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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
par