Banking Law Questions and Answers –

Name: Sarbodeep Sood

Reg No: 44915301019
Date: 20th May 2019

1. Discuss the precaution taken by a banker while operating an account with

agent. [8]

Introduction

A banker should be very careful in opening accounts. When banker accepts deposits,
he is said to borrow money. He should be very careful that fraudulent persons should
not exploit him. Else, he will be responsible in future and will be compelled to pay
damages, for no fault of his own but merely slight negligence.

There are general precautions that need to be followed by the Banker when opening
accounts. As such the RBI has issued directives that banks must obtain introduction
before opening any type of an account, either from a respectable person of that society
or an existing customer of the bank.

However, when introductions cannot be obtained they may obtain relevant ID’s from
the customer and check their validity, for example:

 A passport;

 Government issued Identification card; and

 PAN card

Therefore, in the absence of obtaining an introduction it is possible to utilise these

documents to establish the authenticity of a potential customer.

Agents:

As per section 182 of Indian Contract Act, a person employed to do any act for
another, or to represent another in dealings with third persons is known as an agent
for another.
A banker, who has been authorised to allow an agent to operate a customer’s account,
should at once suspend all operations on that account upon hearing or being notified
of the principal’s death, insanity or bankruptcy. The agent must sign the cheque for
and on behalf of the principal, so that third parties would know that he is dealing in
the capacity of a representative.

The powers bestowed upon an agent must be succinct and specific; therefore, under
no circumstances can the banker allow the agent to exceed the capacity. In Pramod
Kumar v Damodar1, it was held that the authority to draw bills of exchange does not
itself imply an authority to endorse bills.

Precautions:

1. Whenever a bank receives a mandate, it should be recorded in a register, serially

numbered, index alphabetically and the instructions should be noted in the
customer’s ledger account.

2. In case an agent is authorised to open an account on behalf of principal, it would

be better that the application form for opening the account is signed by the
principal himself, delegating authority to operate the account.

3. The agent should sign in a manner to indicate that he is signing as an agent.

4. The banker should not allow the agent, or in fact any person, to pay into his own
private account, cheques which he has endorsed per pro or on behalf of another,
without satisfying himself that the agent has the authority of the principal to do so.

5. A banker should not allow an agent to overdraw his principal’s account except
with his express authority.

6. If the agent is authorised to borrow and he pledges securities belonging to the

principal against the borrowings made, the bank acting in good faith would be
entitled to hold the securities against the entire amount advanced even if the
principal’s instructions to the agent was for lesser sum.

1
ILR (1953), Cuttack, 221.
Conclusion

All in all, it is made obvious that the banker is duty bound to exercise extreme caution
when opening and operating accounts with agent, as there is no scope for presumption
and there is straight up demand for proof of authority. Such proof must be in written
and in an explicit manner. The ambit of the agents authority must be clearly defined
and it must be abided by, without any scope for going beyond it without the authority
of the principal.
2. Bankers lien [8]

Introduction

Lien means a legal claim to hold property as security. It the right of a creditor in
possession of goods, securities or any other assets belonging to the debtor to retain
them until debt is repaid, provided that there is no agreement to the contrary.

According to Halsbury, it is defined as “a right in man to retain that, which is in his

possession belonging to another, until certain demands of the person in possession
are satisfied.” Basically, the retention of a debtor’s property up until the debt or
obligation is discharged.

A lien does not require any special agreement, written or oral, but it arises only by
operation of law.

Essentials

i. That the creditor is in possession of goods, securities etc., and has come in
possession, in the ordinary course of business;

ii. That the owner of the goods, securities etc., has a lawful debt to pay to the
person in possession thereof; and

iii. That there is no agreement to the contrary.

Kinds of lien

i. Specific or particular lien: - A particular lien is one, which confers a right to

retain the goods in connection with a particular debt only. It applies only to
one transaction or certain transactions only.

For example, a watch-repairer has a lien over the watch till the repair charges
due from the owner of the watch are paid to him.

ii. General lien: - this is a right to retain all the goods or any property (which is in
possession of the holder) of another until all the claims of holder are satisfied.
It extends to all transactions and thus, more extensive than of a particular lien.
This is the lien exercised by bankers.
Nature of Bankers lien

One of the important rights enjoyed by a banker is the right of general lien. One of the
special features of the relationship between banker and the customer is that a banker
may in absence of a contract to the contrary, retain as a security for the general
balance of account any goods or securities bailed to him.

In Brando v Barnet2, it was held “bankers most undoubtedly have a general lien on
all securities deposited with them by customers, unless there is an express contract or
circumstances that show an implied contract inconsistent with lien.”

Under Indian law, section 171 of Indian Contract Act, provides Bankers with the right
of general lien over all securities.

Conditions for exercising banker’s general lien

i. There must not be any agreement inconsistent with the right of lien;

ii. The property must come into the hands of a banker in his capacity as a banker;

iii. The possession should be lawfully obtained in his capacity as a banker; and

iv. The property should not be entrusted to the banker for a specific purpose.

Incidents of banker’s general lien

i. Bills of exchange or cheques deposited for collection, or pending discount;

ii. Dividend warrants and interest warrants paid to the banker under mandates
issued by the customer;

iii. Bearer bond left with the banker in order that the coupons may be cut off and
collected by him;

iv. Securities deposited to secure a specific loan, but left in the banker’s hand
after the loan has been repaid;

v. Securities, whether negotiable or not, which the banker has purchased or taken
up, at the request of the customer, for the amount paid.

2
(1864) 3 CB 519
Exceptions to the banker’s right of general lien

i. No general lien on safe custody deposits: - the general lien cannot be

exercised on securities/articles deposited with the banker for safe custody. The
rationale is that when receiving the securities/articles does so in the capacity
of a bailee and not of a banker, thereof not meeting one of the essential
conditions.

In Cuthbert v Roberts3, it was held that the banker, in receiving the securities
or valuables, and are not subject to the banker’s general lien and a contract to
the contract is implied.

ii. No lien on securities or bills of exchange or other documents entrusted for

a specific purpose: - securities/goods, which are handed over to a banker
specific purposes cannot be subject to banker’s general lien because a
contract, inconsistent with the right of lien is presumed to exist in such cases.
In Greenhalgh v Union Bank of Manchester4, it has been clearly established
that if a bill of exchange or any other document or money is entrusted for a
special purpose, a banker’s general lien cannot be extended to them.

iii. No lien on articles left by mistake or negligence: - a banker cannot exercise

any lien in respect of the property, which comes into his hands mistake. It
amounts to unlawful possession.

In Lucas v Dorrein 5 , the banker had refused to grant an advance against

certain securities; it was held that the banker could not exercise his right lien
over those securities because they came into his possession in an unlawful
manner.

iv. No lien on deposits: - a banker has no lien upon the deposit account of a
customer in respect of a loan account due from the same customer. In
Brahammaya v. K.P Thangavelu Nadar6, when moneys are deposited into the
bank, ownership passes to the bank therefore they would not have the right of
lien but rather that of set-off or adjustment.

3
(1909) 2 Ch 226 CA
4
(1924) 2 KB 153
5
(1817) 7 Taunt, 18 RR 480
6
AIR 1956, Madras 570
 v. No lien on stolen bond: - a banker has no lien on a stolen bond given for sale,
if the true owner claims it before the sale is executed.

vi. No lien until the due date of a loan: - this is because no debt arises until that
date. A banker cannot retain any money belonging to the customer against any
bills discounted, which are not yet matured. The reason is that no liability
arises till the date of maturity.

vii. No lien in respect of trust account: - the banker cannot exercise his right of
general lien over the securities deposited by the customer as a trustee in
respect of his personal loan.

viii. No lien on title deeds of immovable properties: - the banker cannot exercise
his lien on these. However, he may recover his dues in a civil proceeding
against such properties.

ix. No lien on balance in the deposit account: - this is in respect of a

partnership. Wherein the balance in the deposit account of a partner cannot be
held as lien in respect of debt due from the firm.

Conclusion

All in all, these are the various aspects dealing with the banker’s right of general lien.
When exercising this right it is pertinent that the conditions therein specified are met
and it is exercised over the articles permitted and does not fall into the exceptions to
the right of general lien.
 3. Bank orders [8]
Introduction
As a supplementary to the present draft facility, bank order scheme is under the active
consideration of the bankers especially for the remittance of small accounts in the
denomination of Rs. 2, 5, 10, 20, 50 and 100. Bank orders are also known as pay
orders.

The banker’s cheque or otherwise known as pay order is an instrument issued by the
bank on the behalf of a customer, containing an order to pay a certain sum to a
specified person, within the city. These orders will be sold across the counter for
which no application form is necessary. There won’t be any payee’s name.

Features

i. The validity period of the Banker’s cheque is 3 months; however, it can be re-
validated subject to some legal formalities.

ii. Though pay orders are akin to the bank drafts, these are not covered by section
85-A and Section 131-A of Negotiable Instruments Act, 1881. It is always pre-
printed with the words ‘not negotiable’, which means it cannot be further
negotiated.

iii. In Banker’s cheque, the chances of dishonour are not possible because its mode is
prepaid.

iv. A pay order can be cleared at any branch of the issuing bank so as long as it is in
the same city. This is one of the attempts to provide instant encashment facility for
the remittance of small accounts.

Conclusion
It is a secure mode of payment to another person. Many schools and colleges prefer
these instruments to cheques, as there is no possibility of same bouncing. These days
many prefer direct credit through the RTGS and the NEFT mechanism. This
completely eliminates the need to visit the bank branch. It is important to note that
you have to visit the bank branch to make a pay order. If the requisite payment is to
be made within the same city then a pay order is a preferable mode of payment.
4. Travellers cheque [8]

This word is not defined in the Negotiable Instruments Act, however Tannan gave a
detailed explanation and definition of the word, as follows:

“Traveller’s cheques bear a striking resemblance to circular notes, with the exception
that they do not require any letter of indication. Like the circular notes, they are
generally drawn for certain round sums and are cashed at the current exchange rate.
At the time of the issue of a traveller’s cheque, its holder signs it at the place
appointed for the purpose and he has only to sign it again in the presence of the
banker to whom he presents it for payment. This signature must correspond with the
signature already on the cheque, which serves to identify the holder.”

As per section 6(1)(a) of the Banking Regulation Act ‘traveller’s cheque’ is a draft
issued by a bank, express company etc. having the bearer’s signature and payable
when the bearer signs it again in order to cash it. A traveller’s cheque is one of the
negotiable instruments. It possesses all characteristic features of a cheque.

Traveller’s cheque is a method whereby travellers take currency to another place in

India or abroad to provide for their expenses. Usually availed when a person wants to
travel without taking the risk of carrying cash with him, he may avail the said facility.
The said cheque may be encashed at any other place or another branch of the bank.
The only aspect to be kept in consideration is that the signature must tally with the
one made at the time of issue of the said cheque.

There is no limitation to utilise this cheque. As long as it is not countersigned, the

cheque can be kept with the purchaser for a long-time. He may keep left over cheques
for future trips and unexpected expenses.

In case that such a cheque is stolen and the purchaser of it informs the bank about it,
and on receipt of such information, the bank must inform all its branches about the
same. Due to the rise of the more modern and computerised system of banking like
the ATM and credit cards, this has become a less popular option.

In Dena Bank v. K. K Alex alias Alexander7, the bank issued a traveller’s cheque to
the plaintiff and the bank assured him that the cheques would afford complete

7
(1988) 63 Com Cas 122 Ker
protection against theft or loss. After the theft happened the plaintiff informed the
bank and the bank sent out circulars to all its branches however before it reached the
cheques were encashed. Both the trial court and the High Court on appeal adjudged
the bank liable and said that they were negligent.

Advantages of Traveller’s cheque

i. Financial protection: the ability to obtain a refund on the amount of the

traveller’s cheque purchased, if it is lost or stolen, is one of the greatest
advantages.

ii. Cash equivalent: it may be used like cash itself wherever they are accepted.
Most cheques carry a watermark and include space for endorsement at time of
use. They’re sold in several different denominations and currencies, which
helps when you travel to another country another want to arrive with local
currency in hand.

iii. No expiry: if you don’t spend all the cheques so purchased then there is no
issue as you may use them another time.

iv. Ease and efficiency: does not make one look for any ATM or local currency
exchange shop, as the cheque itself is equivalent to cash it easily useable and
efficiently fulfils the need of the traveller.

Disadvantages of Traveller’s cheque

i. Convenience: few overseas restaurants, stores and hotels accept traveller's

checks. Many see them as an inconvenient way of doing business, especially
now that credit and prepaid cards that offer favourable exchange rates are
widely available.

ii. Value: Traveller's checks yield the least favourable exchange rates when
compared with competitive currency credit cards and the cheapest Bureau de
Change counters. If you have a credit card that charges a 0% currency
conversation rate, using it on your travels will typically always work out
cheaper than buying traveller's cheques.
 iii. Security: The one perceived major advantage of traveller's cheques is the
security they offer. They're certainly safer than cash, but they don't offer the
same protection as credit cards. You can get replacement traveller's cheques if
yours are lost or stolen as long as you have the serial numbers of each cheque
written down. But if somebody steals your checks and does a decent job of
forging your signature, you could have an uphill struggle getting your money
back.

iv. Fees: Overseas banks and vendors that accept traveller's cheque will often
charge you a fee for processing them, diminishing the value of your travel
money further after exchange rates have been taken into consideration.
Conversely, foreign cash can be exchanged at face value, and credit cards
typically don't attract a processing fee.

Conclusion

In a nutshell, this is a means that was prominently used in the older times by travellers
when moving between cities or countries of carrying finances who wanted to avoid
the risk of carrying a lot of cash with them.