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banking_law:notes:special-types-of-customers

Special Types of Banker’s Customers

In discharge of primary function, banker invites the public to open an account with the bank. Opening of an account with a bank, is creation of a special contract so that the principles of contract viz. capacity to contract, free consent etc. are strictly adhered to. Therefore, a banker must be very careful, while opening an account in the name of a customer particularly at the time of opening/accepting accounts in the name of special category of customers viz. minors, partnership firm, joint stock company, club etc. This lecture deals with the precautions to be taken by the Banker, while opening as account in the name of the “Special Types of Customers” as follows:

  1. Minor
  2. Illiterate
  3. Lunatic
  4. Married woman
  5. Purdanashin Woman
  6. Joint account
  7. Joint Hindu Family
  8. Trust account
  9. Clubs, Societies and Charitable Institutions
  10. Partnership Firm and
  11. Joint Stock Companies.

Minor

A minor is a person, who has not completed 18 years of age. The minority extends to 21 years, if a guardian of his person or property is appointed by the Court (See 3 of Indian Majority Act, (1875). Before 1969, in England the age of minority was 21 years. The age of minority is reduced to 18 years after passing of the Family Law Reforms Act, 1969. In other words, in England also, a person who has not completed the age of 18 years is a minor.

According to Sec. 11 of the Indian Contract Act, 1872, a minor is not competent to contract. A contract entered into by a minor is void ab initio i.e. invalid from the very beginning (as laid down by the Privy Council in Mohori Bibee v/s Dharmodas Ghose1). However, a contract with a minor for supplying of necessaries to minor or his dependants is valid and enforceable (Section. 68, Indian Contract Act, under the Principle of Equity).

According to Section. 26 of the Negotiable Instruments Act, a minor may draw, endorse, deliver and negotiate such instruments so as to bind all the parties, except himself. He need not incur any liability under the negotiable instrument, but he can acquire rights over the instruments. However, the minor is bound by the withdrawals made by him and the bank can legally debit his account.

Therefore, a Banker may open an account in the name of a minor in the following ways:

  1. In the name of the minor or
  2. In the joint names of the minor and his guardian or
  3. In the name of the guardian.

In the first case an account can be operated by the minor himself and there is nothing unlawful, since, Sec. 26 of the Act allows the minor to do so. In the second case, an amount can be operated jointly by the minor and his guardian. In the third case, when the account is operated on behalf of the minor, the Minor should have completed 14 years and he must be capable of reading and writing.

As the minor is immune from liability under the contract, the Banker must be very careful and should take the following precautions while dealing with the Minor.

  1. He (the banker) may open savings bank account (and not a current account) in the name of a minor.
  2. The bank records the date of birth of the minor as given by the minor or his/her guardian. When the minor attains majority, the banker has to close the account and should open a new account in his name as major (i.e. the name of the minor, who became the major). The credit balance if any (from the account closed) should be transferred/credited to the new account.
  3. In case the minor dies, the guardian can be permitted to withdraw the amount. In case of joint account in the names of minor and his/her guardian, the balance will be held at the absolute disposal of the guardian.
  4. There is no risk involved so long as the minor’s account shows credit balance. In case, the minor’s account is overdrawn even by mistake or unintentionally, the banker cannot recover the amount. Even if the minor has pledged some asset as security, such pledge itself is invalid and the Banker cannot exercise any lien over it. The reason is, a minor can be a promise or beneficiary but cannot be a promisor.
  5. The Banker should not grant an advance to a minor even against the guarantee by a third person, who is a major since the contract with minor itself is void, the guarantor or surety also is not liable unless there is some specific provision to that effect.
  6. A minor may draw, endorse or negotiate a cheques or a bill but he cannot be held liable on such cheques 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 (Section 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.

Illiterate

Illiterate persons cannot sign their names and hence the banker take their thumb impression as a substitute for signature, and also a copy of their recent photograph. The application form and the photograph should be attested by an approved witness. For withdrawing money, he must attend personally and affix his thumb impression in the presence of an official of the bank, for the purpose of identifications.

Lunatic

According to Sec. 12 of the Indian Contract Act, 1872, a person of unsound mind is not competent to enter into a valid contract. 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 judgement as to its effect upon his interests2). It is important that he should be of sound mind at the time he enters into a contract. If a person is usually of unsound mind but occasionally of sound mind, he may make a contract when he is of sound mind. Similarly, 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 has 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 person concerned 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.

Married Woman

A married woman (Hindu) has the contractual capacity (if about 18 years of age) and has the right to acquire or dispose of her personal property called “Stridhana” in Hindu Law. The manager should make the usual essential enquiries in opening the account of a married woman. In the application (account opening form), she should fill up in addition to her name, address etc., the name of her husband,, his address (and the address of the employer of the husband). Proper introduction is necessary. As a competent person, she can draw and endorse cheques and other documents and these can be debited to her account. As long as credit balance is there in her account, there will be no risks, but, if loan or overdraft is to be given the Bank should ascertain her credit worthiness, her personal properties (Stridhana) the nature of the properties held by her etc. The Husband is not liable for her debts, except for those loans incurred for “necessaries of life” for her and her family.

Precautions in granting loans or overdraft are necessary as:

  1. she may have no property as stridhana,
  2. Her Husband's property is not liable except for necessaries,
  3. she may plead undue influence or ignorance of the nature of loan transaction,
  4. she cannot be committed to civil prison.

Purdanashin Woman

She is one who wears a veil (Purdah), as per her customs, and is secluded except the members of her family. Some Muslim women observe this as custom in their community. The Manager should of course follow the preliminary enquiries as usual and may allow such a woman to open an account. Her identity and that she is opening the account out of her freewill are essential. To be on the safer side the manager may require a responsible person known to the bank attest her signature. Better if he insists such attestation in respect of her withdrawals also.

Joint Account

While opening the joint account, all the concerned persons should sign the application form. The necessary forms are filled up and signed to specify how the account is to be operated and also who is authorised on all matters including cheques, bills, securities, advances etc. Operation of the account may be by one or more persons but clear instructions are essential to draw cheques etc. Instructions regarding survivorship are also a part of the process of opening of accounts. Generally the account is made payable to either or survivor and the survivor is entitled to the amounts standing to the credit. The joint holders may nominate a person, if they so desire. Example of Joint Account is Husband and Wife. In a case of an account with instructions payable to either or survivor it is held that on the demise of the husband, the wife would be entitled to the amount if the husband had such an intention to benefit her, but, if there is no intention, it becomes part of the estate of the husband and hence heirs will be entitled as per law. Death of the husband, will not constitute a gift to the wife. The burden of proving the intention is on the wife.3)

Partnership Firm

When two or more persons (subject to a maximum of 100) carry on business to share profits and losses equally or in proportion of capitals, it is called ‘Partnership business’. The Indian Partnership Act, 1932 defines partnership as “The relation between the persons who have agreed to share the profits of the business carried on by all, or by any one of them acting for all”. The persons are called ‘Partners and the business is called ‘Partnership Firm’. In partnership, the liability of partners is unlimited.

A banker should take the following precautions, while opening an account in the name of a partnership firm:

  1. He (Banker) must examine carefully, the partnership deed to acquaint himself with the constitution and business of the firm.
  2. He must check that the number of partners is not less than two and not more than 100.
  3. The account should be opened in the name of the firm, not in the name of partner/partners.
  4. The Banker can insist all the partners to join, to open the account, and must obtain specimen signatures of all the partners.
  5. The Banker should take a letter or mandate containing:
    1. the names and addresses of the partners;
    2. nature of business undertaken by the firm;
    3. name/names of the partner/partners who will operate the account.
  6. If a cheque in favour of firm is endorsed to a partner, the banker should not honour it without making necessary enquiry.
  7. If there is a minor partner, his date of majority should be obtained to ensure that a fresh partnership later signed by him on attaining majority.

Joint Stock Companies

A company is an artificial person, created by law with perpetual existence and common seal. To acquire legal personally (to sue and be sued) it must be incorporated/registered under the Indian Companies Act, 1956. A Banker has to take the following precautions while opening an account in the name of a Joint Stock Company.

  1. He (Banker) must ensure that the company (applicant to open an account in the Bank) is incorporated/registered under the Indian Companies Act, 1956 (so that the Banker can sue the company for default or breach of contract if any in future).
  2. He has to thoroughly examine the following documents of the company:
    1. Certificate of Incorporation, issued by the Registrar of Joint Stock Companies to ensure that the company (whether Private Limited or Public Limited) is incorporated under Companies Act.
    2. Certificate of Commencement of Business in case, the applicant is a Public Limited Company. (A Private Company can start business after getting the certificate of Incorporation. But a public company can start business only after obtaining the certificate of commencement of Business issued by the Registrar of Joint Stock Companies).
    3. Memorandum of Association and Articles of Association are the most important documents, submitted to the ‘Registrar for Incorporation. Memorandum contains the relationship between the company and outsiders (public) while the Articles contain the constitution of the company.
  3. He must obtain from the applicant, a copy of the ‘Resolution passed by the Board of Directors’:
    1. to ensure that the Bank is appointed as Banker of the Company’.
    2. To know the persons authorized to operate the Account, and
    3. to know the borrowing power of the company and the persons so authorized to borrow.
  4. If the person authorized to operate the company’s account is having his personal account also with the bank, the banker must properly enquire about the cheques endorsed and deposited in personal account so as to avoid unauthorized transfer/diversion of Company’s funds.
1)
1903 30 I.A 114 (P.C.)
2)
Section 12 Indian Contract Act
3)
Marshall V. Crulwell; Foley V. Foley; Panikar V. TWQ Bank Ltd.


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