As the banker—customer relation is contractual and may terminated by any one of the two by serving a notice on the other. Customer may terminate this relationship by closing down his account on any of the following ground;
1. Change in residence, the customer may not maintain his account from the new place.
2. Not satisfied with products and services provided by the bank, the unacceptable behavior of banking staff, inefficiency in service delivery and incomplete information and delayed bank statements and other information.
3. Death of a customer may lead to account closure. The law does not authorize the heirs to operate the account of a deceased person, The account is closed down and the credit balance is paid to the heirs of the deceased person according to the law of the land.
Notice by a banker Just like customer, the banker may also close down the account on a number of valid reasons. In this case the bank gives reasonable notice to customer that he may protect his reputation and it depends largely on the character of the account and circumstances of the case.
Formal information are given that bank wishes the account to close so that necessary arrangements may be done on the part of the customers. The Bank normally serve the account closure notice on the following grouds;
I. Presentations of customer's cheques for payment without having sufficient funds in the account
II. A customer is unable to keep a remunerated credit balance in his account due to very small balance.
III. A regular presentation of cheques for payment after the usual business hour. and if customer does not respond to the notice, the banker may close its customer account for the following reasons;
1. Obstinacy of the Customer:
When a customer does not want to close the account even after the notice given.
2. Death of a customer:
As soon as the bank is informed that customer has died, the bank must stop payment of cheques drawn on by the deceased customer. Under Section 122.A, of Negotiable Instruments Act 1881, the death notice revokes the bank's authority to pay such cheques.
3. Customer Insanity:
The mental disorder or insanity of the customer automatically terminates the banker's authority to act as his customer agent. The bank has authority to revoke all the transactions by a notice of insanity to the customer. This scenario arises when the bank sees fairly conclusive evidence of customer's insanity.
4. Customer's insolvency:
Insolvency is “Civil death”, therefore the insolvent loses his right; and his affairs are transferred to the official assignee, Receiver or Liquidator. As the bank receives notice of insolvency or petition, the bank is liable to stop paying cheques and all other bills. Under section 28 of the Provincial Insolvency Act, “An order of adjudication shall relate back to, and take effect from, the date of the presentation of the petition on which it is made.
5. Order of Court:
A court of law may serve an order in garnishee proceeding in execution of a decree, prohibiting a bank to honor customer's cheques, The order may be absolute or it also be partial in specific sum of amount.
6. Assignment of Account:
The customer may assign his entire credit balance to a third part and give a notice assignment to the bank, asking for payment to the assignee.
7. Unsatisfactory Operations:
A bank may close a customer account after serving a notice if he fails to maintain the account satisfactorily. The bank is authorized to consider and determines whether the account is Unsatisfactory.
Banking Law and Practice, Lecture No. 9 The Concept of Know Your Customer (KYC) General View of the Customer Accounts
On the day and time, the account is opened, the Bankercustomer relationship is established.
However some precautionary measures of inquiries must be
taken before establishing this relationship (Contract)
The customer is required to obtain proper references and
introduction from responsible personas about the Identity,
Integrity, and Reliability of the proposed customer.
Prudential Regulations No: M1, M2, and M5 have laid down
great stress in this respect and violation invites penalties
from the State Bank of Pakistan (SBP).
KYC (Know Your Customer)
1. Introduction and Preliminary Investigation
Before opening an account, it is mandatory for the banker to
ascertain fully whether the customer to the bank.
• The banker should determine the prospective customer's
integrity, respectability, occupation, and the nature of
business.
• Negligence in this informal investigation may result in
serious consequences for the bank directly, but also for
the other banks and general public indirectly.
• In Ladbroke&Co vs. Todd (1914-30), Justice Bailhache
observed, negligence found on the part of the bank under
section 82 of the Bills of Exchange Act, 1882.
• The Federal Ombudsman of Pakistan ruling on Complaint No.
(11/31/5186), has also strengthen and streamlined this process with
directing the banks:
to retain a photo copy of NIC of the prospective customer
and,
of the introducer.
Due to these clear cut directions the bankers should the steps as
follows.
The branch managers are required to obtain original NIC along with
attested Photo copies to verify and ascertain the authenticity of the
retained copies.
The SBP Prescribed Document of under Prudential Regulation M1 (Appendix)
Preliminary investigations must be carried out on the
following grounds according to SBP.
1. Avoidance of Fraud:
Dishonest person may misuse cheque books and other
promissory notes and in the case of bankruptcy, the bank
may come under an awkward position.
2. Safeguard against unintended Overdraft:
In the case of overpayment and credit entry into the
wrong customer account may raise serious issues. Only
trustworthy and respectable customer will realize this
situation.
3. Negligence:
Negligence of necessary investigation may deprive the
bank of statutory protection provided under Section 131 of
the Negotiable Instruments Act 1882.
4. Inquiries about Client:
It is business obligation for the bank to respond to
inquiries from other banks about his customer's financial
position.
the banker should have necessary information about the
customer in question.
2. Specimen Signature
A customer is required to produce a specimen in the form of
signature at the time of account at every transaction he
makes with the bank.
It is generally on the card specially designed for general rules
for customers, full name and account number are also
entered on it.
Doubtful signatures on cheques are either confirmed or
returned with the remark “Signature differs” and
If the signature is forged the banker cannot escape his
liability to act on behalf of his customer.
Signature other than in English and Urdu; the customers are
required to fill a “Vernacular/Indemnity form”
Illiteracy of a customer is nota disqualification but some
extra precautions may be taken as follows;
• 2 to 3 passport-size photos,
• Right and left hand thumb impression are taken in the
record
• The customer must come personally for every and any
transaction to the bank
• Illiterate customer should not issue cheques to any
other person in any regard.
Other Customer Accounts
3. Married Women Accounts,
4. Pardanashin Women Accounts
5. Minor's Accounts;
customer under the age of 18 years can open bank
accounts with the supervision of guardian under Section 3 of
the Majority Act 1875.
• According to section 11 of Contract Act 1872, a minor is
incompetent to sign a contract, so as in Pakistan, any
contract with Minor is void.
• However, in 1925 Bombay high court declared if a
competent person has made a contract for the benefit of
the Minor, that is valid and the minor can enforce it.
Problems in Personal Accounts
A) Death of a Customer:
previously discussed in Section 122-A of “Negotiable
Instruments Act 1881”
B) Lunacy of Customer:
section 11 of the “Contract Act of 1872”, prohibits all
persons of unsound mind and insane behavior coming into
contract.
C) Insolvency of Customer: discussed above in part A.
D) Joint Account and Mandate: the accounts of two or more
persons who are neither partners nor trustees. Either one
or more can operate the account.
E) Stop Payment in A Joint Account:
Anyone of the joint account-holders can stop payment
of the cheque but to remove the sop-payment shall be
signed by all joint account holders.
F) Survivorship: the authority who will operate the
account and to whom the balance shall be transferred in
case one or more customers die. (Law of Devolution)
G) Joint Account of Husband and Wife.
H) Bankruptcy of Joint Account Holder.
I) Safe Custody Items in Joint Account.
for details see, Siddique 2007, p.148
Bankers” Obligation and Authority to Pay Cheques
The origin of cheque is unknown, however the London
goldsmiths of the 17th and 18th centuries used to pay to third
parties by orders or “drawn notes” were the earliest form of
cheques.
The Crown servants and pensioners were paid by Debentures,
which after being encashed were kept as vouchers in proof.
The earliest known handwritten cheque is Dated 14th August,
1675, drawn on Mr. Thomas Fowlers, a fleet street goldsmith
banker for ₤9. Sh. 13, 6d. Is believed to the first written cheque.
It is believed that printed cheques were first issued between
1749 and 1759. However, cheques were not popular for number
of reasons. There was stamp duty on cheques also till 1927.
Definition and Requisition of A Cheque:
Definition”
According to section 6 of the Negotiable
Instruments Act 1881, “Cheque is a bill of exchange, drawn on
a specified banker and not expressed to be payable otherwise
than on demand”.
As a bill of exchange it must have all its characteristics as
mentioned in section 5 of the Negotiable Instruments Act
1881.
A cheque can also be defined as, “An unconditional order in
writing drawn on a specified banker, signed by the drawer,
requiring the banker to pay on demand, a certain in money
to, or to the order of, a specified person or to the bearer and
which does not order any act to be done in addition to the
payment of money”. (Law of Banking by Dr. Hart, p. 327)
The requisition of a Cheque:
Irrespective of any prescribed form or designed, the cheque
should fulfill all the requirements mentioned in Section 6 of
the Negotiable Instruments Act 1881, which says,
(i) It should be in writing:
Cheques are restricted by law to be hand written or
typed. Oral order cannot be entertained as cheques in any
circumstances.
(ii) The Unconditional Order:
customer cannot attach or put any conditions with
cheque payment, e.g. signing and dating a receipt of is
desired before payment or if customer desires to make
payment out of a particular fund.
(iii) Drawn on a Specified Banker Only:
The cheque can only be drawn on the customer's bank
and none else. The name of the banker must specified to
avoid any mistake in paying a cheque.
(iv) Payment on Demand:
Payable only on demand from the customer and should
be lodged during a reasonable period, at present, in Pakistan
it is 6 months from the date of its issue. After this time
period the cheque becomes “stale”.
(v) Sum Certain in Money:
The cheque must show a certain sum of money only. No
ambiguity or dispute in the amount be tolerated. Section 18
of the Negotiable Instruments Act 1881, authorizes the
bankers to take the amount in words as ordered or intended.
(vi) Payable to A Specified Person:
The cheque should be payable to or to the order of a
certain person or bearer of an instrument. According to
Law, a person may not be necessarily a human being. A
person can as well be one of the corporate bodies
constituted by Law to contract according to the recognized
legal principles.
(vii) Signed by the Drawer:
All or any cheque must be duly signed according to
Section 29-A of the Negotiable Instruments Act 1881.
Banking Law & Practice, Lecture No. 10 Accounts of Special Customers
Every person is though, legally capable of becoming a
party to contract, can open an account with the banker, but
the capacity of certain classes of persons to make valid
agreements is subject to well recognized restrictions.
For example in the agents, trustees, executors,
administrators, firms, and joint stock companies etc.
Special Account Holders:
A) Partnership Accounts:
Section 4 of Partnership Act 1932, describes,
“partnership is the relationship between persons who have
agreed to share the profits of the business carried on by all
or any of them acting for all”.
• Partnership can be created by an oral or written
agreement.
• Persons are individually called partners, while collectively
they are known as Firm
• Maximum number of partners in a banking business is 10,
and for other business is 20.
• At the moment there is no partnership firm conducting
banking business in Pakistan.
• In the course of ordinary partnership business, any act
done by one partner will bind the other.
• Every firm should be registered with the registrar of firms
under section 58 of the Partnership Act 1932.
• Unregistered firms are not entitled to any legal cover and
any law suit filed by these firms is not maintainable.
• Under section 18 of the partnership Act says, a partner is
the agent of the firm for the purpose of the business but
• Under section 19(2-B), he has no implied authority to
open a bank account on behalf of the firm in his own
name.
• In Alliance bank Ltd vs. Kearsley (1871), the bank was not
allowed recovery from other partners of the firm, as it was
held that it was not in the ordinary course of business to
open a bank account for a firm in the name other than
that of the firm itself.
Operation of Firm's Account
• A firm's account is to be operated according to the
instructions given at account opening.
• Section 19 of Partnership Act 1932 says, every partner in
a firm has an implied power to bind his co-partners by
drawing or endorsing of cheques,
• The drawing, accepting and endorsing of bills of
exchange, and making and making of promissory notes,
• Every partner has an implied authority also to
countermand payment of any cheque, and the banker is
bound to comply with the instructions issued by the
partner. Other normal operations include,
• Signing of the form, Specimen signature, partnership
letter, liability of the firm to the bank. (section 25) of P.A
Borrowing by a partnership firm
• Every partner in a trading firm has the implied authority to
borrow for the partnership firm and bind his partners in the
ordinary course of business.
• Each partner should have the power to pledge partnership
property as a security for advance.
• However the banker does not rely merely on implied authority
of a partner to borrow for the firm,
• The bank obtains signatures of all the partners on any deposit,
letter, charge and security documents.
• Dr. Hart says in “Law of Banking”, the mere fact that the firm
has had the benefit borrowed by a partner, will not render the
firm liable to pay it.
• Section 19 of Partnership Act lays down that if one partner
signs a legal mortgage, it is treated as equitable mortgage
Issues involved in Firm's Business
1. Admission of New Partners:
• Under section 31 of Partnership Act, new partner is not
responsible for the firm liabilities taken before his joining.
• The operation of the account should not be stopped but a fresh
mandate or partnership letter, duly signed by all partners
should be obtained for account operations.
2. Retirement of A Partner:
If the provision has been made in the contract, the partnership
can be carried out even after the retirement of a partner.
Section 32 of Partnership Act lays down that unless expressly
agreed, a retired person is liable for the debts already incurred and
also for the future unless, he gives notice of retirement.
3. Bankruptcy of A partner:
According to Section 34 of the Contract Act 1872, if there
is no agreement beforehand, the partnership/firm is
dissolved as soon as declared insolvent or bankrupt.
4. Death of A Partner:
Death of a partner dissolve the firm and the deceased's
personal representation have no right to act on his behalf.
5. Insolvency of A Firm:
If the firm is adjudicated as bankrupt or insolvent, the
business of the partnership vests with the officials assignee
who winds up the business.
Under section 39 of the partnership Act, the account become
inoperative.
Joint Stock Companies
What is a company:
Section 2 of the Companies Act 1984, defines,
• “company as, an association of individuals for the purpose
of profit, processing a common capital contributed by the
members constituting it.
• The capital is commonly divided into shares, which are
transferrable by the owner and this association in terms of
law become “An Artificial Person with a common seal and
perpetual succession.
• It is regarded as a legal person, separate and distinct from
its members. Such a company is called a Joint Stock
Company.
Types of Joint Stock Companies
Essentially there are 3 types of joint Stock Companies.
1. Unlimited Companies:
The liability of each member, like partnership is unlimited.
Since there is great risk involved, such companies are not
operating in Pakistan.
2. Limited Companies:
These companies are limited by shares, where the liability of
members is limited to the amount due on the shares held by
them.
3. Companies Limited by Guarantees:
Company members undertake to contribute a fixed amount of
money to pay the debts in the event the of company being wound
up. Capital is not usually divided into shares. The objective is to
promote some trade or science and not profit. E.g. Karachi stock
Exchange
Formation of Joint Stock Companies
Criteria for the formation of JSC:
a) Chartered Companies:
these companies are incorporated under a Royal charter
and have very wide powers. It is an oldest form but is
emerging gradually. E.g. East India company in the past.
b) Statutory Companies:
Incorporated under a special Act of parliament or Assembly.
Such companies not governed by the Companies Ordinance
but by the special Act. SBP is a good example in this case.
c) Registered Companies:
Formed under the Companies Ordinance 1984, and the
are many operating in Pakistan.
Limited Companies:
These companies may be Private or Public limited
companies.
In private Ltd company the right to transfer shares is
restricted ,and the public subscription in the shares is
prohibited under its articles. Maximum number of members
is 50.
A public Ltd company is registered as JSC under section 14 of
Companies Act 1984. the minimum number of members to
form the company is fixed at 7.
In addition these companies are required to meet all the
requirements prescribed in Section 29 of Companies
Ordinance 1984.
e) Company Limited by Guarantee:
The liability of the company is limited to a fixed amount of
money. The members are obliged to contribute this amount
when the company is in crisis.
Such companies are not generally formed for purpose of
profit but for the promotion of commerce, sports etc.
Opening of An Account: Public Ltd companies are required
to produce certified copies of certain documents when
opening an account with a bank.
a) Resolution of the board of Directors, b) Memorandum
and Articles of Association, c) Certificate of Incorporation,
d) Certificate of Commencement of Business, e) Balance
Sheet,
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