Assignment on Banking Law

Title: Special Types of Customers of the Banks

Name: Dathranghok Robert Sean Pajat

Roll No. : 19
Semester: Tenth (10th) Semester of January 2024- July 2024
Name of institution: Department of Law, North Eastern Hill University,
Shillong.
Submitted to: Shishir Tiwari

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Sl no. Contents Pg no.

1 Introduction 3

2 Aims and Objectives 4

3 Special Types of Customers 5-11

4 Conclusion 12

5 Bibliography 13

Table of Contents

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Sl no. Contents Pg no.

1 Commissioner of Taxation v. English Scottish and Australian Bank 5

2 Bombay v. Gopinath Nair and Others 5

3 New Bank of India v. Union of India 10

Case Laws Table

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 Introduction
The term 'customer' of a bank is not defined by law. Ordinarily a person who has an account in a
bank is considered its customer. There is no statutory definition of “customer”, and so one has to
refer the decisions of the courts in order to discover the principle which determines whether or
not a person is a customer. In the United States, customer means, 'any person having an account
with a banker or from whom a bank has agreed to collect items and includes a bank carrying an
account with another bank'. The statutory protection under section 131 and 131A of the
Negotiable Instruments Act, 1881, is available to a collecting banker only if the banker inter alia
receives payment of a cheque or a draft for a customer. Though a customer is a very important
person for a bank, he appears only once in law of Negotiable Instrument (i.e., in section 131 of
the Negotiable Instruments Act) and even there only casually; he is neither defined nor
explained. 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. According to section 45-Z of
the Banking Regulation Act, 1949, “Customer” includes a government department and a
corporation incorporated by or under any law. 1

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http://www.nls.ac.in

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 Aims and Objectives
The main aims of the project are as follows:

• The paper essentially seeks to outline the Special types of Customers.

• To identify or examine the different Laws to provides the privileges to the special types
of customers.

Scope, focus and limitations of the project: (Hypothesis)

 To analyze the Banks procedures and stipulated terms.

 To analyze the Banking Regulation Act, 1949.
 To Analyze the Judicial pronouncements.

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 Special Types of Customers
The following are some examples of special types of customers:

• Married women

• Lunatics

• Minors

• Illiterate Persons

• Joint Hindu Family

• Co-operative Societies

• Partnership

• Trustees

In the case of Commissioner of Taxation v. English Scottish and Australian Bank2, Lord Dunedin
observed, “the word customer signifies a relationship in which duration is not essence. A person
whose money has been accepted by the bank on the footing that the bank undertakes to honour
cheques upto the amount standing to his credit, is a customer of the bank irrespective of whether
his connection is of long or short standing.”

The above view was also confirmed by the Kerala High Court in the case of Central Bank of
India, Bombay v. Gopinath Nair and Others3, the Lordship observed: “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 the banking transactions are concerned he is a person whose money has been accepted on
the footing that the banker will honour his cheques upto the amount standing to his credit,
irrespective of his connection being of short or long standing”4.

Thus in order to constitute customer, a person should satisfy two conditions:

He should have an account with the bank, whether fixed, savings or current.

The dealings should be of a banking nature.

Special Classes of Customers

1. Married Woman:

2
1920 AC 683
3
AIR 1970 Kerala 74
4
http://www.lexisnexis.com

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An account can be opened in the name of a married woman. She has the power to draw cheques
and give discharge. But if a loan is given to a married woman, the banker will have no remedy
against her if she has no separate means. Bank must insist for the guarantee of her husband,
because the married woman can plead for and get validated that her debts to the bank are void if
the explicit written consent of the husband is not recorded by the lending bank. This is possible
by virtue of provisions in Married Women’s Property Act.

2. Lunatics:

Under Section 1 of the Indian Contract Act, persons of unsound mind are disqualified from
contracting. But the disqualification does not apply to contracts entered into during the periods of
sanity. However, no banker would knowingly open an account in the name of a person of
unsound mind because he then would have to face the difficulty of choosing whether cheque was
made during a period of sanity and pay it or it was made during a period when it was not and so
dishonour it.

If a banker receives notice and is sure that an account – holder has become a lunatic, he should
stop all operations in the account till such time the customer becomes normal. The banker should
obtain a Certificate of Sanity from a competent authority after which such a person is allowed to
operate on the account.

Lunatics are the people who are unsound in mind. They are incapable of entering into valid
contracts. Hence, a banker cannot open an account in the name of lunatic. In the same manner, a
customer who subsequently becomes a lunatic loses his capacity to contract and therefore cannot
continue to be the customer of the bank. In such a situation where a banker honors the cheque
issued by a customer who subsequently becomes lunatic cannot be held liable unless it is proved
that the banker had knowledge of the unsound mind of the customer.

The banker has to take the following precautions on coming to know of the insanity of the
customer.

a) Return Cheques On coming to know of the unsound nature of mind of the customer,
the banker must immediately return all the cheques drawn by him with the remark
‘refer to drawer’.
b) Lunacy Order The order of lunacy on being received from the Court should be
entered in the proper records of the banker.
c) Account operation The banker may allow the operation of the account of the lunatic
customer only on the basis of the guidance of the Court Of Law. The customer should
not be allowed to operate the account in any manner.
3. Minors:

According to Section 3 of Indian Majority Act, a person attains majority at the age of 18, except
in cases where a guardian is appointed by a Court where the age of majority is 21. According to

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the Indian Contract Act, a minor is not under a legal capacity to enter into a contract and
therefore any contract with a minor is void.

Thus, the minor has a guardian to maintain his / her property. Section 6(a) of Hindu Minority and
Guardianship Act, 1956 recognizes that either of the parents, father or mother, can be the natural
guardian. Normally, bankers do not open accounts in the name of the minor individually, but
open accounts in the joint name of the minor and the natural guardian.

Sometimes, the Court may appoint someone who is not a natural guardian as minor’s guardian.
In such cases the account should be in the name of the minor and the Court - appointed guardian.
Usually, the account should be operated by the guardian on behalf of the minor.

The account opening form should contain details,

 Name of the Minor

 Age of the Minor
 Date of birth of the Minor
 Date of attaining majority
 Name of the Guardian
 Signature of the Guardian
 When the minor attains the age of majority, he/she alone can operate the
account and the guardian should not be allowed to operate the account.

Other Issues in Opening Account in the Minor’s Own Name:

a) A minor of any age can open a SB/FD/RD account through his /her natural or legally
appointed guardian.
b) Minors above the age of 10 years may be now allowed to open and operate savings bank
accounts independently, if they so desire. Keeping in view their risk management
systems, banks may fix limits in terms of age and amount up to which minors may be
allowed to operate the deposits account independently. Banker can also decide, in his
own discretion, as to what minimum documents are required for opening of accounts by
minors.
c) On attaining majority, the minor should confirm the balance in his account and if the
account is operated by the natural guardian / legal guardian, fresh operating instruction
and specimen signature of the minor should be obtained and kept on record for all
operational purposes.

4. Illiterate Persons:

A person who cannot read or write is considered as an illiterate person. The banker while
opening an account in favour of an illiterate person, should adopt the following procedures:

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  The illiterate person will have to be introduced by an existing literate account holder of
the branch.
 The left hand thumb impression has to be attested by a judicial officer or by any witness
who is also the account holder of the bank. The illiterate person should not be given
cheque book.
 Three passport size photographs should be obtained. One will be affixed in the passbook,
the other in the ledger and the third in the account opening form.
 While withdrawing money from the account, the withdrawal slip should be accompanied
by the pass book.
 The left hand thumb impression affixed in the withdrawal slip should carry the sign of a
witness.
 While endorsing any cheque, the thumb impression should carry the signature of witness.
 No bank employee should fill up the withdrawal slip for the illiterate customer and he can
be assisted by any other customer of the bank.
 In the account opening form the banker should obtain two identification marks from the
illiterate person.
 If the illiterate person is unable to come to the bank in person for withdrawal of cash, he
can send a messenger with an authorization letter which should contain the signature of
two witnesses authorising his left hand thumb impression.

Illiterate persons are the people who cannot either read or write, A banker can always open an
account in the name of the illiterate person. The banker however needs to observe following
precautions.

a) Thumb impression

As the illiterate person cannot sign, it is necessary for the banker to obtain the thumb impression
of such a customer. The thumb impression has to be compared with the thumb found on the
cheques drawn by him.

b) Photograph

The banker should obtain the photograph of the illiterate customer. The photograph will help
identify the illiterate easily.

c) Identification Mark

Besides the photograph, the banker should also obtain brief details of the physical identification
marks of the illiterate customer.

5. JOINT HINDU FAMILIES

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The concept of joint Hindu Family is recognized by law. A business, according to law is a
distinct heritable asset. Where a Hindu dies, leaving a business it passes on the heirs. If he leaves
male issues it descends to them and the property becomes joint Hindu Family property. The
members of the family are called co- parceners and the eldest male member is the manager or the
karta. When an account in the name of the JHF is opened all the adult co- parceners are to sign
the account opening form, even though the karta would operate on the account. In addition, the
bankers also obtain a letter of undertaking signed by all the adult co- parceners stating that the
business carried on by the family through births and deaths will be advised to the banker. If the
business is ancestral, the co- parceners are liable to the extent of their share in the family
property, whereas if the business is not ancestral, co- parceners will be personally liable for the
family from the bank.

The main problem in dealing with a JHF arises in respect of loans. In the JHF governed by
mithakshara law, all the members acquires a right in the property by birth and this right starts
from the date of conception in the womb and so there is always the danger of a loan being
repudiated by a member who was not even born on the date of the transactions. The burden of
proving this necessity lies on the banker and the banker has to not only prove the legal necessity,
but also prove that he made reasonable inquiries and was satisfied as to the existence of the legal
necessity.

To avoid these and several other difficulties, some banks requires a Hindu customer opening an
account, to furnish a statement to this effect that the money deposited is his self acquired
property and not that of JHF.

• The account should clearly indicate that it is a JHF.

• The JHF letter should be signed by all the co- parceners.

• The letter should clearly indicates the powers of the karta.

• All co- perceners should sign the documents for loans.

• Death/Lunacy/Insolvency of co- perceners does not dissolve the JHF. It continues till partition
of property.

6. TRUSTEES

According to the Indian Trusts Act, 1882, a 'trust' is an obligation annexed to the ownership of
property, and arising out of a confidence responed in and accepted by the owner, or declared and
accepted by him, for the benefit of another, or of another and the owner Section 3. The person
who resposes the confidence is called the author of the trust. Trustees is the person in whom the
confidence is resposed. The person for whose benefit the trust is formed is called beneficiary. In

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the case of New Bank of India v. Union of India5, Supreme Court observed that a trustees is
generally not entitled to dispose of or appropriate trust property for his benefit. In the present
case the banker was entitled to dispose of the share and utilities the amount thereof for
adjustment to the loan account if the debtor defaults. This banker’s obligation to transfer back the
shares can arise only when the debtor clears dues of the bank. Hence bank was not considered as
trustees.

7. PARTNERSHIP

A bank should take the following precautions in the course of having business dealing with the
firm:

• The banker should open an account in the name of partnership firm only when one or more
partners make an application to the effect.

• The bank should ask for a copy of the partnership agreement and thoroughly acquaint itself
with its clauses.

• The banker should take a letter signed by all the partners containing the following:

• The name and address of all partners

• The nature of the firms business

• The names of the partners authorized to operate the account in the name of the firm.

• The banker should not credit a cheque in the firms name to the personal account of a partner
without enquiring from other partners.

In the absence of any contract to the contrary, a partnership firm stands dissolved on the death of
a partner. In case the firm continues to carry on the business, the estate of the deceased is not
liable for any act of the firms after his death.

8. IN THE NAME OF LIQUIDATORS

A liquidator is a person appointed by the court to wind up the affairs of a company. His business
is to realize the company's assets and apply funds thus collected in repayment of debts and
distribute the balance among shareholders. He has power to borrow money on the security of the
company's assets and to draw endorse and accept instruments on behalf of the company. While
exercising such powers, the liquidator is free personal liability. Every official liquidator is
required to maintain a personal ladges account with RBI or SBI or any Nationalized Bank in
terms of the court order.

5
AIR 1981, 51 Company Case

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9. CO – OPERATIVE SOCIETIES

These are established under Co – operative societies act in force in various states. They are
governed by their respective rules and by – laws. Before opening the accounts, these have to be
scrutinized to see if there are any restrictions on opening bank accounts. In some states, the co-
operative societies cannot open accounts with commercial banks without permission from the
registrar of co- operative societies and the registrar may also impose certain conditions like
maximum balances. All such conditions should be observed while opening and operating the
accounts.

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 Conclusion
Millions of private individuals and hundreds of thousands of small businesses, most of which are
sole traders or partnerships, make up the bank's customer base. Some small enterprises were
established as private limited companies. Certain people—minors, inebriated individuals, insane
people, and the insolvent—are incapable of making legally binding agreements. There are
restrictions on the authority of certain other individuals who act on behalf of others, such as
agents, trustees, executors, etc. Therefore, it is especially important to make sure that their
accounts are handled in compliance with the guidelines in their individual charters.

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 Bibliography

Primary Sources

 The Banking Regulation Act, 1949

 Indian Majority Act, 1875
 The Indian Contract Act, 1872

Secondary Sources
 https://www.lawyersclubindia.com/articles/details.asp?mod_id=3318
 https://www.bdu.ac.in/cde/SLM/B.Com
 http://www.lexisnexis.com
 http://www.infibeam.com
 http://www.ehow.com

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