Relationship between a banker and customer

Relation of a debtor and a creditor

     The general relationship between banker and a customer is that of a debtor and a creditor
i.e. borrower and lender. In Foley v. Hill, Sir John Paget remarks, “the relation of a banker and a
customer is primarily that of debtor and creditor, the respective positions being determined by
the existing state of account. Instead of the money being set apart in a safe room, it is replaced
by the debt due from the banker. The money deposited with him becomes his property, and is
absolutely, at his disposal, and, save as regards the following of the trust funds into his hands,
the receipt of money by a banker from or on account of his customer constitutes him merely the
debtor of the customer with ‘super added’ obligation to honour his customer’s cheques drawn
upon his balance, in so far the same is sufficient and available”.

     In Shanthi Prasad Jain v. Director of Enforcement, Foreign Exchange Regulation, the SC
held that the banker and customer relationship in respect of the money deposited in the account
of a customer with the bank is that of a debtor and a creditor.

     On the opening of an account a banker assumes the position of a debtor. The money
deposited by the customer with the bank is in legal terms lent by the customer to the banker
who males use of the same according to his discretion. The creditor has the right to demand
back his money from the banker, and the banker is under an obligation to repay the debt as and
when he is required to do so.

     A depositor remains a creditor of his banker so long as his account carries a credit balance.
But he does not get any charge over the assets of his debtor/banker and remains an unsecured
creditor of the banker. Since the introduction of deposit insurance in India in 1962 the element of
risk of the depositor is minimized as Deposit Insurance and Credit Guarantee Corporation
undertakes to insure the deposits upto a specified amount.

     Banker’s relation with the customer is reversed as soon as the customer’s account is
overdrawn. Banker becomes creditor of the customer who has taken a loan from the banker and
continues in that capacity till the loan is repaid. As the loans and advances granted by a banker
are usually secured by the tangible assets of the borrower, the baker becomes a secured
creditor of his customer.

Various legal relationships of banker and customer

     2) Agent and Principal- Sec.182 of ‘The Indian Contract Act, 1872’ defines “an agent” as a
person employed to do any act for another or to represent another in dealings with third
persons. The person for whom such act is done or who is so represented is called “the
Principal”.
     One of the important relationships between a banker and customer is that of an agent and
principal. The banker performs various services of the customer, where he acts as the agent.

Buying and selling securities of customer

Collection of cheques, bills of exchange, promissory notes on behalf of customer

Acting a trustee, executor or representative of a customer

Payment of insurance premium, telephone bills etc.

1)      Trustee and beneficiary- section 3 of the Trusts Act defines a trustee as one to whom
property is entrusted to be administered for the benefit of another called the beneficiary. A
banker becomes a trustee under special circumstances. When a customer deposits securities or
other valuables with the banker for safe custody, the banker acts as trustee of customer.

2)      Bailee and bailor- during certain circumstances banker becomes bailee. When he

receives gold ornaments and important documents for safe custody he takes charge of it as
bailee and not trustee or agent. He cannot make use of them as he is bound to return the
identical articles on demand.

3)      Pawnee and pawner- pawn is a sort of bailment in which the goods are delivered to
another as a pawn, to be a security for money borrowed. Thus a banker acts as a pawnee
where a customer delivers he goods to him to be kept as security till the debt is discharged. The
banker can retain the goods pledged till the debt is paid.

4)      Mortgagee and mortgagor- the relation between a banker as mortgagee and his

customer as mortgagor arises when the latter executes a mortgage deed in respect of his
immovable property in favour of the bank or deposits the title deeds of his property with the
bank to create an equitable mortgage as security for an advance.

5)      Lessee and lessor- when a customer hires a locker in the bank’s safe deposit vault, the
bank undertakes to take necessary precaution for the safety of the articles in the locker. The
relation between the parties is that of a lessor and lessee.

6)      Guarantor and guarantee- a bank as guarantor gives guarantee to its customer by

issuing a ‘letter of credit’. It is a kind of credit facility to its customer to facilitate international
trade. A bank guarantee contains an undertaking to pay the amount without any demur on mere
demand of the principal amount on the ground for non-performance or breach of contract.

7)      Fiduciary relationship- every relation of trust and confidence is a fiduciary relation. A

banker who receives a customer’s money is under a duty not to part with it which is inconsistent
with the customer’s fiduciary character and duty. In Official Assignee v. Rajaram Aiyar, it was
held that where banks old money for a specific purpose of sending it somebody the money is
impressed with trust.
6. Explain the special relationship between banker &
    

customer. OR What is the special relationship arising out

of general relationship between a banker and a customer.
OR What are the rights and obligations of a banker
towards a customer?
 

     By opening an account with the banker, there will be some rights conferred and obligations
imposed to the banker as well as the customer. These rights and duties are reciprocal i.e. the
banker’s duties are the customer’s rights and the banker’s rights are the customer’s duties.
These rights and obligations are called the special features of relationship between banker and
the customer.

     The special relationship between banker and customer can be presented as under:

General obligations of banker towards customer

    

     Obligation to honour cheques- banker accepts the deposits from the customer with an
obligation to repay it to him on demand or otherwise. The banker is therefore under a statutory
obligation to honour his customer’s cheques because, it is recognized under section 31 of the NI
Act, 1881-

     The drawee of a cheque having sufficient funds of the drawer in his hands properly
applicable to the payment of such cheque must pay the cheque when duly required so to do,
and, in default of such payment, must compensate the drawer for any loss or damage caused
by such default.

     Thus the banker is bound to honour his customer’s cheques provided the following
conditions are fulfilled-

(a)   Sufficient balance in customer’s account

(b)   Presentation of cheques within working hours of business

(c)   Presentation of cheques within reasonable time after ostensible date of its issue

(d)   Cheques should be presented at the branch where account is kept

(e)   Fulfilment of requirements of law

 
     Obligation to maintain secrecy and disclosure of information required by law- the banker is
under an obligation to take utmost care in keeping secrecy about the accounts of the customers
since it may affect his reputation, credit-worthiness and business. It was firmly laid down
in Tournier v. National Provincial and Union Bank of England Ltd. in India it was made
compulsory after 1970. The duty to maintain secrecy will be continuing even after the account is
closed or the death of the customer.

     This obligation is subject to certain exceptions.

     Obligation to keep a proper record of transactions- the banker must keep a proper record of
transactions of the customer. If he wrongly credits the account of the customer and intimates
him with the same and the customer acts upon the intimation bonafide and withdraws cash the
banker cannot contend that the entries were wrongly made. He shall not succeed in recovery of
money from the customer.

     Obligation to abide by the instructions of the customer- the banker must abide by any
express instructions of the customer provided it is within the scope of their banker-customer
relationship. In the absence of any express instructions, the banker must according to prevailing
usages at the place where the banker conducts his business.

Rights of a banker

     Banker’s right of general lien- one of the important rights enjoyed by a banker is the right of
general lien. Lien means the right of the creditor to retain goods and securities owned by the
debtor until the debt due from him is paid. It may either be general or particular.

     In Brando v. Barnet, it was held that bankers most undoubtedly have a general lien on all
securities deposited with them as bankers unless there is an express or implied contract
inconsistent with lien.

     In India sec 171 of the Indian Contract Act confers general lien upon bankers as follows-
bankers…..may in absence of a contract to the contrary, retain as a security for a general
balance of account, any goods bailed to them.

     Banker’s right of set-off- the right to set off is a statutory right which enables debtor to take
into account a debt owing to him by a creditor, before the latter could recover the debt due to
him from the debtor. Thus when a customer keeps two or more accounts at the same bank,
some of which are overdrawn and some in credit, the bank has a right to combine such
accounts and pay the resultant balance.  In Halesowen Presscook and Assemblies Ltd v.
Westminister Bank Ltd, it was held that a banker has the right to combine two accounts and to
set off unless he has made some agreement express or implied to the contrary.

     Banker’s right for appropriation of payment- when a debtor owes two or more debts to a
creditor and he pays some amount which is not sufficient to meet any debt to the creditor
appropriation is done. It applies to a banker if the customer has more than one deposit or more
than one loan account.

     In Devaynes v. Noble, famously known as Clayton’s case, a principle was laid down as to
when the customer has current account and deposits and withdraws money frequently the first
item on debit side will be discharged by the first item on credit side. The credit entries in the
account adjust or set off the debit entries in chronological order.

     Banker’s right to claim incidental charges- the banker may claim incidental charges on
unremunerative accounts such as service charges, processing charges, ledger folio charges,
appraisal charges, penal charges and so on.

     Banker’s right to charge compound charges- a banker has a special privilege to charge
compound interest. In Syndicate Bank v. West Bengal Cement Ltd, the adding of unpaid interest
due to the principal amount is recognized. However, the SC abolished this in case of agricultural
loans in theBank of India case.

7. What are the obligations of a banker?

    

1. Obligation to honour cheques- the banker is under a statutory obligation to honour his
customer’s cheques in the ordinary course of business. If he wrongfully dishonors the
cheque, then he is liable to the customer for damages.

Thus the banker is bound to honour the customers cheque provided the following conditions
are fulfilled-

(a)   Sufficient funds- there must be sufficient funds of the drawer in the hands of the drawee.
A banker should be given sufficient time to release the amount of the cheque sent for
collection before the said amount can be drawn upon by the customer. The banker can
dishonor the cheques if there are insufficient funds.

(b)   Funds must be properly applicable- a customer might be having several bank accounts
in his various capacities. But is essential that the account on which a cheque is drawn
must have sufficient funds. If some funds are earmarked by the customer for some
 specific purpose, they are not available for honouring the cheques. But where the
customer has overdraft facility the banker has the obligation to honour the cheque upto
the amount of overdraft sanctioned.

(c)   The banker must be duly required to pay- the banker is bound to honour the cheque only
when hi is duly required to pay. The cheque, complete and in order, must be presented
before the banker at the proper time.

2. Obligation to maintain secrecy of accounts-The customer’s account details are

recorded in the books of the banker and the true state of his financial dealings are available
with the banker. If any of these facts are made known to others, the customer’s reputation
might suffer and he might incur losses also. The banker is therefore under an obligation to
take utmost care in keeping secrecy of the details of the customer.

However, this rule has exceptions(mention briefly)

3. Obligation to keep a proper record of transaction- the banker must keep a proper and
accurate record of all the transactions of the customer. Sometimes, he may commit some
wrong.           

                                                                                       

8. Explain the banker’s right of general lien.

    

     Lien means a legal claim to hold property as security. According to Halsbury, lien may be
defined as “a right in man to retain that which is in his possession belonging to another, until
certain demands of the person in possession is satisfied”.

     Lien is of two kinds- 1) specific or particular lien and 2) general lien

     A particular lien is one which confers a right to retain the goods in connection with a
particular debt only while a general lien is a right to retain all the goods or any property of
another until all the claims of the holder are satisfied. It extends to all transactions and thus
more extensive.

Banker’s right of general lien

     One of the important rights enjoyed by a banker is the right of general lien. In Brando v.
Barnet, it was held that bankers most undoubtedly have a general lien on all securities
deposited with them as bankers unless there is an express or implied contract inconsistent with
lien.
     In India sec 171 of the Indian Contract Act confers general lien upon bankers as follows-
bankers…..may in absence of a contract to the contrary, retain as a security for a general
balance of account, any goods bailed to them.

Circumstances for exercising general lien

1)      No agreement inconsistent with the right of lien.

2)      Property must be possessed in his capacity as a banker.

3)      Possession should be lawfully obtained.

4)      Property should not be entrusted to the banker for a specific purpose.

Incidents of lien- lien attaches to

1)      Bills of exchange or cheques deposited for collection or pending discount.

2)      Dividend warrants and interest warrants paid to the banker under mandates issued by
the customer.

3)      Securities deposited to secure specific loan but left in banker’s hand after loan is repaid.

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

Exceptions- banker has no general lien

1)      On safe custody deposits.

2)      On securities or bills of exchange entrusted for specific purpose.

3)      On articles lefty by mistake or negligence.

4)      On deposit account.

5)      On stolen bond.

6)      Until due date of the loan.

7)      On trust account.

8)      On title deeds of immovable properties.

 
9. What are the circumstances under which a disclosure by
    

banker is justified? OR Banker’s duty of secrecy is not

absolute. Explain.
 

     The duty of the banker to maintain the secrecy is not an absolute one. It is also subject to
certain exceptions. The exceptions were stated in the landmark judgment Tournier v National
Provincial Bank Limited. Section 13 of the Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1970 also allows certain exceptions.

1. Disclosure under the compulsion of Law- Banker’s obligation to his customer is

subject to his duty to the law of the country. The baker would, therefore, be justified in
disclosing information to meet the following statutory requirements.

(a)   Under the Income –Tax Act, 1961- Vide Section 131 & 133, Income Tax authorities
have powers to call for the attendance of any person or for necessary information from
banker for the purpose of assessment of the bank’s customers.

(b)   Under the Banker’s Books Evidence Act, 1891- a banker may be asked for the Court
to produce a certified copy of his customer’s account in his ledger.

(c)   Under the Reserve Bank of India,1934- the RBI is empowered to collect credit
information from Banking Companies relating to their customers

(d)   Under the Banking Regulation Act, 1949- every bank is compelled to submit an
annual return of deposits which remain unclaimed for 10 years.

(e)   Under the garnishee order- when a garnishee order nisi is received, the banker must
disclose the nature of the account of a customer to the Court.

(f)     Under the Companies Act, 1956- when the Central Government appoints an inspector
to investigate the affairs of any joint-stock company under section 135 or section 137 of
the Companies Act, the banker must produce all books and papers relating of the
Company.

(g)   Under CrPC- the police officers conducting an investigation may also inspect the
banker’s books for the purpose of such investigation.

2. Disclosure in the interest of the public-the following grounds generally fall under this
category

(a)   disclosure of the account where money is kept for extreme political purposes in
contravening the provisions of any law
 (b)   disclosure of the account of an unlawful association

(c)   disclosure of the account of a revolutionary or terrorist body to avert danger to the State

(d)   disclosure of the account of an enemy in time of war

(e)   disclosure of the account where sizable funds are received from foreign countries by a
constituent.

3. Disclosure in the interest of the bank- the banker may disclose the state of his
customer’s account in order to legally protect his own interest. For example- if the baker
has to recover the dues from the customer or the guarantor, disclosure of necessary
facts to the guarantor or the solicitor becomes necessary and is justified.

4. Disclosure under the express or implied consent of a customer- the customer may
instruct his banker to give some or all other particulars of his account to say, his auditor,
in such case banker can disclose. Banker can also disclose to a referee whose name is
suggested by the customer. It is implied that the banker can disclose information to the
guarantor.

5. Disclosure under Banker’s enquiry- it is an established banking practice to provide

credit information about their customers by one bank to another. The customer gives
implied consent to this practice at the time of opening the account.