"The relation of banker and customer is primarily that of debtor and creditor" says Sir John Paget. The money deposited by the customer is absolutely at his disposal. But so far as the bank is concerned it is a debtor, with an obligation that it should honour the customer's cheques drawn on it upon his balance as is available and sufficient.
The bank becomes the owner of money on deposit. It is not a lien, it is not a bailee. The money is used by the Bank to earn profits and to pay interest. The bank need not pay
with the same currency notes and coins as deposited by the customer (Hanuman Bank Ltd.
There is no debtor-creditor relationship when the bank is entrusted with money to pay certain amounts to specified persons under an agreement, as then the bank will be a trustee. The bank is not a bailee* not an agent but only a debtor, when a customer deposits money. It was so held in Foley V. Hill. In Shanti Prasad V. Director of Enforcement,the Supreme Court held that the relation in case of deposits by a customer with the bank is that of a creditor and debtor and not of a trustee and beneficiary.
Bank is sometimes called a dignified debtor as the bank borrows as a borrower but is called in a dignified way as "deposit"; customer goes to the "bank" and not the bank to the customer; repayment by bank is done when customer demands, the place is the bank's branch office, not any other place. Further, bank does not give any security to customer for the deposits made.
Bank is to repay only when a demand is made by the customer. In Jokinson V. SwissBanking Corpn., Lord Atkin (Privy Council) pointed out that there was "one and indivisible"contract created between the bank and the customer. The bank undertakes to receive money, collect bills, repay at the branch during office hours and honour cheques (prbills) issued by the customer.
The customer undertakes to take reasonable care in issuing cheques and not to mislead the bank. It was held in Clare and Co. V. Dresdner Bank, that the payment by bank is confined to the, particular branch where account is kept. The reasons are one of convenience and of verification of signature and state of affairs of the customer's account. However, special arrangements may be made for payment in other branches by agreement. Though the primary relationship of debtor-creditor is created by thecustomer opening an account in the Bank, there may be other subsidiary relationships created by agreement such as : bailor-bailee, trustee beneficiary, principal-agent etc.
Points of difference between, bank-customer relationship and commercial creditor-debtor are :
Salient Features of Banker's Relationship :
1. Honouring customer's cheques When a customer opens an account there is an the customer. Not otherwise. undertaking by the Bank to honour the cheques of the customer. The cheque should be presented, within 6 months[now 3 months] from the date of issue to the branch concerned.If there is any order of court or any competent tax authority etc. the amount need not be paid. There are other legal grounds for the bank to dishonour its customers' cheques. Otherwise dishonor becomes wrong and the bank becomes liable to pay damages, for lossof credit or injury to reputation of customer.
Leading cases : (i) Marzette V. Williams; (ii) Canara Dank V.Rajagopal. P issued the cheque for Rs.294/- to telephone department. This was wrongly dishonoured and the department disconnected the phone and P lost his job. The court awarded Rs. 10,000 for loss of salary and Rs,4,000 for loss of reputation and mental agony
2. Lien of Banker : The general rule is that the banker has a "general lien" on securities etc. of the customer and can draw on them to liquidate the balance of account due by the customer. This rule applies unless there is a contract to the contrary between the customer and the banker. Banker has no lien over "Safe Custody Deposit" of customer or on the deposit made for special purpose.
3. Maintenance of Secrecy of Accounts : In Tousier's Case (1924), it was declared that there was an implied legal condition that the account of the customer must not be disclosed. This obligation to maintain secrecy continues even if the account is closed by the customer. , . „ However, to guarantor introduced by the customer the state of the account may be disclosed to the extent necessary; to the court, as per its order, the bank may disclose, and no further.
4. Levying Incidental Charges : The banker has a right to claim incidental charges from the customer especially when the account is not remunerative. !n recent years, the banks are closing the account when the balance is less than minimum for years in customer's accounts.
5. Duration : Formerly there must have been some recognisable course of habit in dealing between the person and banker. Hence a single banking transaction or by merely opening an account the account holder would not become a "customer". This was so held in Mathews V. William Brown & Co. But this is discarded and today, as per Ledbroke V. Todd, the relationship begins as soon as a cheque is paid in and accepted for collection. In Central Bank V. Gopinathan Nair, the court held that so far as banking business is concerned the customer is a person whose money has been accepted by the bank on the condition that the bank will honour the customer's cheques to the extent of credit available, irrespective of his connection being of short or long standing. Hence, the general relationship commences, from the time the customer .opens his account.
6. Demand essential for payment: There should be a demand by the customer for payment. The period of limitation of 3 years starts from the date of demand. Hence, for Fixed Deposit, the period starts when ED. receipt is produced and demand made. Similarly in case
of current account, savings bank accounts etc.
Banker's General Lien
It is an established fact that the relationship between a banker and its customer is one
of debtor and creditor. The salient features of this relationship are ;
(i) The bank undertakes to honour the cheques etc, of its customer for the money deposited by the customer in his accounts.
(ii) Banker has a lien on securities etc. of the customer.
(iii) Banker should maintain secrecy of the Customers accounts.
(iv) Banker may levy incidental charges, and
(v) Customer's demand is necessary for payment.
Banker's lien is one such feature. "Lien" is a right to hold or retain goods, securities etc. and the banker's lien is called General lien, i.e., to hold or retain all securities for a general accounts of the customer. Hence, the.bank may adjust or draw on them toward payment due by the customer. This right extends to all securities, including goods etc., unless there is an agreement to the contrary (Brandae V. Barneit). This lien is an implied pledge. The banker has a right to sell the securities on default of payment. In regard to immovable property, the banker has a right to retain the deeds. Banker's lien extends to all funds, securities and amounts that come to banker's hands, According to Sir John. Paget,, "General lien extends only to customer's own securities." | Creation of Lien : As per Sn.171 of Contract Act, the banker's lien is implied. However,
(i) the banker should get the property of customer as a banker;
(ii) The possession should be obtained lawfully;
iii) The property should not be for a particular purpose and there should be no agreement against the General lien.
The banks are providing in their own premises specially built safety vaults for use by the customers, on payment of a special fee. This is a special service available. The Bank in such a case is a bailee in respect of articles deposited by the customers. Though as per Sn.171 of Contract Act, there is a general lien of the banker, this rule will not apply to safety vaults. The reason is, this is not banking, but a special, service for a particular purpose, i.e., safe custody. Hence, the banks will have no lien. It was held in Lease V. Martin that the banker (in London) who had advanced loans on security of share certificates could not. exercise lien on a safety box deposited by customer for custody. No Lien on B/E or document: For specific purposes, a customer may deposit in the bank B/E or other documents. In such cases, the banker cannot exercise a general lien.
Trust Account: There is no right of lien over trust account as the trust is for a
Firms : For loans due from a firm, the bank cannot exercise a lien over partner'sunless there is acceptance by the partner. If money is deposited for a particular specified purpose, there is no general lieu.
Problem : Can a bank exercise general lien on the following :
(i) Sealed box or a bar of gold deposited in safety vault.
Ans : No general lien can be exercised. The bank acts as a bailee; the purpose of
deposit is specific and hence no general lien.
(ii) Documents of title to goods, fixed deposit receipts, life insurance policy, cheques
and bills deposited for collection.
Ans: The bank has a general lien as these have come to .his hands as a banker. In the
case of cheques and bills, they are deposited for collection. The banker has received in his
capacity as a banker. Hence, there is general lien.
(iii) Dividend and interest warrants or coupons deposited for collection.
Ans /There is general lien as these are received by the bank in its capacity as banker.
(iv) Money deposited for a particular purpose.
Ans : There is no general lien, as the purpose is specified and accepted.
(v) Securities left by customer by mistake.
Ans : There is no general lien as the bank has not received lawfully.
(vi) Fixed deposits by X and Y jointly.
Ans: X is due certain amount to the Bank. Hence, X and Y are not having debit and
credit account in the same right. Hence, bank cannot have general lien for arrears from X.
Secrecy of Customer's Account:
In the relation of the banker and customer as a debtor and creditor, there is an obligation on the banker to maintain the secrecy of the customer's financial position as the disclosure may harm his creditworthiness. From Tousier's case, this secrecy is considered as an "implied condition" of the relationship. This obligation continues even when the accounts are closed by the customers.
Exceptions : To the general rule of secrecy, there are exceptions.
(i) The status or condition of the account of a customer may be disclosed when there are proper and reasonable circumstances.
(a) Court Order: When there is a court order to the bank summoning the bank to disclose the state of affairs of the customer's standing, the bank is justified in testifying to the accounts of the customer. The Civil Procedure Code has made provisions for productions of evidence before the court as for eg. discovery and inspection, examination of bank officials under oath, production of books of accounts or documents or under commission. Similar provisions are in the Income Tax Act, the Wealth Tax Act etc. Under Criminal Procedure Code, the police and under the Customs Act, the officials may call for any information from any person including a banker.
(b) Enemy Character : In case of war, if the bank comes across its customer's transactions dealing with a country having Enemy Status, it may disclose the status to the government in public interest.
(c) Recovery by Civil Action : When the bank, for recovery of loans, sues the customer in a civil court, it may disclose to the court the status of the account of the dependent customer.
(d) Guarantor : When the customer brings in a guarantor to stand as surety, and if the guarantor makes enquiry about the state of affairs of the customer's credit status, the bank may disclose the information as may be necessary for the purpose. Normally, the bank takes permission of the customer in such circumstances.
(ii) Limited Disclosures :
(a) Status or Credit Information : This gives general information regarding the status of the customer. This is based on courtesy between banks as when a person stands as guarantor or surety. The bank of such guarantor may by courtesy give information but it must be given very cautiously and to the extent necessary. It must be general otherwise the bank may be liable, in damages for libel to its customer.
(b) Disclosure under direct use of I,.T. Dept.: Shankar Lai V SBI The customer remitted 261 currency notes of 1000 Rs, denomination to a SB1 branch. The branch reported to the I & T department which issued a notice to the customer and attached. Question was whether this was a proper or legal disclosure. The High Court held that de-monetization was made by law and directives had been duly issued by the department. Hence, disclosure was proper, (i.e., the amounts were released later as per I.T.Act)
(c) Foreign Exchange Regulations Act authorises the R.B.I, to inspect the books of accounts of the banks.
(d) The Companies Act empowers Inspector of Central Government to inspect the books of accounts for investigation purposes.
(e) Customer himself authorising a reference in which case the bank may disclose as may be necessary.Consent by the customer may be express or implied.
Cases : (1) Sutherland V. Barclay's Bank. A cheque issued by wife W was dishonoured by the bank. At the instance of the husband H, W phoned to the bank to know the reason and when conversation was in progress, H took the phone and expressed his displeasure for dishonouring but the manager told H about W's cheques being issued to betting in horse race etc. W sued the bank. Held, W by giving phone to H, had given her implied consent and hence not liable to the bank. (2) Hadley Byrne & Co. V. Heller & Partner Ltd. (3) Banbery V. Bank of Montreal Hence, the general rule is that secrecy of the customer's financial status should be maintained by the Bank as an implied condition of-its relation with the customer. However, only in exceptional and defined circumstances disclosure is allowed. The bank becomes liable for damages for the tort of libel if disclosure is beyond these limits.
Honouring Customer's Cheques :
(i) Obligation : When a customer opens an account there is a super head obligation
or an undertaking by the bank to honour the cheque of the customer.The cheque should be
presented within 6 months from the date of issue to the branch concerned.
There are certain legal grounds on which the bank may refuse to honour the cheque
of its customers. These are :
1. Insufficient funds of the drawer.
2. Post dated cheques.
3. When the form of cheque is of doubtful legality.
4. Cheque not presented during banking hours.
'5. When the funds cannot be applied to the cheque.
6. Material alterations, signature irregular etc.
7. Death of drawer, bank having notice.
8. insolvency of drawer, bank getting notice.
9. Countermanding of cheque.
10. Cheque drawn on different branch.
11. On receipt of Court order, prohibiting payment.
12. When the customer's account is held under general lien by the bank.
(ii) Nature of the obligation to honour:
There is a 'Contractual obligation' on the part of the bank to honour its customer's cheque, and hence, the bank is bound by this obligation. As per Sn.31 of Negotiable Instruments Act, there is also a statutory obligation in as much as this section imposes an obligation to pay if there are sufficient funds properly applicable and 'in default of such payment, must compensate drawer for any loss or damage caused by such default';
(a). Sufficiency of funds : The funds available in customer's account (i.e., Current Account) must be sufficient. Having credit balance in another branch of the bank is of noconsequence. Overdraft given, if any , must be taken into consideration.
(b) Proper application : The funds must be available for payment in Customer's accounts and should be capable of being appropriated. Credit balance in other accounts as for eg., Trust account, specific amounts deposited for a purpose etc. are not funds properly available.
(c) Within 6 months : The cheque should be presented in 6 months from the date of issue.
(d) No legal bar : If a court has issued a 'general order' attaching the funds of the customer, the bank may dishonour the cheque of its customer.
(iii) Consequences of Wrongful dishonour : If a bank refuses to pay or dishonour a cheque without justifiable reason, there is wrongful dishonour (Hopkinson V. Forester). The bank will become liable to compensate the customer for' injury to his credit'.
The leading , case is Marzette V.Williams (1830). Marzette, a wine merchant had opened an account in Williams (Bank). On a particular day, the balance was £ 69 and on the same day £ 40 was remitted. A cheque of Marzette drawn in favour of Mr. Sampson came up for collection, and, was dishonoured. Marzette sued the bank. Held, Bank liable, even though there was no financial loss to Marzette. There was injury to his credit or reputation. In Sterling V, Barclay's Bank, Mrs. Sterling sued the bank for dishonouring her cheque. Her cheques had been dishonoured twice for insufficient funds. Only nominal damages were granted. For non-traders special loss or injury should be proved. In Gibbon V. Westminister Bank, nominal damages of £ 2 were awarded. Held, special damage should be proved to recover substantial damages. However, in case of a trader or businessman, substantial damages will be awarded, without proof of special loss or injury.
Leading cases :
(a) New Central Hall V. U. C.Bank .-The cheque was dishonoured stake but the bank wrote letters explaining the mistake. The court held 'First unjustly spitting on a person, and then washing it with a bucket of water' will not in any way reduce the liability. Substantial damages were awarded.
(b) Canara Bank V. Rajgopal : R, a non-trader had issued a cheque for Rs.294/- to telephone department which was wrongly dishonoured by the bank. The telephone was disconnected and R lost his job. The court awarded Rs.14,000 towards loss of salary, prestige and for mental agony.
(c) In Davldson V. Barclay's Bank, a trader was awarded £250 for wrongful dishonor of his cheque of £ 2.15., Is wrongful dishonour defamatory ? According to leading cases 'Yes'. Hence, when a cheque is wrongfully dishonoured with the reason 'No Account', 'Not sufficient funds', 'Refer to drawer', 'Present again' are held by the courts to be a libel and hence, substantial damages, will be awarded by the courts. In Wilson y Midland Bank, endorsement by Bank 'no account' was held libelous. In Davidson V. Barclays Bank, 'not sufficient funds' was held as defamatory. In Sterling V. Bare lays Bank, 'refer to drawer' was held libelous. Of course in all these cases, the dishonour was wrongful.
The bank is under a contractual and statutory obligation to honour the customer's cheques. The legal grounds for dishonoring are well defined, However, for wrongful dishonour, the bank, is made liable and, substantial damages are awarded as detailed above, to the traders, but to others, only nominal damages are awarded. The law on this is well defined.