Chapter – 1 : LAWS RELATED TO BANKING

1.1. Reserve Bank of India Act, 1934

1.2. B. R. Act, 1949
1.3. Negotiable Instrument Act, 1881
1.4. Consumer Protection Act, 1986
1.5. Limitation Act, 1963
1.6. Other Laws relating to Banking
1.7. Registration of Documents
1.8. Mortgage of Immovable Properties or Assets
1.9. Indian Stamp Act, 1899
1.10. Hindu Succession Act – Amendments

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2
 1.1

RESERVE BANK OF INDIA ACT, 1934

(SOME IMPORTANT SECTIONS)

Sec.2(e) Definition of Scheduled Bank : Name in 2nd schedule with minimum paid up Capital & Reserves
of Rs. 5 lac.
Sec 17: RBI can transact business like
i) Accepting deposits of Central/ State Govt. free of intt.
ii) Purchase / rediscount of Bills of Exchange from banks
iii) Purchase / sale of Foreign Exchange to / from banks
iv) To give loans to banks, SFCs etc.
v) To provide advances to Central / State Govt.
vi) To purchase / sale Govt. securities etc.

Sec.18 Emergency loan to banks

Sec.21 Central Govt is obliged to give its banking business to RBI and to entrust management of
Public debt to RBI
Sec.22 Exclusive right to issue bank notes
Sec.24 Maximum denomination of bank note can be Rs. 10000/-
Sec 28 RBI can frame rules for refunding value of mutilated, soiled or imperfect notes as a matter of
grace.
Sec 31 No body other than RBI or Central Govt. is authorised to make promissory note payable to
bearer : Demand Similarly except RBI and Central Govt. , nobody is authorised to draw /
accept bills of Exchange payable to bearer on demand ( Exception : Cheques payable to
bearer on demand can be drawn by any body).
Sec.42 (1) Maintenance of CRR by scheduled banks
Sec 45 A–F Power to call for credit information from banks
Sec49 Publication of bank rate – presently 6.0% (since 29.04.2003)
Sec.58 RBI's Central Board is empowered to make regulations consistent with the Act.

CASH RESERVE RATIO : Presently, 5% (since 02.10.2004).

As per sec-42 of RBI Act 1934, all schedule banks are required to maintain cash reserve. A
schedule bank maintains cash reserve by keeping a specified percentage of its Net Demand and Time
Liabilities (NDTL) as current account balance with RBI. Sec 5(f) of Banking Regulation Act defines
Demand Liabilities as liabilities, which must be met on demand and term liabilities as liabilities payable
after a specified time.
RBI is authorised by the act to vary the cash reserve requirement from minimum 3% to maximum
20% of NTDL (amended in 1990). For any statutory reserve above 3%, RBI pays interest @ 3.5%
(presently).

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 1.2

BANKING REGULATION ACT, 1949

Section 5a Approved securities as defined in Clause a, b, bb, c, d,; Sec 20 of Indian Trust Act.

Sec. 5b Definition of Banking

Sec. 5c Definition of Banking Company

Sec 5n “Secured Advances” Loans against assets, whose Market value is higher than loan at
any time

Sec 6 Forms of business in which Banking Company may engage

Sec. 6.1 Banks may act as agent of a person/ Govt. undertake and execute trusts

Sec. 7 For Banking Company carrying on Banking Business in India to use as least one word,
Bank, Banker, Banking or Banking Company in its name.

Sec. 8 Prohibits businesses like trading of goods, etc.

Sec.9 Bank shall not acquire IP except for its own use , for any period exceeding 7 years.

Sec. 10 Tenure of CMD can not exceed 5 years at a time.

Section 11 Foreign banks Paid up capital and Reserves > 20 or 15 lakhs having offices at Bombay,
Calcutta or other than above places.

Sec.12 Minimum ratio of a bank's Authorised : Subscribed : Paid-up Capital :: 4:2:1

Sec. 13 Bank can not pay commission, brokerage, etc. more than 2.5% of paid up value of one
share.

Section 14.1 Prohibits bank from creating floating charges on any property of the company.

Sec. 15 Prohibits dividend till all capitalised expenses are written-off.

Sec 16 Prohibits a person to be appointed as director of more than one bank

Sec 17 Every year, a bank is required to transfer Min. 20% of profit before dividend to a reserve
Fund.

Sec. 20 Prohibits advances against bank's own shares.

Section 21 Empowers RBI to control advances by banking company.

Sec. 21 A Rate of interest charged by banks shall not be reopened by any court on the ground that
the rate of intt. Charged by banks are in excessive.

Sec. 21 35A Interest of deposit/ advance should be rounded off to the nearest multiple of Rs. 1/-

Sec. 22 Empowers RBI to issue licence for opening a Bank

Sec. 23 Prior RBI permission required for opening a new branch.

Sec 23.1 No permission of RBI required, for change of premises, within same city/ place by a
bank

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Sec 24 Every bank to maintain a percentage of its net demand and time liability as S.L.R.
Statutory Liquidity Ratio (Sec.24) : 25% w.e.f. 22.10.1997
A Banking company is required to maintain at the close of business on any day a certain
percentage of its total Demand and Time Liabilities in India in form of cash, gold and
unencumbered approved securities. This is known as Statutory Liquidity Ratio (SLR).
Both scheduled and non-scheduled banks are required to maintain SLR as per Sec.24
of Banking Regulation Act.
As per this section the min. amount of SLR to be maintained is 25%. RBI is empowered
to vary SLR upto maximum 40%.
SLR to be maintained with reference to NDTL as on last Friday of the second preceding
fortnight.
It is to be maintained in form of a) cash, b) Net bank balance (with any scheduled bank),
c) Gold, d) Unencumbered approved securities, e) Any excess balance with RBI beyond
CRR requirement.
Valuation of gold should be done at current market price. Valuation of investment should
be made at cost/ market price/ book value as per guidelines received from RBI.
Sec 25 Assets of banks on last quarterly Friday shall not be less than 75% of its D&TL
Sec 26 Return of unclaimed deposit 10 years and above.
Sec 29 To prepare final a/cs, P&L and Balance sheet in the form prescribed in the 3rd schedule.
Sec 31 To publish balance sheet and auditor's report within three months from the end of period
to which they refer. RBI may extend the period by further three months.
Sec 35 No bank can open office abroad, without permission of RBI, who only inspects such
branches. RBI has powers to give directions.
Sec 36AD No person shall obstruct the transactions of normal business by the bank in any manner.
Sec 44 A Provides procedure for amalgamation of Banking Companies.
Sec. 45 Powers of RBI to apply central Govt. for suspension of business by a Banking Company
and to prepare scheme of reconstruction or amalgamation
Sec 45 Y Central Govt., to specify period for which bank may preserve books a/cs instruments
etc. (Presently 5 years).
Sec45 Z A customer has a right to ask the bank to return him a paid instrument any time/ period.
Sec 45 ZY While returning a paid instrument, bank must retain its true copy of all relevant parts.
Sec 45 ZA to 45 ZF Nomination.

NET DEMAND AND TERM LIABILITIES

NDTL is computed by adding i) Liability to public and ii) Net liability to banking system.
{Note: With effect from 26.4.1997 liability to banking system of all schedule banks (excluding
RRBs) are exempted from maintenance of CRR}.
Liability to public include i) all demand deposits, term deposits excluding certain deposit balance
as notified from time to time and ii) other demand and term liabilities to public.
Other Demand and Time Liabilities include balances like i) Sundry Creditors, ii) Bankers cheques,
iii) Intt. Accrued and Payable, iv) Margin on LG, LC etc. It also includes Net Credit Balance, Head Office
account.

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 1.3

THE NEGOTIABLE INSTRUMENT ACT, 1881

The Act came into effect from 01-03-1882, sections 138 to 142 were added w.e.f. 01-04-1989 and has
17 chapters and 142 sections.

The act extends to the whole of India including J&K and Sikkim.

IMPORTANT DEFINITIONS

(1) Negotiable Instrument, section 13 (1)

“A Negotiable Instrument means a Promissory Note, Bill of Exchange or Cheque payable either to
order or to bearer.”

(2) Promissory Note (Pro Note / Hand Note), section 4

“A Promissory Note is an instrument in writing (not being a bank note or a currency note) containing
an unconditional undertaking signed by the maker, to pay a certain some of money only to, or to
order of a certain person, or to the bearer of the instrument.”

(3) Bill of Exchange, section 5

“A Bill of Exchange is an instrument in writing containing an unconditional order, signed by the

maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain
person or to the bearer of the instrument.”

(4) Cheque, section 6

“A Cheque is a bill of exchange drawn upon a specified banker and payable on demand.”

In India, the term negotiable instrument does not include Bills of Lading, MTR/RR, LIC Policy,
Share Certificate, FDR, Hundies and similar other documents. However, being analogous to notes
and bills, the N.I. Act applies to them under certain cases:

(1) Bank Draft—it is a bill of exchange

(2) Certificate of Deposit—it is a promissory note

(3) Commercial Paper—it is a promissory note

(4) Treasury Bill—it is a promissory note

(5) Share warrant—it is a cheque

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(6) Dividend Warrant—it is a cheque
Promissory Note
i) In writing,
ii) Signed by the maker/promiser
iii) Containing an unconditional
undertaking to pay
iv) A certain sum of money only
v) Pay to or to the order of a certain v)
person or to the bearer of the P.N.
vi) If payable on demand—DPN,
payable after a definite
period of time ----UPN.
vii) Needs to be stamped, stamp
duty is uniform throughout India.
viii) RBI Act prohibits a P.Note
payable on demand to a bearer
ix) May be drawn in any form.
Bill of Exchange
i) In writing
ii) Signed by the maker
iii) Containing an unconditional order
iv) A certain sum of money only
Pay to or to the order of a certain
person or to the bearer of the B.E.
vi) If payable on demand-Sight bill,
payable after a definite period of time
----Usance bill.
vii) Must be properly stamped.
viii) RBI Act prohibits a BE
drawn payable on demand to a bearer
ix) May be drawn in any form.
Cheque
i) In writing
ii) Signed by the drawer
iii) Containing an unconditional order
iv) A certain sum of money
v) Pay to or to the order of a
certain person or to the bearer .
vi) Always payable on demand,
drawn on a specified banker only.
vii) Need not be stamped.
viii) Must be dated and presented
for payment after date only.
ix) May be drawn in prescribed form.

Common Characteristics of Negotiable Instruments

(1) Negotiability, sec.14: A negotiable instrument is freely transferable by (a) delivery if it is payable
to a bearer—sec.46 & 47 subject to sec.58 or (b) endorsement and delivery if it is payable to the
order—sec.48. The maker, drawer, payee or endorsee, jointly, if there are several, and not restricted
otherwise, can negotiate-—sec.51.
An instrument may be made non-transferable by using suitable words, e.g., Pay to x only.ö A
withdrawal slip for withdrawing money from a bankÆs SF account is not a negotiable instrument
as being subject to the condition that it must accompany the passbook. An instrument is negotiable
till payment/satisfaction-sec.60
(2) Writing and signature
(3) Money
(4) Title : A holder in due course gets a better title than the transferor.
(5) Notice : It is not necessary to inform the party liable to pay if the instrument is being transferred.
(6) Presumptions : It is presumed that there is a consideration, i.e., for value received. Also, every
holder is presumed to be a holder in due course.

Parties to a Negotiable Instrument

(1) Promissory Note : (a) Maker (b) Payee
(2) Bill of Exchange: (a) Drawer (b) Drawee (c) Payee
(3) Cheque: (a) Drawer (b) Drawee bank (c) Payee

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Related terms :—
(1) Acceptor : The drawee becomes an acceptor after accepting the bill.
(2) Drawee in case of need : A drawee in case of need is mentioned in the bills itself and is approached
if the drawee fails to honour (accept/pay) the bill.
(3) Acceptor for honour : He is a person who accepts a bill, noted or protested for non-acceptance.

Types of Negotiable Instrument

(1) Ambiguous Instrument, sec. 17: Due to faulty drafting an instrument is interpreted either as a
Promissory Note or a Bill of Exchange. Such instruments are known as ambiguous instruments.
(2) Bearer / Order instruments
(3) Inchoate Stamped Instrument, sec.20: It is an incomplete instrument--- blank or partially written
document. Holder of such instruments has the right to complete the same up to the amount covered
by the stamp. In case it is filled up for an amount in excess of the amount for which it has been
drawn/stamped, no person other than the holder in due course can recover the excess amount
from the drawer.
(4) Inland / Foreign Instruments, sec. 11 & 12: An inland instrument are (a) made/drawn in India and
(b) payable in India / payable by a person resident in India. An Inland instrument may, however, be
made payable/ accepted/ endorsed outside India. Foreign Bills are (a) made/drawn in India but
payable by a person resident outside India, or (b) made/drawn outside India but payable in India.
The former is need not to be protested for dishonour while the latter needs to be protested for
dishonour if the law of the place where it is drawn so requires.
Inland Bills are therefore:--
(1) Made payable outside India;
(2) Made in India but payable outside India;
(3) Made in foreign country but payable in India;
(4) Drawn in India but drawn upon a person resident outside India;
(5) Drawn outside India but upon a person in India;
(6) Drawn outside India and upon a person resident outside India.
Foreign bills are generally drawn in sets of three, each part being numbered and called a ôvia.ö It
may be: a) drawn in India on a person resident in India, though payable in India or abroad; b)
drawn in India and made payable in India, though the drawee may be residing outside India.
(5) Accommodation Bills : It is a bill drawn/accepted/indorsed without consideration, with a view to
oblige someone—provide him with funds.
(6) Demand/Sight and Usance Bills
(7) Fictitious Bills : Names of the drawer and payee are fictitious.
(8) Clean and Documentary Bills
(9) Escrow Bill : A bill delivered conditionally is called Escrow. There is no liability to pay unless the
conditions agreed upon are satisfied--- not affecting the rights of the holder in due course.

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(10) Bills in sets, sec. 132 & 133: Often bills, particularly the foreign bills, are drawn in several parts/
sets with the condition that the entire sets together would constitute one bill and any one can be
paid so long as others remain unpaid. Each part needs to be stamped.

(11) Hundis : These are bills of exchange written in vernacular languages as per local practices. Their
different types include---

1) Darshani Hundi, similar to demand/sight bill

2) Miadi Hundi, similar to usance bills

3) Namjog Hundi, similar to order instrument.

12) Khokha : A Hundi that has been paid up but cancelled is called Khokha. A partly

Convertible debentures non-convertible portion that can be sold to someone at a discount is also
called a khokha.

Maturity of Bills, computation of Due Date and Grace Period

For example, a bill payable 1 month after date of bill, say 10/02/2001 or after sight, say 25/05/2001
will be due for payment respectively on 13/03/2001 or 28/06/2001.

Holder, sec. 08

A holder of an instrument is a person entitled to hold the said instrument in his own name and to
receive/ recover payment due thereon. But a person getting the possession of an instrument by an
illegal way can not be regarded as a holder. Thus, clerks, peons handling the instruments are not the
holders—may be the agents of the holders concerned.

In case of a bearer cheque, any person to whom the cheque is legally negotiated is the holder. In
case of the order cheque, the payee or the last endorsee, if any, is the holder.

Rights of holders are—

❏ To receive/ recover payment due thereon and thereafter giving a valid discharge to the party
making the payment.

❏ To negotiate the instrument

❏ To file a suit in his own name against the defaulter party.

❏ To complete an inchoate stamped instrument

❏ To ask for a duplicate instrument in case of loss of the original.

Can't be a Holder : 1. A thief in possession of the instrument

2. An endorsee barred by the court order from receiving the amount involved.

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Who, other than the holder can sue?

(a) An assignee of the instrument

(b) An unregistered firm as an endorsee but not as a payee

Holder in Due Course, SEC.09

A holder in due course is the holder of an instrument who satisfies following three conditions:

1. Consideration

2. Before maturity

3. Good faith

Can't be a holder in due course :

1. Obtained the instrument by gift or illegal ways.

2. Obtained the instrument after its maturity.

3. Obtained instrument despite having ample reasons to suspect the title of the transferor to be
defective.

A person who has derived his title through a forged endorsement can not be a holder in due
course.

Rights of holder in due course :

1. Defects of instruments are eliminated.

2. Unauthorised acts of an agent become valid.

3. Derives good title in an inchoate stamped instrument, for a sum more than what was intended
by the maker.

4. All prior parties are liable to him until the final disposal of the instrument.

5. Entitled to file suit in his own name against the parties liable to pay.

6. An acceptor of a fictitious bill is liable to pay to the holder in due course—sec.42.

7. Instruments obtained by unlawful means is valid for a holder in due courseùindorsee/possessor.

8. Estoppel against denying original validity of instrumentùsec.120.A minor can, however, take
the defence of minority and there is no liability if the signature is forged.

9. Estoppel against denying capacity of payee to indorseùsec.121

10. Estoppel against denying signature or capacity of prior party---sec.122

11. Title of transferee derived from a holder in due course is valid---sec. 53.

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ENDORSEMENT, SEC.15

This is signature of the maker/holder made with the object of negotiating/transferring, not as a
maker of the instrument. Endorsee gets right of further negotiations if not otherwise restricted.

Types : 1. In full

2. In blank; the holder can change a blank endorsement into full.

Rules :

a) It may be made on the face of the endorsement or on its back, if no space is available, on an
attached paper, called Allonge.

b) Only signature, without any words is endorsement in blank.

c) Anything intended to transfer the document to a person or order and the signature makes the
endorsement full.

d) If the name of the payee/endorsee is wrongly spelt in the instrument, then he should sign the
name as spelt in the instrument, and write the correct spelling within brackets after his
endorsement.

e) Except in case of a crossed cheque, an instrument endorsed blank is payable to a bearer even
though originally payable to order.

f) The holder/authorised agent must sign (in ink) the endorsement.

g) Usual prefixes like Mr., Mrs., and Sh.etc. is not written in signing/endorsing an instrument.

h) An illiterate can put his thumb impression with witnesses signatures on the instrument for
endorsement.

It is presumed that the endorsements appearing on the instrument were made in the sequence in
which they appear thereon.

Restrictive Endorsement, sec.50

This refers to an endorsement, which restricts the right of further negotiation of instrument
or merely entitles the endorsee to receive the contents of the instrument for a specific purpose
by express words. Ex.: “Pay X or order for the account of Z”

Negotiation Back, sec.52

When an endorser excludes his liability and afterwards becomes the holder of the instrument, all
intermediate endorsers are liable to him, i.e. he regains the position he occupied before he made the
restrictive endorsement. This is known as negotiation back.

Facultative Endorsement

Here, the endorser by express words abandons some right or increases his liability under a
negotiable instrument, e.g. an endorsement with “notice of dishonour not required.”

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 Payee's/Endorsee's Name Endorsement
Irregular Regular

1. Roshini Neha˚ 1. Rosini Neha 1. Roshini Neha

2. Rosini 2. For Roshini Neha
3. Binod Gupta Binod Gupta Agent

2. Mrs. R. Sinha 1. Kiran Sinha 1. Kiran Singh

W/o Sinha
2. Kiran Singh
Mrs. R. Sinha

3. Miss Rita Bhaduri 1. Rita Rastogi 1. Rita Bhaduri

Now Rita Rastogi
2. Rita Rastogi
Nee (formerly) Rita Bhaduri

4. M/s XYZ & Co. 1. R. K. Tandon 1. For XYZ & Co.

Prop. / Partner R. K. Tondon
XYZ & Co. Prop. / Partner

5. P. Prasad 1. Late P. Prasad 1. For the Executors of

(Expired) 2. P. Prasad P. Prasad, deceased
C. Pradhan, Executor

6. ABC Ltd. 1. For ABC Ltd. 1. For ABC Ltd.

S. Mazumdar S. Mazumdar,
Managing Director

7. ABC Ltd. 1. U. K. Dey, Liquidator 1. For ABC Ltd.

(In liquidation) ABC Ltd. (In liquidqation)
(In liquidation) U. K. Dey, Liquidator

Partial Endorsement, sec 56

If purports to transfer only a part of the amount due on a negotiable instrument, the endorsement
are invalid. But a partly paid instrument can be negotiated for the remaining balance if the fact of such
part payment is mentioned on the instrument.

Conditional Endorsement, sec.52

Herein, the endorser with the use of express words likes “sans recourse,” without recourse excludes
his liability or make it based on the occurrence of a specific event which might not happen at all.

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Ex.: “Pay C if he returns from abroad.”
“Pay to C without recourse to me.”

Rights of an Endorser, sec 117

The legal status of an endorser is similar to that of a surety for a prior party, if any and/or drawer/
maker of an instrument. An endorser having paid the amount due thereupon an instrument is entitled
to—
1. The amount so paid with an interest @ 18% p.a. from the date of payment till its realisation,
and
2. All expenses caused by the dishonour and payment.

Liability of an endorser, sec.35

The endorser is liable to all subsequent parties in case of dishonour of the instrument, provided—
(i) there is no contract to the contrary; (ii) the endorser had not limited or qualified his liability by using
appropriate words and expressions for the purpose and (iii) due notice of dishonour has been given to
or received by, such endorser as hereinafter provided.

Forged Instruments
If the signature on a negotiable instrument is forged, the document is invalid and can not confer
any right/liability. However, an acceptor of a bill of exchange, already endorsed, is not relieved from
liability by reason that such endorsement is forged, if he knew or had reason to believe the instrument
to be forged when he accepted the billùsec.41.
The endorsee gets no title, if there is a forged endorsement in an instrument payable to order. But
the holder gets a good title in case of a forged endorsement in a bearer instrument/instrument endorsed
in blank. In latter case the endorsement is immaterial, because negotiation takes by mere delivery.
Discharge of a party to the negotiable instrument from liability
1. By payment, sec.10, 82© & 85
2. By release, sec.82(b)
3. By cancellation, sec.82(a) & 40
4. By default of the holder
I. Not presenting the bill for acceptance within due time, sec.61;
II. Not presenting the bill for payment within due time, sec.64;
III. Allowing more than 48 hours for deliberation, sec.83;
IV. Delay in presenting the cheque, sec.84;
V. Qualified acceptance, sec.86; and
VI. Not sending notice of dishonour.
5. By material alteration, sec.87

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Payment in due course, sec.10
This 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 therein,
mentioned. That is, the payment must be made :
1. According to apparent tenor of the instrument
2. In good faith without negligence
3. Payment to the possessor of the instrument
4. No reason to believe that the possessor is not entitled to receive payment

Crossing of cheque
Crossing of cheque means a direction to the drawee banker not to pay the money over the counter,
i.e. the drawee banker should pay the money only through another banker or through some specified
banker or his agent. If not crossed, cheques are called open cheques. I n case of fraud, if cheques are
crossed, it will enable to ascertain, if such cheques are paid, to whom use the money has been paid.

1. General Crossing, sec.123

Here, the cheque bears two parallel transverse lines across its face with/ without the words “ &
Co.”, “Not Negotiable”, etc. The paying banker shall make payment only to a banker in case of a generally
crossed cheque.

2. Special, sec.124
Here, the cheque bears the name of a specific bank in addition of two parallel transverse lines
with/without the words “Not Negotiable”. Such can be payable to the so specified banker only by the
paying banker.

3. Restrictive Crossing
Here, the cheque bears across its face words “Account Payee” or “A/C Payee only” along with
general/special crossing. Such crossing restricts further transferability of cheque as the paying banker
will make payment to the said payee only.

4. “Not Negotiable” crossing

Cheques with such crossing loose its primary feature of negotiability and, therefore, the transferee gets
no better title than that of the transferor/previous holder.
A holder of negotiable instrument is entitled to make following changes in the instrument under his
possession :
(a) To convert a bearer cheque into an order cheque;
(b) To cross an uncrossed cheque;
(c) To cross specially a generally crossed cheque; and
(d) To add restrictive words like ‘not negotiable’ or ‘a/c payee’ on the cheque. A collecting banker can
convert a general crossing into a special crossing.

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Stale Cheque
If a cheque is not presented for payment within a reasonable time it becomes stale or out-of-date
cheque. What is reasonable time depends upon the arrangement between the various banks and the
customers; in India, this reasonable period is 6 months. No payment is made on stale cheque without
getting it confirmed by the drawer.

Mutilated Cheque
Mutilated cheque are those cheques which have been damaged or mutilated in course of circulation.
The bankers do not honour such cheque, in general, for payment.

Marked Cheque
In some countries (other than India) there is a practice that the cheques are marked or certified by
the drawee bankers indicating that on the date of presentation the banker had sufficient funds for
payment of the cheque.
Marketing or certification is the writing on the face of the cheque by the bank on which cheque is
drawn, the words ôgood for payment.ö The implication of marking a cheque can be inferred from the
words used. The words of certification might be construed as words of representation that the cheque
and the signature are genuine. It may also represent that there is sufficient money in the drawer's
account.
Unlike in U.S.A. or U.K. in India the practice of marking or certification is not allowed. Certification
of a cheque is not equivalent to an acceptance of the cheque by the banker; as the banker is not bound
by such marking. Further cheque is not bound to pay the money if there is not sufficient funds in the
drawer's account. Moreover, the drawer can countermand payment at any time before payment through
the cheque has been marked. Though the marking amounts to representation that a cheque is genuine,
such representation is not enforceable because there is no consideration passing from the person to
whom the cheque is marked. The marking of post dated cheque also is equally without any real effect
[Bank of Baroda Ltd. Vs. Punjab National Bank Ltd., (1914) A.C. 176: 71 I.A. 124].

Protection to a Paying Banker

A banker is duty-bound to verify the drawer's signature before making payment of the cheques.
Otherwise, he would be liable to compensate his customer for the fund loss caused by the payment of
cheque with drawer's forged signature which might not be identifiable by naked eyes of a common
man. However, while a banker is expected to recognise his customer's signature, it cannot be expected
to recognise signature of the payee/endorsee. The law, therefore, gives protection to a paying banker
under such circumstances.
❏ Cheque payable to Bearer, sec. 85(2) : If a cheque is originally expressed to be payable ôto
bearerö, the banker is discharged from liability by payment in due course to a bearer of the cheque,
who presents it for payment, even though endorsementsùwhether in full or in blank, and whether
general or restrictive—appear on the back of the cheque. Once a bearer is always bearer.
❏ Cheque payable to order, sec. 85(1) : A banker is discharged from liability if he makes payment
in due course of a cheque payable to order which purports to be endorsed by, or on behalf of, the
payee. It does not require verifying the payee's endorsement on the back of the cheque. If the
endorsement appears to be that of the payee, the banker is entitled to make payment of the
cheque. In case the endorsement does not appear to be that of payee's, the banker would not be
entitled to make payment. Also, if the banker actually knows that the endorsement which purports

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 to be that of the payee is not the payee's endorsement, then if the banker makes payment of the
cheques relying upon a purported endorsement which he knows to be not genuine he cannot be
said to have made payment ôin due course” and therefore not discharged from liability.
❏ Crossed cheque, sec. 128 : A banker gets protection, if he makes payment “in due course” of a
crossed cheque provided that the payment is made in accordance with the crossing. The paying
banker, however, is not required to recognise the signature/endorsement of the payee.

Protection to collecting banker, sec.131

Sec 131 of N.I. Act provides protection to the collecting banker, in the case of the cheques, which
were crossed before they come into the possession of the collecting banker. However, the collecting
banker cannot claim this protection, by himself crossing the cheques after he receives them.
Sec.131 holds, “A banker who has in good faith and without negligence received payment for a
customer of a cheque crossed generally or specially to himself shall not, in case the title to the cheque
proves defective, incur any liability to the true owner of the cheque by reason only of having received
such payment”.
Explanation : A banker receives payment of crossed cheque for a customer within the meaning of
this section notwithstanding that he credits his customer's account with the amount of the cheque
before receiving the payment thereof.
This protection is also available in case of the collection of bank drafts. (Sec. 131-A)

Dishonour of Negotiable Instruments

(1) Dishonoured by non-acceptance : An instrument is said to be dishonoured by non-acceptance
when :
a) the drawee(s) makes default in acceptance, within 48 hours, when the bill is duly presented to
him.
b) the presentment for acceptance is excused and the bill is not acceptedùsec.91, if the drawee is
not competent to contract, or the acceptance given by the drawee is qualified.
(2) Dishonoured by non-payment : Sec. 92 of the act holds, “A promissory note, bill of exchange or
cheque is said to be dishonoured by non-payment, when the maker of the note, acceptor of the bill
or the drawee of the cheque makes default in payment upon being duly required to pay the same—
sec.92.”
(a) The instrument is treated dishonoured if the person responsible to make payment fails to do
so when the instrument is duly presented to him.
(b) But in case where presentment for payment is necessary under sec. 76, the instrument is
treated as dishonoured if the same remains unpaid on the due date.

Steps involved in dishonour

1. Giving notice of dishonour : Not necessary to be given to the maker of the promissory note as
well as to the acceptor/drawee of a dishonoured bill of exchange or chequeùsec.93. The notice of
dishonour is unnecessary, sec.98 in cicumstances as under:-
(a) If it is dispensed with by the concerned party;

16
 (b) If the drawer who has countermanded the payment of the instrument has to be charged for
dishonour,
(c) If the party charged could not suffer damage for want of notice,
(d) If the party entitled to notice cannot be found or the party responsible to give notice could not
give the same due to reasons beyond his control,
(e) If the drawer is to be charged when the acceptor is also a drawer,
(f) If the instrument is a promissory note which is not negotiable, and
(g) If the party entitled to notice, coming to know the facts promises unconditionally to pay the
amount due thereon.

2. Getting the dishonoured instrument noted and protested :

Noticing is not necessary in the case of inland bills/ promissory notes and if omission does not
affect the right of the holder in any way.

Minor's position
Though a minor is not competent to enter into a valid contract. Sec. 26 holds, “a minor may draw,
endorse, deliver and negotiate instruments so as to bind all parties except himself”
The sec. 26 holds that an agent acting on behalf of the principal binds the latter by his acts. But
sec. 27 states that an authority to draw a bill of exchange does not of itself give an authority to endorse.
The agent must sign only as an agent of his principal. Further, an agent, acting under the power of
attorney given by his principal, even if discounts a bill which is in fact an accommodation bill, binds his
principal by his such act.

THE NEGOTIABLE INSTRUMENTS (AMENDMENT & MISC. PROVISIONS) ACT 2002

The Act makes following amendments in the Negotiable Instrument Act 1881 :

1. Section 6 (Definition of 'Cheques')

'The electronic image of a truncated cheque' and 'a cheque' in 'The electronic form 'have been
included in the definition of 'Cheque'.
'A cheque in electronic form' is the mirror image of a cheque generated in the electronic medium
with digital signature.
"A truncated cheque" is a cheque in physical form which is kept with the banker and further physical
movement of the cheque is done through the electronic image.

2. Incidental provisions relating to Truncated Cheque

(a) Drawee bank has been given right to demand any further information regarding truncated
cheque, from the bank holding the truncated cheque, in case of any suspicion about the
genuineness of the instrument. The drawee bank has also been given right to further demand
presentation of the truncated cheque itself for verifications thereof and in such case the drawee
bank shall have the right to retain such cheque after making the payment. (Section 64)
(b) In the ordinary case, the Payee bank retains the instruments. In case cheque is an electronic
image of a truncated cheque, the collecting bank is entitled to retain the truncated cheque and
a certificate issued on the foot of the print out of the electronic image of truncated cheque by
the paying banker, shall be the prima-facie proof of such payment. (Section 81)

17
 (c) Any difference between electronic image and the truncated cheque shall be material alteration
and it shall be duty of the bank while truncating and transmitting the image to ensure that
electronic image of the truncated cheque is exactly the same. (Section 89)
The paying banker shall verify from the party who transmitted the electronic image that image
so transmitted is exactly the same.
(d) The collecting banker has to verify the prima-facie genuineness of the cheque to be truncated.
(Section 131-Explanation II)

3. Bouncing of Cheque
(a) The maximum imprisonment has been extended to a term of 2 years.
(b) Time for giving notice by the payee or the holder in due course of the cheque to its drawer has
been increased to 30 days (from existing 15 days) from the receipt of information by him from
the bank regarding the return of the cheque as unpaid. (Section 138)
(c) In case of offence by companies, the person who has been nominated by virtue of his holding
an office or employment in the Central Govt., State Govt. or a Financial Corporation owned or
controlled by Central or State Govt. shall not be liable for prosecution. (Section 141)
(d) Court has been given the power to condone the delay if the complainant satisfies the Court
that he had sufficient cause for not making a complaint within prescribed period. (Section
142).
(e) The Court has been given power to try cases summarily, and in any such summary Trial,
Magistrate shall have the power to pass the sentence of imprisonment for a term not exceeding
one year and fine not exceeding Rs. 500/-. It has also been provided that so far as practicable,
the trial of the cases shall be continued from day to day until conclusion. (Section 143)
(f) The services of summons can be made by speed post or by courier services as are approved
by Court of Session. (Section 144)
(g) Evidence of the complainant can be made on affidavit. (Section 145)
(h) Bank's slip / memo bearing official mark denoting that cheque has been dishonoured shall be
primafacie evidence for such dishonour. (Section 146), so, Bank's officials will not be disturbed
for evidence, unless absolutely necessary.
(i) The offences under this Act have been made compoundable. (Section 147)

4. Other Amendments :
The Amendment Act also amends Bankers' Book of Evidence Act. 1891 and Information Technology
Act, 2000.
(a) In this electronic age, banks may keep data on site or off site or at disaster recovery site. A
print out of the data kept in Electronic Data Retrieval Mechanism shall be accepted as evidence.
(b) The Information Technology Act excluded Negotiable Instrument from its scope. The
amendment now includes 'cheque' under IT Act. However, to any negotiable instrument other
than cheque, IT Act is not applicable.

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 1.4

CONSUMER PROTECTION ACT, 1986

CONSUMER
1. Any person who buys goods or services for consideration is known as consumer. However a
person purchasing on resale is not a consumer.

SCOPE
2. The act extends to whole of India except the state of J & K and covers all goods and services
including banking, insurance, transport, processing, electricity, doctors etc. in private, public and
co-operative sectors. Goods means every kind of moveable property other than actionable claims
& money and does not include, therefore, stocks & shares, growing crops, grass and things
attached to or forming part of the land which are agreed to be served before sale or under contract
of sale. The provisions of this Act do not supercede any specific provisions in other Act. The Act
provides additional means of obtaining remedy by a consumer but if the remedy prayed is barred
under any other Act, then the Forums constituted under this Act cannot grant such remedy.

PROCEDURE
3. A consumer can lodge a complaint individually or jointly, or a voluntary consumer organization as
also the central or state organization. The complaint can be lodged at any forum by a simple
written application in duplicate with details of the case, the name and full address of the complainant
and the relief sought along with the copies of the supporting documents.

LIMITATION
4. Limitation for lodging the complaint under the act is one year from the date of cause of action.

JURISDICTION
5. The complaint for the disputes involving upto Rs 20 lac can be filed in the District Forum. State
Forum deals with the complaints more than Rs. 20 Lac to Rs. 1 crore and the National Commission
deals with the complaints over Rs. 1 crore. Admissibility of complaint needs to be decided within
21 days. Every proceeding before the District Forum shall be deemed to be a judicial proceeding
as per Section 193 & 228 of I.P .C. and the District Forum shall be deemed to be a Civil Court as
per Section 195 of Cr. P.C.

COMPOSITION
6. Each District Forum shall have a person, eligible to be a District Judge, as its President and two
members, one of whom shall be a woman. Every member of the District Forum shall hold office
for a term of 5 years or upto the age of 65 years, which ever is earlier.
7. State Commission shall have a person who is or has been Judge of a High Court, as its President
and at least two members, one of whom shall be a woman, with a bachelor's degree from a
recognized University and at least 10 years in dealing with problems relating to economics, law,
commerce etc. Not more than 50% of members shall be from amongst persons with a judicial
background.
8. National Commission shall have a person, who is or has been Judge of the Supreme Court, as its
President with at least four members, one of whom shall be a woman. Every member of the

19
 National Commission shall hold office for a term of 5 years or upto the age of 65 years, which ever
is earlier.

DISPOSAL TIME
9. The cases not involving testing or analysis of the goods and commodities should be disposed in
3 months.
10. The cases involving testing or analysis of the goods and commodities should be disposed in 5
months.
11. The cases at State and National Commissions should be disposed in 3 months.

AVAILABLE RELIEFS
12. The forum may award the compensation by order of removal of defect from the goods, removal of
deficiencies from the services, replacement by new goods free from defects, refund of price/
charges, award of compensation for loss of injury suffered, discontinuance/non repetition of the
unfair and restrictive trade practices, prohibition of sale of goods of hazardous nature and providing
for adequate cost to the party.

PENALTY
13. Non compliance of orders of the Forum or lodging of frivolus complaint may result in the
imprisonment from the month to three years or fine not less than 2000 and upto Rs. 10000 or
both. Frivolous & vexatious complaint shall be dismissed and complainant can be fined upto
Rs. 10000.

APPEALS
14. (a) Appeal agaisnt the judgement of District forum are to be filed before the State Commission
within 30 days from the receipt of order by deposit of Rs. 25000 or 50% of the claim amount
whichever is less.
(b) Appeal against the judgement of State Commission are to be filed before the National
Commission by deposit of Rs. 35000 or 50% of the claim whichever is less.
(c) Appeal against the judgement of National Commission are to be filed before the Supreme
Court by deposit of Rs. 5000 or 50% of the claim amount whichever is less. An appeal filed
before the State / National Commission needs to be disposed off expeditiously within 90
days.

CONSUMER PROTECTION COUNCIL

15. Consumer Protection Councils are established not to directly deal with consumers' complaints
but to work towards promoting and protecting rights of consumers. The highest consumer protection
councilis the Central Consumer Protection Council, established by the Central Government, which
has the jurisdiction for the entire country. The Central Council consists of Minister in-charge of
consumer affairs in the Central Government, as its chairman and such number of official/non-
official members as prescribed by the Central Government. State Government shall establish
State Consumer Protection Council whose chairman will be the Minister in-charge of consumer
affairs in the State Government along with such number of official members as prescribed by the
Central/State Government. For every district, the state government establishes the District
Consumer Protection Council or District Council, with the District Collector functioning as the
chairman along with such number of official/non official members as prescribed by the State
Government. All these councils at central, state and district levels shall meet as and when
necessary.

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 1.5

LIMITATION ACT, 1963

Every suit filed, appeal sought and application made after the prescribed period shall be dismissed.
The prescribed period is called “Limitation”, which is governed by Limitation Act, 1963. The period
prescribed under Law of Limitation can be extended by any of the following acts :
1. Acknowledgement of debt by the borrower;
2. Part payment of the debt; and
3. Fresh promise to pay.
The key provisions of the Limitation Act, 1963 are as under:
❏ Section 3 Bar of limitation;
❏ Section 4 Expiry of prescribed period when court is closed;
❏ Section 5 Extension of prescribed period in certain case;
❏ Section 6 Legal disability;
❏ Section 8 Special exceptions;
❏ Section 10 Suit against trustees & their representatives;
❏ Section 12 Extension of time in legal proceedings;
❏ Section 13 Exclusion of time in a case where leave to sue or appeal as a pauper is applied for;
❏ Section 14 Exclusion of time of proceeding 'Bonafide' in court with jurisdiction;
❏ Section 16 Effect of death on or before the accrual of the right to sue;
❏ Section 17 Effect of fraud or mistake;
❏ Section 18 Effect of acknowledgement in writing;
❏ Section 19 Effect of payment on account of debt or interest on legacy; and
❏ Section 20 Effect of acknowledgement or payment by another person.

LIMITATION PERIOD
1. Bill of Exchange/Promissory Note :
(a) Bills Exchange/Promissory Note payable at sight (Sight Bill): 3 years from date of presentation;
(b) Bills Exchange/Promissory Note payable at a fixed time after date (Usance Bill): 3 years from
date of bill/note falling due;
(c) Bills Exchange/Promissory Note payable on demand (not accompanying any other thing in
writing) : 3 years from date of bill/note;
(d) Bills Exchange/Promissory Note payable at a fixed time after sight/demand: 3 years from date
when fixed time expires;

21
 (e) Bills Exchange/Promissory Note payable by instalment: 3 years after expiration of first term of
payment as to part then payable and for other parts, expiration of respective previous term of
payment;
(f) Bills Exchange accepted payable at a particular place: 3 years from date when bill is presented
at that place; and
(g) Promissory Note, which provides that if payment of one or more instalment defaulted the
whole, shall be due : 3 years from date when default is made.
2. For balance due on an open / mutual /current account where there have been reciprocal
demands between parties : 3 years from the close of the year in which last entry was made in the
account.
3. For guarantors:
(i) By a surety against a principal debtor : 3 years from date when surety pays creditor; and
(ii) By a surety against a co-surety : 3 years from date when surety pays anything in excess of his
own share.
4. For secured advances :– Advances secured as follows :
(a) (i) Simple (demand) loans on the basis of an agreement or secured against Pledge/
Hypothecation and Cash Credit/Over Draft secured against Pledge/Hypothecation, where
there are no instalments agreed for payment even if there is a stipulation of demand : 3
years from date of execution of documents—for personal decree as also for sale of
securities. Acknowledgement of amount outstanding as per bank rules and / or part payment
under borrower's signature give fresh start to limitation from date of advance/payment.
(ii) Term Loans secured against Pledge/Hypothecation, where the payment is agreed to be
on an instalment basis: 3 years from date of respective defaults, i.e. from date of recurring
cause of action, in terms of stipulation made in relative documents.
(b) (i) Equitable or registered mortgage of immovable property:
● For personal decree : 3 years from date when mortgaged money fall due for payment;
and
● For sale of mortgaged property : 12 years from date when mortgaged money fall due
for payment.
Example—A loan secured by mortgage of I.P. repayable on demand : 12 years from date
of mortgaged deed and for personal liability : 3 years from date of mortgage.
(ii) a. A bond having no fixed date of payment : 3 years from the date of execution of bond;
and
b. A bond having a fixed due date : 3 years from due date of bond.
(iii) Pledge/Hypothecation and collaterally secured by equitable/registered mortgage:
● For personal decree against borrower: 3 years from date when mortgage money
becomes due; and
● For sale of mortgage Immovable Property through Court : 12 years from date when
mortgage money becomes due.
c. (i) Guarantee :
● Limitation for personal liability against guarantor: 3 years from date when guaranteed/
mortgaged money becomes due; and

22
 ● Limitation for sale of mortgaged I.P. through court : 12 years from date when guaranteed/
mortgaged money becomes due.
(ii) A demand Promissory Note/Usance Bill as primary security : 3 years from date of
Promissory Note/Usance bill.
(iii) A demand Promissory Note simultaneously accompanied by loaning documents as
regards repayment schedule : 3 years from date amount falls due in terms of related
documents.
❏ If there is a default clause making entire outstanding amount payable, it should be ascertained
from loan documents whether it is obligatory/optional for bank to sue for whole amount?
´ If obligatory–Suit be filed for entire loan amount; and
´ If optional–Suit be filed for amount of instalment(s) defaulted.
❏ For ascertaining starting date of limitation, the related loan documents be studied carefully,
e.g. if demand in writing is required to be made in terms of guarantee deed—the limitation will
start from date when first demand notice is served.
❏ Further, a guarantee deed may include a limitation clause restricting enforceability of guarantee.
In such cases, the suit be filed or demand notice be served in writing, as the case may be,
within the stipulated period.
5. For execution of a decree / order of any civil court : 12 years from date when such decree
becomes enforceable.
6. To have legal representative of decreed plaintiff/appellant/defendant made a party : 90 days
from date of death of the appellant, defendant or respondent as the case may be.
7. To set aside an abetment : 60 days from the date of abatement.
8. To restore a dismissed suit for default of appearance or for want of prosecution or for failure
to pay cost of service of process : 30 days from the date of dismissal
9. To set aside a decree passed ex-parte or to rehear an appeal decreed or heard ex-parte : 30
days from the date of the decree or where the summons/notice was not duly served, when the
applicant had knowledge of decree.
10. Review of judgment by a court (other than Supreme Court) / Appeal to any court from any
decree and so on : 30 days from date of decree or order.
11. For appeal :
a. To a high court from any decree or order : 90 days from the date of decree or order.
b. To any court from any decree or order : 30 days from the date of decree or order.
12. From a decree or order of any High Court to the same court : 30 days from the date of decree
or order.
13. By a mortgagor :
(a) For Redemption, i.e. taking possession of mortgage I.P. from mortgagee, mortgagor
can file suit from the date the right of redemption arises : 30 years from date of right.
(b) For taking possession of mortgage I.P. transferred by the mortgagee for a valuable
consideration : 12 years from the date when the transfer becomes known to plaintiff.

23
 (c) To recover surplus collections received by the mortgagee after the mortgage has been
satisfied : 3 years from the date when the mortgagor re-enters on the mortgaged property.
14. By a mortgagee :
(a) For Foreclosure : 30 years from the date when the money secured by the mortgagee becomes
due.
(b) For possession of I.P. mortgaged : 12 years from the date when the mortgagee becomes
entitle to possession.

Acknowledgement of Debt
Under Section 18 of the Limitation Act, 1963, a duly stamped acknowledgement (balance
confirmation) of liability signed by the borrower gives fresh start of limitation against the borrower.
Similarly, any part payment by the borrower under his signature will also give fresh start of limitation.
Likewise, an acknowledgement/part payment in the hand of the guarantor will extend limitation against
the guarantor. But, an acknowledgement/part payment taken/made after the expiry of limitation shall
not extend the limitation. If the debt gets time-barred, the proper course would be to take a fresh
agreement/promise to pay the said debt.
The aforesaid acknowledgement/part payment will extend limitation in respect of the debt alone.
To avail the benefit of extension of limitation for enforcement of securities, proper acknowledgement
from borrower in regard to the securities, created in favour of the bank (i.e. Balance & Security
confirmation Letter) should be taken.

Limitation for taking cognizance of criminal offences

The Criminal Procedure Code, 1973 prescribes limitation in such cases as follows :
Offence Period of limitation Commencement of limitation
✐ If offence is punishable 6 months On the date of offence
With fine only OR
If offence is punishable 1 year Where commission of an offence was not
With imprisonment for a known to the person aggrieved by the
Term not exceeding 1 year offence, the first day on which such
offence comes to the knowledge of such
person
OR
✐ If offence is punishable with 3 years Where it is not known by whom the
imprisonment for a term more offence was made, the first day on which
Than 1 year & below 3 years the identity of the offender is known to
the person aggrieved by the offence or
the Police Officer making investigation
into the offence, whichever is earlier.
❏ Where the prescribed period for filing any action / proceedings, civil or criminal, expires on a day
when the court is closed, the said action can be filed on the day when the court re-opens.
❏ The period of limitation for any suit, appeal or application does not include the day from which
such period is to be reckoned.
❏ When a document gets time barred, the concerned party is debarred from filing a suit. However,
his original right on which the suit was to be based is not debarred. That is, the Law of Limitation
bars remedy but does not extinguish ones right.

24
 1.6

OTHER LAWS & ISSUES RELATING TO BANKING

Indian Contract Act, 1872.

Section 2(b) of the Act defines a contract “as an agreement enforceable by law”
Section 2© defines as “every promise or every set of promises forming consideration for each
other”
Section 2(d) defines promises as “when the person whom the proposal is made signifies his
assent thereto the proposal is said tobe accepted” A proposal when accepted, becomes a promise. All
contracts are agreements but all agreements are not contracts.
A contract of indemnity is defined by Section 124 as “a contract whereby one party promises to
save the other from loss caused to him by the conduct of the promissory himself or by the conduct of
any person” A contract of indemnity is a contingent contract. A good example of a contract of indemnity
is the contract of insurance.
A contract of guarantee, is defined as “a contract to perform the promise or discharge the disability
of a third person in case of default” Performance guarantee or guarantees issued in favour of government
department or otherwise by banks on behalf of their customers are governed by this section.

Rights of a Surety are :

(a) Rights against creditor
(b) Rights against the principal debtor, and
(c) Right against the co-sureties

A surety is discharged by notice of revocation with regard to future transactions:

— By death of surety
— By variance in form of contract
— By release of discharge of principal debtor
— By compounding with, of giving time to, or agreeing not to sue principal debtor
— By creditor's acts or omissions impairing surety's eventual remedy; and
— By Loss of or parting with security given by the principal debtor to the creditor.
Bailment is defined by Section 148 as “the delivery of goods by one person to another person, for
some purpose upon a contract that they shall, when the purpose is accomplished, be returned or
otherwise disposed of, according to the directions of the persons delivering them”. There are two parties
in bailment – bailor and bailee.
The Section 171 defines the right of general lien as “the right to retain the goods bailed as a
security for a general balance of payment”. This right is available to certain kinds of bailees only such
as

25
 (a) Banker
(b) Attorneys of Right Court and,
(c) Policy Brokers
Bailees falling in category other than the above have a particular lien unless there is an express
agreement to that effect.
Duties of a Bailor are :
(a) To disclose known faults in the goods bailed
(b) Bailor in case of bailment for higher demand shall be liable for damages for faults whether
they are known or unknown to him.
(c) Bailor is liable for damages due to lack of authority to make bailment.
(d) To bear expenses in case of gratuitous payment and.
(e) To bear only extraordinary expenses in case of non gratuitous bailment

Duties of a Bailee are :

(a) To take as much care of the goods as a man of ordinary prudence would take of his own
goods
(b) Not to make unauthorised use of goods.
(c) Not to mix bailor's goods with his own
(d) To return the goods bailed when debt is repaid and
(e) To return any accretion to the goods bailed.

Rights of Bailee are :

(a) Duties of the bailor are in fact the right of the bailee
(b) Rights to retain the goods till the money due thereon is paid and
(c) In case of wrongful deprivations, right to use the same remedies which the owner might have
used in the like cases.

Termination of Bailment is :
(a) On expiry of stipulated period
(b) On accomplishment of the specified purpose
(c) Where Bailee does any act inconsistent with the conditions of bailment and
(d) A gratuitous bailment may be terminated any time. Section 172 defines a pledge as “the
bailment of goods as security for payment of debt or purpose of a promise”. In such a contract
there are two parties pledger and pledgee

Rights of Pledgee are :

(a) Right to sue the pledger on default
(b) Right to sell the things pledged on giving to the pledger notice of sale in case of default

26
 (c) Right to claim damages because of non-disclosure of any defects or faults in goods pledged
(d) Right to claim damages suffered
(e) Pledgee's rights are not limited to his interest in goods alone and
(f) Right to recover any extraordinary expenditure

Requirements of a Valid Contract are :

(a) The parties are competent to enter into a contract (Under Section 11, a minor, a insolvent and
insane person are not competent to contract) :
(b) An agreement between the parties and
(c) The object is lawful and not void

Minor : A minor is a person who has not completed the eighteen years of age. There are two exceptions
to this rule :
(a) When a guardian of minor's person and property is appointed under the Guardian and Ward
Act, 1890.
(b) Where the superintendence of minor's property is assumed by a court of ward

In both the cases a minor attains majority after 21 years of age. A contract with a minor is void ab-
initio, i.e. from the very beginning. Agreement with him cannot be ratified by the minor on attaining the
majority. A minor cannot be stopped to plead minority even where he falsely represents himself tobe of
full age.
A minor can be a promisee or a beneficiary. He cannot accept a bill or draw a promissory note but
he can make a bill, issue cheque and can become a payee. A minor's estate is liable to a person who
has supplied necessities of life to him. Minor's parent/ guardian is not liable to his creditor for the breach
of contract by him.
A minor can act as an agent but he cannot act as a principal. A minor cannot be a partner in
partnership firm. He may, however, be admitted to the benefits of an already existing partnership firm.
In such a case his person or property cannot be made liable for the losses of the firm but his share in
the partnership can be adjusted towards the losses in the proportion he gets benefit out of the profits.
A minor may at any time on attaining majority within six months of his obtaining knowledge that he had
been admitted to the benefits of the partnership, whichever date is later, repudiate his liability as partner
by giving notice as such. Otherwise he will be held liable as a partner of the firm from the date he was
admitted to the benefit of the partnership {Section 30 (7)(a) of the Indian Partnership Act, 1932}.

RULES OF APPROPRIATION
❏ When a debtor owing several debts makes a payment, the creditor should appropriate it as per the
rules of appropriation.
❏ The rules of appropriation are laid down in section 59, 60 & 61 of Indian Contract Act.
❏ Sec. 59 states that if the borrower expressly mentions the debt to which the payment will be
credited or if it is implied from the circumstances, the creditor must appropriate the payment of the
debt.

27
❏ Sec. 60 : In the absence of the express or implied intention of the borrower, the creditor may use
his discretion and apply the payment to any lawful debt actually due and payable including time
barred debt from the debtor.
❏ Sec. 61 : Where neither of the two parties makes any appropriation, the payment will be applied for
discharging debt in order of time. If the debts are of equal time, the payment will go to discharge
the debts proportionately. The provision of this section is same to that of the rule laid down in
famous Clayton's case.

RULE IN CLAYTON'S CASE

❏ This rule which was laid down in the famous case Devayanas Vs. Noble states the rule of
appropriation in running accounts like Cash Credit and Overdraft accounts.
❏ As per this rule, each withdrawal in a cash credit account is considered as a new loan and each
deposit as a repayment of the loan in the order in which it is made. The first debit in the account is
considered to have been discharged or reduced by the first item in credit side and accordingly
other entries follow suit in chronological order.
❏ It is to avoid application of this rule, the bankers stop operation of the account in case of death /
insolvency of a partner / guarantor / joint account holder.

APPROPRIATION FIRST TOWARDS INTEREST

❏ In the absence of the agreement to the contrary, any payment by a borrower to a loan will first go
towards interest and then to principal (M/s Kharavela Industries Vs OSFC & others).

APPLICATION OF CLAYTON'S RULE

Death / Insolvency of borrower
Where an individual borrower or the proprietor expires / becomes insolvent, we stop operation in
his cash credit account. In case any fresh credit is allowed to the account, the liability of such deceased
borrower stands reduced by the amount and his estate can not be made liable for the same. The estate
of the deceased / insolvent borrower can not be made liable for all fresh debit after his death / insolvency.
Death / Retirement / Insolvency of a partner in partnership firm
On the death / retirement / insolvency of a partner the liability of such partner stands determined.
In case of any fresh debit to the account, the deceased / retired / insolvent partners' estates can not be
made liable for the same. On the contrary their liability stands reduced by the credit.
For this reason, the operation in the account should be stopped to determine the liability of the
deceased / retired / insolvent partner.
In case the bank decides to allow operation to the new firm, it should be done after ruling off /
breaking the account and allowing operation in a fresh page.
Death of guarantor of a Cash Credit / Overdraft account
On receipt of notice of death / insolvency of a guarantor the operation of the account should be
stopped or should be ruled off.

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 In case it is not done, the rule in Clayton's case will apply and the liability of the estate on the
guarantor will diminish to the extent of credits allowed in the account after the receipt of news of death /
insolvency.
The same principle also holds good in case of revocation of guarantee.

Joint Account
On receipt of news of death / insolvency of one of the joint account holders the operation in the
account should be stopped or the account should be ruled off as otherwise the rule in Clayton's case
will apply.

GARNISHEE ORDER
Concept
Garnishee Order is issued by the competent court on the application made by the judgement
creditor in a situation where the judgement debtor refuses to pay debt payable to him. The garnishee
order is issued on the banker maintaining account of the judgement debtor, under Civil Procedure
Code, 1908, Sec. 60, Order 21, Rule 46.

STEPS INVOLVED
A Garnishee Order is issued in two stages, first as an Order Nisi and then an Order Absolute.
1. Order Nisi
An Order Nisi requires the banker to explain as to why the funds of the depositor should not be
attached towards satisfaction of the dues of the judgement creditor. On receipt of an "Order Nisi" the
bank is bound to stop operation in the depositor's account. Bank must immediately inform the customer
about the receipt of the order.

2. Order Absolute
After receipt of the explanation from the bank the Court may issue "Order Absolute". On receipt of
"Order Absolute", the bank should pay the amount to the court. The production of pass book or deposit
receipt is not necessary for making such payment.
Amount to be attached
A garnishee order usually does not mention the amount. In case no amount is mentioned, the
entire balance should be attached. However, if it is issued for a specific amount, only that amount
should be attached.

Accounts to be attached
Garnishee Order extends only to those accounts which are held in the same capacity in which the
order is issued and not to accounts held otherwise.
Proprietorship Account : Where the Garnishee Order is in name of individual, it would extend to
any account maintained by him in the name of a firm as sole proprietor.
Joint account : If the Garnishee Order is the name of A, but the account is in joint names of A, B &
C, the account is not to be attached. However, if the Garnishee Order is in joint names of A, B and C it
will not only attach the joint account of A, B, C but also accounts in their individual names.

29
 Partnership Account : In case the Garnishee Order is in the name of A, and the account is in the
name of a partnership firm where A is a partner, the firm's account cannot be attached. However, a
Garnishee Order issued in the name of a partnership firm, extends to the balance in the firm's account
and also to the balance available in the accounts in the individual names of the partner.
Trust Account : Accounts held by a person in a trust in fiduciary capacity can not be attached by a
Garnishee Order issued in the individual name.
Advocate's name : A garnishee order in the name of the advocate will attach his office account but
not client's account maintained by him.

Accounts not to be attached

Deceased person : Funds belonging to deceased constituents are not attachable by a Garnishee
Order.
Insolvent Persons : Funds in the name of an undischarged insolvent are not attachable by a
Garnishee Order.

Type of Deposits to be attached

Demand deposits such as SF, CA, Call deposits payable on demand, overdue time deposits etc.
and time deposits maturing for payment in future can be attached. However, in case of term deposits,
which will mature for payment in future, attached amount will be paid only on maturity.
Where before receipt of a Garnishee Order an amount is passed for payment, the debit entry is
made and token issued but the amount is still not paid by the Cashier, the Garnishee Order attaches
such amount.
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. However, if the Garnishee Order is received after such
time, it does not apply to the amount of cheque.
Type of Asset not to be attached
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. Cheque, Bills sent on collection are not attachable. However, if
a cheque has been collected at an upcountry centre (drawee's account debited through clearing or
otherwise), but credit is not given to the payee's account for want of the credit advice from the collecting
branch, that amount can be attached. The sale proceeds of shares / securities yet to be received by the
bank are not attached. Call deposits payable on Notice can not be attached. The undrawn portion of a
cash credit account can not be attached as it is not a debt due. Uncleared Balance in SF/CA account
can not be attached.

Future Credits
The balance available at the time of the receipt of order is taken into consideration for attachment.
Credits / deposits given after the receipt of the order are not attachable. For example, if the Garnishee
Order is received at 10 A.M., the money deposited at 1 P.M. in the account can not be attached.

30
Miscellaneous
Notice to Customer : On receipt of a garnishee order, the customer should be informed about it, at
the earliest.
Right of Set Off : The bank is entitled to exercise its right of set off for all certain & due debt from the
customer before complying with the order.
A Garnishee Order can be served at the Head Office of a Bank. However, it will become effective
on the branch after a reasonable time which is required to send the communication.
Balance with foreign branches : No garnishee order can be issued for attaching balance available
in foreign branches of a bank in the name of the debtor.
Salary : A garnishee order can not attach salary.
Limitation : 12 years.

Cheques marked Good for Payment

Cheques marked "good for payment" by a banker can be paid even after the receipt of garnishee order.

ATTACHMENT ORDER
Attachment orders are issued by the government authorities such as I. Tax, S. Tax, Custom,
Enforcement Directorate authorities on the bank having any type of deposits in the name of the assessee
from whom money is due or may become due. In other words, an attachment order may be issued
under Income Tax Act, Wealth Tax Act, The Recovery of Debts due to Bank & Financial Institutions Act
or Sales Tax Acts of the concerned State.

Income Tax Attachment Order

This is issued under Sec. 226(3) of Income Tax Act, 1961 by an ITO. This section authorises the
ITO "to require, by notice in writing, any person from whom money is due or may become due, to the
assessee, or any person holds or may subsequently hold money for or on account of assessee, to pay
the Income Tax Officer an amount equal to the amount of arrears of tax".
It is not only debts due and payable (as is the case with a garnishee order), but also any money
held on account of assessee is attached by an Income Tax Attachment Order.
Accordingly, it can attach : (i) Saving Fund and Current Account, (ii) Term Deposit (however, amount
is payable on maturity), (iii) Proceeds of Collection item not credited to account (note that it is not
attached by a garnishee order). The limitation available is 30 years.

Joint Account
Even though the order is received in a single name, it attaches balance (prorata) in any joint
account maintained by such person. Unless it is proved otherwise, the share of the joint account holders
is considered to be equal {Section 226 (3) iii}.

Procedure before attaching joint account

Account in joint name can be attached only where there is a mention in the order that a copy of the
same is sent to the other joint account holders. In case no such remark is made, the Income Tax

31
Department should be advised. "You have not sent the notice to both/all depositors as provided in Sec.
226(3) (iii) of the Act. We are, therefore, unable to comply with your demand without references to the
other joint depositors".
The joint account holders should be asked to establish their claim, if any, to the entire balance to
the exclusion of the person named in the order. In case they fail to produce Court order/stay order,
within a reasonable time, the bank should act on the presumption made by the Act and pay proportionate
amount to Income Tax Authority.

Account in the name of a deceased or insolvent person

An I. T. attachment order attaches the funds held on account of a deceased or insolvent depositor.
(Garnishee Order does not attach the same).
Attachment of joint account towards the dues payable by a deceased depositor
Where the attachment order relates to the arrears ot tax dues on the estate of the deceased
depositor, the balance in the joint account in his name need not be attached.

Accounts in other capacities

If the order is individual name, it does not attach accounts in the name of partnership firms (where
he is a partner) or in the name of a trust (where he is a trustee).

Money held subsequent to receipt of order

As per the Act, the order attaches the money held or that may be subsequently held. Accordingly
if an order is received at 10 AM and an amount is deposited at 1 P.M., this amount should also be
attached by the order.

Right of Set Off

The bank is entitled to first exercise its right of set off before acting on the order.
Penalty
Where a bank fails to attach the amount it would be deemed to be an assessee in default.

Action to be taken on receipt of the order

On receipt of the order, the customer must be given notice. The account holder must be informed
about the payment to I.T.O. Attachment order, being the liability to Govt, will have the preference over
Garnishee Order. If both are received simultaneously, the former contains the statutory liability.
CONTRACT OF AGENCY
An agent is a person employed to do any act for another person or to represent another person in
dealings with some third person. The person for whom such act is done (or who is represented) is
called the principal. The contract between the principal and the agent is a contract governed by normal
rules of contract. Any person can become an agent, if he is a major and of sound mind. Unlike other
contracts, consideration is, however, not necessary for a contract of agency. The authority of an
agent may be expressed or implied. An agent having an authority to do an act or carry on a business
has authority to do every lawful thing necessary to do such act or conduct such business. In an
emergency, an agent has authority to do all acts to protect his principal from loss as would be done by
a person in his own case.

32
 Normally, an agent cannot employ another to perform acts, which he has undertaken to perform
personally. However, if the custom of trade or nature of agency permits, an agent can employ a sub-
agent. The sub-agent will be responsible for his acts to agent, but not to the principal, except in case of
fraud or wilful wrong. In case some acts are done by an agent on behalf of the principal without his
knowledge/authority, the principal may elect to ratify (expressed or implied) or to disown such acts. In
absence of any contract to the contrary, an agent can retain (lien on) principal's property until
remuneration due to him is paid. However, an agent who is guilty of misconduct is not entitled to such
remuneration or right of lien on principal's property. Further, the principal is bound to indemnify the
agent consequences of lawful acts done by him in good faith exercising the authority conferred upon
him.
Termination of Agency – By
– Principal revoking his authority,
– Agent renouncing the agency,
_ Business of agency being completed,
– Either the principal or agent dying or becoming of unsound mind, or
– The principal being adjudicated an insolvent.

SALES VS. AGREEMENT TO SELL

Sale
It is a contract in which parties have
already performed their part.
Herein ownership/title of goods have
already transferred to buyer for a price
irrespective of whether goods are
delivered or not.
Risk in goods lies with the buyer.
If seller does not deliver goods, buyer can
sue and seek delivery of goods or demand
specific performance.
If buyer does not pay for goods, seller
can sue for claims and has right to stop
delivery of 'goods-in-transit' or resale.
Agreement to sell
It is an act in which parties are yet to
perform their mutual parts.
The ownership/title of goods is yet to
pass on to buyer at a latter date subject to
fulfilment of certain conditions as agreed
upon by the seller and buyer.
Risk is goods remains with the seller and pass
to buyer only after agreement to sell becomes
a sale (when time elaspes or conditions are
fulfilled subject to which ownership of goods
is to be transferred).
If seller does not deliver goods, buyer can
only claim damages in a suit.
Seller can only sue for damages.

Condition & Warranty

Under the Sale of Goods Act, the stipulations in a contract of sale with reference to goods are classified
based on their importance as Condition and Warranty. A Condition is a stipulation, which is essential to the main
purpose of the contract of sale and, if breached, can make the aggrieved party entitled to repudiate the contract.

33
Warranty, on the other hand, is a stipulation collateral to the main purpose of the contract. The breach of such a
stipulation gives rise to a claim for damages only.

PARTNERSHIP

Partnership is the relation between persons having agreed to share profits of a lawful business carried on by
all or any of them acting for all. There is a mutual relationship of 'agency' between partners. Any partner can by his
acts bind all the partners of the firm. Three types of partnership are Partnership at will, Partnership for a fixed
period, and Particular partnership.

Every partner is bound to indemnify the firm for any loss caused to it by any of his misconduct in the
business of the firm. The partners of a firm can decide their mutual rights and duties and change the same from
time to time with the mutual consent of all the partners. In order to bind a firm, the partner must do the activities
in the name of the firm and execute documents on its behalf or in a manner so as to bind the firm (expressed/
implied). Every partner is liable jointly with all the other partners and also severally for all acts of the firm done
while he/she is a partner. A minor cannot be a partner but he/she can be admitted to the benefits of the partner-
ship.

Registration of a partnership firm is not compulsory but optional. Section 69 of the Partnership Act casts
certain disabilities on an unregistered firm: (a) a partner of an unregistered firm cannot enforce by way of a suit,
any right available to him under Partnership Act or that conferred by a contract amongst the partners against the
partnership firm or any partner thereof, and b) an unregistered firm cannot enforce by way of suit, any right arising
by a contract against any third party. However, the enforcement of any right to sue for matters relating to the
dissolution of a firm is not affected and can be brought before the court of law.

A firm can be dissolved by agreement between the partners or by the court or gets compulsorily dissolved
(a) if all partners, except one, are adjudicated insolvent, (b) by happening of any event that renders it an unlawful
association, and ( c ) if not otherwise agreed, (i) on expiry of term in case of fixed partnership, (ii) on completion
of project in case of particular partnership, (iii) by death of a partner, and (iv) by adjudication of a partner as an
insolvent. However, if the partnership firm is carrying on more than one separate businesses, the illegality of one
or more do not cause the dissolution of the firm. Further, even after dissolution of a firm, partners continue to be
liable to third parties for any act done by any of them, until a public notice is given to this effect.

COMPANY

Section 3 of the Indian Companies Act, 1956, defines a company as a company formed and registered
under this Act, or an existing company'. An incorporated company is an artificial legal person with perpetual
succession, distinct from members forming it and existing only in the eyes of the law, which can enter into con-
tracts in its own name, i.e. a common seal with name of the company engraved in it. Members and directors of a
company lives behind a 'corporate veil' that can be lifted if court set aside separate entity of the company and
directly concerns itself with the persons behind the veil. Any person competent to contract can become a member
of a company. A company can become a member of another company but a partnership firm cannot buy any
shares in its own name to become a member of a company.

34
Company vs. Partnership
Distinction Company
Registration It is compulsory.
Number of members/ Private : Min.-2, Max.-50, and
partners Public : Min.-7, Max.-No limit.
Legal Status It has a separate legal entity
Ownership of Property Company owns its property.
Management Managed by Board of Directors.
Perpetual existence It has a perpetual existence.
Contracts A contract between a member
and company is possible.
Liability Except unlimited company,
liability of members is limited.
Transfer A transferee of shares becomes
a member of the company.
Death Death of one or all members
does not affect the existence of
the company.
Agency Members of a company aren't
the agents of each other or of
the company.
Partnership Firm
It is optional.
Min.-2, and Max-20 or 10 if
Banking Business.
No separate existence.
Partners own property.
Managed by partners.
Doesn't have perpetual existence.
A partner cannot contract with
the partnership firm.
Liability of partners in a
partnership firm is unlimited.
A person can become a partner
with the consent of all partners.
Death of a partner dissolves the
partnership unless partnership
deed provides otherwise.
Every partner of a partnership
firm is an agent of the other.

A company may be a statutory company like RBI, FCI, and etc. or a registered company under Indian
Companies Act, 1956. Further, a company may be an unlimited company or a company limited (by shares or
guarantee). Again, a company may be a public company, a private company, a government company, or a foreign
company. A private company, under section 3 of the Act, should have a minimum paid-up capital of Rs 1 lakh
and at least 2 directors. It cannot transfer shares beyond 50 members, issue prospectus and invite/accept depos-
its from persons other than its own members, directors or their relatives. It doesn't need to obtain a 'certificate of
commencement of business' or to hold a statutory meeting and submit a statutory report to the Registrar of
Companies. A public company is one, which is not a private company, and has a minimum paid-up capital of Rs
5 lakh and at least 3 directors. A government company like BHEL, SAIL, etc., is a company in which not less than
51% of the paid-up share capital is held by the Central &/or State Governments. A foreign company is a company
incorporated outside India with business in India. Similarly, a company is said to be a Subsidiary Company of a
Holding Company, if the latter controls the majority composition of the board of directors of the former, holds
majority shares of the former, or former is a subsidiary of the subsidiary of the latter. Memorandum of Association
and Articles of Association are two basic constitutional documents needed for incorporation of a company. Doc-
trine of Ultra Vires holds that a company cannot carry on the objects not permitted by its Memorandum of
Association. Doctrine of Constructive Notice holds that every outsider is assumed to have read the Memoran-
dum of Association and Articles of Association. Doctrine of Indoor Management holds that the outsiders are

35
not required to see the compliance of internal regulations of the company. A public company raises funds from
public by issuing a Prospectus. Section 56 of the Act requires certain facts to be stated in the prospectus.
Section 63 holds that if prospectus contains an untrue statement, responsible person shall be punishable with
fine, imprisonment or both.
Ownership of a company lies with its shareholders whereas a board of directors manages the company.
Only an individual can be appointed as a director of a company. Until the directors are duly appointed, the
subscribers of the Memorandum are deemed to be the directors of the company. A public company having a paid-
up capital of Rs 5 crore or more and 1000 or more small-shareholders (holding shares of nominal value of Rs
20000 or less), can elect a director by its small-shareholders. A company can have a maximum of 12 directors
and to increase this number, the approval of Central Government is required. Unless the Articles provides for the
retirement of all directors at every annual general meeting, at least two-thirds of total number of directors of a
public company, or those of a private company, which is a subsidiary of a public company, have to be (a) persons
whose period of office is liable to determination by retirement of directors by rotation; and (b) appointed by the
company in general meeting. Remaining directors are to be appointed in general meeting as per the Articles of
Association. If provided in Articles, additional directors can be appointed by passing a resolution, who can hold
office till next annual general meeting. A person cannot act as a director unless he signs and files his consent to
act as a director with the Registrar within 30 days of his appointment. Every public company, or a private company
that is a subsidiary of a public company, having a paid-up share capital of Rs 5 crores must have a managing
whole-time director or a manger. A director of a public company, or a private company that is a subsidiary of a
public company, is also required to hold certain shares as qualification shares if so required under Articles of
Association of the company. Further, a person cannot be a director of more than 15 companies excluding a
private/unlimited company; a non- profitable business association or which prohibits payment of dividend, alter-
nate directorship (director in absentia). A public company needs prior approval of the Central Government to give
any loan to its director.

Information Technology Act 2000

The government of India has enacted the Information Technology Act 2000, which came into effect from l7th
October 2000, to address some of the legal issues arising out of the need for facilitating E-commerce and Elec-
tronic Governance. The Act is based on "United Nations Commission on International Trade Law" (UNICTRAL)
model law on E-commerce.
The salient features of the Act are
❏ Legal recognition for Electronic Records and Digital signatures,
❏ Electronic contracts will be legally valid,
❏ Appointment of Certifying authorities and Controller of Certifying Authorities for management of Digital cer-
tificates,
❏ Define Computer Crimes and provide for Penalties,
❏ Power of police officers and other officers to enter into any public place and search and arrest without
warrant and
❏ Appointment of Cyber Appellate Tribunals and procedures relating to enquiry and adjudication.
Digital Signature (Section 2)
Digital signature means authentication of any electronic record by a subscriber by means of asymmetric crypto

36
system and hash function which envelope and transform the initial electronic record into another electronic record.
Computer Crimes
Broadly computer crimes can be classified as
❏ Unauthorised access,
❏ Unauthorised interception,
❏ Unauthorised use of computer and computer system,
❏ Computer related fraud,
❏ Computer forgery,
❏ Damage to computer data,
❏ Computer sabotage.
Section 93 of IT Act provides for the amendment of the Banker's Book Evidence Act, 1891 in respect of clauses,
which relates to definitions of 'Banker's Book' and 'certified copy'.
Bankers' Book Evidence Act, 1891
The Act extends to whole of India except the state of J&K. In any proceedings where bank is not a party , no
officer shall be compellable to produce any bankers' book contents of which can be proved under this Act by
production of certified copies. Similarly no officer of the bank shall be called as witness to prove the matters,
transactions and accounts recorded in the certified copies. However, the Court may order otherwise for special
cause. The order for inspection of books must give three clear days for the bank to arrange for inspection. Court
has discretion to award costs for any application under the Act.
Amendments to the Bankers' Book Evidence Act, 1891
The following amendments have been made, consequent upon the introduction of the Information Technol-
ogy Act 2000.
Bankers' Books to include ledgers, daybooks, cash books, account books and all other books used in the
ordinary business of a bank whether kept in written form or stored in a micro film, magnetic tape or any other form
of mechanical or electronic data retrieval mechanism. Such records can be either on site or at any off site location
and includes a back-up or disaster recovery site. It also includes, therefore, the printouts of data as well as data
stored on a floppy, disc, tape or any other form of electro-magnetic storage device.
A certified copy of any entry in a bankers' book shall in all legal proceedings be received as prima facie
evidence of the existence of such entry. Where certified copy of printouts of data stored in electro-magnetic data
storage device is produced as evidence, it should be accompanied by
a) A certificate to the effect that it is a printout of such entry or a copy of such printout by the principal account-
ant or the Branch Manager; and
b) A certificate by a person in-charge of the computer system containing a brief description of the Computer
System and the particulars of —
(A) Safeguards adopted by the System to ensure that data is entered or any other operation is performed
by only authorised persons;
(B) The safeguards adopted to prevent and detect unauthorised change of data;
(C) The safeguards available to retrieve data that is lost due to systemic failure or any other reasons;

37
 (D) The manner in which data is transferred from the system to removable media like floppies, discs, tapes
or any other electro-magnetic devices;
(E) The mode of verification in order to ensure that data has been accurately transferred to such remov-
able media;
(F) The mode of identification of such data storage devices;
(G) The arrangements for storage and custody of such storage devices;
(H) The safeguards to prevent and detect any tampering with the system, and;
(I) Any other factor, which will vouch for the integrity and accuracy of the system.
c) A further certificate from the person-in charge of the computer system to the effect that to the best of his
knowledge and belief that the computer system operated properly at the material time, he was provided with
all the relevant data and the printout in question represents correctly, or is appropriately derived from, the
relevant data.

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 1.7

REGISTRATION OF DOCUMENTS

The objectives of Registration are deduced from the laws relating to registration as given in Indian
Registration Act, 1908, and the Indian Companies Act, 1956, which are as under :

❏ To put up a proof that such documents have been executed.

❏ To prevent fraud and forgery.

❏ To ensure complete notice of all transactions affecting the title to the property.

Indian Registration Act, 1908

This act extends to whole of India excepting J&K . It lays down rules for compulsory registration of
certain documents and the consequences which result from their non-registration.

The important sections are :

Section 17

The following documents are required to be registered compulsorily with the Registrar or Sub-
Registrar :

(i) Instruments of gift of immovable properties.

(ii) Non-testamentary instruments relating to any right /title/interest in the IPs, valued at
Rs.100/- or above.

(iii) Non-testamentary instruments which acknowledge the receipt or payment of any consideration
in respect of such right.

(iv) Lease of immovable property for more than one year.

(v) Non-testamentary instruments, transferring decree or order of a court in respect of such

rights in immovable property valued at Rs. 100/- or above.

Documents which create a charge (fixed or floating), mortgage deed, power of attorney, sale deed
in respect of a property, and lease-deed of a property where the period of lease is over one year also
are required to be registered.

Section 18 :

It enumerates the documents which are optionally registerable.

Section 23 :

All documents that are required to be registered as per Section 17 of the Indian Registration Act
should be presented at the office of the registrar or Sub-registrar within four months from the date of its
execution. Documents executed out of India must be presented for registration within four months of its
arrival in India.

39
Section 25 :
If the document is not presented for registration within four months of its execution because of
unavoidable incident, it can be presented for registration thereafter provided the delay does not exceed
four months, and a fine not exceeding 10 times the registration fee is paid. In this case, the document
will take effect from the date of registration.

Section 32 :
Only the executor, or a representative or assignee of such person , or a person holding power of
attorney from such person , can present the documents for registration.

Section 47 :
Since the document takes effect from its date of execution and not from the date of registration, so
a document executed first will have priority over a document executed at a later time even though the
latter might have been registered first. If two registered deeds or instruments are executed on the same
day, then the deed or instrument executed first will have priority over the other.

Section 49 :
A document required to be registered as required under Section 17 or by any provision of Transfer
of Property Act, 1882, but not registered will have the following effects:
(a) An unregistered mortgage of immovable property, or an unregistered deed of sale, or an
unregistered lease cannot be admitted as an evidence for proving a mortgage, sale or lease.
(b) Such documents are admissible to prove the nature of possession or evidence of a relationship
or evidence of acknowledgement of a debt and for any collateral purpose.
(c) Such documents can also be used in suits for specific performance of a contract, mortgage
sale or lease, the property refers to in the documents as provided in Section 53 A of the
Transfer of Property Act, 1882.

Section 50 :
A registered document prevails over an unregistered document when registration is compulsory.
The registering officer shall endorse, sign and affix the date on those documents presented for
registration after complying with the provision of sections 34, 35, 58 and 59 of the Indian registration
Act.

REGISTRATION UNDER INDIAN COMPANIES ACT

Charges to be registered
Under section 125 of the Indian Companies Act, 1956, the following charges are required to be
registered with the registrar of companies within a period of 30 days of their creation:
1. A charge for the purpose of securing any issue of debentures.
2. A charge for the uncalled share capital of the company.
3. A charge for any immovable property, where ever situated, or any interest therein.

40
4. A charge for any book debt of the company.
5. A charge not being a pledge on any movable property of the company.
6. A floating charge on the undertaking of any property of the company, including stock trade.
7. A charge on calls made out but not paid.
8. A charge on a ship[ or any share in a ship.
9. A charge on goodwill, on a patent, or a license under a patent or a trademark or a copyright, or a
license under a copyright.
10. An equitable mortgage or charge created by deposit of titled deeds also requires registration
under the section. So, an agreement to give security will have to be registered.

Registration of Charge not Required :

1. Charges by way of pledge of goods.
2. A pledge of shares of Government securities.

Condonation of Delay of Registration :

If the prescribed particulars of the charge are not filed with the Registrar within the applicable
period of 30 days as mentioned above, the course open to the company and the charge holder is :
❏ To approach the Registrar who is empowered to allow the particulars of charge to be filed
within next 30 days following the expiry of original period of 30 days on payment of such
additional fees not exceeding ten times prescribed in Schedule X of the Act.
❏ In case of the delay in filing particulars is beyond the period during which the Registrar is
empowered to allow the same, the company shall approach Company Law Board invoking
Section 141 of Act and seek extension of time to file the same.
❏ Once the prescribed particulars in respect of charge are filed with the Registrar for registration
in the manner required, and within the time allowed thereof, the registration of charge is a
function to be performed by the Registrar. There is no time limit under the Act within which the
Registrar has to register the charge. So neither the non-registration of charge nor delay in
registration of charge by the Registrar will effect the charge or interest of creditors in any
manner as long as prescribed particulars are filed for registration in time.
❏ In the meantime, if any other charge has been registered against the company's assets, the
first registered charge will rank prior to the subsequently registered charge.
❏ A registered subsequent mortgage will have priority over a prior unregistered mortgage even
if the subsequent mortgage had notice of the prior mortgage.

Effect of Non registration :

If the mortgage of a charge, which requires registration, is not registered if does not mean that the
transaction is altogether void or the debt is not recoverable. The only consequence is that the security
created by the mortgage or charge becomes void as against the liquidator and other creditors. Although
by non-registration the security is rendered void, the contract is not effected. Section 125 provides that,
in such cases, the money becomes immediately payable and t he company cannot repudiate it on the
ground of non-registration.

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 Section 125 applies only to a charge created by a company and not a charge arising by operation
of law, such as a vendor's lien for unpaid purchase money. The provision of this section does not apply
to charge created by a partnership firm over its assets (merely because one of t he partners is a limited
company or because the limited company is not the owner of the assets).

Legal Obligation on Company to File Particulars :

It is obligatory for a company to file the particulars of charge and default thereof is punishable
under Section 142 unless the registration has been effected on the application of some other person
viz. secured creditors.

Procedure for Filing Charges :

❏ An application on Form 8 (separate for every charge) along with the attested copies of the documents
by which such a charge has been created and a registration fee should be sent to the concerned
registrar of Companies. These papers must reach the office of the registrar within a period of 30
days from the date of its creation.
❏ A registered documents shall operate from the time from which it would have commenced, even if
no registration thereof had been required tobe made.
❏ A registered document shall not operate from the time of its registration.

Release/Modification of charge :
Under Section 135 of the Indian Companies Act, 1956, a release of the charge, or a modification
of the terms of the charge already registered, also requires to be filed for registration with the Registrar
of Companies within 30 days of such modification. However, no modification is required where the rate
of interest is linked with the RBI rate.

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 1.8

MORTGAGE OF IMMOVABLE PROPERTIES OR ASSETS

Mortgage is a kind of charge that can be created by the transfer of the interest in a specific
immovable property for securing a loan, an existing or future debt or a performance involving liability of
financial nature. This has been defined under Section 58(a) of the Transfer of Properties Act, 1882 as
the transfer of interest in specific immovable property for the purpose of securing—
1. The payment of money advanced or to be advanced by way of loan;
2. An existing or future debt or
3. The performance of an engagement, which may give rise to pecuniary liability.
The person who transfers an interest in a specific immovable property/asset by way of mortgage
is called a mortgagor (transferor) and one who receives the interest is called a mortgagee (transferee).
The principal money and the interest of which payment is secured by way of the mortgage is called
mortgaged money and the instrument (if any) by which the transfer is affected, is called mortgaged
deed. The immovable property may include land, the benefits arising out of it and things (structure/
super structure) attached to it, e.g. Trees, Buildings, Fixed machinery, etc.

Characteristics
❏ In a mortgage there is a transfer of an interest in some specific immovable property.
❏ The interest is transferred by way of security.
❏ The security is for the due repayment of a loan or a debt, incurred or to be incurred for any purpose,
or the performance of an engagement, which may create a pecuniary liability.
❏ If the money due or the pecuniary liability is not met within the agreed time, the interest transferred
(i.e., the security) can be sold through the court and the dues recovered.
❏ A valid mortgage can be affected only by a written document, signed by the mortgagor and two
attesting witnesses, and registered, unless the mortgage is an equitable mortgage or the mortgaged
money is less than Rs.100.
❏ A mortgage is a contract and, therefore, it must satisfy all the essential elements of a valid contract
such as Consideration, Free consent, etc.

Classification
There are 6 types of Mortgages, but the Bank takes only three types of mortgages, namely Simple
Mortgage, English Mortgage and Equitable Mortgage as security. As per Section 59 of the T.P. Act,
where the principal money secured is Rs.100 or more, a mortgage, other than an Equitable Mortgage,
can be affected only by a registered instrument signed by the mortgagor and attested by at least two
witnesses.
1. Simple Mortgage as per the Section 58(b) of the T.P.Act, means a transaction where, without
delivering possession of the mortgaged property, the mortgagor binds himself personally to pay the
mortgage money, and agrees, expressly or impliedly, that, in the event of his failing to pay according to

43
his contract, the mortgagee shall have a right to cause the mortgaged property to be sold and the
proceeds of sale to be applied, so far as may be necessary, in payment of the mortgage-money.
❏ A simple mortgage has following characteristics :
❏ The mortgagor retains the possession of the property.
❏ The mortgagee is given the right, in case of non-payment of the mortgage money, to have the
property sold through the court and realize his dues from the sale proceeds.
❏ The mortgagor undertakes that if the sale proceeds of the property are insufficient to repay the
money due, the mortgagor will remain personally liable for the payment of the debt.
❏ Power of sale without intervention of court can be conferred if the property is, on the date of
execution of the mortgage deed, situated at Kolkatta, Chennai, Mumbai, Ahemedabad, Delhi
and as such other places specified by State Governments.
2. English Mortgage as per Section 58 of the T.P. Act, involves a transaction, where the mortgagor
binds himself to repay the mortgage-money on a certain date, and transfer the mortgaged property
absolutely to the mortgagee, but subject to a proviso that he will retransfer it to the mortgagor upon
repayment of the mortgage-money as agreed.
❏ Essential characteristics of an English Mortgage are as follows :
❏ The mortgagor transfers the property absolutely to the mortgagee.
❏ The mortgagee agrees to reconvey the property back to the mortgagor if the mortgage-money
is paid up by a certain date.
❏ The mortgagee can file a suit for sale.
❏ The mortgagee also has right for immediate possession.
❏ The debtor is personally liable for the debt.
❏ There is a power of sale without the intervention of the court, if the parties are not Hindus,
Buddhists or Mohammedans irrespective of the place where the property is situated.
❏ If the parties are Hindus, Buddhists or Mohammedans, power of sale without intervention of
court can be provided in the deed, if the property is situated at specified places viz. Kolkatta,
Chennai, Mumbai, Ahemedabad, Delhi and as such other places specified by State
Governments.
3. Mortgage by deposit of Title Deeds (Equitable Mortgage) as per Section 58 (f) of the T.P. Act,
denotes a transaction, where a person, in towns of Kolkatta, Chennai, Mumbai, Ahemedabad, Delhi
and as such other places notified by State Governments, delivers to a creditor or his agent documents
of title to immovable property, with intent to create a security thereon.
Essential features of an equitable mortgage are as follows :
❏ No writing or registration is required, but the deposit of title deeds must be made with the
intention of creating a security and not for any other purpose.
❏ The transaction may be recorded in a letter of memorandum.
❏ Equitable mortgage can be created either by deposit of title deeds accompanied by a registered
memorandum of deposit or by simple deposit of title deeds with intention to create a security.
❏ The mortgagor must not sign the title-deed register (PNB 363).

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 4. Mortgage by conditional sale as per Section 58(c) of the T.P. Act, involves a transaction where,
the mortgagor ostensibly sells the mortgaged property—
❏ On condition that on default of the payment of the mortgage-money on certain date the sale
shall become absolute; or
❏ On condition that on such payment being made, the sale shall become void; or
❏ On condition that on such payment being made the buyer shall transfer the property to the
seller.
The conditions regarding resale etc. must be incorporated in mortgage deed.
5. Usufructuary Mortgage as per Section 58 (d) means a transaction, where the mortgagor
delivers possession or expressly or by implication binds himself to deliver possession of the mortgaged
property to the mortgagee, and authorized him to retain such possession until payment of the mortgage
money, and to receive the rents and profits accruing from the property or any part of such rents and
profits and to appropriate the same in lieu of interest or in payment of the mortgage money or partly in
lieu of interest and partly in payment of the mortgage money. Its chief characteristics include the following:
❏ The mortgagor delivers possession of the property to the mortgagee.
❏ The mortgagee takes the rents and profits of the property and appropriates the same to the
interest and the principal sum due.
❏ When the full amount due has been recovered in the manner aforesaid, the mortgagee gives
up possession of the property to the mortgagor.
❏ The mortgagee cannot sue for the sale of property or for the mortgage money; has only remedy
is to continue.
6. Anomalous Mortgage as per Section 58(g) means a mortgage, which is not a simple mortgage,
a mortgage by conditional sale, a usufructuary mortgage, an English mortgage or a mortgage by
deposit of title deeds within the meaning of this section.
Submortgage : The mortgagee can mortgage the interest transferred to him by way of security.
Such a mortgage is called a Submortgage.
Subsequent mortgage by the Mortgagor : There may be any number of mortgages/mortgagees
over the same property. After a property is mortgaged to a person, called first mortgagee, the owner-
mortgagor can mortgage it again to other persons who will be known as subsequent mortgagees. For
purposes of payment the different mortgagees rank in order of time, i.e. first mortgagee is paid in full
first, then the second mortgagee and so on.
Rights of Mortgagor : A mortgagee must manage the property as a person of ordinary prudence.
1. Right of REDEMPTION authorizes a mortgagor to get back the mortgaged property, any time
after the principal amount secured by the said mortgage becomes due, by paying off the claims of the
mortgagee. However, the court may extinguish his right by passing a decree for the sale of the mortgaged
property. The decree by which the mortgagor is prevented from exercising the right of redemption is
called a Decree for Foreclosure. The mortgagee under a simple, English or equitable mortgage
is, however, not allowed the right of foreclosure (Sec.67a).

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 2. Accession/improvement, of any kind, to the property when it is in the mortgagee's possession,
will go to the mortgagor after it is redeemed.
3. Inspection & copies : The mortgagor is authorized to inspect and take copies of the title of
property while they are in mortgagee.
4. Deposit & Suit : The mortgagor can file a suit and deposit the mortgage money in court itself.
5. Instalments : He can pray before the court to direct payment in instalments.
6. Lease : If mortgagor is in possession, he can under certain situations grant a lease of property
(Sec. 65A).

Rights of Mortgagee : He
1. Can recover any expenditure made by him for protection and preservation of the property.
2. Can receive principal and interest as per agreement.
3. Can file a suit for any remedy.
4. Can sell a property without the court's intervention, if allowed under the agreement/law.
5. Can be benefited by the implied contracts with mortgagor as per Section 65.

Mortgage and Pledge :

1. Mortgage relates to immovable property; pledge to movable property.
2. Mortgage involves transfer of interest in some property; there is only an obligation to make
payment in pledge.
3. In mortgage, possession of property may be with the mortgagor/mortgagee; in pledge, properties
remain with creditor.
4. The same property may be mortgaged several times; several pledge of same property is not
possible.

Mortgage and Charge :

A charge on an immovable property as per Section 100, is created where an immovable property
of one person is, by an act of the parties or by operation of law, made security for the payment of money
to another, and the transaction does not amount to a mortgage.
1. In a mortgage, there is a transfer of an interest in some immovable property; in charge, there
is no such transfer.
2. In some mortgages, there is a personal covenant to pay by the mortgagor; there is no such
covenant in a charge.
3. If a mortgage property is transferred, transferee takes the property subject to mortgage, whether
he is aware or not. In such transfer of a property subject to a charge, the bona fide transferee for value
without notice is not bound by the charge.

Mortgage and Hypothecation :

Hypothecation is also called mortgage of movables.
1. Mortgage relates to immovable property; hypothecation to movable property.
2. In mortgage, there is transfer of some interest in property; in hypothecation, there is only an
obligation to repay money.

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 1.9

INDIAN STAMP ACT, 1899

Stamps are of three types — Sec. 10

1. Adhesive Revenue Stamp
2. Special Adhesive / Impressed / Embossed Stamp
3. Bill of Exchange Stamps
Adhesive Revenue Stamps—Sec.11, are fixed on D. P. Notes, Acknowledgements, Balance
Confirmation, Receipts, etc. Special Adhesive Stamps / Impressed Stamps or Embossed stamps—
Sec.13, are generally used on printed forms such as Hypothecation, Pledge agreement, Letters of
Guarantee, etc.
All instruments executed in India—Sec. 17, shall be stamped before or at the time of execution
and those (other than bills & notes) executed out of India—Sec. 18, shall be stamped within three
months after it has been first received in India. Bills & notes drawn out of India—Sec. 19, shall be
stamped before being presented for acceptance, payment, endorsement, transfer or negotiation.
Sec. 29—Stamp duties are payable by the person drawing, making or executing an instrument.
Sec. 30—Any person receiving any money exceeding five hundred rupees in amount, or any BE,
cheque, etc. give a duly stamped receipt for the same.
Sec. 31—The collector is the competent authority to adjudicate as to proper stamp.
Sec. 33—Every person, except a police officer can examine and impound instruments not duly
stamped.
Sec. 35—Instruments not duly stamped are inadmissible in evidence.
Sec. 37—The State Govt. may make rules for admission of improperly stamped instruments. Any
understamped instruments, if paid subsequently as per the rules, shall be deemed to have been duly
stamped as from the date of its execution.
Sec. 62—Penalty for executing, etc., instruments not duly stamped – such offence be punishable
with fine upto five hundred rupees.
Sec. 63—Penalty for failure to cancel adhesive stamp may be a fine upto one hundred rupees.
Any material alteration after execution of documents will attract a fresh stamp duty.
Stamps can be of two categories :–
(1) Central Revenue Stamp duties are uniform every where in India, e.g. P. Note, B.E., L/C, Bill of
Lading, Share Transfer, Debentures, Proxy, Insurance Policy and Receipts.
(2) State Revenue Stamp duties are decided by the State Govt. (Sec. 72) in case of all other
documents.

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 1.10

HINDU SUCCESSION ACT – AMENDMENTS

Who is the Hindu Succession Act applicable to ?

The Hindu Succession Act is applicable to any person who is Hindu by religion. This includes
the followers of the Brahmo, Prarthana and Arya Samaj. Further it also includes Buddhists, Jains and
Sikhs within its ambit. In case there is others who might not be covered under these categories then
any other person who is not a Muslim, Christian, Parsi or Jew by religion would be covered unless it
is proved that Hindu law would not govern such a person.

What are the proposed changes in the Act ?

A bill, which has been introduced in the winter session of Parliament, has proposed a couple
of changes to the Act. These have become noteworthy as these changes seek to remove any gender
discrimination present in the Hindu Succession Act currently in force. This involves giving equal rights
to daughters in the Hindu Mitakshara Co-parcenary property. Coparcenary property is the ancestral
property of the family that currently devolves on the sons in case of death of the father. Under the law,
as it stands today, daughters do not have equal rights in the ancestral property. Now the daughter has
been given an entry into the coparcenary of her family. This means that the daughter will be counted
among those members who are entitled to seed partition and get equal shares in the ancestral property.

Is there any other fallout of this move ?

The right of entry to the coparcenary means much more because there are a host of other
factors that come into play. Thus the first change to consider is on the liability side where the daughter
will also be bound by the common liabilities.
If a person can be the member of the coparcenary the next stage or situation that can arise is
that such a person can go on to become the Karta of the family.
A Karta is the head of the family and hence now it would be possible for daughters to occupy
this role. Currently only male members can occupy this specific position. This change can be quite
significant in terms of social equations. However, all this relates to only coparcenary property. In case
of other property there is no restriction on the ability of anyone to will away the self-acquired property
in any manner that they desire.
The major impact of this move will be felt in the northern states of the country as quite a bit of
reform on this front has already taken place in the southern states of the country.

Is there any restriction on this benefit ?

The proposed reform will not apply to daughters married before the enactment of the changes.
Further the impact is likely to be felt the most in the Hindi belt as the states of Andhra Pradesh, Tamil
Nadu, Maharashtra and Karnataka have already carried out this reform of making daughters coparceners.
Are there any more changes proposed ?
The existing act does not allow a female heir to ask for the partition of a house wholly occupied
by a joint family, until the male heirs choose to divide their respective shares therein. This once again
gives the male members a privilege, which is not available to the female members. This restriction is
now also sought to be removed due to which the female heirs will be in the same position as their male
counterparts and ask for a partition.
❏

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