surety bonds

were held personally liable to repay.

Borrowing Power Of A Partner

It is evident from section 19(1) of the Indian Partnership Act, 1932, that

a partner may justifiably do all that he is expected to do for carrying on

the business of the firm in the usual way. It implied that a partner, who

is not prohibited from managing the affairs of the firm, possesses the

power to borrow money on behalf of the firm for the purpose to borrow

money on behalf of the firm for the purpose of carrying on the firms

business. Such a debt shall be binding on the firm and all the partners

shall be liable to pay the same. But if the powers of a partner arelimited by the partnership deed or if he is not permitted to manage the

affairs of the firm, he does not possess the power to borrow money on

behalf of the firm.

According to Section 19 (2), a partner does not possess, in the absence

of any usage or custom of trade to the contrary, implied power to do the

following:

(a) To submit a dispute relating to the business of the firm to

arbitration;

(b) To open a bank account on behalf of the firm in his own

name;

(c) To compromise or relinquish any claim or portion of a

claim by the firm;

(d) To withdraw a suit filed on behalf of the firm;

(e) To admit any liability in a suit against the firm;

(f) To acquire immovable property on behalf of the firm or to

transfer the same; and

(g) To enter into partnership on behalf of the firm.

But he can do any of the above-mentioned acts with the express

authority of other partners or if the usage or custom of the trade permits

him to do so. For example, the immovable property of the firm cannot

be transferred until all the partners jointly transfer their interest. If one

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of the partners is empowered by other partners in this regard he may do

so on behalf of the firm.

Liability Of The Partners In Respect Of Firms Debts

The liability of the partner of a firm is unlimited and every partner is

liable to pay the obligations and debts of the firm to an unlimited

extent. But if debts are due from the firm and also from the partners on

the dissolution of the firm, Section 49 of the Indian Partnership Act,

1932, lays down that the debts of the firm shall be settled out of the

property of the firm and the surplus, if any, shall be available for paying

the private debts of the partners. But if the partners are also personally

indebted, the personal assets of the partner shall be applied first to meet

the claims of their individual creditors. Out of the reminder, if any,

claims of the firms creditors will be met.

Example. A and B are partners in a firm having assets amounting to Rs

40,000. The firm owes Rs 50,000 to X in respect of goods supplied.

Both the partners are adjudicated insolvent. Other claims against the

partnership amounted to Rs 30,000. As assets are worth Rs 14,000 but

he owes Rs 22,000. B has assets worth Rs 24,000 but owes Rs 14,000.

According to Section 49 of the Indian Partnership Act, 1932, the

personal debts of the partners would be repaid out of their personal

assets. As creditors will realize Rs 14,000 only from his personal

assets while Bs creditors will realize their full amount of Rs 14,000.

The surplus of cash realized from Bs assets (Rs 24,000 Rs 14,000 =

10,000) would be made available for appropriation amongst the firms

creditors. The firms creditors, amounting to Rs 80,000 (Rs 50,000 +

Rs 30,000) would be able to recover Rs 50,000 (Rs 40,000 +10,000)

only and the rest of their claim would become irrecoverable.

But if the partners sign the loan documents in both of their capacities,

i.e., individually as well as jointly, the creditors of the firm can recovertheir debt simultaneously from the assets of the firm and the partners.

The banker should, therefore, insist that the partners of the firm sign the

documents in both the capacities, i.e., individually as well as jointly.

This will enable the banker to recover the amount from individual

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assets of the partners and also to exercise his right to set-off against the

credit balance in their personal accounts with him. It is usual practice of

a banker to seek a declaration to this effect from all the partners at the

time of opening an account. The joint and several liability of the

partners continues until

(a) All the debts of the firm are discharged, or

(b) The constitution of the firm changes due to death,

retirement or insolvency of a partner and the banker is

informed thereabout.

The personal property of a partner may be attached even before

judgment is delivered in a suit against the firm and its partners. The

High Court has held that when each partner is liable, in the event of

passing of a decree and in the event of the apprehension that one of the

partners is screening away the property and is removing the same out ofthe jurisdiction of the court, the court is competent to pass an order

attaching his property under order 38 Rule 5 CPC.

Death Of A Partner

If a partner die, the firm stands dissolved automatically, if an agreement

to the contrary does not exist. It means that the firm is not dissolved on

the death of a partner if the partnership deed specifically provides for

this. The deceased partners heirs cannot succeed him as partners. They

can demand the share o the deceased in the firm from the surviving

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