OBLIGATIONS AND RIGHTS OF A BANKER
Que. What the Banker’s obligations?
Though the primary relation between a banker and his customer is that of a debtor and creditor or vice versa, the special features of this relationship impose some additional obligations on the banker as discussed below:
1. Obligations to honour the cheques.
2. Obligations to maintain secrecy in the account.
Que. What is banker’s obligation to honour the cheques?
According to section 31 of the Negotiable Act, 1881, “The drawee of a cheque having sufficient funds of the drawer in his hands, properly applicable to the payment of such cheque, must pay the cheque when duly required to do so and in default of such payment must compensate the drawer for any loss or damage, caused by such default.”
Que. What are the conditions for banker’s obligation to honour the cheques?
The banker must honour the customer’s cheques, provided:
· There is sufficient balance in the account.
· The funds must be properly applicable to the payment of the cheque.
· The must be duly required to pay i.e. the cheque is complete and in order.
Que. Under which stage the obligation of a banker to honour his customer’s cheques is extinguished?
The obligation of a banker to honour his customer’s cheques is extinguished on receipt of an order of the court known as the Garnishee Order.
Que. What is Garnishee order? How it is issued?
Garnishee Order is an order issued by the court under Order 21, Rule 46 of the Code of Civil Procedure, 1908. If a debtor fails to pay the debt owed by him to his creditor, the latter may apply to court for the issue of a Garnishee Order on the banker of his debtor. Such order attaches the debts not secured by a negotiable instrument, by prohibiting the creditor from recovering the debt and debtor from making payment thereof.
Que. Whether the banker is under obligations to make payment to debit of the account of the customer on issuance of a Garnishee Order?
The account of the customer is suspended and the banker is under obligations not to make any payment to debit of this account.
Que. What is the procedure of issuance of a Garnishee Order?
The Garnishee Order is issued in two parts:
1. Order Nisi
2. Order Absolute
Under Order Nisi the court directs the banker to stop payment out of the account and also seeks explanation from the banker, why the funds in the said account should not be utilised for meeting the claim of the Judgement creditor.
Que. What do you understand by order Absolute?
After filing reply by the banker, the court issues final order called as Order Absolute whereby the entire balance or a specified amount is attached to be handed over to the Judgement Creditor.
Que. What are characters of Garnishee Order
· The Garnishee Order may attach the entire amount or a specified amount.
· The order restrains the banker from paying the debts due or accruing due.
· The order attaches the balance standing to the credit of the principal debtor at the time the
order is served on the banker.
Que. What is the procedure for application of the Garnishee Order to a Joint Account?
In case of a joint account in the name of two or more persons, if only one of them is Judgement debtor, the joint account cannot be attached. But if both or all the joint account holders are Judgement Debtors, the joint account can be attached. But, the reverse is possible. If two or more persons jointly take a debt, their individual accounts in the bank may be attached.
Que. What is the procedure for application of the Garnishee Order to Partnership account?
In case of debts taken by a partnership accounts, the personal accounts of the partners can be attached in addition to the account of the firm. But reverse is not possible.
Que. What is the procedure for application of the Garnishee Order to a Trust Account?
An account opened in the name of a trust cannot be attached for personal liabilities of the trustees.
Que. Under what circumstances Attachment Order is issued by the Income Tax Authorities?
Income Tax Authorities may attach the credit balance in the account of a customer of a banker, if the former defaults in making payment of the tax due from him, under section 226(3) of the Indian Income Tax Act, 1961.
Que. Which amount/s can be attached under Attachment Order is issued by the Income Tax Authorities?
This order may attach:
a) any debts due and payable.
b) debts due but not payable on the date of receipt of the notice.
c) any amount received subsequently.
Que. What is meant by banker’s obligation to maintain Secrecy of Accounts?
The Banker is under obligation not to disclose- deliberately or intentionally- any information regarding his customer’s accounts to a third party and also to take all necessary precautions and care to ensure that no such information leaks out of the account books.
Que. Under what circumstances The general rule about the secrecy may be dispensed with?
The general rule about the secrecy may be dispensed with in the following circumstances:
1. Disclosure when required by law.
2. When the practices and usages amongst the bankers permit such disclosure.
Type of Deposits Attached
1. All deposits due and accruing due are attached. Deposits due means SF, CA, Call deposits payable on demand and overdue time deposits. Deposits accruing due are term deposits, which will mature for payment in future. Accordingly, Garnishee Order attaches the term deposits however, the amount is payable only on their maturity.
2. Where before receipt of a Garnishee Order an amount is passed for payment, the debit entry is made and token issued but the Cashier does still not pay the amount, the Garnishee Order attaches such amount because a payment is not conclusive unless the amount is actually parted by the bank.
3. Similarly where a cheque is received in clearing for payment and a Garnishee Order is received before the time within which the clearing cheque can be returned unpaid, the cheque should be returned unpaid and the amount attached by the order.
Type of deposits not attached
1. A garnishee order attaches only debt. It does not extend to funds/goods/money held by a bank other than as a debtor. Therefore, funds held in safe custody, safe deposit locker, funds held in trust are not attachable by a Garnishee Order.
2. Cheques, Bills sent on collection are not attachable.
3. The sale proceeds of shares/securities yet to be received by the bank cannot be attached.
4. Call Deposits payable on Notice cannot be attached as they are neither due nor accruing due unless the bank receives a notice demanding payment.
5. Cash Credit A/c: The undrawn portion of a cash credit account cannot be attached, as it is not debt due.
6. Uncleared Balance in SF/CA account cannot be attached.
7. Future credits are not considered for attachment. Credits/deposits given after the receipt of the order are not attachable. To illustrate, if the Garnishee Order is received at 11.30 A.M., the money deposited at 1 P.M. in the account is not attached.
RIGHTS OF A BANKER
Que. What are the rights of a Banker?
· Right of lien
· Right of Set Off
· Right of appropriation Or Rule in clayton’s case
Que. What is the Right of General lien?
The Right of General lien confers upon the creditor, the right to retain the security of the debtor and not the right to sell it. It is the right of the creditor to retain the goods and securities owned by the debtor until the debt due from him is paid. General lien is available to a banker on all securities deposited with them by the customer, in absence of a contract to the contrary.
Que. How many types of lien are available under Right of lien?
Lien may be (i) a general lien or (ii) a particular lien
Que. What is meant by Particular Lien?
A particular lien can be exercised by a craftsman or a person who has spent his time labour or money on the goods retainede.g. The clothes retained by a tailor.
Que. Why Banker’s Lien is called as an Implied Pledge?
Banker’s Lien is an Implied Pledge because in the event of default, the bank has the power to sell the securities without filing a civil suit against the customer.
Que. What does Negative Lien mean?
The banker sometimes asks the borrower to execute a letter that his assets are free from encumbrance at the time the advance is made. The borrower also undertakes that the assets stated in the said letter shall not be encumbered or disposed off without the bank’s permission in writing so long as the advance continues. It is known as Negative lien.
Que. What are the circumstances where right of general lien cannot be exercised?
The right of general lien cannot be exercised in the following circumstances:
· On safe custody articles.
· Documents deposited with special purpose.
· Securities left negligently.
· Securities held in trust.
Que. Which type of right is possessed by a banker on the money deposited with it?
A banker possesses right of set-off and not lien on money deposited.
Que. What is Right of Set Off?
Right of set off is a statutory right which enables a debtor to take into account a debt owed to him by a creditor, before the latter could recover the debt due to him from the debtor. In other words, mutual claims of the debtor and creditor are adjusted together and only the remainder amount is payable by the debtor. A banker like others possesses the right of set off.
Que. What are the conditions subject to which right of set off can be exercised?
The right of set off can be exercised subject to the following conditions:
- The amount must be in the same name and in the same right.
- The right can be exercised in respect of the debts due and not in respect of future debts or contingent liabilities.
- The amount of debt must be certain i.e. determined exactly.
- The right may be exercised in absence of any contract to the contrary.
- The banker may exercise this right at his discretion but before the Garnishee order is made effective.
Que. How Right of Set Off can be applied in Sole Traders account?
In case of sole trader, the account in his personal name and that in the firm’s name are deemed to be in the same right and hence the right of set off can be exercised in case either of two accounts is having debit balance.
Que. How Right of Set Off can be applied in Partnership accounts?
Partner’s individual accounts cannot be set off against firm’s accounts.
Que. How Right of Set Off can be applied in Guardianship accounts?
In Guardianship a/cs, the account as guardian of a minor, cannot be treated in the same right. Hence the right of set off cannot be exercised.
Que. How Right of Set Off can be applied in Trust accounts?
In case of Trust accounts the funds held in trust accounts are deemed to be in different rights.
Que. How Right of Set Off can be applied in Joint accounts?
In Joint accounts, a debt due from the one of the joint account holders in his individual capacity cannot be set off against an amount due to him by the bank in the joint account.
Que. What is Banker’s Right Of Appropriation Or Rule In Clayton’s Case?
The above right arises when a customer has more than one accounts or has taken more than one loan from the banker.
Section 59 to 61 of the Indian Contract Act, 1872 contain the provisions regarding the right of appropriation of payments. According to section 59 such right is vested in the debtor, who makes a payment to his creditor to whom he owes several debts.
Que. How a Banker can appropriate the payment under Right Of Appropriation?
A Banker can appropriate the payment under Right Of Appropriation:
· By an express intimation.
· Under circumstances implying that the payment is to be applied to discharge of some particular debt.
If the creditor accepts such payment, it must be applied accordingly.
What are the provision under section 60 for application of Right of Appropriation?
According to section 60’ “If the debtor does not intimate or there is no other circumstances indicating to which debt the payment is to be applied, the right of appropriation is vested with the creditor. He may apply it at his discretion to any lawful debt actually due and payable to him from the debtor.”
Que. What are the provision under section 61 for application of Right of Appropriation?
According to section 61, “where neither party makes any appropriation, the payment shall be applied in discharge of the debts in order of time. If the debts are of equal standing, the payment shall be applied in discharge of each proportionately.
Que. What is the application of Clayton’s case in case of single account of a customer?
In case a customer has a single account and he deposits and withdraws money from it frequently, the order in which the credit entry will set off the debit entry is the chronological order, as decided in the famous Clayton’s case.