Banking Law & Practice, Lecture No. 11 Accounts of Non-Trading Organizations Clubs, Societies, and Associations
• Non-trading organizations are also not-for-profit organizations
• Formed normally for the promotion of culture, science, education, recreational activities and charitable purposes.
• Some of them are these institutions are registered under the “Societies Registration Act 1866.
• Administered under a body, called “Governing Body”, or “Managing Executive Committee”, which is authorized by the institution.
• This body is authorized by rules and regulations or byelaws of the institution.
Accounts of Non-Trading Organizations
The banker must take the following important documents when opening accounts for these institutions;
1. The resolution of the Governing Body/Managing Committee authorizing the opening of account with the bank. The resolution should expressly specifying the powers of the person operating on the account. The resolution must be duly signed by the chairman and countersigned by the secretary of the Governing Body/Executive Committee.
2. Certified copies of the bye-laws or rules and regulations clearly showing the limitations of the Managing Committee or Governing Body.
3. The account-opening form duly signed by the authorized person(s) who would operate on the business. 4. An undertaking signed by all the authorized persons on behalf of the institution that as and when any changes in the person authorized occur, the banker will be immediately informed.
Operating on the Account:
As not generally registered under the Registration Law and have no legal entity, as such no contracting powers. They can neither be sued, nor the individual members liable for any overdraft as long as these members sign the cheques in their representative capacity and not in their individual capacity. Only registered institutions are legal entities and are competent to enter into a valid contract.
Agent's Account
“Agent” is a person who has powers to act for or on behalf of another person called his “Principal” The agent can open and operate a bank account if authorized by the principal under power of attorney. Powers of attorney should be stamped according to provisions of Stamp Act, even to a power of attorney executed abroad for use in Pakistan. Such powers of attorney should be stamped within three months of arrival of the agent in Pakistan.
Opening and Operation on Account
Agent's power of attorney is strictly construed and will be used according to the law. The banker must carefully follow the clauses of law for power of attorney relating to opening and operating of account and borrowing powers.
The banker should keep a certified copy of these clauses, as in a law suit, (Jacob v Morris, 1902, it was held that “If an agent is empowered to draw and endorse cheques, that does not imply an authority to draw, accept, and endorse bills of exchange, nor does it imply a power to overdraw the account. The Principal will not be liable for any unauthorized borrowing.
Opening of Account
The banker must strictly follow the instructions given by the principal. The principal may cancel the power of attorney any time he likes to do so, and it is cancelled automatically when the principal becomes insane or is declared insolvent or dead.
In view of, any of the above events, the banker must stop all the operations immediately after being notification. Cheques presented after death of the principal should be returned marked, “Drawer Deceased”. But if, The agent dies and the cheque is presented for encashment bears his signature on behalf of his principal, it should be paid.
Trust Accounts
A Trust has been defined in Section 3 of the Trust Act 1882, and it says, “A Trust is an obligation annexed to the ownership of property and arising out of a confidence proposed in and accepted by him for the benefit of another, or of another and the owner”.
Section 4 of the Trust Act 1882, clarifies that, “A Trust may be created for any lawful purpose. The purpose of a Trust is lawful unless, (a) Forbidden by law, or (b) is of such a nature, that if permitted, it would defeat the provision of any law, or (c) is fraudulent, or (d) involves or implies injury to the person or property of another, or (e) the court regards it as immoral or opposed to public policy.
The Purpose of Trust
A trust can be created only for lawful purposes. Every trust whose purpose is unlawful is void. When a trust is created for two purposes, of which one is lawful and the other unlawful, and the two purposes cannot be separated, the whole trust is void. Section 3 (2) of the Trust Act 1882, it has the following constituents;
(a) The person who declares the confidence and is called the “Author of the Trust”.
(b) The person who accepts the confidence, and is called the “Trustee”.
(c) The person who benefits from the confidence and is called the “Beneficiary”.
Constituents and Creation of the Trust
(d) The subject matter of the trust that it is called “Trust Property” or “Trust Money” or “Beneficial Interest”.
(e) The instrument by which a trust is declared, is called the “Instrument of Trust”. The Creation of the Trust: Any person who is competent to contract may create a Trust which must for a property transferrable to the beneficiary. Section 5 of the Trust Act 1882, lays down that, “No Trust in relation to immovable property is valid unless declared by a non-testamentary instrument in writing, signed by the author or the trustee and registered or by the will of the author of the trust or trustee”. But under section 6 of the Act, authorizes the creation of a Trust by word of mouth or by any act which reflects the intention of the author of the Trust.
Opening and operation of the Trust Account
The account should be in the name of the Trust and all the trustees should sign the account-opening form. They should also sign a mandate governing transactions on the account including authority to the bank to ask for securities, deeds, boxes or parcels and their contents for safe custody.
If the account is in the name of trustees, it should not be treated as a “joint account” The banker should examine the “Instrument of Trust” very carefully, and an attested copy of it should be kept on the record.
Operation on the Account
Section 47 of Trust Act 1882, has forbidden the delegation of authority to co-trustee or to a stranger by a trustee. The must see that the breach of trust is not caused by unreasonably transferring the Trust funds to the personal accounts of the trustees.
Borrowing by the Trustee: The banker should consider the following 2 factors on trustee's application for borrowing. (i) Whether the trustees have the power to borrow for the proposed purpose, (ii) Whether they have power to give security for the proposed advance.
Death of A Trustee
Section 44 of the Trust Act 1882 says, “when authority to deal with the Trust property is given to several trustees, and one of them disclaims or dies, the authority may be exercised by other trustees, unless apparent from Instrument of Trust that authority to be exercised by a number in excess of the number of the remaining trustees”.
However, section 76of the Act makes it clear that, “on the death or discharge of one of the several co-trustees, the Trust survives, and the Trust property passes on to the others, unless the Instrument of Trust expressly declares otherwise”.
Section 73 of the Trust Act regarding new trustee says, “whenever any person appointed trustee disclaims, or any trustee, either original or substituted dies, or absent from Pakistan continuously for six months, or go abroad for residing, or is declared insolvent, or desires to be discharged, or refuses or becomes, in the opinion of law court unfit, or personally incapable to act in a Trust, or accepts an inconsistent trust, a new trustee may be appointed in his place.
Banking Law & Practice: Lecture No. 12, Date: 20/03/2023 Executor's and Administrator's Accounts
• An Executor, is a person to whom the execution of a will is entrusted by the testator. The Executor derives his authority from the will.
• The executor generally carries out all the directions from the testator's last will. Testator may appoint any person, including a minor or a married woman.
• However, a minor (Executor) can only carry out activities till the age of majority.
• And this position of action is delegated to a third person ,the administrator, who acts till the Minor is reached to the age of Majority.
• Administrator is a person appointed by a court of law to look after the estate of a person who died without leaving a will or the persons he appointed are incapable of acting as Executors.
• When he dies “in-estate”, (i.e. without leaving a will), the administration is generally granted to his widow or widower or the children of the deceased, as the case may be.
• The Will: Section 74 of the Law of Wills lays down that a will may be drawn in any such language or expressions that the wording expresses the intentions of the Testator clearly.
The Will of the Testator
• A will may be oral or in writing , and may not be not be signed or witnessed.
• The Testator under Muslim Law is permitted to give only one-third of his estate to a stranger by Will, while he may the other one-third to only one of the legal heirs, provided the other legal heirs agree to it.
• Moreover the Will drawn under Muslim Law does not require to be attested.
Probate or Letter of Administration Probate or Letter of Administration is a certified copy a Will issued under the seal of the court i.e. High Court, District Judge Court, or First Class Sub-Judge court in Sindh.
• The Requirements for An Application for the Letter of Administrator”
(a) The date and time of the Testator's death.
(b) Statement mentioning that the enclosed is his last Will and Testament.
(c) Statement mentioning that the enclosed Will Testament was duly executed.
(d) Details of the Estate which are likely to come into the petitioner's hand.
(e) Declaration that the petitioner is applying for probate and that he is the Executor named in the Will.
The Law of Will
• Section 281 of the Law of Wills makes it obligatory that the witness should declare that he was present and saw the said testator affix his signatures or the Testator made his Will in the presence of the witness.
• Once the Probate or Letter issued, it extends to all the Estates and Movable or Immovable properties of the deceased throughout the province, in which it is granted.
• It grants conclusive representative title against all debtors of the deceased and affords full indemnity to all debtors and all persons delivering up such property.
• Under 220 of the Law of Wills also entitles the Administrator to all the rights to in-estate as effectively as if the Administration had been granted at the moment after his death.
Opening and Operating Accounts of the Testator
• A grant of Probate or a letter of Administration is prerequisite for Executor to administer the property of the Deceased.
• The Administrator or Executor can open an account with banker after the death of the Testator, but not before the grant of probate, as the Executor derives his title from the Will.
• In such a case the banker must examine the Will and the Testament very carefully to verify the name(s) of the Executor or Administrator.
• In case the account is in the name of Administrator , a valid Letter of Administration must be produce d at time of account-opening, and an attested copy of the letter should be retained on the banker record.
• If more than one Executors or Administrators, all should sign on the account-opening form. And also the instructions for operation of account.
• The Title of the account should indicate the status of the account. (For Details and Examples, see Siddiqui 2007, p.168) • The Administrator and Executor are trustees, so the banker should be more careful as the bank will be liable as a party to any breach of the Trust.
• The Administrator is empowered to borrow money on his personal liabilities but he is entitled to identified out of the Estate, which he is administering.
• The borrowing power Administrator or Executor is verified from the Will or Letter of Administration, and the application for Advance should be signed by all the Executors and Administrators.
• The responsibility will be assumes jointly and severally, so the bank can exercise the right of Set-Off on the credit balance.
Death of Executor or Administrator:
When one or more of the Administrators and Executors die, the authority vests with the survivors. And If the dead was sole executor or administrator , a fresh Letter of Administration must be applied for.
Accounts of Local Bodies
• There are numerous autonomous institutions in almost every country of the world formed under the Local Bodies Act , such as, Municipal Corporations, or Municipal Committees, , District and Tehsil or Union Councils, City Councils/Govts., etc.,
• These institutions are generally governed by their independent management, mostly by members of the Committees, elected by the public.
• These institutions are normally administered though notifications issued under the Act from time to time.
• The Chairman of these local bodies may be elected by the members or nominated by the government.
Opening and Operation of Accounts
• Only the person authorized under the Controlling Act can request for the local body account, and sign the form.
• He will mention clear instructions regarding the operations on the account, and the specimen signature should be taken from the person authorized to operate the account.
• As a general rule no advance should be considered for a local body unless some Statutory provision expressly or impliedly authorize the banker to do so.
• The banker will make sure the purpose and limitations, given in the Statutory Provisions are in accordance with the authority, and,
• Prior approval of the government has been obtained before applying.
• If a Local Body borrows Ultra Vires, the repayment of the loan is also Ultra Vires.
• The banker who lends to an authority, acting Ultra Vires when borrowing, may be forced to refund any money repaid to him by the authority.
• Also any markup charged on the unauthorized loan, as was the case in (Attorney General v. Tottenham Urban District Council, 1909), (Ref: Siddiqui 2007, p. 169.)
Liquidator's Account
“A liquidator is a person with the legal authority to act on behalf of a company to sell its assets before it closes in order to generate cash for a variety of reasons including debt repayment”.
• Liquidators are generally assigned by the court by unsecured creditors, or by the company's shareholders. They are often employed when companies go bankrupt.
• However, one of the functions of many liquidators is to bring and defend lawsuits.
• Other actions include, collecting outstanding receivables, and paying off bills and debts. • Finishing other corporate termination procedures.
Powers and Duties of a Liquidator:
• The authority or power of a liquidator is defined by the law where the role is assigned.
• Liquidator may b granted a complete authority over all matters of the business until the assets are sold and the debts are set-off.
• Some others are granted liberties, while still under the supervision of the court.
• The liquidator has a fiduciary and legal responsibility to all parties involved, such as, the company, the court, and the creditors involved.
• Generally considered to be the Go-to person when it comes to any decision about the company and its assets.
• The liquidator must keep all assets under his own control to ensure they are properly valued and dispersed after they are sold.
• He issues any correspondence and holds meetings with creditors and the company in question to ensure the liquidation process goes through smoothly.
• The liquidators charge fee for their services, the fee varies depending on the size of the business, the complexity of the case, and the time needed to complete the job.
• The Insolvency Act 1986 specifies, the Absolute Priority (also known as Liquidity Preference) with which shareholders are repaid in the event of Bankruptcy or Liquidation.
Types of Accounts Lecture. 13, Date: 21/03/2023 Various Types of Bank
Accounts The Banker's Funds:
The banker's funds come from two main sources.
1. Banker's own paid up capital, the reserve fund. And the liquid assets of the bank.
2. Money received from the customers (Depositors) in current, Fixed, and term deposits.
A. Bank's Capital: The amount with which a banking company in Pakistan is registered is called the, “Nominal or Authorized” Capital. This capital is further divided into Paid-up and Subscribed Capital.
The Banker‘s Fund
Section 13 (1) of Banking companies (Amendment)Ordinance 2000 describes, that the minimum authorized capital for Banking company in Pakistan is determined by the SBP. Again Sub Section (2) says, the similar requirement for foreign banks operating in Pakistan. Section 14 of Banking Companies Ordinance 1962 describes that no Bank can operate until fulfill the following;
(i) The subscribed Capital is not less than one half of the authorized capital and Paid-Up capital is not less than one half of the Subscribed Capital.
(ii) The capital of the company should consist of ordinary shares only,
(iii) The voting right of the shareholders be strictly in proportion with shareholders contribution to the paid-up capital of the company.
B. The Reserve Fund:
These funds are the accumulated Un-divided trading profits, set aside to prove for contingencies and any unusual call upon the bank's resources. Section 21 of the Banking Companies Ordinance 1962, makes it obligatory for any bank in Pakistan to create reserve fund as follows;
a. If the amount in reserve fund together with share premium account is less than the Paid-Up capital, the bank will subscribe twenty per cent of the balance of profit of each year before any dividend is announced.
b. if the same amount is equal to or more than the Paid-Up capital, the bank will contribute ten per cent of profit.
C. Liquid Assets: According to Section 29(1) of the Banking Companies Ordinance 1962, every bank in Pakistan is under legal obligation to maintain liquid assets in Pakistan. These liquid assets should be maintained in Pakistan in cash-on hand and balances with the State Bank of Pakistan; Money at call and short notice; Bills Discounted; Gold and Bullions, and Unencumbered approved securities, Debentures, and other Securities.
More details are included in Section 29(3) of Banking Companies (Amended) Ordinance 1995. See Siddiqui 2007, p.108
The Life-blood of A Bank:
The Deposits The Inter-related relationship shows that deposits are referred to as the, “life-blood” of a bank. In today's world very few businesses are run solely with owner's capital, instead Borrowing funds from different sources has become an essential feature of today's business enterprises. But this trend of money creation from outside parties plays even more vital role in banking system.
The borrowed capital of bank is much greater than their own capita, which is mostly in the form of deposits. The larger the deposits, the larger will be the funds available for employed; so greater will be the profit of the bank.
The Nature of Deposits:
These deposits are broadly classified as Current Deposits, Fixed Deposits or Term Deposits, and Saving Deposits. Prudent banker would always maintain a deposit mix, which would keep his average cost of deposits within safe limits to maintain profitability and viability for the bank. This classification is based on the duration and purpose for which deposits are to be kept at the bank before thay can be withdrawn by the depositors.
A. Current Deposits: These are payable to the customers when demanded. Banks treat them as current liabilities. Bankers in Pakistan do not allow any profit on these deposits and minimum balance need to be maintained.
The proportion of Current deposits are normally very small in relation to Term Deposits.
B. Fixed or Term Deposits:
• The deposits that can be withdrawn after a specified period of time are referred to as “Fixed or Term deposits”.
• They are normally kept at the bank for a period varies from one month to five years on agreed terms and conditions.
• Profit/Return is paid to the depositors on all fixed or term deposits and the rate of profit varies with duration.
• As kept for longer period, so the bank employs it more profitably, and the customer prefers these deposits because of their investment nature.
C. Saving Accounts:
Savings Deposits Accounts were introduced in England by the Trustee Saving Banks, established under, “Trustee Savings Bank Trust Act 1863.
• The main object of the Savings Deposits was to encourage thrift, among people of small means like children, married and house-hold women, who could deposit a very small amount at a time.
• In India these accounts first started in 1833 and 1835.
• Then in 1870 the District Savings Banks were established.
• By 1882, Post Office Savings Banks also started in all principal post offices in India.
0 Comments