CHAPTER 3 OPENING OF ACCOUNTS

Precautions to be taken by the Bank before opening an account:


(i) Proper introduction of the customer is essential. The manager should'verify whether the new customer is a person with integrity and reputation to be'a "desirable customer", to open the Account. This is to prevent any fraud,


(ii) The bank manager may make enquiries from references given by the customer or banks about the status of the customer. He should make 'reasonable enquiry' as is necessary in the circumstances, to convince himself that the person is n bonn fide customer. He need not act like a master detective and put the new customer to serious cross examination.


(iii) The manager should not act negligently in making enquiries; if proper enquiries are made, he gets protection under Sn.131 of the Negotiable Instruments Act.


Minor's Account:

(i) General : As a minor has legal incapacity (incapax) to enter into contracts, generally he cannot open a Bank account. This rule is made only to give protection and to safeguard the interests of the minor. Hence, there should be a guardian according to law to deal with minor's property.


The father is the natural guardian, and after his demise, the mother. The court in suitable cases may appoint a court guardian, Hence, the general rule is. that the Guardian may open and operate the Bank Account on behalf of the minor. He ceases to act, on the minor attaining majority.


(ii) Practice: In practice, the banks allow a minor above 12 years, to open an account in his own name and to issue cheques as per Sn.26(a) of the Negotiable Instruments Act. This is valid and the minor may continue his account on attaining majority at 18 (or if under Court of Wards, age 21).No overdraft can be given to a minor, as overdraft involves a contract which would be void ab initio A minor may be admitted to the benefits of a partnership firm, as per Sn.30 of the Partnership Act, but he will not be liable for the debts of the firm.



Joint Account:

While opening the joint account, all the concerned persons should sign the application form. The necessary forms are filled up and signed to specify how the account is to be operated and also who is authorised on all matters including cheques, bills, securities, advances etc. Operation of the account may be by one or more persons but clear instructions are essential to draw cheques etc. Instructions regarding survivorship are also a part of the process of opening of accounts. Generally the account is made payable to either or survivor and the survivor is entitled to the amounts standing to the credit. The joint holders may nominate a person, if they so desire.


Example of Joint Account is Husband and Wife.

In a case of an account with instructions payable to either or survivor it is held that on the demise of the husband, the wife would be entitled to the amount if the husband had such an intention to benefit her, but, if there is no intention, it becomes part of the estate of the husband and hence heirs will be entitled as per law. Death of the husband, will not constitute a gift to the wife. The burden of proving the intention is on the wife (Marshall V. Crulwell; Foley V. Foley; Panikar V. TWQ Bank Ltd.)


Partnership Account

A banker may open a Current Account in the name of the Partnership, Firm onapplication made and duly signed by all the Partners along with the partnership deed (original or certified copy). The banker should make enquiries as usual and also about the nature of the business, names' and addresses, of partners etc. He should get an authority letter signed by all partners authorising a partner or two or more partners to draw cheques and other documents, to endorse bills or to accept bills etc., to mortgage, and sell property of the firm.The partnership deed is an important document to know the nature of the authorityof the partners including implied authority of a partner. The number of partners is limited to10 in Banking business and 20 in other businesses. From the provisions of the Partnership Act:


(i) A partner's act will bind the firm if such an act is done in usual business of the firm or on behalf of (he firm, with an intention to bind the firm. This authority is implied.


(ii) Registration under Sn.69 of the Partnership Act is optional. However, if the firm is not registered, it gets no locus standi to sue an outsider. Partner cannot sue the firm or other partners. But, third parties may sue the firm.


To maintain a suit,

(a) the firm should be registered;

(b) names of Partners are to be on records of Register of Firm.


(iii) Implied Authority does not enable a partner to open an account on behalf of the firm in his own name.Hence, the manager should ensure that the acts of the partner bind the firm, and that a partner does not act on his own behalf. According to Sn.4 of Partnership Act, "a partnership is the relation between persons who have agreed to share the profits of a business, carried on by/all or any of them acting for all." In Abbas Bros. V, Chetandas, the signatures on two pronotes were (1) for M. M. Abbas & Bros., Mohsin Bhai, Partner; (2) Mohsin Bhai, Partner, M. M. Abbas & Bros.The second was held as one that does not bind the firm or the partners, as it is not done on behalf of the firm. The first was held to bjnd the firm and the partners.Partners' Private Accounts: Transfer of funds from the private account of a partner to the firm may be done by the bank, but not vice versa.On retirement of a partner, the liability of such partner continues up to the date of retirement and notice thereof. The Bank may close the account and open a new account with the reconstituted firm, but to avoid the operation of Clayton's ease, a continuing guarantee by the retiring partner becomes essential.


Joint Stock Companies :

Public Limited Companies and Private Limited Companies :

The manager should take the usual precautions while opening a Current Account. Application for opening the current account should be filled up and signed by the duly authorised director or officer of the company.


The following documents are essential:

(i) Certified copy of the latest Memorandum of Association; (ii) Certified copy of the latest Articles of Association;

(iii) Certificate of incorporation of a private company, as that itself is the certificate of

commencement in case of Private Companies;

(iv) Certificate of Authority, to commence business, issued by the Registrar of Joint Stock

Companies, for Public Limited Companies;

(v) Copy of the extract of the Resolutions passed by the Board of Directors, authorising the opening in the Bank, a current account (and such other accounts) in the name of the company mentioning the names of directors authorised to operate the account, to draw or endorse cheque, bill of exchange etc.;

(vi) A complete list of current directors (with addresses) ot the company duly signed by the

Chairman of the Company;


(vii) Balance Sheet of 3 years (if not a new company) of the company. On a perusal of the M/a& A/A, the manager will get a picture of the objects,Capital (authorised and paid-up) nature and functions of Board of Directors, the borrowing powers of the company etc. with the other documents he will be in a position to ascertain whether the company has already commenced its business, if so with what results, its financial status, profits and losses etc* The certified copy of resolution enables the manager to restrict the operations of the accounts of the company strictly according to the resolutions. As was observed by the learned judges in Royal British Bank V. Turquand, all those who have dealings with the company are expected to know the contents of its M/A and A/A. When the company puts up a proposal for a loan or overdraft, the bank should follow a number of formalities.


The company should have the powers to borrow; it should submit a certified copy of resolution of the Board, authorising the borrowing and the amount, terms, and conditions etc. (within the limits allowed). Balance sheets for 3 years should be submitted. This would give a clear picture of the financial status of the company. When there is a charge on the assets of the company, the charge should be registered within 30 days of its creation etc. with the Registrar of Joint Stock Companies.In case of a Private company, the manager should enquire the antecedents to ascertain whether there was any conversion from a partnership firm or proprietor concern to private company. This will help to prevent any fraud or misrepresentation.


Married Woman : .

A married woman (Hindu) has the contractual capacity (if about 18 years of age) and has

the right to acquire or dispose of her personal property called "Strjdhana" in Hindu Law.

The manager should make the usual essential enquiries in opening the account of a married woman. In the application (account opening form), she should fill up in addition to her name, address etc., the name of her husband,, his address (and the address of the employer of the husband).


Proper introduction is necessary.As a competent person, she can draw and endorse cheques and other documents and these can be debited to her account. As long as credit balance is there in her account, there will be no risks, but, if loan or overdraft is to be given the Bank should ascertain her credit worthiness, her personal properties (Stridhana) the nature of the properties held by her etc.


The Husband is not liable for her debts, except for those loans incurred for "necessaries of life" for her and her family. Precautions in granting loans or overdraft are necessary as

(i) she may have no property as stridhana

(ii) Her Husband's property is not liable except for necessaries,

(iii) she may plead undue influence or ignorance of the nature of loan transaction,

(iv) she cannot be committed to civil prison.


Purdanashin Woman:

She is one who wears a veil (Purdah), as per her customs, and is secluded except the members of her family. Some Muslim women observe this as custom in their community. The Manager should of course follow the preliminary enquiries as usual and may allow such a woman to open an account .Her identity and that she is opening the account out of her free - will are essential. To be on the safer side the manager may require a responsible person known to the bank attest her signature. Better if he insists such attestation in respect of her withdrawals also.


Trust Account

The Manager of the Bank should make his usual enquiries in regard to the trust, the nature of the trust, its objectives, the trustee, his status etc. The application for opening the trust account should be filled up and signed by the trustees duly authorized. The Manager should get the original Trust Deed ,examine it and collect a copy along with the application. The trust deed gives-an idea about the nature the trust, whether registered or not, who is the author (or settler) of the trust, who is appointed as the trustee, what are his powers, functions etc, who is the beneficiary, what is the trust property etc. He must examine the Registration Certificate and satisfy himself about registration.


All the trustees should sign the account opening form and subscribe to a declaration that they will operate the account as per the terms of the Trust deed in the interests of the beneficiary. If there are more than two trustees, the manager should get a resolution passed as to who is the chairman and by whom the accounts are to be operated, (whether Jointly or otherwise) as per the Trust deed, and get their specimen signature.If the trustees desire to borrow there should be specific powers mentioned in the Trust Deed to borrow and to charge the trust property. If care is not taken, the manager becomes liable to the beneficiary. In case of retirement, insanity or death of a trustee the manager should refer to the Trust deed and proceed accordingly.


H.U.F. (The Hindu Undivided Family)

The Hindu Undivided Family, is governed by the Hindu Mithakshara school, and consists of the propositus, his sons, grandsons, and great grandsons (up to 3 degrees) their wives, unmarried daughters, widows, etc. The coparceners, are all male descendants and get their status by birth, not by contract. The Kartha is the head of the family. He is entitled to foil possession of the H.U.F. property and is absolute in its management.


He is a sui generis. He has a legal right to represent the H.U.F. and to bind the H.U.F. He has absolute discretion to spend the family income for the purposes of the family and for "legal necessity". The Bank Manager should get all the details of the H.U.F. before opening the Account.


In the account opening form, the names and addresses of the Kartha and all coparceners should be filled up and they should give their mandate in the declaration, by putting their signatures. On behalf of minors, the signature of the guardian should be taken. The date of birth of minors should be noted and when they attain majority their signatures should be taken to cover their earlier transactions.


When a charge is created on the property by the H.U.F.aU the coparceners should execute the Bank documents. The Kartha no doubt has the capacity to sign, but his powers to alienate the H.U.F. property is limited to legal necessity and hence to be on the safer side, all should sign. Further, the burden of proving that the overdraft or loan was for legal necessity or for family business would be on the manager.


The loan should not be for speculative, business or for immoral purposes. The leading ease is Ramdayal V. Bhanwarlal.i It was held that the alienation should be for the benefit of the estate or for legal-necessity. However, the burden is on the transferee. He should have made reasonable inquiries and be satisfied with the purpose of the. loan as for H.U.F. business. The liability of minors is limited to the extent of their interest; but adult male coparceners are personally liable with the Kartha ,if they sign the documents.


This was so held in Jivan Das V. Peoples Bank, The Manager should therefore take maximum care in getting the loan documents duly executed in the light of the above position of H.U.F. in Law.




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