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Published by Enhelion, 2020-08-26 08:46:36

MODULE_2

MODULE_2

MODULE 2

OBLIGATIONS OF THE BANKS

When a customer opens an account with a bank, there are certain rights given to the banker
and certain responsibilities or obligations which are imposed upon him. These rights and
responsibilities determine the relationship between the banker and the customer.

2.1. OBLIGATION TO HONOUR CHEQUES

It is one of the duties that the banker performs and it is that of an implied nature. The banker
accepts the deposits from the customer which creates an obligation on the part of the banker
to repay the deposit to the customer by way of honouring the cheques drawn upon the banker.
Honouring of cheques is a statutory obligation under Section 31 of the Negotiable
Instruments Act. The Section states that “The drawee of a cheque, having sufficient funds of
the drawer in his hands, properly applicable to the payment of such cheques, must pay the
cheque when duly required so to do, and in default of such payment, must compensate the
drawer for any loss or damage cased by default.”1 Therefore, it is the duty of the banker to
pay cheques of his customer who has an account provided that these conditions are fulfilled

§ The funds in the account must be sufficient. They must at least be equal to the amount
that the cheque has been presented for. The banker is to pay the sum of money to the
payee and in the event of such sum not being present with the banker at the time the
cheque is presented, the banker does not have any obligation to make the payment of
the cheque. The banker should not disclose the amount by which the credit balance in
the drawer’s account falls short of the amount of the cheque to the payee. He will
otherwise, be liable for damages for disclosing information of his customer’s account
to a third party.

§ There may be times when a customer might be having several accounts in the same
bank in various capacities. But the account on which a cheque is drawn must have
sufficient funds.

1 Section 31, Negotiable Instruments Act, 1881.

§ The cheque must be presented for payment within six months. The cheque is said to
be stale and the banker will be justified in dishonouring the cheque after the expiry of
this period.

§ According to Section 65 of Negotiable Instruments Act, presentment of the cheque
must be made during the working hours of the bank.2

§ The cheque should be presented at the branch where the account of the customer is
maintained i.e., the demand for payment must be made in the same branch.
Therefore, when the customer makes a proper written demand for payment, the bank
shall honour the cheque. The banker shall not injure his customer’s credit by refusing
to pay his cheque except on reasonable and proper grounds.3 Wrongful dishonour of a
cheque means failure to make payment against the cheque by mistake or negligence
on the part of the banker or its employee. For example, if a deposit is made by the
customer had not been duly credited to his account in time and consequently the
cheques that were issues by the customer have been dishonoured due to lack of
sufficient funds in his account.

If the banker, without any justification, dishonours a customer’s cheque, he will be made
liable to compensate the customer for the injury caused.4 In simple terms, the banker will be
made liable for damages. These damages can be either a monetary loss caused to the party or
loss to his credit or reputation. While assessing the damages, there are certain things that need
to be considered. Whose cheque is dishonoured, whether the person is a trader or not, what is
the amount of the dishonoured cheque, is it meagre or large.
If the cheque of a person who is not a trader is dishonoured, generally he is entitled only to
substantial damages. If the cheque of a trader is dishonoured, he will be entitled to get more
damages because it affects the reputation that the person holds in his respective business.
When the amount in the cheque is of a lesser amount, the damages claimed are higher. It is an
inverse phenomena. While assessing the damages, loss to the person’s status, his financial
position and the injury to his reputation must be kept in mind. The liability of the banker for
dishonour of cheque extends only towards the drawer of the cheque and not towards the
payee. In addition to the claim of damages, wrongful dishonour also gives rise to an action
for libel (defamation). It is up to the customer to institute an action against the banker for
libel.

2 Section 65, Negotiable Instruments Act, 1881.
3 1990 A.C. 577.
4 Marzetti v Williams, 1830 1 K.B. 415.

The banker can only be made liable for the dishonour of a cheque when there is no
justification or a valid reason which backs his act. However, there are a few grounds that are
considered to be reasonable and justifiable, and the banker can dishonour a customer’s
cheque under any of these grounds5-

§ When the cheque presented is out-dated (when it is presented after a period of six
months)

§ When the cheque presented is post-dated (presented for a future date)
§ When the funds in the account are insufficient
§ When the customer countermands or cancels or revokes the payment of the cheque
§ When the validity or legality of the cheque is doubtful
§ When the amount of payment differs in words and figures
§ When the cheque is cut into pieces
§ When the signature of the customer does not match the one in the records of the bank
§ When the customer has dies and the banker receives a notice of his death, the

authority of the bank to pay is terminated as the funds of the deceased now vest in his
legal representatives
§ When the banker receives notice of the customer’s insanity
§ When the customer is declared insolvent
§ By a Garnishee order passed by a court of law
§ When the banker is restricted by the government
§ When a notice is issued by either the banker or the customer for closing of the
account
§ When there is a breach of trust
§ When the title of the parties seems to be defective
§ When the holder of the cheque issues a notice stating that the cheque was lost
§ When the customer gives notice of assignment

2.2. OBLIGATION TO MAINTAIN SECRECY OF ACCOUNTS

The banker has an implied obligation to maintain the utmost secrecy of the customer’s
account. It is generally treated as confidential information and the banker should not disclose
any information that is concerned with the customer’s financial position to any third person.
This duty starts the moment the relationship is established between the banker and the

5 CMA Students Newsletters, http://icmai.in/upload/Students/Stud_NL_15th_January_2016_1B.pdf.

customer. Disclosing such information may affect the customer’s reputation, his credit-
worthiness and business. This was held in the landmark case of Harvey v Veasey (1868).

In the case of Tournier v National Provincial and Union Bank of England6, it was held that
the banker must not disclose the position of the customer’s account except on reasonable and
proper circumstances. The banker should not disclose the state of the customer’s account
even after the account is closed.

Tournier was the plaintiff in the case. He was working in M/s. Kenyon and Co. on temporary
basis and his employment was to be permanent. He overdrew from the defendant bank, a sum
of 9 pounds, 8 cents and 6 d., and he agreed to repay the sum by means of weekly instalments
of 1 pound. Out of this amount, he paid some amount to the bookmaker towards the purchase
of certain goods. Tounier did not come for duty on one day. The Directors of Kenyon and Co.
called up to the bank manager of the defendant company to ask for the plaintiff’s address. In
the conversation, the bank manager also gave them the information that the plaintiff had
overdrawn from the bank and that he had made a certain payment to a bookmaker. The
Directors misunderstood the information and formed the impression of the plaintiff as a
gambler, that he was in the practice of betting and that he was insolvent. Therefore, they did
not grant a permanent job to the plaintiff and fired him from the company. This caused an
unbearable grievance to the plaintiff who subsequently filed a suit against the bank for
disclosing information of his account, and for the bank to compensate him for the job that he
lost. The lower court dismissed this petition. The court of appeal allowed his appeal and
passed the judgement in his favour in which the court opined that the bank manager violated
his duty and caused great loss to the plaintiff.

Five instances where the disclosure by the banker may be justified were listed out in the same
case7-

§ When the disclosure is required by law
§ When it is the duty of the banker to disclose such information to public
§ When it is with the implied or express consent of the customer himself
§ When it is for the bank’s own interest
§ When the practice and usage of the bank permits it to do so

6 1924 1 K.B. 461.
7 ‘When banks required to disclose Customer Information’, iEduNote, https://iedunote.com/bank-required-to-
disclose-information-about-customers.

These points are explained in detail as under-

§ When the banker is under a public duty, he can disclose the position of the customer’s
account to the relevant authority. The duty that the banker had towards his nation or
the public is superior and it overrides his duty towards his customer.

§ The customer may instruct the banker to give a few or all other particulars of his
account to a person. For example, an auditor. In such a case, the bank is allowed to
disclose the information. The banker can also disclose such information to a referee
when his name is suggested by the customer. And in case the customer provides the
bank with the name of a guarantor, it is implied that the banker can disclose
information to him as and when required. 8

§ When the protection of the bank’s own interest legally requires the disclosure of the
actual position of the customer’s account, the banker can do so. For example, when a
customer fails to repay money which is due to the banker, the banker has a right to file
a suit for recovery of the said money in which he will have to disclose the exact
amount which is due to him from the customer. The banker will not be made liable for
such a disclosure.

§ The Banking Companies (Acquisition and Transfers of Undertakings) Act, 1970,
requires the banker to “observe, except as otherwise requires by the law, the practices
and usages customary amongst bankers in particular not to divulge any information
relating to the affairs of the constituents except in circumstances in which they are, in
accordance with law or practices and usages customary among bankers, necessary or
appropriate for them to divulge such information.”9 Therefore, it imposes an
obligation of the banker to not disclose any information of his customer’s account.
But if it is on the basis of usage or usual practice of the banker, or if the law requires
disclosure, then it can be divulged.

2.2.1. DISCLOSURE OF INFORMATION AS REQUIRED BY LAW UNDER
VARIOUS LEGISLATIONS

2.2.1.1. Under the Income Tax Act, 1961

The Income Tax officials possess the same powers as that of a court under the Code of Civil
Procedure, 1908, for call for the attendance of any person, including any officer of a bank, to

8 Sunderland v Barclays Bank.
9 Section 13, Banking Companies (Acquisition and Transfers of Undertakings) Act, 1970.

examine him on oath and to compel the production of books of account and other
documents.10 The Income Tax officials have the power to call for any necessary information
or to furnish statements of accounts and affairs which will be useful or relevant to the
officials.11 They can obtain this information from any person, including a banking company
or any of its officers. They can obtain information from the banker for the purpose of
assessment of the bank’s customers.

2.2.1.2. Under the Companies Act, 2013

When an Inspector is appointed by the Central Government to investigate and look into the
affairs of any company under Section 210 or 212 or 213 of this act, it shall be the duty of all
officers and other employees and agents, including the bankers of the company to produce all
books and documents relating to the company which are under their custody or power, and
otherwise to give to the Inspector all the assistance in connection with the investigation which
they are reasonably able to give.12 The banker has an obligation to disclose all information
regarding the company but not to any other customer for the purpose of such investigation.

2.2.1.3. By the order of the Court under the Banker’s Books Evidence Act, 1891

The banker is bound to disclose information relating to a customer’s account when the Court
passes such an order. The Act provides that certified copies of the entries in the banker’s
books are to be treated as sufficient evidence. The production of the books in the Court
cannot be forced upon the banker. This provision aims at avoiding the inconveniences that
are likely to be caused to the banker. “A certified copy of an entry in a banker’s book shall in
all legal proceedings be received as prima facie evidence of the existence of such entry and
shall be admitted as evidence of the matters, transactions and accounts therein recorded in
every case where, and to the same extent as the original entry itself is now by law admissible,
but not further or otherwise.”13 It is also important to note that Section 5 of the Banker’s
Books Evidence Act, 1891 states that “Case in which officer of bank not compellable to
produce books — No officer of a bank shall in any legal proceeding to which the bank is not
a party be compellable to produce any banker’s book the contents of which can be proved
under this Act, or to appear as a witness to prove the matters, transactions and accounts

10 Section 131, Income Tax Act, 1961.
11 Section 133, Income Tax Act, 1961.
12 Section 217, Companies Act, 2013.
13 Section 4, Banker’s Books Evidence Act, 1891.

therein recorded, unless by order of the Court or a Judge made for special cause.”14 If a
banker is not a party to a suit, a certified copy of the entries will suffice as evidence. The
Court also has the power to allow any party to legal proceedings to inspect or copy from the
books of the banker for the purpose of such proceedings.

2.2.1.4. Under the Reserve Bank of India Act, 1934

The RBI collects credit information from the banking companies and also provides
consolidated credit information to any banking company. Every banking company in the
country is under a statutory obligation under Section 45-B of the Act to provide such credit
information to the Reserve Bank. The Act, however, provides that the credit information that
is supplied by the Reserve Bank to the banking companies must be kept confidential. After
the amendment to the Act in 1974, the banks were granted statutory protection to exchange
freely credit information among themselves.

2.2.1.5. Under the Banking Regulation Act, 1949

Under 26 of this Act, every banking company is required to submit a return of all such
accounts in India which have not been operated for more than 10 years. This is to be done
annually. Banks are supposed to give particulars of the deposits standing to the credit of each
such account.

2.2.1.6. Disclosure to the Police
Section 94 of the Criminal Procedure Code, 1973, says that the banker is not exempted from
producing the account books before the police. The police officers conducting an
investigation may also inspect the banker’s books if necessary.

2.2.1.7. Under the Foreign Exchange Regulation Act, 1999
Banking companies dealing in foreign exchange business are designated as ‘authorised
dealers’ in foreign exchange. Section 12 and section 37 of this Act respectively empowers the
Reserve Bank of India and officers of the Directorate of Enforcement to inspect the books
and accounts or any other documents of any authorised dealer and also to examine on oath
such dealer or its director or officials in relation to its business.

2.2.1.8. Under the Industrial Development Bank of India Act, 1964

14 Section 5, Banker’s Books Evidence Act, 1891.

After the insertion of sub-section (I-A) to Section 29 of the Act in the year 1975, IDBI is
authorised to collect or provide to the Central Government, the State Bank, any subsidiary
bank, nationalised bank or other scheduled bank, State Co-operative bank, State Financial
Corporation, any credit information or other information as it may consider useful for the
purpose of efficient discharge of its functions, in such manner and at such times, as it may
deem fit. ‘Credit information’ is used in the same sense as in the Reserve Bank of India Act,
1934.


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