MODULE 2 -

THE TERMS OF BANKER AND CUSTOMER

SYLLABUS TO BE COVERED
Types of relations between banker and customer Bankers obligation to customers Right of lien Set off Appropriation Provisions of negotiable instruments act 1881 Bankers legal duty of disclosure and related matters

RIGHT OF LIEN
Lien is the right of the banker to retain possession of the goods and securities owned by the debtor until the debt due from the latter is paid. The banker acquires the right to retain and sell the goods which came into his possession in the ordinary course of banking business, incase the debt is not paid. Section 171 of indian contract act 1872 gives the banker absolute tight of general lien on all goods and securities received by the banker.

APPLICATION OF LIEN

It applies where :

To sell To a specific person Against the customer

safe custody of articles Document / money deposited for specific purposes Article left negligently in bank Immature debts Stolen goods No simultaneous rights to bank

It doesnt apply where :

RIGHT OF SET OFF

Definition :

set off is the right of the debtor to take into account a debt due from him to the creditor. In case of a banker , the right of set off enables him to adjust a debit balance in a customers accounts , with any balance outstanding to his credit in the books of the bank.

Essential features of set off

It is a statutory right and can also arise out of an agreement between the parties concerned. There should be mutual debts and the debts should be for certain sums , while the claim and the cross claim should be for certain sums.

CONTINUED..

The claim and cross claims should be for determined amounts. The set off can be applied only to those debts , which are due and recoverable on the date of exercising the set off Indebtedness should arise in the same rights. A deceased credit account and a customers debit account cannot be combined Automatic right of set off in :
Death or insanity of customer Insolvency of a partner or on the winding up of the company Receipt of garnishee order Receipt of notice of assignment of customers credit balances Receipt of a notice of secured mortgage over the security changed to the bank.

CONTINUED..
the account of a sole proprietor and his individual account can be combined A customer does not have right of set off against various accounts of various branches.

NEGOTIABLE INSTRUMENTS ACT 1881

The negotiable instruments act 1881 deals with three kinds of instruments which are widely used in commercial transactions. They are :
Promissory notes Bills of exchange Cheque

Cheque - Definition : a cheque is a bill of exchange drawn on a specific banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in electronic form.

CONTINUED A cheque contains instruction in writing by the account holder to his bank for payment of money from his account. There is a statutory obligation on the part of a banker to make payment of cheque if,

It is properly drawn There is sufficient balance in the account There is no legal restraint on the banks duty to pay

CONTINUED

When a cheque is presented for payment , following aspects must be looked into :

Branch on which it was drawn Date Payee Order cheque / bearer cheque Whether amount stated in words and figure are the same Whether crossed Whether instrument contains any endorsement Alterations / mutilations Signature of the drawer Stop payment instruction

PAYMENT IN DUE COURSE

Protection is available for the paying banker in case of forgery of endorsement in an order cheque , bearer cheque. In such cases , the condition for getting protection is that the payment made of the cheque should be in due course. payment in due course means payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount there in mentioned

CONTINUED

To explain in detail ;

Apparent tenor means instructions of the drawer of the cheque , which is apparent from merely looking at the face of the cheque Good faith and without negligence means the common understood meaning of acting honestly whether it is done negligently or not. Payment to a person in possession means that the banker has to make the payment of the cheque to the payee of the cheque holder or holder in due course. Entitled to receive payment means that there are no circumstances to doubt the bona fides of the payee as regards his title to cheque.

LIABILITY OF THE PAYING BANK

As per section 31 , the drawee bank is under a liability to honor a cheque drawn on its account that is having a sufficient balance. In case of default , the bank must compensate the drawer for any loss or damage caused by such default. Protection available for the paying banker : a paying banker is entitled for protection under the NI act in the following cases

Forged endorsements in an order cheque Forged endorsements in a bearer cheque Forged endorsements in a draft Material alteration Payment of a crossed cheque

COLLECTION OF CHEQUES
A collecting bank is the one that collects promissory notes , bills , cheques and other similar instruments like dividend warrant etc for and on behalf of customers. NI 1881 gives protection to the banker in this respect if the following conditions are satisfied.

The cheque should have been collected for a customer The cheque should have been crossed generally or specially before it comes to the hands of the banker While collecting the cheque , the banker acted in good faith and without negligence.

ENDORSEMENT OF CHEQUES
When the maker or holder of a negotiable instrument signs the same, otherwise that as such maker , for the purpose of negotiation , on the back or face thereof or on a slip of paper annexed thereto , they are said to endorse the same. Kind of endorsements :

Endorsement in blank Endorsement in full Conditional endorsement Restrictive endorsement Sans recourse facultative

FORGED INSTRUMENTS
Forged instruments means forging of the signature of the drawer and / or endorser , name of the payee and the amount of the instrument etc. forgery is abolished by law and hence not protected. No title to the holder of the instrument.

BOUNCING (DISHONOR) OF CHEQUES FOR

INSUFFICIENCY OF FUNDS NI act 1881 was amended in 1988 and included a new chapter for penalties in case of dishonor of a cheque , due to the insufficiency of funds in the account of the drawer of the cheque. This amendment was included with view to inculcate the culture of use of cheques and enhancing the credibility of the instrument.

RETURN OF CHEQUES

Return of the cheque by the banker without payment on demand may cause legal recourse by the customer.

The reason for the balance amount being considered not available are :
Payment is stopped by the customer Death of customer Garnishee orders Set off rights

Reasons for return are :

Insufficient funds Exceeds arrangement Payment stopped Closure of account

DISHONOUR OF CHEQUES : SECTION 138

Punishment :

Imprisonment (extendable to 2 years) or / and Fine (extendable to twice the amount of cheque)

Unless , Stale cheque Notice of demand for payment within 30 days Drawer fails to make payment within 15 days of receipt of notice