COMPANY ACCOUNTS

COMPANY ACCOUNTS

TYPES OF COMPANIES

• Companies limited by shares can be classified into three categories viz., (i) Private Limited Company, (ii)  Public limited Company and (iii)  Government Company

A private limited Company is a company which by its  articles (i) restricts transfer of its shares, (ii) prohibits itself from inviting subscription of shares/debentures from public, (iii)  limits the number of its members to 50.

A public limited company does not have such restrictions.

A Government Company where not less than 51% of the share capital held by government (central/state/both)

Company Limited by the guarantee

A company limited by guarantee is a registered company having the liability of its members limited by its memorandum of association to such amount as the members may respectively undertake to pay if necessary on liquidation of the company

DIFFERENCE BETWEEN A PVT. LTD. CO. AND  A PUBLIC LTD. CO.

	Points of Difference	Private Ltd. Co.	Public  Ltd. Co.
i)	Minimum number of shareholders	2	7
ii)	Maximum number of shareholders	50	No limit
iii)	Transfer of share	Restricted	Freely transferable
iv)	Invitation to public for share & Debentures and fixed deposit	Prohibited	Permitted
v)	Certificate of commencement of  business	Not required	Permitted
vi)	Minimum Directors	2	3

DOCUMENTS RELATING TO COMPANY ACCOUNTS

1. Certificate of Incorporation is issued by Registrar of Companies. This gives the conclusive proof that all formalities involved in formation of a company are duly complied with.
2. Memorandum of Association

• While applying for registration / certificate of incorporation, the promoters of the company submit to the Registrar of Companies two important documents for registration. They are memorandum of association and articles of association.
• The memorandum of association of every company contains the following six clauses (i)  Name clause (which gives the name of the company), (ii) Place clause (gives address of he registered office of the company), (iii) Objects clause (gives the activities the company can pursue),(iv) liability clause (gives that the liability of shareholders is limited, (v) Capital clause (gives the maximum  capital the company can issue/authorized capital), (vi)  Association clause (gives the consent of the promoters under their signatures that they are desirous of forming a company).
• The object clause usually sets out the powers which the company can exercise for achieving its objectives. For this reason memorandum of association is also called charter of the company

     3.  Articles of Association

• Like Memorandum of association it is also a public document.
• It contains the rules and regulations for internal management of the  company like the powers of Board of Directors, Rules for conducting meetings,use of common seal, use of borrowing powers etc.
• The Articles are subordinated to memorandum.
• A public limited company may opt not to register article of association. In that case the rules and regulations given in Table A in first schedule of the companies Act will be taken ass the article of association of the company.

    4.   Certificate of Commencement of Business

• Required only in case of public limited companies

          Omnibus Resolution

• A resolution (passed by Board) authorizing to open account in the name of the company with any bank at any place is called Omnibus resolution.
• An omnibus resolution can be accepted for opening  current account. No credit/overdraft facility is sanctioned in the account, based on such resolution.

OPERATION OF COMPANY ACCOUNT

• Cheque signed by an authorized person can be paid even after his death or insolvency
• Cheque payable to a limited company should not be collected in personal account of any director.
• Employee/official of the payee company.
• cheque issued by a company in favour ofa third party and endorsed by he payee in favour of a director/employee of the company should not be collected without proper enquiry.

Insolvency

• A company cannot be declared insolvent. Whee a company cannot pay its debits it can be liquidated/wound up.
• Where one of the directors becomes insolvent, it does not affect operation of account.
• Cheques signed by him can be paid.However,after insolvency be cannot act as director.
• If one of the two directors of a Private Limited Company is adjudged insolvency, the operation in the Company's account should be stopped till a fresh director is appointed.

DEEMED PUBLIC LIMITED COMPANIES

• Section 43(A) of Companies Act provides that a Private Limited Company shall be deemed to have become a Public Limited Company on the happening of any one of these events. (I) one more more body corporate hold 25% or more of  the paid-up capital of public company.(II) The Company accepts (by public invitation) deposits, or (III) its average annual turnover (fora period of three years) exceeds the limit prescribed by the Central Govt.form time to time (presently it is Rs.10 Crores).

NON-PROFIT MAKING COMPANY

• A limited company need not ladd the word limited to its name if it is a non-profit making  association formed for the promotion of art, literature,religion and licensed by Central Government under Section 25 of Companies Act, 1956.
• The word "Limited: in the name of a company indicate that the liability of a share holder is limited to the extent of the face value of shares held by him.

ACCOUNTS TO COLLECT SUBSCRIPTION

• When a newly formed public limited company wants of open a bank account for the purpose of collection of subscription money f9or its shares/debentures,banks should not the following points
• It is the responsibility of banker to ensure that the one is not withdrawn/utiliszed till the company obtains the certificate of commencement of Business.
• For opening subscription account the bank, therefore, should not insist upon "Certificate of Commencement of Business".
• No chequebook can be issued in such account.
• No withdrawal can be allowed until the company obtains Certificate to commence business.
• However, bank can transfer the amount or part thereof for investing in short term deposits.

WINDING UP OF COMPANY

• Winding up or Liquidation is the process by which a company is dissolved.
• Winding up can be (I) voluntary, either by shareholders or by creditors (II) Compulsory by Court or III) through Court supervision.
• On the appointment of a liquidator, all the powers of Board of Directors cease tro operate except when it is otherwise permitted in general body meeting  resolution.
• In case of death/resignation of the liquidator the company in general body meeting appoints the next liquidator

Order of payment on debts

• In case of winding up, the debts of the company are paid in the following order (I) workmen dues, (II) Secured Creditors, (III) Cost and charges of winding up (IV) Preferential debts (taxes etc.), (V) Floating charges, (VI)  Unsecured Creditors.
• The unsecured creditors are paid part passu their claim.

DIFFERENCE  BETWEEN PARTNERSHIP  AND  A COMPANY

PARTNERSHIP	COMPANY
A partnership firm is the sum total of persons (minimum 2 and maximum 20) who have come together to share the profit f the business carried on by them or any of them. It does not have a separate legal entity.	The company has a separate legal entity. It needs to be incorporated. A public company may have as many members as it desires subject to a minimum of 7 members. A private company can’t have more than 50 members and less than 2
Liability of partners is unlimited	Liability of shareholders of a limited company is limited to the extent of unpaid shares or unpaid amount guaranteed by the shareholders.
Property of the firm  belongs to the partners and they are collectively entitled to it.	In case of a company the property belongs to the company and not to its shareholders.
A Partner cannot transfer his  shares in a partnership firm without the consent of all other partners	Shares may be transferred without the permission of the other members due to the absence of provision to contrary in the articles of associations of the company.
On the death of a partner, the partnership is dissolved unless there is provision to the contrary in the Deed of Partnership.	On the death of the shareholder the company’s existence is not affected.

PARTNERSHIP ACCOUNT - LAW

LAW  RELATING TO PARTNERSHIP

1.  Registration of the Firm

(a)  It is not compulsory to register afirm. However, unregistered firms suffer from certain handicaps, and 

      certain handicaps indirectly compel firms to get themselves registered.

      

      Effect of Non-registration (Section 69)

• No partners of an unregistered firm can not sue the firm or any partners of the firm for enforcing rights arising out of a contract or from the partnership Act.
• An unregistered form cannot sue third parties to enforce its rights arising out of a contract.
• Though the rights of non-registered firm  are affected the right of third party to proceed legally against the firm to enforce its rights arising out of a contract is not affected to all fact tat the firm is unrestered.

(b)  Procedure  for4 Registration  (Section 58 & 59)

• A partnership firm can get itself registered at anytime (even years after its formation) with fees. The Firms of the state where the head office of the firm is located.
• For registration, the partners have to file an application giving details of the firm alongwith fees.The Registrar records these particulars in the "Register of irm" maintained in his office and issues a "Certificate of Registration". Registration is effective from the date when Registrar makes the entry in the register.

(c)    Bank's Preference

• Banks prefer to deal with registered firms particularly while sanctioning credit facilities, Reasons :(i) It is easy to verify the particulars about the firm with the Registrar of Firms, (ii)  A registered firm is in a better position to pay its debts as it can sue outsiders to recover its debts.

2.   Minor as Partner

• A minor being incompetent top contract can not become a partner is a partnership firm.
• However, he can be admitted to the benefit of an already existing partner ship with the consent of all partners (Section 30 of Indian Partnership Act.).
• The liability of a minor admitted to lthe benefit of partnership is limited to his share in the firm. His personal assets nor he personally can b e held liable for the debt of the firm.
• Though a minor can not  be declared insolvent,his share in a firm which is declared insolvent vests in official Receiver/Official Assigner.

         Minor Attains Majority

• On attaining majority a minor can opt-out of the partnership.
• He must exercise this option within six months from the date of his attaining majority or from the date when he first knew about his interest in the partner ship, whichever date is later.
• This option is exercised by giving a public notice {Public Notice is given by (i) giving notice to Registrar of firms (ii)  publication in at least one vernacular newspaper circulation in the district where the firm has principal place of business}. 
• In case he fails to give a public notice, within the stipulated time limit, he is deemed to have become a partner and is personally liable for all liabilities of the firm from the date of his admission to the benefit of partnership.

3.   Right and Liabilities of Partners

       Act Subordinate to Partnership Deed

• The rights,duties and liability of partners of a firm are determined as per the agreement between them (as recorded in the partnership deed).
• Where there is no agreement or the agreement is silent, the rights of partners are determined as per provisions of the Partnership Act.
• Therefore provisions of the Act are subordinate to any contract between partners and will apply only if the partnership deed is silent as to particular right and duty of  partners.
• Therefore for finding out the right of a partner one should first refer the partnership deed.

       Essential Features of a Partnership Deed

• Should bear signatures of all partners
• Should be adequately stamped as per Stamp Act.

      OPERATION OF ACCOUNT

1. Operation only lby Authorised persons : Only partners/person authorized by the partnership deed or separate authority letter signed by all partners should be allowed to operate the account. Cheque signed by other partners can be returned unpaid.
2. A partner authorized to operate account  cannot delegate his authority to another person.
3. Any Partner can stop payment of a cheque : Any partner,whether authorized to operate account or not can stop payment of cheque.
4. Revocation of mandate : Any partner (whether allowed to operate the account or not) can revoke/cancel authority given for operation of account. However, the authority cancelled,can be reinstate only under the signature of all partners.
5. Death/Insolvency/Retirement of Partners : A firm gets automatically dissolved on the death,m insolvency or retirement of one or more than one partners unless there is a specific provision in the partnership deed to the effect that the remaining partners, would continue the partnership in case of such eventuality. No public notice is required.

• Cheques signed by a partner, who is adjudged insolvent, should not be paid unless it is confirmed by 0ther solvent partners.
• On the death/insolvency/retirement of a partner the operation of the account should be stopped.
• If the account has credit balance, the balance should be given to all surviving partners under their joint signatures or anybody authorized by them.
• In case there is debit balance (i.e. over draft/cash credit account) no further debit or credit should be allowed  in order to keep the deceased/insolvent/retired partner's estate liable for the debt.

         Lunacy of a Partner : Cheque signed by other partners can be paid even after the lunacy of a partner

         However, cheque signed by the lunatic should be returned unpaid.

       DISSOLUTION OF A FIRM

-     A firm is said to be dissolved when the partnership relating between the partners comes to an end.

1. Effect of Dissolution

• Each partner ceases to have authority (i..e. agent), to bind the firm.
• All partners at the time of dissolution remain jointly and severally liable for all dues of the firm outstanding on the date of dissolution.
• A partner retiring from partnership will continue to be liable to third parties for any act done after his retirement lun less a public notice is  given regarding the retirement.

       RECONSTITUTION 

• In the case the partnership deed provides for the continuation of the firm by remaining partners and these partners opt for the same, then the firm is said to be re-constituted.

Action to be taken by Bank in case of Reconstitution

• Where the Bank wants to keep the outgoing partners liable, it should not recognize reconstitution.
• If the bank does not recognize the reconstitution it should do the following:

i)   Give notice to the retiring partner/legal heirs of deceased partner to the effect that they would not be

      released of their liability.

ii)   The account should be frozen under notice to all partners.

iii)   No credit/debit should be allowed to avoid operation of rule laid down in Clayton's case.

-     In case the bank recognizes the reconstitution it should ask for :

i)   Consent letter from guarantor.

ii)   Consent from mortgagors to the effect that the mortgage will continue to be available for the 

      drawings of the reconstituted firm.

iii)  Confirmation of balance by all partners

 -    In case of reconstitution of a firm due to the admission of a partner, a letter from the new partner should        be taken to the effect that he undertakes the liability of the firm incurred before his admission.

FORMATION OF NEW FIRM BY THE REMAINING PARTNERS

• Where the partners deed does not reconstitution, the firm cannot be reconstituted. It stands dissolved on the death/insolvency/retirement of a partner(s).
• In such a case if the remaining partners decide to continue the business, it would be considered as a new partnership.
• All procedure applicable to advance given to a new partnership should be done fresh for the account.

      

DIFFERENT TYPES OF CUSTOMERS IN BANKING

TYPES OF CUSTOMERS

A.  MINOR

WHO IS A MINOR ?

•  Minor is defined in Section 3 of Indian Majority Act,1985
• A minor is a person who has not completed 18 years of age.
• A minor, for whom a guardian is appointed by the Court (for the person, or property or both) or for a minor for whom a Court of ward is appointed as guardian, or a person of foreign domicile,attains majority only on his completion of 21 years.

MINOR'S AGREEMENT

• A minor is not competent to enter into a contract. All agreements with a minor are void ab-initio  (i.e. invalid from the very beginning).{Ref: Section 11 of Indian contract Act 1872.}. {Note : A contract for the supply of necessaries suitable to the life of a minor is, however, valid}
• In case  a bank sanction loan, or opens deposit account in the name of a minor, it5 cannot legally compel  him to perform his part of the contract (since there can not be a contract with a minor). For this reason, banks never sanction loans/overdraft to minors.However, they open deposit accounts in the name of minors, after taking necessary precautions. As long as the account is in credit, the banks run no risk in such accounts.
• A person upon attaining majority cannot ratify a contract entered during his minority (Reason : there was no contract).
• Since a minor is incapable to contract, he can be represented by his lawful guardian.A lawful guardian, like a trustee, has the power to represent the minor in dealing his property. He has got a fiduciary relationship and can lawfully deal with property only for the benefit to  the minor".

WHO IS THE GUARDIAN OF A MINOR ?

• The guardian to a minor can be  (a) Testamentary Guardian, or (b) Legal Guardian, or (c) Natural Guardian.

Testamentary Guardian

-         Guardian appointed by the will of the minor's father is called testamentary guardian

-         Such guardian acts only after the death of the father &mother of the minor child.

Legal Guardian

-         Where there is no natural guardian, or testamentary guardian, the Court ca appoint a 

           Guardian as per the provisions of Guardian and Wards Act, 1890.

Natural Guardian

-         In case of Hindus, the guardianship of minor is determined as per the provisions of Hindu Minority l&            Guardianship Act,1956.

-         Section 6 of the Act provides that in case of a minor boy or unmarried girl, the father and after this death the mother shall be the guardian of both person and property of the minor. As per recent Supreme Court of India judgement either father or mother can act as guardian.

-          After the death of both father and mother, a mibor can be represented only through a legal guardian.

-          Step father/step mother cannot act as natural guardian.

-           For a minor married girl, her husband (if major) is the natural guardian. In case the the husband is a 

            minor, her father (or mother, if the father is dead)  may continue to be natural guardian.

-           For a minor married girl, who has become a widow, her father (mother, if father is dead) is to act as              natural guardian.

-           In case of an illegitimate minor child, his/her mother is the natural guardian.

-           For a Muslim minor, father is the natural guardian. After father, guardianship lies with (i) executor 

            appointed by father's will and then (ii) father's father and then (iii) the executor appointed by the will

            made by the father's father.

-          In case, any of these of a Muslim minor cannot act as guardian except when appointed by Court or 

            by will (of father of father's father).

            

           In case of Christians and persons of other religion 

-          Father, upon his death, mother acts as natural guardian.

-          Where both are dead, a person appointed by Court can alone act as guardian.

OTHER IMPORTANT POINTS ON GUARDIANSHIP

-  Even after conviction, the natural guardian continues to be the natural guardian.

-  A guardianship can be for the person, or for the property or for both. A legal guardian appointed for the person (not for the property) of the minor is not entitled to alienate any property even for the benefit of the minor, Accordingly, such a person is not entitled to open, operate and receive deposit on behalf of the minor.

-  In case of Muslim, the natural guardian is guardin only for the property and not  the person of the minor.

-  A bank does not undertake to act as guardian of the person of the minor.

TYPE OF DEPOSIT ACCOUNT FOR MINORS

• Account can be opened in the name of a minor are broadly the following : (i) Minor's account to be operated by guardian (ii) Minor's account to be operated by mother (iii) Minor's account to be operated by himself/herself.
• Minor's account opened and operated by guardian single or joint account.
• The guardian can open a deposit account in sole name of the minor to be operated by him on behalf of the minor,. Alternatively he can open a joint account in the name of the minor and himself.

Guardian's power

-  He can operate the account on behalf of the minor.

-  He can foreclose the term deposit or avail loan against the same for the benefit of the minor.

-  His power to operate account /foreclose deposit/borrow against deposit ceases as soon as the minor attains majority.

When Minor Attains Majority

-  From the date the minor becomes a major, he has the sole right  to operate the account (not the guardian). 

-  For term deposits maturing for payment on or after  a date on which the minor attains majority, the guardian has no power to foreclose the same. The amount should be paid to the minor  upon his attaining  majority.

Advance against Minor's deposit

-  Should be sanctioned only for the benefit of the minor.

Death of Minor

-  Balance is payable as a claim case.

Death of Guardian

-  The balance is treated as a Trust and is paid to the minor upon his attaining majority. During his minority it can be paid to his guardian appointed by Court.

Self operated Minor account

-  Minors who have completed 10 years of age, who are literates and can sign uniformly are permitted to open saving fund account or FD/RD account (not Current account) in their own name and operate the same.

-  No cheque book should be issued to the minor customer .

-  Opening of Term deposits including RD can be allowed for any amount.

-  No advance can be given against such deposit.

IMPORTANT

Mental Health Act,1987 -  The Act deals with persons who are mentally ill (persons in need of treatment by reason of any mental disorder other than mental retardation). Under the Act, where the Mentally ill person is incapable of taking care of himself, the Distt. Court or where a direction has been issued under the Act, the Collector of the Distt. may appoint any suitable person to be his guardian.

National Trust for Welfare of person with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities Act, 1999,  (Act deals with persons suffering from disabilities like Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities). Under the Act, a parent of a person with disability or his relative, defined under the Act, may make an application to the local level committee for appointment of any person of his choice to act as a guardian of persons with disability. Under the ct, Local Level Committees can be constituted and they are also empowered to appoint guardian under the Act.

• Where guardian of a minor or major person, (suffering from Mental illness and persons, suffering from disabilities like Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities or any existing account holder subsequently acquiring these disabilities), duly appointed by the competent authority /court under Mental Health ct, 1987 or under The National Trust for Welfare of persons with Autism, Cerebral Palsy, Mental Retardation and Mental Disability Act, 1999 approaches the branch for opening /continuing to operate the account of such person, such accounts (savings/term deposits and recurring deposit accounts only) may be opened /allowed to be operated by the guardian appointed under the aforesaid Acts. Thew operational guidelines in such cases will be same like existing guidelines, as are applicable for accounts opened in the name of minor under guardianship.

• The guardianship will continue (even after attaining the age of 18 years, in case of minor) as long as the disability continues.

• The guardian, appointed under any of the above Acts, will be asked to furnish one in a year, a certificate from the appointing Authority that he/she continues to be guardian of such person/s and has not been removed from the guardianship.  Guardian so appointed will be asked to give affidavit to the bank that in case his appointment as guardian has been cancelled/elapsed/withdrawn by the competent Authority, he will immediately bring this fact to the notice of Bank and also shall indemnify the Bank in case of any loss to the Ward on account of his not bringing this fact to the notice of Bank.

• No current account will be opened in the name or on behalf of such persons and in no case such person will be allowed an overdraft.

• In case the Ward , whose guardian has been ap[pointed under the above two Acts, is minor, nominee in the account can be appointed by such guardian in terms of the nomination rules. However, where the ward is major, Guardian will not be permitted to make nomination in the account. Nomination made during minority of the ward will cease to be operative after the attainment of age of majority by the ward.

• On the death of the guardian, no operation in the account will be allowed unless the new guardian is appointed by the Competent Authority under the Act.

• On the death of the ward, the matter will be dealt as a claim case.

• Locker facility will not be allowed to the guardian appointed under the above Acts.

B.  ILLITERATE PERSONS

i)   Capacity to contract
-  Persons who cannot read and write are called illiterates.

-  Like others, illiterate persons are fully competent to enter into contracts.

-  However, they can avoid the contract if they can prove that their consent was obtained by misrepresenting the facts due to their incapability to read. Banks. therefore, must create sufficient evidence to prove that the illiterate understood the terms and conditions beyond doubt.

ii)  Type of Account
-   No current account should be normally opened in the name of illiterate persons as it would be difficult to identify his LTI in cheque issued by him.

iii)  Joint Account
-  Joint accounts in the name of two illiterates can be opened with condition that withdrawals will be allowed only in person.

iv)  Operation

-  No cheque book is to be issued.Withdrawal should be allowed only in person after proper identification. The passing official will verify in the withdrawal form under his signature to the effect that the left hand thump impressions affixed in his presence and the amount withdrawn in orally confirmed, by the (illiterate) depositor.

-  Where the illiterate person gives a power of attorney in his account, the mandate should be attested by a Notary Public.

C.  BLIND PERSONS

i)   Risks in opening account in the name of Blind person
-  Blind persons are fully competent to enter into contract and there is no legal bar in opening accountys in their name or getting loan documents executed by them.

-  However, in case of dispute they can always argue that the terms and conditions of the account and the amount paid were misrepresented ti them. They may dispute their signature at a later date. The courts may also believe this on account of their blindness.For this reason banks should be extra careful while opening and allowing operations in the accounts of blind persons.

ii)  Type of accounts
-    Current account : Current account should not be opened in  the name of a blind.
   
     Joint Accounts
-    Joint account in the name of two blind persons must not be opened.

iii)   Opening and operation of account
-     A respectable person, who should certify that the contents are explained to the blind person in his presence, must witness the signature in the account opening form.

-       The visually impaired customer may be allowed to use cheque book provided the incumbent in-charge  is satisfied that the account holder is capable of conducting his/her account satisfactorily. Where cheque book/cheque leaves can be issued , the same should be marked with ordinary crossing and the word ' bearer' submitted with 'order' so that the payees could be traced.

-      Three passport size photographs should be obtained and be used in the same ways is done in case of illiterate.

-       The visually impaired customer may be allowed to use cheque book provided the Incumbent incharge is satisfied that the account holder is capable to conducting his/her account satisfactorily. Where cheque book/cheque leaves is / are issued, the same should be marked with ordinary crossing and the word "bearer" substituted with "order"   so that the payees could be traced.

-       Even cheque book/cheque leaves can be issued to the blind customers who put thump impression or cannot sign consistently, for certain specified purposes, swuch as payment of loan instalments, utility bill payment.In such cases at the time of issuance of cheques, the customer will also affix his/her left/right thump impression, as the case may be, on each leaf and the same should be verified by the Bank's authorised official under his/her full signature with date and his / her identification no. If the cheque is for loan payment all the details with (Post)date  must be filled in at the time of issue. For utility bill payment amount and date will be filled in at the time of actual issue. But all the cheques will be ordinarily crossed.

-        The blind person must come in person to withdraw cash.  

-        Cash payments and cash deposits should be made in presence of a witness who should be preferably a customer of the bank./

-        The account opening form, specimen signature sheet, pass book, cheque book must be branded with "Blind person" so that caution is exercised while transacting with the blind customers.

-        Considering the fact that the blind persons/persons with low vision are legally competent to contract, lockers facility can be allowed to such person also. Locker facility may be allowed jointly with a person without any visual impairment known/related to him/her (the visually impaired person intending to take locker on lease) and operation of such locker shall be permitted jointly. All the documents relating to leasing of locker shall be executed jointly If the locker facility is allowed in the single name,operation of such locker shall be permitted in the presence of one literate witness with no visual impairment who shall be designated by the blind lessee at the time of execution of Rent Deed Memorandum. The lessee (the visually impaired person) may designate maximum three witnesses at the time of executing the Rent Deed Memorandum. The signature  of the witness  shall also be obtained alongwith the signature/thump impression of the visually impaired lessee at the time of operation of locker. However,it should be ensured that the designated witness(es) is/are customer(s) of the branch and whose identification and  address verification has been conducted by applying full KYC procedures.

D.  MARRIED WOMEN

• Competent to contract  : A married women can enter into a valid agreement in her own name and therefore, the bank can open account in her name and give loans against documents executed by her.
• Husband's address : While opening the account in the name of a married lady bank should obtain the employment particulars and occupation of her husband.
• Change of name after marriage. : While a lady maintaining account in maiden name approaches for a change of name in the deposit account consequent to her marriage, the bank should do the following : 

          -  Obtain a letter from her asking for the change,
          -   Obtain evidence like marriage invitation card/marriage certificate/newspaper publication about the
              about the marriage ) In case it is not available, a respectable person/introducer should confirm
              about the marriage).
          -   Obtain fresh specimen signature and change the title of the account in the ledger as Mrs. PM Das nee
              Miss PM Sarkar.

Points to note :
-  There is no need to close the existing account and open a new one.
-  Cheques in her maiden name can be collected in the account after proper endorsement.
- Cheques issued prior to the change of name can be paid in the account.
-  The letter requesting the change of name should expressly authorize bank to collect cheques
    in her maiden name and also to pay cheques signed in her maiden name.
-  A husband cannot be made liable for payment of loans taken by his wife except when(i) the debt is                 incurred for the purpose of necessities suited to her life, and (ii) the loan is given with his consent.
-  For this reason banks prefer to take guarantee of husband while sanctioning loans to a lady.
-  Further,a married woman cannot be adjudged an insolvent.

E.  PURDANASHIN LADIES

A Purdanashin lady is a woman who remains in complete seclusion and does not transact with people other than her family members.

(i)  Undue influence
-     A Purdanashin can avoid a contract if there is undue influence on her for signing the contract. Where a purdanashin complains of undue influence the onus of proving the absence of undue influence lies on the other party to the contract.

(ii)  Type of account
-    No account should be opened in the name of a purdanashin lady who is an illiterate.
-    No current account should normally be opened in the name of purdanashin lady except in exceptional cases ( with prior approval from Regional /Zonal office).
-    The signature of the pudanashin lady in the account opening form should be attested by her husband and in case of unmarried, by her natural guardian.
-     The cheques/withdrawal slips executed by her should be attested by her husband or two account holders of the bank.
-   Photograph of the purdanashin  must be obtained while opening account in her name.

F.  TRUST ACCOUNT

      DEFINITION AND MEANING OF TRUST

• Trust is defined in Section 3 of Indian Trust Act, 1882
• "Trust is an obligation, annexed to the ownership of property and arising out of a confidence reposed in and accepted by the owner or declared and accepted by him for the benefit of another or of another and the owner".
• In simple words, a trust is said to be created when the ownership of a property is transferred to, somebody with an obligation to hold and manage the same for lthe benefit of another.
• Usually there are three parties to a trust viz.

          (1) The person who transfers the property and reposes confidence is called the Author of the trust or             Creator of the trust or Donor or Settler. 

          (2)  The transferee of the property on whom confidence or trust is reposed is called the trustee.

          (3)  The person for whose benefit the trust is formed, is called beneficiary or donee.

• Trust Deed - is the document through which a trust is formed. It records the right and obligations of the trustees. A trust deed should be registered.

          TYPES OF TRUSTS

• A trust can be a private trust or la public trust.
• Private trust : It isformed forlthe lbenefit of one or more specific individuals. Law relating to private trust is codified in Indian Trust Act, 1882.
• Public trust : Public trusts are formed for the benefit of public. They are also known as Charitable trusts.
• They are formed as per the Public trust Act of the state concerned.These trusts are registered with Charity Commissioner of State and are controlled by him,

          APPOINTMENT OF TRUSTEES  

• The trust deed generally mentions the names oflthe trustees. Alternatively it may name a person who will appoint trustees.
• It may provide that new trustees can be appointed by the surviving trustees/legal representative of surviving trustee. In this case, the appointment is done by executing a "Deed of appointment" by the outgoing and incoming trustees.
• The trust deed may provide that new trustees will be appointed by Court.

           OPENING OF TRUST ACCOUNT

            Documents required

(1)        Trust Deed ( in case of private trusts), or Certificate from Charity Commissioner ( in case of public 

             trust), or order of Court (in case there is no trust deed), 

(2)         Latest deed of appointment,

(3)         Certified copy of "resolution by all trustees" regarding opening and conduct of bank account.

(4)         List ofall trustees.

           SECURITY OF TRUST DEED AND OPERATION OF ACCOUNT

            Joint Signature

• Unless the trust deed provided otherwise, all trustees must jolin in operating the account (Section 48 of Indian Trust Act).
• All trustees can sign are solution and instruct bank to allow one or more of them to operate the account. In absence of such instruction all trustees must join in signing the cheque.

          No Delegation

• Unless the trust deed provide otherwise , trustee(s) cannot delegate his/their powers (Section 47)

          Borrowing power

• Unless the trust deed gives power to borrow money, trustees cannot borrow or overdraw account.To be on safe side the bank should ask for personal guarantee of trustees, while giving advance.

          Death of Trustee

• If the sole trustee dies, the operation in the account should be stopped. Cheques signed by him are not to be paid.
• If one of the trustees dies/retires the surviving trustees can operate the account if the trust deed provides of - For example  , if the trust deed provides that minimum two trustees can operate the accounts, the operation of the account need not be stopped as long as the number of surviving trustees is two or more.

          Insolvency

• Even if a person is declared insolvent, he can continue to be the trustee.
• The trust property cannot be attached to pay the dues of a trustee who is declared insolvent.

          BREACH OF TRUST

• In case of a trust account, the bank must take all possible precautions to protect the interest of the beneficiaries of the trust. So far as the use of trust money is concerned, bank's responsibility is as good as that of trustee. In case there is misuse of money within his knowledge, he will be liable for "breach of trust" and will be required to compensate the beneficiary for any loss.
• Beach of trust can be established where bank allows transfer of funds from trust account to the personal account of the trustee or where a cheque favouring the trust is collected in the personal account of the trustee.

BANK IS NOT BOUND BY TRUST

• It is an accepted practice that the bank should guard against misappropriation in all accounts where thee are circumstances to indicate that if it a trust. However there is no responsibility on the part of a bank to enquire as to whether an account is a trust account or not. A bank is not bound by trust, if it is not within his knowledge.

G.  JOINT HINDU FAMILY

• Joint Hindu Family or Hindu Undivided Family (HUF) is governed by Hindu Law accept to the extent already by certain acts. 

          Two Schools of Hindu Law

• There are two schools of Hindu Law (i) Mitakshara, which prevails through out India except West Bengal and (ii) Dayabhaga which prevails in Bengal.

(i)       Mitakshara Law

• Under Mitakshara School of Hindu law all male member have a right on the joint family property by birth (even from the time of conception) which is called as "Doctrine of ownership by birth"  The HUF consists of one common living ancestor and his make descendents up to three generations next to him.The HUF is also known as "COPARCENERY" and the make members are called co-parceners. All  co-parceners have equal right on the property of HUF.
• As per " The hindu Succession (Amendment) Act, 2005- which came into force w.e.f. 09.09.2005 the daughters have been given equal rights as son.

(ii)      Dayabhanga School of Law

• They treat father klas the absolute owner of property and son do not acquire any interest  in property by birth.

          Karta and Co-parceners

• The eldest male member of the HUF is called Karta and other make members are called co-parceners.
• As per law, Karta has power to incur debit, execute documents, pledge securities on behalf of the      family for the purpose of family business for the legal necessity of the family.His liability is unlimited while that of the co-parceners is limited to the shares in the joint family estate. Accordingly the consent of co-parceners is not required.
• While giving loan /overdraft to a HUF the bank should be extra careful because the banks prefer to obtain loan documents executed by all major make members of the family or with their written consent by the head of the family.
• Further the liability of co-parceners is limited only to the extent of their share in HUF property. However, if the  documents are executed by all co-parceners they become personally liable.
• Where there is a minor co-parcener, his guardian should sign the document on his behalf. Upon attaining majority, express consent should be obtained from him.

          Ancestral Business

• The HUF carries on the ancestral business and possesses ancestral properties.
• The bank must verify the purpose for which the loan is availed. In case the Karta borrows for any new business,the co-parceners, unless they have joined in executing document, are not liable for the debt.
• But in case of a HUF  consisting of father and sons, the new  business started by father is deemed to be ancestral and co-parceners can be made liable to the extent of their shares in  family property.(Achutta Narayanayya Vs Ratnaji)

           Operation of Account

• A co-parcener, even though not permitted to operate the account. can countermand the payment of a cheque.
• The Karta can favour of a third party to  operate the account is not acceptable unless all co-parceners execute an indemnity.
• For opening a HUF account,apart from the accounting opening form, a half yearly declaration letter by Karta.

H.  CLUBS, COMMITTEES, ASSOCIATIONS,

       REGISTERED CLUBS/ ASSOCIATIONS.

• Clubs can be registered or unregistered.
• A Club can be registered under (I) The Societies Registration Act, 1860 or (II) Companies Act, 1956 (Section 25 bib-profit making company)
• The Registrar of Societies,after registering the bye-law of the society,m issues a Registration Certificate.
• While opening account in the name of a registered association bank should obtain (i) Copy of certificate of Registration (ii) Copy of Bye-law (i.e. Rules, Regulations,) (iii) a certified copy of resolution of the Executive/Managing / Governing Body) to open account and giving names of office bearers tooperate account. (This should be certified by Chairman of the meeting  of that body).

UNREGISTERED ASSOCIATIONS

• Examples of unregistered  associations are (i) some schools, (ii) some clubs & (iii) other associations not registered.
• Should be opened only in case of very reliable persons.
• All members of managing committee/governing body should sign the resolution as per the rules.
• In no case overdraft should be given in such accounts.
• No loan should be sanctioned to an unregistered club.

OPERATION OF ACCOUNT

Payment of cheque

• Cheques signed by an authorized signatory can be paid even after his death, insolvency or retirement (Reason : He is signing as an agent).

Collection of Cheques

• Cheques favouring the club/association should not be collected in the personal account of its office bearers/employees as bank can be held guilty of conversion.
• Cheques drawn by the club in favour of third parties should not be collected in the personal account of office bearers/employees for the above mentioned reason.

I.  CO-OPERATIVE SOCIETIES

• A co-operative society is an association registered under the provisions of the Co-operative Societies  Act. of the State concerned. Therefore, all formalities required for opening the account of a registered association must be complied with by the Bank. 
• Generally co-operative societies are not permitted to open accounts in banks other than co-operative  banks unless specifically permitted by Registrar of Co-operative Societies. Banks should ask for this permission before opening the account.

J.   LOCAL AUTHORITIES 

• Examples of local authorities are (i) Municipal Corporation, (ii)  Zilla Boards, (iii) Notified Area Council, etc.
• These authorities are established under separate statutes of State/Central legislature.
• Bank must obtain copy of such statute and find out the provisions as to who would authorize opening bank account and who can be authorized to operative the account.
• Generally, these authorities have a Managing Committee; with a President, Vice-president and Treasurer, and the Treasurer is given powers to open and operate bank account
• No overdraft/advance should be given to such authorities, except to the extent and for the purpose permitted by the statute.

K.   GOVERNMENT DEPARTMENTS

• Obtain copy of the government Notification/other authorizing the concerned person to open and operate account.
• Obtain copy of the letter signed by the Head of the Department, authorizing the executive to open and operate bank account.
• Also obtain certified copy of rules and regulations framed by the department for opening and operation of such account.

I.   PROVIDENT FUNDS

• Accounts in the name of provident funds are similar to the account operate in the name of trusts.
• Documents to be obtained are : (i)  copy of Trust Deed, (ii) Cop of Rules of the Provident Funds, (iii) Resolution by trustees, and (iv)  other documents required to open a trust account.

M.  JOINT ACCOUNT

        MEANING 

• Joint account means an account in the name of two or more persons.
• The balance in a joint account is a joint property and can be disposed off as per the instructions given by all the depositors.
• All the depositors must join in signing the account opening form and the authority letter for operation of the account.

       DIFFERENT TYPES OF OPERATION

• The different types of authorities which can be given to a bank for operating a joint account are the following : (i) By all depositors jointly, (ii) By both or survivor, (iii) By either or survivor, (iv) Vt former or survivor, and (v) By any one/two persons named by them.

          Meaning of Either or Survivor

• In Saving Bank account it means (i)  account can be operated by any one of the depositors, (ii)  On the death of one of the depositors are survivor can operate the account and the account can be closed under both signatures. (Reason : Authority to operate the does not include authority to close the account).
• In term deposit account this notation means the following (i) On maturity, the proceeds is payable to either or survivor, (ii) it does not by itself mean that either of them or the survivor can foreclose the deposit or can avail a loan against the deposit under his single signature unless specifically provided in the account opening form.
• The survivor can be allowed to foreclose the deposit/avail loan against it only if an undertaking to this effect was obtained from all the depositors which is a part of the AOF itself.

          Style of operations if the account is the name of more than two persons

• It can be (a) Jointly by all depositors,  (ii)  Jointly by all or survivor, (iii) Anyone or survivors and (iv)  First named or survivors.

     SOME IMPORTANT POINTS ON OPERATION OF A JOINT ACCOUNT

1. Mandate for operation of account : A mandate  /authority to allow any one of the depositors or a third party to operate the account must be signed by all joint depositors. 
2. Delegatee can not delegate : A person who is authorised to operate a joint account can not give mandate to some body to operate the account on his behalf. This is based on the principle " an agent has no authority to delegate his powers". 
3. Revocation of Authority : The mandate/authority given for operation of the account can be revoked by any one of the joint account holders irrespective of whether he is allowed to operate the account or not.
4. Signature on the cheque : Cheque should be signed by person(s) authorised to operate the account. Cheques signed by other depositors should be returned unpaid.
5. Alteration  in the cheque : Alteration, if any,m in a cheques is to be authenticated by the same person who has signed the cheque, and or by others who are permitted to operate the account severally.
6. Stop payment order : Like revocation of the mandate for operation, a stop payment order for cheques can be validly given by any one of the depositors, even if he is not permitted to operate the account.

DEATH, INSOLVENCY OR LUNACY

• After the receipt of the confirmed news of death, or insolvency or lunacy of any one of the joint depositors, the bank must stop operation in the account. Cheques signed by such depositors should be returned unpaid.

         Accounts operated jointly by all depositors

• In the case of a joint account unless there is a contract to the contrary the balance is payable to jointly to the surviving depositors alongwith the legal heirs of the deceased  depositor.
• The principle which is called " Devolution of joint rights" is laid down in Section 45 of Indian Contract Act. 
• As such unless there is a contract to pay the balance to "either or survivor" or  former or survivor" or "any one of survivors"  the bank should pay the balance in a joint account to the surviving depositors and the legal heirs of the deceased depositor.

          Either or Survivor accounts

• If the balance is payable to either or survivor, the bank gets a good discharge by paying the amount to the survivor.
• However, if there is a counter claim from the legal heirs of the deceased, the bank should ask for a Court order/legal representation for the disposal of the balance.
• In case of Saving Fund  account, the name of the deceased should be deleted and account should be treated as belonging to the survivor.

          DEATH OF DEPOSITOR,WHEN THE ACCOUNT IS OVERDRAWN

• The operation of the account should be stopped.
• Any credit given to this account will reduce the liability of the deceased depositor can not be made liable for the same.

         INSOLVENCY OF A DEPOSITOR

• The operation of the account should be stopped.
• The payment form the  account can be made as per the instruction jointly signed by the solvent depositors and official receiver of the insolvent.
• In case of a former or survivor account, the insolvency of the 2nd party does not affect the operation of the account.

        DEVOLUTION OF JOINT LIABILITIES (section 45 of Indian Contract Act.)

• When two or more persons have incurred a debt in their joint names, they are liable to pay the debit jointly. In case of death of one or more persons, the debit should be jointly paid by the surviving persons alongwith the legal heirs of the deceased. Thuys a bank can file a suit in joint names alone.
• Banks like to establish  individual liability of the joint borrowers in addition to their joint liability. This is done by obtaining promissory note and other documents with joint and several liability clause.
• Several (individual) liability of each joint depositor helps bank in : (i) filling suit an individual names(s) for the entire liability, (ii) exercising right of set-off from the credit balance available in the accounts in individual names.

N.   PARTNERSHIP FIRM

       CHARACTERISTIC FEATURES OF PARTNERSHIP

• Agreement : Partnership is a special type of contract. Persons desirous of forming a partnership must enter into a contract and should agree to its terms and conditions.
• The contract (agreement) maybe written or oral. The document containing the written agreement is called "Partnership  deed".
• Since partnership arises out of a contract, person who are incapable of entering into contract (i.e.minor, insolvents,alien enemy) cannot enter into relationship arrangement with others.

       Mutual Agency

• The most important characteristic of a contract of partnership is that " the business can be carried on by all or any of them acting for all.
• It means each partner can act as an agent of all partners (firm) and can bind them by  all the acts during the usual course of business.
• Thus a partner has a two fold status. He is an agent of all other  partners and also the principal of all of them. In other words they are mutually agents to each other.
• Section 18 of the Act. provided that ,for purpose of the business of firm, a partner can act as an agent for all partners.
• In fact law or partnership   is an extension of law of agency.

          Unlimited liability  (Section 25)

• The liability of partners is unlimited. Not only properties of the firm, but the individual properties of partners are also liable for the satisfaction of the liabilities of the firm.
• All partners are jointly and severally liable for all the debts of the firm.Therefore, for realising its debts given to a partnership firm, a bank can sue a partner individually or jointly with other partners. The principle of unlimited liability is however, subject to provision laid down in Section 49 of the Act. As pr this, where a firm is dissolved the bets of the firm will be first met out of the property of the firm and surplus, if any, all be utilised for payment of private debts of partners. Similarly the personal debts of a partner will be paid first out  of his personal assets and surplus, if any, can be utilised in case of need towards of settlement of the debt of the firm.   

          Minimum and Maximum Number of Partners

• Minimum number of partners can be 2.
• The partnership Act does not provide for any ceiling in the number of partners. However, section 11 of Companies Act, 1956, provides that the number of partners of a firm carrying on banking business should not exceed 10 and that carrying any other business 20.
• For computing this ceiling the following points may be noted :-

           (i)  Where one or more companies are partners of a firm, each company, irrespective of its number

                 of share is treated as one person/partner.
           (ii)  Firms can not become partners of another firm. Where a firm is said to be partner of another firm,
                 the number of partners in the former are taken into consideration for computing this ceiling.
           (iii) Similarly a Hindu Undivided Family can not become partner of a firm\, But the Karta or any
                 other co-parcener of the HUF can become a partner of any partnership firm in his individual
                 capacity.
               

                                                          OOOOOOOOOOOOO

RULES OF APPROPRIATION

RULES OF APPROPRIATION 

INDIAN CONTRACT ACT

When a debtor owing several debts makes qa 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.

Section 59 : states that if the borrower expressly mentions the debit to which the payment will be credited or if it is implied from the circumstances, the creditor must appropriate the payment of the debit.

Section 60: In the absence ofthe express or implied intention of the borrower, the creditor may use his discretion and apply the payment to any lawful debit actually due and payable including time barred debt from the debtor.

Section 61 : Where neither of the two parties makes any appropriation, the payment will be applied for discharging debt in order of ltime. 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 rue laid down in famous Clayton's case.

RULES 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 is 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 accountholder.

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.

APPROPRIATION OF CLAYTON'S RULE

1. Death/Insolvency of borrower

Where an individual borrower or the proprietor expires insolvent, we stop operation in his cash credit account. In case any fresh credit comes to the account, the liability of such deceased borrower stands reduced by the amount and his estate cannot be made liable for the same. The estate of the deceased/insolvent borrower cannot be made liable for all fresh debit after his death/insolvency.

2.  Death/Retirement/Insolvency of a partner in partnership firm

On the death /retirement/insolvency pf a partner the liability of such partner stands determined. In case of any fresh debitto the account, the deceased/retirement/partners' estates cannot be made liable for the same.

On the contrary their liability stands reduced by the credit.

In case the bank decides to allow operation to the new firm, it should be done after ruling off/braking the account and allowing operation in a fresh page.

3.  Death or 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.

In case it is snot 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.

4.  Joint account

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

BANKER & CUSTOMER RELATIONSHIP

DEFINITION OF BANKING

The term " Banking" is defined in Section 5(b) of Banking Regulation Act,1949.

It is defined as "Accepting for the purpose of lending and investment of deposits of money from public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise".

Thus the characteristic features of banking are to : (1) accept deposits from public, (II) pay cheques, (III) act as intermediary to invest public money in investment and credit.

Section 6 of BR Act.1949 mentions the type of business in banking company can undertake and Section 8 prohibits a bank from engaging itself directly or indirectly in trading activity.

Section 9, prohibits a banking company to hold immovable properties for a period exceeding seven years except those required for own use (for details see banking regulation act, 1949).

DEFINITION OF CUSTOMER

There is no statutory definition of the word "CUSTOMER" .

A customer is a person who has an account with the bank and whose dealing with the bank are in the nature of banking business.

A person, not having a bank account, but availing services from bank like purchasing a draft, remitting money, hiring a locker cannot be strictly termed as customer as such"dealing are casual dealings and are not in the nature of banking business".

A customer can be a person, or any legal entity.

Now in  SARFAESI  the customer has been defined as person/entity as follows :

-  a person who is maintaining account in his own name or whose name the deposit is made.
-  any principal beneficial owner of the funds being deposited who is not the account holder or named depositor.

The principal controllers of an account or business relationship.

BANKER & CUSTOMER RELATIONSHIP

The primary relationship between a banker and customer is that of a debtor and creditor (Reason : on opening the SF/CA/term/any deposit account the banker  becomes a debtor).

However a banker is different from an ordinary debtor on two accounts, viz.

i)    The banker is required to pay the customer only when payment is demanded within business hours of a working day at the branch ( An ordinary debtor should search for his creditor and repay the debt).

ii)  For a normal debt, the period of limitation start from the date of debt. However, in case of bank deposits, it starts from the date of demand, by the depositor.

Apart from the primary relationship,thee can be other legal relationship between  a bernker and customer depending up to the transaction as given hereunder :

     Type of transaction                                          Banker Customer Relationship
1.  Acceptance of Deposits                                        Debtor and Creditor
2.  Overdraft/loan/CC in debit balance                       Creditor and Debtor
3.  Collection of cheques on behalf of customer          Agent & Principal
4.  Sale/purchase of securities/shares on
     behalf of customer                                                 Agent & Principal
5.  Carrying in standing instruction
     (Like paying insurance premium, etc.)                     Agent & Principal
6.  Issue of Bank DD/MT/TT                                      Agent & Principal
7.  Safe custody of article                                            Bailee - Bailor
8.  Safe deposit locker                                                 Lessor (land lord) - Lessee(tennant)
9.  Payee of a Draft & Issuing Bank                             Trustee-Beneficiary
10. Money tendered to bank pending
     instruction for its disposal                                         Trustee - Beneficiary

DUTIES AND RIGHT OD BANKER

The primary duties of a benker can be classified into the following heads

a)  Duty of secrecy
b)  Duty to honour cheques
c)  Duty to submit periodical statement
d)  Duty to collect cheques/bills

Rights of Banker

Banker's lien :  In terms of Section 171 of Indian Contract Act, inter alias, a banker may, in absence of contract to the contrary, retain as security, for a general balance of account, nay goods bailed to them in ordinary course of business in capacity as banker. This right of a banker is automatic and no agreement/contract is required and hence called general lien. General Line U/s 171 of Indian contract act specifies that lien can be exercised for all his dues and not for a particular due. Lien means right to retain goods in possession (but not to sell) until debit is discharged. But in case of bank, general lien tantamount to " implied pledge". He has the right to sell. Bankers right of general lien is available only over goods and securities received during normal course of business but not over those received for specific purpose as an agent or as a trustee etc. It is also not available if there exists any  contract to the contrary. Right of lien is lost when possession is lost. It is available on goods and securities and not on money or any other thing except goods and securities. Lien is available on bills, cheque, P/N etc. delivered to bank in the capacity of banker.

A reasonable notice is must before selling the goods/securities under lien of a bank. Banker's right of lien is not barred by law of limitation.

There may be particular lien over particular goods as per specific contract or even a negative lien i,e  an undertaking not to alienate a security without specific consent of the bank.

Right of set off :  Banker has a right to combine two or more accounts, if one of lthem is in debit, of a customer in the same name and same right. This right is not aailable if there is an agreement (express of implied) for not exercising this right. This lsright can only be exercised, when debit balance is certain. Care be taken that :

-  An account in the individual capacity of the Customer showing debit balance can not be combined with one in fiduciary capacity (i.e. trustee etc.) showing credit balance.

-  Accounts really belonging to same person, but in different names can be combined. Thus an account of sole proprietorship concern may be combined with hqt in the personal name.

-  Two accounts, of a solicitor, one inhis poersonal name and other marked clients account can not be combined.

-  Two accounts, one belonging to an individual and other jointly with someone, can't be combined. The right can't be exercised if the deposit is in the firm name and debt due is in partner's name, and also when deposit is in the dividend account of company and borrowing is in the company's name. But if deposit is in the single name and borrowing is in the joint name with joint and severally liability, and deposits are in partner's name and borrowing by firm and also deposit in joint names payable to former or survivor and borrowing is in the name of former, this right can be exercised.

-  The right can be exercised only when debt is due.

-  The right should be exercised after giving due notice, unless a contract to the contraty exists.

-  The right may be exercised before the garnishee order is made effective.

-  The right is available on time barred debts and can be exercised also in case of insolvency Death, and Lunacy of customer.

The aforesaid right to combine accounts is available to bank only.The customer can not combine his two or more accounts and hence can not expect bank to honour cheques, drawn on one account, if balances are not sufficient in that account, but is so into other one.

TERMINATION OF BANKER CUSTOMER RELATIONSHIP

The banker customer relationship stands terminated on the (i) death, (ii) insolvency, (iii) lunacy of the customer. On the happening of any of these events the bank must stop operation of the account and stop payment of cheques.

The banker customer relationship is not affected by reason of (i) arrest of the customer, (ii) imprisonment of the customer, (iii) migration of customer to foreign country and such other reason.

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