Unit 4
Customers and account holders
Customer is the person who has an account with the banker. According to John Paget, “a Customer constitutes a person who has an account with a bank, whether fixed or savings, and has dealing of banking nature”. Dealings of banking nature refer to those transactions of deposit and withdrawal of money at frequent intervals. The above definition is popularly known as the ‘Duration Theory’.
A bank opens accounts for various types of customer’s like, Individual/s- either singly or jointly with other individuals
Sole relationship
Hindu Undivided Family
Limited Liability Partnership firm
Limited Company (Joint Stock Company)
One – Person Company Ltd.,
Club and Association, Institution, Society
Trust
Executor and Administrator
Official Liquidator
Co-operative Society
Who can open an account?
As the banker- customer relationship is a contractual relationship, all the essential features of a valid contract must be present when a banker opens an account. Even though the actual formalities will differ depending on the type of the customer, certain formalities are common to all. The common formalities are: The banker must ensure that the customer is competent to contract. For entering into a valid contract, a person needs to fulfil the basic requirements of being a Major (18 years of age or above) and possessing sound mental health (ie., not being a lunatic). A person who fulfils these basic requirements, as also other requirements of the banks as mentioned below can open an account. However, minors (below 18 years of age) can also open SB accounts with certain limitations. A person who wants to open a deposit account has to fill up and sign the prescribed account opening application form and furnish: Acceptable proof of his/her identity and residential address,
His/her photographs, and
Initial deposit not less than the prescribed minimum (varies from bank to bank according to the types of deposit accounts)
Key Takeaways
- Customer is the person who has an account with the banker. According to john paget, “a customer constitutes a person who has an account with a bank, whether fixed or savings, and has dealing of banking nature”. Dealings of banking nature refer to those transactions of deposit and withdrawal of money at frequent intervals. The above definition is popularly known as the ‘duration theory’.
Minors:
According to Section 3 of Indian Majority Act, a person attains majority at the age of 18, except in cases where a guardian is appointed by a Court where the age of majority is 21. According to the Indian Contract Act, a minor is not under a legal capacity to enter into a contract and therefore any contract with a minor is void. Thus, the minor has a guardian to maintain his / her property. Section 6(a) of Hindu Minority and Guardianship Act, 1956 recognizes that either of the parents, father or mother, can be the natural guardian. Normally, bankers do not open accounts in the name of the minor individually, but open accounts in the joint name of the minor and the natural guardian.
The account opening form should contain details,
- Name of the Minor
- Age of the Minor
Date of birth of the Minor
Date of attaining majority
Name of the Guardian
Signature of the Guardian
When the minor attains the age of majority, he/she alone can operate the account and the guardian should not be allowed to operate the account.
Other Issues in Opening Account in the Minor’s Own Name:
a) A minor of any age can open a SB/FD/RD account through his /her natural or legally appointed guardian.
b) Minors above the age of 10 years may be now allowed to open and operate savings bank accounts independently, if they so desire. Keeping in view their risk management systems, banks may fix limits in terms of age and amount up to which minors may be allowed to operate the deposits account independently. Banker can also decide, in his own discretion, as to what minimum documents are required for opening of accounts by minors.
c) On attaining majority, the minor should confirm the balance in his account and if the account is operated by the natural guardian / legal guardian, fresh operating instruction and specimen signature of the minor should be obtained and kept on record for all operational purposes.
- Illiterate Persons
A person who cannot read or write is considered as an illiterate person. The banker while opening an account in favour of an illiterate person, should adopt the following procedures:
- The illiterate person will have to be introduced by an existing literate account holder of the branch.
- The left hand thumb impression has to be attested by a judicial officer or by any witness who is also the account holder of the bank.
- The illiterate person should not be given cheque book.
- Three passport size photographs should be obtained. One will be affixed in the passbook, the other in the ledger and the third in the account opening form.
- While withdrawing money from the account, the withdrawal slip should be accompanied by the pass book.
- The left hand thumb impression affixed in the withdrawal slip should carry the sign of a witness.
- While endorsing any cheque, the thumb impression should carry the signature of witness.
- No bank employee should fill up the withdrawal slip for the illiterate customer and he can be assisted by any other customer of the bank.
- In the account opening form the banker should obtain two identification marks from the illiterate person.
- If the illiterate person is unable to come to the bank in person for withdrawal of cash, he can send a messenger with an authorization letter which should contain the signature of two witnesses authorising his left hand thumb impression.
2. Married Woman:
An account can be opened in the name of a married woman. She has the power to draw cheques and give discharge. But if a loan is given to a married woman, the banker will have no remedy against her if she has no separate means. Bank must insist for the guarantee of her husband, because the married woman can plead for and get validated that her debts to the bank are void if the explicit written consent of the husband is not recorded by the lending bank. This is possible by virtue of provisions in Married Women’s Property Act.
3. Lunatics:
Under Section 1 of the Indian Contract Act, persons of unsound mind are disqualified from contracting. But the disqualification does not apply to contracts entered into during the periods of sanity. However, no banker would knowingly open an account in the name of a person of unsound mind because he then would have to face the difficulty of choosing whether cheque was made during a period of sanity and pay it or it was made during a period when it was not and so dishonour it. If a banker receives notice and is sure that an account – holder has become a lunatic, he should stop all operations in the account till such time the customer becomes normal. The banker should obtain a Certificate of Sanity from a competent authority after which such a person is allowed to operate on the account. Lunatics are the people who are unsound in mind. They are incapable of entering into valid contracts. Hence, a banker cannot open an account in the name of lunatic. In the same manner, a customer who subsequently becomes a lunatic loses his capacity to contract and therefore cannot continue to be the customer of the bank. In such a situation where a banker honours the cheque issued by a customer who subsequently becomes lunatic cannot be held liable unless it is proved that the banker had knowledge of the unsound mind of the customer. The banker has to take the following precautions on coming to know of the insanity of the customer.
Key Takeaways
- According to the indian contract act, a minor is not under a legal capacity to enter into a contract and therefore any contract with a minor is void. Thus, the minor has a guardian to maintain his / her property. Section 6(a) of hindu minority and guardianship act, 1956 recognizes that either of the parents, father or mother, can be the natural guardian.
Joint Account Holders
A Joint Account is an account opened by two or more persons. Opening of Joint Account. The Account Opening Forms should be signed by all the joint account holders. The names, addressed and other details of all of them should be obtained on the Account Opening Form. The account – holders should also indicates how the account is to be operated the banker should obtain specific directions as to one or more of them will operate on the account. When a joint account is in the name of two persons, the operations may be by,
a. Both survivor
b. Both jointly
c. Either or survivor
d. Former or survivor
e. Latter or survivor In case the account is a term deposit, upon death of any one of the joint holder, balance can paid to survivor in the following cases.
a) All of them or survivors
b) Any one or more of them or survivor or survivors. In the absence of such explicit instructions, the operations will be by all the persons jointly. Since all the instructions are given by the account – holders jointly at the time of opening the account, they cannot be revoked by any one of them singly. All fresh instructions and changes in the existing instructions must be given in writing signed by all the account holders. However, any one of them can stop payment of a cheque issued by any other joint account holder. Any request for granting of an advance should be made by all parties jointly.
Partnership Firms
Partnership is the relation between persons who have agreed to share profits of business carried on by all or any one them acting for all (Indian Partnership Act 1932). As per RBI instruction now Registration Certificate and Partnership deed to be obtained. As per Indian Companies Act 2013, Maximum number of partner can be up to 100 in a firm (Earlier number of partner was restricted to 20 for other businesses & 10 for banking business). Partnership is not a distinct legal person from the partners who have made partnership firm. HUF cannot enter into a partnership as per Supreme Court judgement of 1998. The firm should have PAN or GST Number. A partner cannot delegate his authority to operate the account.
A minor cannot be a partner, but he can be admitted for his benefit in an existing partnership firm. The particulars of minor partner, particularly the DOB should be properly recorded.
In case of death/retirement/insolvency of a partner account should be stopped, if the balance is in debit and a fresh account should opened after fresh sanction of limit. In case of dispute when one partner revokes the authority against the other partner, operation in the account should be stopped.
Dissolution of the Partnership firm can take place by following ways:
- By mutual consent;
- Death/insolvency/retirement of a partner;
- Operation of Law (insolvency of all partners, business becoming unlawful, dissolution by a competent court; and
- In case of automatic dissolution.
Limited Company (Joint Stock Company)
Limited Companies (also known as Joint Stock Companies) are governed by the Companies Act 1956. While a company is normally incorporated under the Companies Act, a company can also be brought into existence by means of a statue by the Parliament or the State Legislature. While the company consists of share- holders, its entity is separate from that of the share- holders. For all practical purposes, the company is just like a person and can sue or be sued in its own name. In the case of a limited company, the liability of a share – holder is limited to the amount remaining unpaid on the shares held by him. The word “limited” is required to be part of the name of the company, unless it is a government company licensed under Section 25 of the Act. Companies can be broadly divided into three categories:
i) Public Limited Company: Should have a minimum of at least 7 members (Share holders), but there is no maximum limit.
Ii) Private Limited Company: Must have at least 2 members (share holders), but not more than 200 members excluding those who are in the employment of the company at the time of share allotment.
Iii) Government Company: These are companies where at least 51% of the total number of shares are held by the Government. Opening of Accounts of Limited Companies:
a. The banker should obtain Certificate of Incorporation, Certificate of commencement of business, Memorandum of Association and Articles of Association as amended up to date. These documents govern the working of the company. The Memorandum of Association lays down the objects of the company and limits the scope of its operations to specific areas. The Articles of Association deals with the rules and regulations governing the internal management of the company- it defines the powers of the directors, officials and share holders. These documents can be amended or altered by passing a resolution at a general meeting of the share holders and having it confirmed by the Company Law Board.
b. The directors of a company have to function within the limits of the power conferred by the Articles of Association and when they do so, these acts are binding on the company. If the directors act in excess of the power conferred, but within the purview of the objectives and functions laid down in the Memorandum of Association, such acts can be ratified by a general meeting of the share – holders. But, if the acts are outside the scope laid down in the Memorandum of Association, they will be ultra virus of the company and will not be binding on the company. The directors will be personally liable for such acts.
c. A company comes into business only after the issue of the certificate of incorporation by the Registrar of Companies. The banker should also verify the original of this certificate. In the case of Public Limited Companies, the banker, should also obtain a copy of the certificate of commencement of business issued by the Registrar of Companies (this is not necessary in the case of private companies). If the account is opened before the issue of this certificate, the banker should not issue the cheque book and should not permit withdrawals until it is obtained. Deposits into account can, however, be accepted.
d. Proof of Identity (POI) and proof of Address not only for the limited company, but also for every authorized signatory are to be obtained. e. The banker should also obtain a certified copy of the resolution passed by the board of Directors authorizing the opening of the account, execution of documents and conduct of the accounts. The copy of the resolution should be under common seal of the company and duly attested as per requirements in Articles of Association. In case there is a change of such authorized signatories, a fresh resolution has to be passed. A resolution will remain in force until it is revoked by a fresh resolution.
e. The account opening form should be filled in and signed by the authorized signatories.
f. The POI and POA besides specimen signature of the directors and the authorized signatories should be obtained.
g. A list of directors is to be obtained. The list should be signed by the chairman and updated.
h. Every limited company is expected to maintain, at its register office, the following registers promptly updated. a) Register of Charges b) Register of Guarantees c) Register of Resolution d) Register of Directors.
Executors
Executors and Administrators are allowed to open bank accounts. Following formalities are to be observed while opening the account in the name of executor/administer at or:
- An executor should submit a probate, and an administrator should submit the “letter of administration” to the bank as a proof of his authority to operate the account of a deceased person.
- The banker should thoroughly examine the probate/letter of administration to acquaint himself with the powers and functions of executors/ administrators.
- An account may be opened in the name of executor/administrator in the following style: ABC executors (or Administrators) of the estate of X, the deceased.
- In case of joint executor/administrator a mandate signed by all of them should be obtained regarding the operation of the account. The insolvency or lunacy of the executor/administrator will terminate his authority to operate the account (unless it has been overdrawn).
Trustees
According to Indian Trust Act 1882, trust is an obligation annexed to the ownership of a property, arising out of confidence reposed in and accepted by the person for the benefit of another person. The person who reposes and declares confidence is called the author of the trust. The person in whom confidence is reposed is called the trustee. The person for whose benefit the confidence is reposed is a beneficiary. The instrument by which the trust is created is the trust deed. Bank has to study the trust deed as regards to the opening and operations of the account. Bank should ensure that money is received and used as per the Trust Deed.
Clubs and Associations
Clubs and Associations, Committees, Funds etc. are non – trading organizations. They have no legal entity, unless they are incorporated under the Companies act. As they have no contractual powers, they cannot be used. The individual members of such organizations are not liable for any overdraft as long as the members are signing the cheques in their representative capacity and not in their personal capacity. Opening of Accounts in the name of Clubs & Associations:
- If the society or club is registered under the Societies Registration Act 1960 or Companies Act, a copy of the Registration Certificate or the Certificate of Incorporation should be obtained.
- The bank should obtain a certified copy of the by-laws, rules and regulations.
- A list of the members of the Managing committee is to be obtained. Iv. A certified copy of the resolution passed by the committee to open a bank account together with the details of authorized signatories and instruction regarding the operation of the account should be obtained. v. The account must be properly introduced.
- POI+ POA not only for the constituent but also for every authorized signatory are to be obtained.
Operations in the Accounts in the name of Clubs & Associations
- No advance, not even a temporary overdraft should be permitted.
- If the person authorized to operate the account has his personal account also in the bank, the banker has to ensure that no cheque payable to the club/ association is credited to the signatory’s account and no transfer of funds takes place from the club/association account to the signatory’s account.
- Only clubs/associations etc. meant for charitable purposes, registered under the Societies Registration Act and that have submitted Income Tax exemption Certificate from IT department are eligible for interest on savings bank accounts.
- In the case of death or registration of an authorized signatory, the operations in the account should be stopped until the receipt of the fresh resolution, appointing new signatories.
Joint Hindu Undivided Family
Hindu Undivided Family’ otherwise known as ‘Joint Hindu Family’ property, business or ancestral estates and its common possession, enjoyment ownership is the basis of formation of HUF.As per Hindu law, the Hindus, Sikhs & Jains can form HUF.
HUF is governed basically by two schools of thought. In Bengal, it is governed by Dayabhag Law. In other parts of India, it is governed by Mitakshara Law. The law governing Hindu Undivided Family is codified under Hindu Code and now, succession among Hindu is governed by Hindu Succession Act, 1956. Parts of this Act was amended in 2005 by the Hindu Succession (Amendment) Act, 2005.Creation of Hindu Law under which all major members of the family get right by birth in the ancestral property of the family.
HUF property is managed by senior most major male member called ‘Manager’ or ‘Karta’. Upon death of Karta, next senior male coparcener becomes Karta. Joint owners of HUF are known as coparceners. It consists of one common living ancestor and his all male & female (female included from Sept. 2005) descendent up to three generations next to him. HUF cannot enter into a partnership as per Supreme Court judgement of 1998. HUF account is operated by Karta. Karta has authority to borrow money for the family necessities & for ancestral family business. Documents are to be executed by Karta. All major coparceners are to be made guarantors. The liability of the ‘Karta’ is unlimited, whereas the liability of the coparceners is limited to their shares in the joint family estate.
Key Takeaways
- A joint account is an account opened by two or more persons. Opening of joint account. The account opening forms should be signed by all the joint account holders.
- Partnership is the relation between persons who have agreed to share profits of business carried on by all or any one them acting for all (indian partnership act 1932).
- Limited companies (also known as joint stock companies) are governed by the companies act 1956. While a company is normally incorporated under the companies act, a company can also be brought into existence by means of a statue by the parliament or the state legislature.
Case study
Children’s bank accounts help parents create a corpus for their children and teach them basics of money management.
Such accounts are called “minor” accounts. A minor is a person who has not attained 18 years of age.
Form
The usual account opening form can be filled up to open a minor account. Details like the minor’s name, address, guardian details and signature must be furnished.
Documents
Following documents need to be furnished:
- Proof of minor’s date of birth
- KYC documents of the guardian.
- Aadhaar card of the minor.
- Specimen signature of guardian. Minor’s specimen signature in case he/she is 10 years old.
References:
1. Gordon & Natarajan: Banking Theory Law and Practice, HPH
2. S. P Srivastava; Banking Theory & Practice, Anmol Publications
4. M. Prakash, Bhargavi VR: Banking law & Operation, Vision Book House.
5. Tannan M.L: Banking Law and Practice in India, Indian Law House
