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BANKER CUSTOMER RELATIONSHIP * Right of Lien RIGHTS * Right of Set-off * Right of Appropriation * Duty to Honour Cheques DUTIES * Duty to Secrecy

BANKER::RIGHTS LIEN: Right to retain a security until the debt is discharges or a promise to performed. LIEN GENERAL SPECIFIC One security more than one charge One security one charge Normally the right is exercised The charge is offered (created by borrower) - This is available to Bankers, Factors - This charge is available to all (finance against receivables), Attorneys of persons/lenders who provide finance High Court, Wharfingers ) against specific securities - Lender can, not only retain the security - Lender is empowered to hold the but also can sell it after giving a security. He cannot sell it. Eg: Tailor, reasonable notice to the borrowers Goldsmith, Finder of lost goods, Pawn broker * As long as Specific Lien is there, General Lien cannot be exercised Bankers General Lien: Banker can exercise General Lien: on all the goods which are received by him (a) during the normal course of business (b) in the capacity of a Banker, provided there are no instructions to the contrary. Example 1: X repaid Gold Loan and demanded the jewels back. Banker refused to do so by stating that he exercised Bankers General Lien on the jewels for the overdue/recalled loan account of X. Whether the Banker is the right? Answer: a) loan is closed and hence the Jewels are free, b) Jewels are received in the capacity of a Banker (Creditor-Debtor) c) There are no contrary instructions Hence, Banker can exercise Bankers General Line Example 2: Y took a Demand Loan from the Bank. The loan is guaranteed by X. The loan became overdue and is recalled. Today X came to the Bank, closed his jewel loan and requested for return of the jewels. Branch Manager refused to deliver the jewels stating that he exercised Bankers General Lien on the Jewels towards the overdue/recalled Demand Loan of Y. X argued that Banker cannot do so because a) The borrower Y is creditworthy b) Banker did not exhaust all their remedies against the borrower and the collateral securities offered by Y. c) Jewels were not offered by X as a security for the loan taken by Y.

d) Y is ready to fight out the case even in High Court or Supreme Court and warned the Branch Manager against the costs & consequences. Answer: Surety/Guarantor is not liable to the debt for Principal Borrower until and unless a notice of recall is served upon him. Once an overdue loan account is recalled, the liability of the surety will be on par with that of the principal borrower (when a Term Loan is sanctioned, the liability of the borrower is primary, the liability of surety is secondary. Once a loan account is recalled, the liability of the guarantor also becomes primary along with the principal borrower). Hence in the present case the jewels of the Guarantor are attachable. Co-obligant The person who signs the DPN (In such a case the liability is coextensive.) Surety/Guarantor The person who guarantees the loan account is called Surety. If such guarantor executes a DPN, he is called Co-obligant. The liability of co-obligant is primary, from the date of the loan. For example, X, a minor, took a loan from the Bank by making the branch believe that he is a major. a) If Z stood as guarantor and signed DPN along with X, what is his liability? b) Y executed a letter of guarantee assuring the repayment of the loan taken by X. If it came to light subsequently that X was a minor while taking a loan, what is the liability of Y. Note: The age of X as on the date of taking loan was 16. The age of X when the bank proposed to take legal action was 19. Solution: a) Z is liable to pay, as he is co-obligant. b) Agreement is void and Y is not liable to pay as a guarantor Note: Even if a minor gives a debt acknowledgement or executes, a fresh set of documents (revival letter) or undertakes to repay a loan taken by him during his minority ,cannot give any legal rights to the banker to proceed against the minor legally. An agreement with minor is void abinitio (from the beginning). Any agreement obtained from the minor even after his becoming major cannot make the void contract as valid contract. (Case: Mohiribibi vs. Dharamdas Ghosh) SET-OFF: Combining 2 accounts, one with debit balance, and the other with credit balance. Combining 2 accounts either with credit balances or debit balances is not called setoff. Set-off is an extension of lien. Set-off is permitted under the following circumstances: - Both the accounts are in the same name, the same right and in the same capacity - The debt is due for payment - The debt is backed by a valid contract - There are no contrary instructions for exercising the right of set-off by the Banker - It is not a contingent contract/liability - A prior notice is served on the borrower about the Banks intention to exercise the right of set-off. EXAMPLE - There is a Balance Rs.20 lakhs in the savings account of a party

- He took a loan of Rs 50 lakhs from the bank. Of which an amount of Rs 5 lakhs is overdue - The customer issued a Cheque for Rs.19 lakhs on 15.09.2008 - On 18.09.2008,the Bank issued a Notice to the borrower expressing its intention for exercising right of set-off from SB account to loan account towards overdue amount of Rs.5 lakhs - The Banker debited the SB account on 19.09.2008. - The Cheque dated 15.09.08, for Rs 15 lakhs was presented in clearing on 20.09.2008 - The cheque was returned with the reason insufficient funds - The notice served by the Banker was received by the customer on 21.09.2008 - Whether the Banker is liable? Answer: The Banker is liable. Had the cheque been presented on 22.09.2008, the Banker would not have been liable. - The balance in the proprietors account is available for set-off for overdue loan account of the proprietor in his individual capacity. - The credit balance in the partnership account is not available for set-off for the dues in the individual account of the partners. - The individual deposit accounts of the partners are liable for set-off towards the overdues in their partnership account. - The credit balances in the individual accounts of the members/shareholders/directors are not liable for set-off towards the dues in the companys loan account and vice-versa. - The balance in the Trust account is not available for set-off towards the overdues in the individual accounts of the Trustees & vice-versa. APPROPRIATION: Rules of Appropriation Section 59, 60, 61 of Indian Contract Act Section 59 When a customer makes a deposit, the Bank should credit such amount to the account for which the amount has been paid. For example, a party has got 2 loan accounts i.e. overdue Demand Loan & regular Vehicle Loan accounts. Today the customer paid Rs.5000/- to Vehicle Loan account. Whether the Banker can appropriate the same towards the overdue Demand Loan account? Answer - No. Section 60 When a customer deposits some amount without mentioning the account number, the Banker should credit such amount to the account to which he regularly pays. If the customer has no such habit of regularly paying to a particular account, the Banker can exercise his discretion and appropriate such amount to any account of the customer including a time barred debt. Section 61 When the customer as well the Banker are not exercising their right of appropriation, the amount paid by the customer should be appropriated towards the oldest debt (high overdues) due by the customer (The Rule in Claytons case) Rule in Claytons Case (Devyans vs. Noble) This rule is applicable for running accounts with debit balances like: - Current accounts, CC/OD accounts - Pertaining to Joint accounts, Partnership accounts, Guarantees - Where the accounts are not closed on the death/insolvency/retirement of a Joint account holder/partner/guarantor Operations in the Current or CC/OD accounts (with debit balance) with the constitution of Joint account/Partnership should be suspended soon after the receipt

of authenticated information about the death/insolvency/retirement of one of the partners/Joint accountholders. Otherwise, the subsequent credits would go to reduce the liability of the deceased/insolvent/retired partner/Joint account holders. Example 1 A, B, C, D are the partners of a firm. They availed a CC limit of Rs.20 lakhs against the security of Rs.80 lakhs immovable property. After few months, C expired. At that time, the account was in credit balance. As per the partnership deed, the partnership continues even after the death/insolvency/insanity of one or more of the partners. Hence the account was continued despite the death of C. After one year, the partnership collapsed. At that time, amount due by the firm to the Bank was Rs.20 lakhs. How much amount could be recovered from the estate of C? Answer Cs estate is not liable for the Bank dues as the account is in credit balance as on the death of C i.e. the firm is not due any amount to the Bank as on the date of death of C. The debit balance of Rs.20 lakhs is on account of operations made by A, B & D in the account subsequent to death of C. Hence C estate is not liable for the debits made in the account subsequent to the death of C. Example 2 M/s.ABCD firm is enjoying a CC/OD limit of Rs.40 lakhs with Prudent Bank. Mr.'X', the guarantor gave a notice to the firm and the Bank on 15.09.2008. As on that date, the debit balance in the account was Rs.33 lakhs. Despite the notice, the following transactions were carried in the account. Date Dr. Cr. 16.09.2008 50 000 17.09.2008 2 50 000 3 00 000 19.09.2008 3 50 000 7 00 000 27.09.2008 12 50 000 13 00 000 Thereafter, the firm collapsed. How much amount is receivable from the estate of X. Answer X is liable for Rs.10 lakhs (Rs.33 lakhs less Cr. of Rs.23 lakhs). Operations in the account are not suspended immediately after the receipt of notice of invocation of guarantee by the guarantor (crystallization of a liability was not made). As per Law, guarantee for a Term Loan cannot be revoked, but guarantee given for a running account like CC/OD account can be revoked. In such cases, the guarantor is liable to the extent the principal borrower is due to the Bank as on the date of receipt of the letter of revocation of guarantee issued by the guarantor. If the Bank permit credits/debits in the account despite the notice of revocation by the guarantor, - The guarantor is not liable for the subsequent debits - The subsequent credits goes to reduce the crystallized the liability of guarantor In the above example, the crystallized liability is Rs.33 lakhs. X is not liable for the subsequent debits of Rs.19.00 lakhs. The liability of X got reduced by Rs.23 lakhs i.e. his present liability would be Rs.10 lakhs (Rs.33 lakhs less Rs.23 lakhs) Example 3 A, B, C, D are partners. D died on 15.09.2008. How much amount can be recovered from his estate if operations continued up to 30.09.2008 and the firm collapsed thereafter. 02.09.2008 30 70 14.09.2008 30 100 19.09.2008 40 60 21.09.2008 10 50 30.09.2008 50 100 Answer D is liable to the extent of Rs.50 lakhs. (Note In a CC/OD account, each debit is treated as a separate loan and each credit is treated as repayment

towards the loan. As per Section 61 of the Contract Act, the credits are to be appropriated towards the oldest debt due.)

DUTIES OF BANKER DUTY TO SECRECY: The duty of secrecy is contractual for all the Banks. It is statutory also to Public Sector Banks as per Section 13 of Banking Companies Acquisition & Transfer of Undertaking Act 1970 (Banking Companies Act). Banker duty of secrecy was first established in the leading case Tournier vs. national Provincial & Union Bank of England. The duty of secrecy of Bankers continues even after the closure of deposit accounts by the depositor and even after the death of the depositor. The duty of secrecy of the Banker has some exceptions. The Banker can divulge information about the customers account in the following circumstances: - At the specific request of the customer - To the proposed guarantor to the extent of the transaction - Exchange of information with the fellow Bankers - Under compulsion of Law i.e. a) Court order b) Income Tax enquiries/matters (Section 131, 133 of Income Tax Act) c) To Police/CBI (Section 91, 94 of Criminal Procedure Code) d) Others like FEMA, RBI, and Companies Act etc. In the interest of Nation, Organization. Eg: Accounts of Extremists Exchange of Information among the Bankers: e) Normally whenever a Banker seeks credit information, reply should be given in the format given by IBA. f) The format should not be signed but only the covering letter is to be signed. g) While furnishing the Net Worth, the amount should not be mentioned in numericals or in words. It should be mentioned in code words.

S.N o 1 2 3 4 5 6 7 8 9 10 11

Means/Net Worth/Amount Up to Rs.10,000 Above Rs.10,000 & up to Rs.25,000 Above Rs.25,000 & up to Rs.50,000 Above Rs.50,000 & up to Rs.1,00,000 Above Rs.1,00,000 & up to Rs.2,00,000 Above Rs.2,00,000 & up to Rs.3,00,000 Above Rs.3,00,000 & up to Rs.5,00,000 Above Rs.5,00,000 & up to Rs.10,00,000 Above Rs.10,00,000 & up to Rs.25,00,000 Above Rs.25,00,000 & up to Rs.50,00,000 Above Rs.50,00,000

Code Word Very Small Small Moderate Moderate to Fair Fair Fairly Good Fairly Good to Good Good Very Good Large Very Large

Disclosure of Information under Compulsion of Law:

No I II Information sought by Court Income (Customs/ Sales Tax/ Revenue Officials) Police/CBI officials Police/CBI officials Tax Legal Provision Any specific Act Sec 131 of IT Act Sec 133 of IT Act Sec 91(i) of CR.P.C Sec 94 of Criminal Procedure Code Sec 102 of CRPC Sec 19(e) & 19(f),43 Sec 251 Sec 45(b) & 45(c) Extent of information to be furnished The information called for in the report should be furnished. (Other wise, it amounts to contempt of Court). Certified copies of documents submitted by Bankers are admissible in the Court of law /Legal Proceeding as per Sec 4 of Bankers Book of Evidence Act IT officials derive the powers of Court vide this section to summon, administer oath and examine the Bank officials to get information Power to call for roving (general) enquiries in respect of: Cash transactions of Rs.10 lakhs & above Details of assets in respect of Loans & advances of Rs.50 lakhs & Against a specific requisition duly signed by the Station House Officer, the following information can be furnished Oral Enquiries &Certified copies of documents ( Original should not be handed over) Stolen property, fake notes, and forged instruments. If these are reported to be in the possession of a Banker, police may call for the same as per the orders of the Court to submit these items as evidence in the specific case. (Note: Originals can be handed over by retaining photo copies against acknowledgement) A Police officer can seize the balance lying in a Bank account and order the Bank to remit the amount to their office. Officials from Enforcement directorate can exercise the same powers as that of a Court. A Banker is under obligation to disclose all information about a Company Bank account sought by the officials appointed under the Companies Act. RBI can collect credit information from all the Banks and provide the same to all Banks wherever it deems fit. Example: RBI Caution List




FEMA Companies Act RBI Act

DUTY TO HONOUR CHEQUES: Banker is duty bound to honour the cheques drawn on the customer account provided: h) sufficient balance is available in the account i) the balance available in the account is properly applicable for the payment of the cheque (Sec 31 of NI Act) Under the following circumstances, balance lying in the account is deemed to be not properly applicable for the payment o a cheque (1)Payment stopped by the drawer, (2)The depositor is reported to have been deceased / insolvent / insane through authentic sources (on receiving information about the death/insolvency/insanity, if a cheque is presented, such cheque is to be returned Refer to Drawer (3)Under compulsion of Law i.e. Court Orders, Garnishee Orders, Income Tax attachment order. In the event of wrongful dishonor of a cheque, the Banker is liable to the DRAWER of the cheque

Differentiating Features between Garnishee Order & Income Tax attachment order
No 1 Differentiating Features Source of authority Garnishee Order Sec 60; Order 21; Rule 46 of Civil Procedure Code GARNISHI - NISHI :ATTACH THE ACCOUNTS & FURNISH THE INFORMATION TO THE COURT. GARNISHI ABSOLUTE: Remit the balance in the account as per the courts directions To recover amount payable to a third party (creditor) Income Tax attachment order Sec 226(3) of IT Act

2 3

Purpose of issue of the order Whether the order should specifically mentioned the account & amount to be attached?

a) Time of Balance




b) Attachment of subsequent credits in the account c) Whether balances lying in the accounts opened subsequent to the receipt of the order are attachable

Not required. If the amount is not mentioned, suspend operations in the account until further order from the Court. If the amount is mentioned in the order and if the balance in the deposit account a) less than the amount mentioned in the order, suspend the operations in the account b) more than the balance mentioned in the order, earmark the order amount in the ledger or transfer the balance in the account up to the amount mentioned in the order, to sundry deposits account, and permit the party to operate on the deposit account The balance outstanding in the account as at the particular point of time of a receipt of the order (which is not out of the hands of the banker. Example: Cheque debited to the account by 10:55 a.m. and order received by 11:20 a.m. Cheque returning time as per the Clearing House practice is 12:00 noon. Attach the funds and return the cheque. Not attachable Subsequent credits are attachable (even though some Courts are against this, there is no Supreme Court decision in this regard) No No

To recover IT dues payable by the account holder The Income Tax attachment order should specifically mention the amount to be attached and the accounts to be attached

Nature of the Deposit Account 01


INCOME TAX ATTACHMENT ORDER SAVINGS BANK ACCOUNTS : NOTE: The Garnishee order or Income Tax attachment Order can be enforced against a deposit a/c, only when the a/c shows Credit (Presumption order is received Balance, i.e. The Banker and Customer relationship is that of in the name of A ) Debtor and Creditor. a)Account in the name of A Attach the balance/account Attach the balance/account b)Account in the name of M minor/guardian A Not attachable the account Not attachable the account c) Account is having OD facility up to Rs.25000. The Not attachable Not attachable debit balance in the account is Rs.5600. Order is for Rs.15000. d)The party reported deceased the previous day, Not attachable because after the death Balance in the account is balance in the account is Rs.2 lakhs and order is of the depositor, rights over the deposit attachable by IT orders because for Rs.1 lakh devolves on the legal heirs i.e. the the amount is due to Govt. banker & customer relationship gets changed from debtor & creditor to trustee & beneficiary e)Mr.A became insolvent prior to receipt of the Do not attach the balances lying in the Attaches the deposit account order account even though the depositor is reported to have been declared insolvent because the order amount represents amount due to Govt./Public f) Mr.A is reported to have been declared insane Will not attach the balances in the Attaches the balance lying in the by authentic sources account account g) A is having a Term Deposit of Rs.4 lakhs. The Attach the deposit but remit the proceeds only on or after the due date deposit is to matured by 31.12.2015 h)A is having a deposit of Rs.1 lakh against which Attach the deposit but remit the balance in the deposit account on the Rs.75000 loan was sanctioned prior to the receipt maturity after adjusting the loan together with interest of the order i) A Bank Guarantee for Rs.1 lakh was issued As on the date of the receipt of the order, there is no existing debt due by against the deposit of Rs.1 lakh to Mr.A prior to Mr.A to the Bank. Hence the right of set-off is not applicable to the Banker. the receipt of the order Since GO/IT attachment order represents an existing debt as against a contingent liability, the deposit account is attachable despite issue of a guarantee there against. Joint Accounts (A/c in the name of A & B) a)SB A/c operated jointly When order is issued in the Until the contrary is proved, the balance in name of A, it will not attach a joint account is deemed to


the joint account

b)SB joint A/c operated Either or Survivor

E or S is operational instruction. Since the balance in the account pertains to A & B, Garnishee Order in the name of A does not attach the joint account of A & B

pertain/belong to both the joint account holders equally. Hence 50% of the balance in the account is attachable. (If joint account holders are more than 2, the balance is attached pro-rata) Until the contrary is proved, the balance in a joint account is deemed to pertain/belong to both the joint account holders equally. Hence 50% of the balance in the account is attachable. (If joint account holders are more than 2, the balance is attached pro-rata)

c) SB joint A/c operated Former or Survivor j) A is Former

The balance in the account is 100% balance in the account is attachable attachable because A is the since A is the owner of the account owner of the account Since the order is in the name of A, it will Since B is the deemed owner not attach the joint account in the name of of the account, Garnishee A & B where B is the Former (since B Order issued in the name of A is deemed to be the owner of the account) does not attach the joint account in the name of A & B where A is Survivor The same rules as applicable to SB joint accounts are also applicable to Term Deposits with joint operations clause. The only difference is that after attachment, the balance in the term deposit account is remitted after the maturity of deposit

k) A is Survivor

d)Term Deposit in the name of A & B

03 04




Proprietar ship Accounts Law does not make differentiation between the individual & (A is the proprietor of M/s.Sagar Coconuts and G.O / proprietor. Hence the account is attachable. I.T attachment order is in the name of A) Partnership Accounts a) You are having the partnership account in the name A partner is deemed to be the agent of the other partners. of M/s.AXA Trading Co. A, B, C & D are its Hence the order received in the name of A cannot be partners. A is the Managing Partner with 80% share enforced on his principals account (B, C & D) in the firm. A alone is having the cheque signing power. The order is received in the name of A b) Order is received in the name of the partnership. You The liability of the partners is joint & several. Hence the are having the individual accounts of the parties A, order is in the name of the firm is attached the individual B, C & D. whether these individual accounts are accounts of the partners.( At the time of dissolution of the firm) attachable? Company Accounts a) You are having an account in the name of M/s.ABC Co. Company is a separate legal entity/person. Order is Pvt. Ltd. A is the MD of the Co. holding 80% of the issued in the name of one person i.e. A cannot attach shares of the Co. and is empowered to sign, deal on the account of another person i.e. M/s.ABC Co. Pvt. Ltd. behalf of the company as per the General Power of Attorney issued in his name. Whether the order is issued in the name of A attaches the Co. account with you b) If the order is issued in the name of the Co., whether it Company is a separate legal entity/person. Order is would attach the individual a/cs. of Directors/ Members/ issued in the name of one person i.e. M/s.ABC Co. Pvt. Ltd Promoters which are being maintained with the Bank cannot attach the account of another person i.e.. A Other Accounts a) You are having the above deposit a/cs,. in which A is Trustee/ Not attachable Not attachable President/Secretary whether these a/cs. are attachable for the order issued against A in his individual capacity b) You have received an order in the name of Trust/ Association/ Club, No. Trustee is an No whether the individual a/c of A is attachable (A is Trustee) agent You are having a HUF account with you. An order is issued in the name of A A is Karta Since the order is in the personal name of A, it will not attach the HUF account. b) Order is received in the name of HUF Yes, because the liability of Karta is unlimited

BANKER CUSTOMER RELATIONS: S.N Transaction o 1 A deposited Rs.1 lakh in Term Deposit for 3 years 2 X withdrawn Rs.1.25 lakhs from his SB account 3 The Banker paid a cheque for Rs.5 lakhs even though the balance in the customer account was Rs.4,99,575/4 A Vehicle Loan is sanctioned to Mr.X for Rs.3.20 lakhs. The loan is backed by Term Deposit of Rs.5 lakhs 5 Customer tendered a cheque for Rs.125/-or collection 6 Banker has discounted the cheque of its customer and sent it for collection 7 8 9 Customer withdrawn Rs.25,000/- from ATM The customer used the Credit Card issued to him The banker issued a Bank Guarantee in favour of Govt. Department on behalf of its customer a) The relationship between the Banker & Applicant b) The relationship between the Banker & Govt. Department c) The Bank Guarantee is invoked by the beneficiary today (relationship between Banker & applicant when applicant is not having sufficient balance in the account) A Customer tendered a sealed packed for Safe Custody a) The contents are not known to the Banker b) Contents are known Eg: Share Certificates, Bank Deposits etc. A Locker is allotted to the Customer Customer requested for the issue of Demand Draft a) Against Cash Payment c) By debit to his account Standing instructions issued by the Customer Shares/Securities tendered for sale

Banker Debtor Debtor Creditor Creditor Agent Creditor Debtor Creditor Agent Trustee Creditor

Customer Creditor Creditor Debtor Debtor Principle Debtor Creditor Debtor Principle Beneficiary Debtor

10 11 12 13 14

Bailee Trustee Lessor Debtor Agent Agent Agent

Bailor Beneficiary Lessee Creditor Principle Principle Principle