· French-Banqa, German-Banco Bench
· North Italy-Lombardy-operated from benches.
· When benches got looted-then term 'bankrupt' came.
· Babylonians deposited money in temples but used to get it stolen, so lost faith.
· Romans, Muslims-Charging of interest was not allowed so banking business suffered a set back.
· India (Manusmriti)-Special Chapters were made for this purpose and mention of interest etc. was there.
· Gautama, Katyayana-They also prescribed for this in their works.
· Middle ages-developed banking business 12th century-Bank of Venice Bank of Geneva 8 banks were established in the 12th century alone. 1401-Barcelona
· England Royal exchangers were appointed by royal family. The king was Charles I and he looted the entire money deosited in Royal exchangers.
· Individual cashiers were established in England but did not work successfully as they used to misappropriate the money.
· Goldsmiths earlier used to charge fees for deposits but later on started giving interest.
· Dutch banks were giving interest on money deposited-1672-Charles II also took all the money deposited in the Goldsmiths institutions.
· Mr. Patterson suggested a new banking institution to be established and passed the Tonnage Act. [Mention 1708 Act]
· 1749, 1759-Issue of cheque books for the first time.
· Peel's Act, 1844-This act gave monopoly to bank started by
Mr. Patterson's bank.
· 1920 Bank of England came into being and got nationalised in 1947.
Before 1936, there were no special provisions of law, except the Reserve Bank of India Act which itself was passed in 1934 and consequently the Reserve Bank of India was established on April 1, 1935, in respect of banking companies which used to be governed by Indian Companies Act, 1930. In 1936, some new provisions were introduced in the Indian Companies Act, 1913 relating to banking companies; but these provisions proved inadequate and necessity to bring a new legislation for banking companies was felt. Abuse of powers by persons controlling some banks, absence of measures for safeguarding the interests of depositors and economic interest of the country were some of the causes to bring a new legislation which ultimately came into force on 16th March, 1949 in the form of the Banking Companies Act, 1949. The Act was passed to consolidate and amend the law relating to banking. The Act was later amended in 1965 and a new name "The Banking Regulation Act, 1949" was given to it. The Act extends to the whole of India. The provisions of the Act are in addition to and not, except as provided in the Act, in derogation of the Companies Act, 1956 and any other law for the time being in force. The Act does not apply to a primary agricultural credit society, a co-operative land mortgagee bank and any other co-operative society, except in the manner and to the extent specified in Part V of the Act. Section 4 of the Act gives powers to the Central Government and the Reserve Bank of India to suspend the operation of all or any of the provisions of the Act, either generally or in relation to any specified banking company for a specified period mentioned in the section.
· Banking Regulation Act, 1949 was passed to consolidate and amend the law relating to banking Companies.
· It come into force from 16th March, 1949 and applies to the whole of India.
1. Abuse of powers by persons controlling the banks.
2. Absence of measures of safeguarding
(a) the interests of depositors of banking costs.
(b) economic interests of the country.
1. To consolidate and amend the law relating to banking costs.
2. It does not codify the laws of banking, merely regulates the functioning of banking companies.
Provisions of Act are "in addition to, and not, same as expressly provided in derogation of the Companies Act, 1956 and any other law for the time being in force".
Amendment Act-w.e.f. 1-2-1969.
It was imposed by Amending Act.
An Act further to amend the Banking Regulation Act, so as to provide for the extension of social control over the banks.
1. To determine priorities for lending and investment.
2. To evolve appropriate guidelines for management.
3. To promote re-orientation for decision-making machinery of banks.
4. To leave no opportunity in hand of bank managers and directors to mismanage.
1. Setting up of a National Credit Council (N.C.C.)
2. Introducing legislative controls by amending BRA, 1949.
Total members in NCC 25 (5 permanent)
1. Finance Minister-Chairman
2. Governer RBI-Vice-Chairman.
3. Deputy Chairman, Planning Commission.
4. The Secretary (Ministry of Finance)
5. Chairman Agriculture Refinance Corporation.
Remaining 20-Appointed by Government to secure adequate representation from sectors like commercial banks, co-operative sector, large and medium scale industries, agriculture and other professional groups, e.g., economists and experts.
After nationalization in 1969-NCC dissolved.
1. Constitution of board of directors of a banking company.
2. Management of affairs of banking company by a whole time Chairman.
3. Restrictions on loans and advances by banking company to its directors or to a company or firm in which he is interested.
4. Additional powers confered on the RBI.
5. Punishments for-
(a) obstructing any person from lawfully entering or leaving a bank.
(b) holding demonstration within a bank.
(c) acting to undermine depositors' confidence in a bank.
6. Special powers of Central Government to acquire undertakings of banking company if committing defaults.
Nationalisation of 14 major banks-w.e.f. 19-7-1969.
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970.
14 major banks were nationalised-whole of the undertakings taken over -became vested in 14 new corporate bodies-these new banks function as public sector banks.
3 types of banks : (1) Non-nationalised banking companies, (2) Nationalised banks (14+6=20+SBI+Regional rural banks+subsidiary banks), (3) Co-operative banks.
The provisions of this Act shall be in addition to, and not, save as hereinafter expressly provided, in derogation of the Companies Act, 1956 and any other law for the time being in force.
Nothing in this Act shall apply to (a) a primary agricultural credit society; (b) a co-operative land mortgage bank; and (c) any other co-operative society, except in the manner and to the extent specified in Part V.
The Legislature has deligated the power to suspend the operation of the Act to the Government or to Governer or in his absence, the Deputy Governor of RBI. The suspension of the operation of the provisions of the Act cannot exceed 1 year. The copy of the notification issued by the Government suspending the operation of provisions of the Act is required to be placed before the Parliament
"The accepting for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise."
According to this definition major characteristics of banking business are:
1. There should be acceptance of deposits.
There is difference between the terms "loans" and "deposits" when amounts are borrowed on the condition that they should be repaid on the expiry of a term, then they are "loans". In "deposits", the liability to replace arises only when a demand for repayment has been made.
In the case of Hirabhai v. Dhugnibai, the court held that "there is no distinction" between a deposit and a loan therefore, they both are money lent by the customer to the bank.
2. Deposits should be from public;
3. Repayable on demand or otherwise;
4. Withdrawable by Cheque, Draft, and order or otherwise.
The "Banking Company" is one which is formed and registered under the Companies Act.
"Banking policy" is one which is specified from time to time by the Reserve Bank in the interest of the banking system or in the interest of monetary stability or sound economic growth, having due regard to the interests of the depositors, the volume of deposits and other resources of the bank and the need for equitable allocation and the efficient use of these deposits and resources.
"Reconstruction bank" has been changed to Indian Investment Bank of India. Reconstruction Bank was construed for the Principal credit of Reconstruct agency, for industrial revival, to coordinate similar work of other institutes to assist and promote industrial development and to rehabilitate Industrial Concerns.
Any business which a bank is reqd. to undertake has been covered in
the definition. But it is not obligatory on the banks to undertake forms of businesses.
The banking company cannot undertake the business of banking without using as part of its name at least one of the words "bank", "banking", banking company. This has been done to ensure the interest of the depositors of the bank.
Purpose of Acceptance of Deposits should be 'lending' or 'investment'.
Therefore those Companies which accept deposists for financing their trading or manufacturing business, will not come within the definition.
According to Section 8, a banking company cannot engage itself directly or indirectly in the buying or selling or bartering of goods except for the purpose of realising a security given to or held by it.
A banking company is prohibited from acquiring immovable property otherwise then for the purpose of its own business. The banking compay can acquire immovable property for its own business. The banking compay can acquire for its own use. The provisions of Section 9 applies when the bank acquires building then for its own use. If the bank acquires any immovable property as a non-banking asset, it can hold the same for a period of 7 years.
The banking company cannot employ or be managed by a managing agent or employ or continue to employ any person who has been adjudicated as an insolvent or who has been convicted by a criminal court of an offence involving moral turpitude or who works for commission or share in the profits of the company or whose remuneration in the opinion of the Reserve Bank is excessive.
This Section 10A provides for the appointment of persons having professional experience on the Board of Directors.
It provides that one of the directors of the Banking company be a chairman either on whole-time or on part time basis. If the Chairman is appointed on a whole-time basis, he shall be entrusted with the management of the banking company. If Chairman is appointed on part-time basis, such appointment shall be made with the approval of Reserve Bank of India of the management of the affairs of the banking company shall be entrusted to the managing director who shall be in whole time employment of the banking company.
Though Companies Act, 1956 does not prescribe any minimum capital reserves for any company, this Banking Regulation Act, 1949 prescribes minimum capital is reserves for the banking company.
|
For companies incorporated in India |
Aggregate Value of paid-up Capital Reserves |
|
1. If it has place of business (POB) in more than one State |
Rs. 5,00,000 |
|
2. State of Bombay and Calcutta for both |
Rs. 10,00,000 |
|
3. If it has POB in 1 state but neither of which in Bom. or Cal. |
|
|
(a) For principal POB Plus |
Rs. 1,00,000 |
|
(b) For each POB in the same distt. |
Rs. 10,000 |
|
(c) In each POB outside the distt Rs. |
25,000 |
|
(d) For only one POB |
Rs. 50,000 |
|
[Subject to a min. of |
Rs. 5,00,000]. |
|
4. If it has all the POB in 1 State |
|
|
(a) If one/more POB is/are in City of Bom./Cal. Plus |
Rs. 5,00,000 |
|
(b) For each POB situated outside Bom./Cal. |
Rs. 25,000 |
|
[max. 10,00,000] |
Section 12(1) provides that in case of banking company incorporated after 15th January, 1973 the subscribed capital of the company must be at least one-half of the authorized capital; and paid-up capital must be at least half of the subscribed capital. The capital of the banking company must consist of ordinary shares only or of ordinary shares and such preference shares as may have been issued before July 1, 1944. Section 12(2) provides that the voting rights of any one shareholder on poll shall not exceed ten per cent. of the total voting rights of all the shareholders.
Section 13 provides that no banking company can payout directly or indirectly by way of commission, brokerage, discount or remuneration in any form in respect of any shares issued by it, any amount exceeding in the aggregate of two and one half per cent of paid-up value of the said shares.
Section 15 provides that a banking company cannot pay any dividend on its shares until all its capitalised expenses have been completely written off.
Restrictions as to payment of divindend: Special provisions have been made by this section for the payment of dividends to the share holders of the banking companies the provisions of Companies Act, 1956 relating to payments of deividends to the share holders don't apply to the banking companies. These special provisions have been made to safeguard the depositors interest and to ensure that the financial position of the banking companies may remain sound.
This section imposes restrictions on the directors of a banking company under the Companies Act, 1956. A director can be director in 20 public companies but under this section, a director of a banking company cannot hold the office of a director in another banking company. Similarly, if a person has a share holding in a company or companies which hold 20% of the share capital of the banking company, such person cannot be appointed as a director of such company. However the restrictions on the directorship of the banking company are not applicable to the directors appointed by the Reserve bank.
Section 17(1) provides that a banking company must maintain a reserve fund and transfer thereto at least 20% of its net profit each year. The company may be exempted from this requirement by the Central Government on the recommendation of the Reserve Bank of India, provided at the time it is made, the amount in the reserve fund together with the amount in the share premium account is not less than the paid up capital of the banking company.
Section 17(2) provides that where a banking company appropriates any sum or sums from the reserve fund or the share premium account, it must communicate this fact, explaining the circumstances relating to such an appropriation to the Reserve Bank of India, within 21 days from the date of appropriation. The Reserve Bank may in any particular case, extend the said period of 21 days by such period as it thinks fit or condone any delay in the making of such report.
Section 18 provides that every banking company other than a scheduled bank must maintain in India a cash reserve with itself or in current account with Reserve Bank or the State Bank of India or any other bank notified by the Central Government in this behalf, or partly in cash and partly in such account or accounts, a sum equivalent to at least three per cent of the total of its time and demand liabilities in India. The section further provides that the banking company must also submit to the Reserve Bank before the 15th day of every month a return showing the amount so held on Friday of each week of the preceding month with particulars of its time and demand liabilities in India on each such Friday or, if any such Friday is a public holiday under the Negotiable Instruments Act, at the close of business on the preceding working day.
This section prohibits any banking company from entering into any commitment for granting any loan or advance to any of the directors or any firm in which any of its director is a partner or manager etc. or company or its subsidiary in which any director of the banking is interested or to any individual for whom a director is a guaranter or with whom a director is a partner or director. The restrictions on loans and advances do not apply to the loans and advances granted by the banking company to its subsidiary company or to a company incorporated under Section 25 of the Companies Act. The directors of a banking company delegating their powers are under a duty to see that the delegate is kept within the limits of the powers delegated & function of property and effectively. If the directors fail to discharge such duty of supervision & effective control over the deligate they will be liable.
Section 20(1) provides that no banking company shall-
(a) grant any loans or advances on the security of its own shares or;
(b) enter into any commitment for granting any loan or advance to on behalf of-
(i) any of its directors,
(ii) any firm in which any of its directors is interested as partner, manager, employee or guarantor, or,
(iii) any company (except a subsidiary of the banking company or a company registered under Section 25 of the Companies Act, 1956 or a Government Company) of which or the subsidiary or the holding company of which any of the directors of the banking company is a director, managing agent, manager, employee or guarantor or in which he holds substantial interest or,
(iv) any individual in respect of whom any of its directors is a partner or guarantor.
The explanation to Section 20 provides that "loan or advance" shall not include any transaction which the Reserve Bank may specify by general or special order as not being a loan or advance for the purpose of this section. It further states that in case any question arises whether any transaction is a loan or advance for the purpose of this section, it shall be referred to the Reserve Bank whose decision thereon shall be final.
Section 20A provides that a banking company shall not, except with the prior approval of the Reserve Bank of India, remit in whole or in part any debt due to it by:-
(a) any of its directors, or
(b) any firm or company in which any of its directors is interested as director, partner, managing agent or guarantor, or
(c) any individual if any of its directors is his partner or guarantor.
Any remission made in contravention of the above provisions shall be void and of no effect.
Section 21 empowers the Reserve Bank to control the advances by banking companies in the public interest or in the interest of depositors or if necessitated by the banking policy. The Reserve Bank in this connection may give directions to the banking companies, either generally or to any banking company or group of banking companies in respect of the purpose of margins, maximum amount and rates of interest for such advances.
Section 22 provide that every banking company must obtain a license before commencing banking business in India from the Reserve Bank of India. The section is reproduced below:
"(1) Save as hereinafter provided, no company shall carry on banking business in India unless it holds a licence issued in that behalf by the Reserve Bank and any such licence may be issued subject to such conditions as the Reserve Bank may think fit to impose.
(2) Every banking company in existence on the commencement of this Act, before the expiry of six months from such commencement, and every other company before commencing banking business in India, shall apply in writing to the Reserve Bank for a license under this section:
Provided that in the case of a banking company in existence on the commencement of this Act, nothing in sub-section (1) shall be deemed to prohibit the company from carrying on banking business until it is granted a licence in pursuance of this section or is by notice in writing informed by the Reserve Bank that a licence cannot be granted to it:
Provided further that the Reserve Bank shall not give a notice as aforesaid to a banking company in existence on the commencement of this Act before the expiry of the three years referred to in sub-section (1) of Section 11 or of such further period as the Reserve Bank may under that sub-section think fit to allow.
(3) Before granting any licence under this section, the Reserve Bank may require to be satisfied by an inspection of the books of the company or otherwise that the following conditions are fulfilled, namely:-
(a) that the company is or will be in a position to pay its present or future depositors in full as their claims accrue;
(b) that the affairs of the company are not being, or are not likely to be, conducted in a manner detrimental to the interests of its present or future depositors;
(c) that the general character of the proposed management of the company will not be prejudicial to the public interest or the interest of its depositors;
(d) that the company has adequate capital structure and earning prospects;
(e) that the public interest will be served by the grant of a licence to the company to carry on banking business in India;
(f) that having regard to the banking facilities available in the proposed principal area of operations of the company, the potential scope for expansion of banks already in existence in the area and other relevant factors the grant of the licence would not be prejudicial to the operation and consolidation of the banking system consistent with monetary stability and economic growth;
(g) any other condition, the fulfilment of which would, in the opinion of the Reserve Bank, be necessary to ensure that the carrying on of banking business in India by the company will not be prejudicial to the public interest or the interests of the depositors.
(3A) Before granting any licence under this section to a company incorporated outside India, the Reserve Bank may require to be satisfied by an inspection of the books of the company or otherwise that the conditions specified in sub-section (3) are fulfilled and that the carrying on of banking business by such company in India will be in the public interest and that the Government or law of the country in which it is incorporated does not discriminate in any way against banking companies registered in India and that the company complies with all the provisions of this Act applicable to banking companies incorporated outside India.
(4) The Reserve Bank may cancel a licence granted to a banking company under this section-
(i) if the company ceases to carry on banking business in India; or
(ii) if the company at any time fails to comply with any of the conditions imposed upon it under sub-section (1); or
(iii) if at any time, any of the conditions referred to in sub-section (3) and sub-section (3A) is not fulfilled:
Provided that before cancelling a licence under Clause (ii) or Clause (iii) of this sub-section on the ground that the banking company has failed to comply with or has failed to fulfil any of the conditions referred to therein, the Reserve Bank, unless it is of opinion that the delay will be prejudicial to the interests of the company's depositors or the public, shall grant to the company on such terms as it may specify, an opportunity of taking the necessary steps for complying with or fulfilling such condition.
(5) Any banking company aggrieved by the decision of the Reserve Bank cancelling a licence under this section may, within thirty days from the date on which such decision is communicated to it, appeal to the Central Government.
(6) The decision of the Central Government where an appeal has been preferred to it under sub-section (5) or of the Reserve Bank where no such appeal has been preferred shall be final."
Section 23 empowers the Reserve Bank to control the opening of new place of business and transfer of existing place of business. These restrictions do not apply to the opening for a period not exceeding one month of a temporary place of business for the purpose of affording banking facilities to the public on the occasion of an exhibition, a conference or a mela or any other like occasion within a town, city or village or in the environs thereof within which the banking company already has a place of business.
Before granting any permission under this section, the Reserve Bank may be required to be satisfied by an inspection under Section 35 or otherwise, as to the financial condition and history of the company, the general character of its management, the adequacy of its capital structure and earning prospects and that public interest will be served by the opening or, as the case may be, change of location, of the place of business.
Section 35A empowers the Reserve Bank to give directions to banking companies generally or to a particular banking company. The section is reproduced below:
"(1) Where the Reserve Bank is satisfied that-
(a) in the public interest; or
(aa) in the interest of banking policy; or
(b) to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors, or in a manner prejudicial to the interests of the banking company; or
(c) to secure the proper management of any banking company generally;
it is necessary to issue directions to banking companies generally or to any banking company in particular, it may, from time to time, issue such directions as it deems fit, and the banking companies or the banking company, as the case may be, shall be bound to comply with such directions.
(2) The Reserve Bank may, on representation made to it or on its own motion, modify or cancel any direction issued under sub-section (1), and so modifying or cancelling any direction may impose such conditions as it thinks fit, subject to which the modification or cancellation shall have effect."
Section 36 gives further powers and functions of Reserve Bank which is also reproduced below:-
"The Reserve Bank may-
(a) caution or prohibit banking companies generally or any banking company in particular against entering into any particular transaction or class of transactions, and generally give advice to any banking company.
(b) on a request by the companies concerned and subject to the provision of Section 44A, assist, as intermediary or otherwise, in proposals for the amalgamation of such banking companies;
(c) give assistance to any banking company by means of grant of a loan or advance to it under Clause (3) of sub-section (1) of Section 18 of the Reserve Bank of India Act, 1934 (2 of 1934).
(d) at any time, if it is satisfied that in the public interest, or in the interest of banking policy or for preventing the affairs of the banking company being conducted in a manner detrimental to the interest of the banking company or the depositors it is necessary so to do, by order in writing and on such terms and conditions as may be specified therein:-
(i) require the banking company to call a meeting of its directors for the purpose of considering any matter relating to or arising out of the affairs of the banking company, or require an officer of the banking company to discuss any such matter with an officer of the Reserve Bank;
(ii) depute one or more of its officers to watch the proceedings of any meeting of the Board of directors of the banking company or of any committee or of any other body constituted by it; require the banking company to give an opportunity to the officers so deputed to be heard at such meetings and also require such officers to send a report of such proceedings to the Reserve Bank;
(iii) require the Board of directors of the banking company or any committee or any other body constituted by it to give in writing to any officer specified by the Reserve Bank in this behalf at, his usual address all notices of, and other communications relating to any meeting of the Board, committee or other body constituted by it;
(iv) appoint one or more of its officers to observe the manner in which the affairs of the banking company or of its officers or branches are being conducted and making a report thereon;
(v) require the banking company to make within such time as may be specified in the order, such changes in the management as the Reserve Bank may consider necessary.
(2) The Reserve Bank shall make an annual report to the Central Government on the trend and progress of banking in the country, with particular reference to its activities under Clause (2) of Section 17 of the Reserve Bank of India
Act, 1934 (2 of 1934), including in such report its suggestions, if any, for the strengthening of banking business throughout the country.
(3) The Reserve Bank may appoint such staff at such places as it considers necessary for the scrutiny of the returns, statements and information furnished by banking companies under this Act, and generally to ensure the efficient performance of its functions under this Act."
(1) Applies to all banking companies which are nationalised.
(2) Only few sections are applicable to nationalised banks.
(3) For company of banks-
(i) Paid-up share capital and reserves of Rs. 1 lakh and more
(ii) Applies to all State & Central Co-operative Banks
(iii) While applying, its sections are to be read as modified by
Constitutes central banking legislation.
Banking Regulation Act: Contains legislations for regulating the activities of commercial and co-operative banks.
Negotiable Instruments Act: Section 3-The term includes any person acting as a bankers.
American definition-
The business dealing in credits is banking.
Definition of Japanese Bank Act, 1927-Banks are defined as "Institutions which carry on operations of giving as well as receiving credit.
Zurich :
Bank is an institute which appeals to public for deposits.
Sweden :
Private banking firms can't use this word.
Argentina, Belgium, Canada, Denmark, Germany, Italy : Unauthorised use of the word 'bank' is prohibited.
English Law :
Dr. Hart : Essential functions to enable a person, firm or institute to be regarded as a banker or a bank, is that of receiving current deposits against which cheques may be drawn.
Sir John Paget's definition :
Four essential functions to be performed by persons desiring to be called bankers : (1) take deposit accounts (2) issue and pay cheques (3) take current accounts (4) collect cheques crossed and uncrossed for his customers.
(a) Collection of bills, promissory notes, coupons, dividends, payment of subscriptions and insurance premium.
(b) Acting as a trustee, attorney or executor of his customers.
(a) Issue of credit instruments.
(b) Transaction of foreign exchange business.
(c) Safeguarding of valuables and documents against fire, theft etc.
"Banker" is a person who engages in business of banking.
"Bank" is a financial establishment for the deposit, loan, exchange, or issue of money and for the transmission of funds.
No statutory definition (By Sir John Paget's definition).
"To constitute a customer, there must be some recognisable course or habit of dealing in one nature of regular banking business.
· It arises out of the Contract between them and cannot be created except by mutual consent.
· A Contract which exists between both of them is a loan contract. Therefore, if customer account is in credit, then bank can give him money, vice-versa if account is overdrawn.
· The relationship between them is basically a contractual relationship of debtor and creditor and is regulated by the provisions contained in the Negotiable Instruments Act, 1881 and Indian Contract Act, 1872.
Services provided by banks in our country are classified into two categories (1) Traditional (2) New services.
1. Traditional Services:
It confers:
· Maintenance of different types of deposit accounts e.g., savings, fixed and current
· Grant of advances through cash credit, overdraft and loan accounts
· Collection of cheques, bills of exchange and other instruments.
· Issue of performance and financial guarantees.
· Permission of remittance facilities by issue of draft, mail transfers and telegraphic transfers.
· Provision of facilities of safe deposit and safe custody.
· Purchase and sale of securities.
2. New Services:
New services laid emphasis on deposit mobilization and grant of credit to weaker sections of the society.
In the case of Central Bank of India Ltd., Bombay v. Gopinath Nair, Customer is defined.
Relationship is of following types:-
1. Debtor and Creditor.
2. Trustee and Beneficiary.
3. Agent and Principle.
4. Bailee and Bailor.
5. Mortgagee and Mortgagor.
6. Lessee and Lessor.
7. Relationship defined by rules of banking practice.
Case :
Mathews v. Williams (1884)
Held:
The initial transaction in opening an account did not set up the relation of a banker and a customer. There had to be some measure of continuity and custom-Duration Theory.
Case :
Ladbrokes v. Todd (1914)
Duration theory exploded - held :
relation of banker and customer begins as soon as the first cheque is paid in and accepted for collection and not merely when it is paid.
Case :
Commissioner of Taxation v. English Scottish & Australian Bank
Above view was confirmed.
Case :
Ram Narayan v. The Simla Banking & Industrial Co. Ltd.,
MANU/SC/0003/1956 : AIR 1956 SC 614
It was held that Sections 171 and 232 of Indian Companies Act are applicable to winding-up proceedings in respect of a bank even after the Banking Companies Act as amended in 1953 as Section 2 of Banking Companies Act specifically provides that the provision of the Act shall be in additon to and not in derogation of Indian Companies Act.
Case :
Central Bank of India v. Their Workmen, MANU/SC/0142/1959 : AIR 1960 SC 12
Court held :
The meaning of "shall employ" means and includes shall have in employment. Further the word "remuneration" in Section 10(1)(b) has been used in the widest sense of any recompense for services rendered, whether the payment is voluntary or under a legal obligation. In that sense it undoubtedly includes bonus.
Case :
(Minority Judges) J. Kapoor & J. Shah state that Section 38(3)(b)(iii) did not offend provisions of Articles 19(1)(f) and 19(1)(g) and were valid. In view of the history of the establishment of Reserve Bank as a Central Bank for India, its position as a bankers bank, its control over banking companies and banking in India, its position as the issuing bank, its power to license banking companies and cancel their license and the numerous powers, a law which empowered the reserve bank to come to a decision to wind up any unsafe banking company in the interest of the depositors could not be challenged as unreasonable.
A law may with reason, leave the determination of an issue to an expert body and such law is justified on the ground of expediency arising from the respective opportunities for action.
In this case, it was held: (Majority Judges)
Section 38 of Banking Companies Act was an unreasonable restriction on the rights of a Banking company to carry on its business and was therefore unconstitutional. A fundamental right pursuant to the subjective satisfaction of the Reserve Bank even though it is an expert body, as to the existence of state of affairs and thereby permanently depriving the citizen of his right of property is wholly unreasonable.
Case :
Indian Overseas Bank Ltd. v. The Commissioner of Income Tax, Madras, MANU/SC/0307/1970 : AIR 1970 SC 1530
That the reserve contemplated under Section 17 is a separate reserve. The amount transferred to that reverse cannot be utilised for business purposes. The reserve contemplated by Income Tax Act is an independent reserve.
Case :
Corporation v. D.S. Gowda, AIR 1994 Com Cas 842
Issue was:
Whether the banks are bound to follow the directive circulars issued by RBI in exercise of the power conferred by Section 21 of the Banking Regulation Act, prescribing the structure of interest to be charged on loans/advance made from time to time and if yes to what extent.
Case :
Muthain v. Syndicate Bank, 1988 Bank Journal 18 (Mad)
Held :
That the rate of interest claimed by the Syndicate Bank can be a subject-matter of judicial scrutiny as under Banking Regulation Act there is no such prohibition, since Section 2 of this Act makes it clear that the provisions of any other enactment and their application are not excluded by the provisions of this Act.
Case :
Indian Bank v. K. Usha, 1993 (2) CLR 508
Held :
Section 19(d) of Specific Relief Act provides that the specific performance of a contract entered into by a company which subsequently becomes amalgamated with another company can be enforced against the new company.
The court held that Bank is bound to give employment to the son.
Case :
G. Gopinathan Nair v. State of Kerala, AIR 1977 Ker ????
Held :
That the contention of the Co-operative society that the co-operative societies carrying on the business of banking are governed in respect of such matters by the provisions of Banking Regulation Act is devoid of any substance.
Case :
Bishop of Kottayam v. UOI, MANU/KE/0027/1986 : AIR 1986 Ker 126
The Bank of Cochin contended that while acting as an authorized dealer in foreign exchange, it does not transit banking business.
Court held:
When a bank acts as an authorized dealer in foreign exchange to receive foreign contribution through any one of its branches, it transits the banking business. The definition of banking in the Banking Regulation Act means the acceptance of deposits of money from the public repayable on demand or otherwise.
Case :
Pheonix Impacts v. State, MANU/RH/0204/1998 : AIR 1998 Raj 100
For a company to be a banking company under this provision, it is not necessary that at a particular point of time it should be in a position to transact its business. The definition also means that transacting the business of banking should be its business and it is not that business should not be transacted at any particular point of time. The fact that the banking company may not be transacting the business of banking at a particular point of time due to some supervening cause, will not cause a banking company to cease to exist within the meaning of the definition contained in Section 5(c).
Case :
North East Finance Corp. Ltd. v. UOI, AIR 2000 Sikkim 1
Sikkim Bank Ltd. is a company within the meaning of Banking Regulation Act by virtue of the notification with which the Banking Regulation Act, 1949 was extended to Sikkim and is also a banking company.
Case :
Central Bank of India v. Their Workmen, MANU/SC/0142/1959 : AIR 1960 SC 12
Held :
The word "Remuneration" has been used in the widest sense, so it undoubtedly includes bonus.
Case :
I.P. Association v. Workmen of Syndicate Bank, (1998) 1 LLJ 233 AP
Held :
The banking Co. cannot employ a person whose remuneration takes the form of commission or of a share in profits of company except broker or agent employed under contract otherwise than as a regular member of staff.
Case :
Central Bank of India v. Their Workmen
Also Held :
The word "any person" is not restricted to those on the managerial or administrative staff but it also applies to other staff members of the banking company.
To determine "Moral Turpitude" court has laid down various tests to judge it.
1. Whether the act leading to a conviction was such as could shock the moral conscious of society in general.
2. Whether on account of the act having being committed, the convict could be considered to be a person who was to be looked down upon by the society.
Case :
Purewal & Associates v. Punjab National Bank, MANU/SC/0134/1993 : AIR 1993 SC 954
This suit is a civil appeal arising out of Special Leave Petition.
In this suit, appeal has been allowed under Article 133 of the Constitution which provides for an appeal to the Supreme Court from any judgement, decree or final order in a civil proceeding of a High Court only if High Court certifies-
a. That the case involves a substantial question of law of general importance.
b. That in the opinion of High Court the said question needs to be decided by Supreme Court.
Now, the facts were: that the appellants were the manufacturers of watches and clocks. They were aggrieved by the denial of banking services to them by the respondent bank. The denial was on the ground that the appellants who allegedly owe large sums of money to the Bank, had failed and neglected to repay dues. The appellant alleged that the respondent had virtually made it impossible for them to avail themselves of normal banking services and operations such as furnishment of letters of credit for import purpose, payment of statutory outgoings, taxes, wages, salaries, payment to suppliers of raw materials etc. and this refusal was sought to be denied on the authority of certain Reserve Bank Instructions & Inter-bank arrangements.
Further Appellants alleged that as a result of this attitude made manifest by the Banks in terms of discipline of RBI, appellants could not survive at all as normal banking activity is indispensable for day-to-day business even at subsistence levels.
Appellants said that they were stifled by these coercive measures and the Bank was applying these procedures to coerce repayment of yet unadjudicated disputed claims. So, bank was required to make some interim arrangements in this behalf.
Appellants also said that the respondent bank could recover the dues claimed by it in accordance with and in the manner known to law.
Now, after considering the contentions of the parties, the bench of Justice M.N. Venkatachaliah and K. Ramaswamy, quoted that "the respondent-Bank may not deny banking facilities to the appellants for operation of a current account to enable them to keep their business going and such account will be free from the incidents of the banker's lien claimed by the respondents. Appellants shall be allowed to obtain letters by credit at full margin and to enable payment of statutory outgoings, taxes, wages, salaries, raw-materials etc. which are the usual business requirements of a manufacturing unit.
But also they said that there shall be no obligation on the part of the bank to provide any credit facility in this account.
However, in consideration of and as a condition for this facility, the bank shall be entitled to receive towards its old account a sum of Rs. 25,000 every month and these payments were to be made against such dues as may be determined against the appellants in appropriate legal proceedings.
Further, they said that this arrangement was made to preserve the rights of both the parties till the bank's claims were fully adjudicated and the respondent Bank was at liberty to institute suit or other appropriate proceedings against the appellant for recovery of its alleged dues and these arrangements made in this order would govern the parties till such proceedings were instituted by the Bank. It was also open to the parties to urge before the forum where such legal proceedings were commenced by the bank for appropriate further interlocutory directions.
Hence, the appeal as well as the writ petition in the High Court were disposed of accordingly.
Such a relationship is created when the banker receives the money of his customer not for deposit but in some other capacity.
In re Farrow Bank LTD. (1923)
Official Assignee of Madras v. J.W. Iron
Official Assignee of Madras v. D.R. Ayyar
First National Bank v. Pioneer Commercial Bank Ltd. (1951)
Sugan Chand & Co. v. Brahammya (1951)
M.P. Co-op Bank v. P.D. Dayal (Official Liquidator)
Bhouanipur Banking Co-op Ltd. v. Bijoy Addy (1942)
Subramaniam Pillai v. Palai Central Bank Ltd.
Bailee has to return goods back to the bailor when the purpose is achieved or otherwise disposed off according to the instructions of Bailor.
UCO Bank v. Hem Chandra Sarkar, MANU/SC/0257/1990 : AIR 1990 SC 1329
(i) There was an oral agreement.
(ii) Bank was the agent of the plaintiff.
(iii) There was a fiduciary relation between bank and the plaintiff.
High Court confirmed the view of the Trial Court. Bank went to Supreme Court as appellant.
Supreme Court observed - In banking transaction, oral agreements are not good.
· Central Bank of the Country.
· It performs both the traditional functions of central bank and a variety of development and promotional functions.
· RBI Act, 1934, confers upon its powers to act as NOTE-ISSUING AUTHORITY, Banker's Bank and Banker to the Government.
· It was set-up as a shareholder's bank with a share capital of Rs. 5 crore divided in 5 lakh fully paid-up shares of Rs. 100 each.
· Entire share Capital was owned by private shareholders with exception of Rs. 2,20,000 which was reserved for allotment to the Government.
· Close integration between policies of RBI and Government were found to be essential.
· It was done after independence only when RBI (Transfer of Ownership) Act, 1948 was passed as per provisions of the Act and entire share Capital was acquired by Government of India with effect from 1 Jan, 1949.
· In the hands of a Central Board of Directors and four local Boards.
[4 local Boards with headquarters at Mumbai, Calcutta, Chennai, and New Delhi].
· Central Board has 20 members.
(a) One Governor and four Deputy Governors appointed by Central Government for a term not exceeding five years.
(b) Four directors nominated by Central Government from each local Board. [Sec. 8(1)(b)]
(c) Ten directors are to represent business, industry and co-operation.
[Sec. 8(1)(c)]
(d) One official nominated by Government of India. [Sec. 8(1)(d)]
· Main function of local Board is to advice the Central Board.
R.B.I has authority to issue currency in the country. All currencies (except 1 rupee coins, 1 rupee notes and other smaller coins) are issued by RBI.
According to Section 33 of RBI Act, 1934,
Assets of the issue deptt. shall have;
· Gold coin and Gold bullion.
· Foreign securities
· Rupee coins and rupee securities.
They are receptacles, (i.e., boxes or containers) in which stock of new or
re-issuable notes are stored along with rupee coins.
(2) Banker to the Government:
It acts as the agent and advisor of both Central and State Governments (except Jammu and Kashmir).
(R.B.I) it discharges following functions to Government-
(i) It keeps cash balances by the Government as deposits free of interest.
(ii) It receives and makes payments on behalf of the Government.
(iii) It carries out their exchange remittance of other banking operations.
(iv) It helps both Central and State Government to float near loans and to manage public debt.
(v) It creates ways and means for advances to the State and local authorities.
(vi) It acts as advisor to the Governments on all monetary and banking matters.
It is the apex banking institution controlling the banking and credit system through its position as banker's bank.
As Banker's Bank it holds cash balances of the commercial banks.
Its function is to provide enough assistance in regulating the credit creating activities of commercial banks.
Section 49 of the Reserve Bank of India Act empowers the bank to publish the bank rate from time to time and it defines bank rate as "standard rate at which it is prepared to buy or re-discount bills of exchange or other commercial papers eligible for purchase under this Act."
It is another weapon at the disposal of the Reserve Bank to control credit. According to the Reserve Bank of India Act, 1934, every scheduled bank has to keep certain minimum cash reserves with the RBI. The present CRR remains at 10%, effective from Jan 18, 1997.
Statutory Liquidity Ratio (SLR) is another method of influencing the lending policies of commercial banks. All commercial banks have to maintain liquid assets in the form of cash, gold and unencumbered approved securities equal to not less than 25% of their total demand and time deposit liabilities.
In India open market operation refers to the purchase and sale of government securities by the Reserve Bank from/to the public and banks on its own account.
Ensues effective co-ordination and control over credit. Organizes sound and healthy commercial banking system-
(i) Development of rural banking
(ii) Promotion of financial institutions
(iii) Development of money and capital market in India.
(1) Established the Bill Market Scheme in 1952.
(2) Helps to provide credit to agriculture sector/industrial sector of economy.
(3) Has promoted Regional Rural Banks with the help of commercial Banks to extend banking facilities to rural area.
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credit account (b) |
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(a) Current Deposits |
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over drawn (d) |
Demand deposits
(c) Saving Deposits
(a) Generally maintained by firms/business organizations.
(b) No interest rather than fee is charged by bank.
(c) No restriction on the number of transactions a day.
(d) No duty of the customer to notify the banks of any items which not authorised by him.
(Forged cheques)
Held : (1) No liability of the customer
(2) Clear and unambiguous provision is needed if the banks are to introduce into the contract a binding obligation upon the customer.
· Bank Pass Book
· Banker's right to recover amount for credits made in error.
(i) Generally maintained by the customers for saving money for meeting needs (ii) Lower rate of interest is paid by the bank on these deposits. (iii) Facility of collection of cheques (iv) Government Deptts./Municipal Corporations are prohibited from opening (v) Time deposits term deposits/Fixed deposits.
(1) After expiry of a specific period
(2) FDR
(3) Cheques can't be drawn against FDR. These days cheques are paid as loan by charging interest.
(4) FDR neither negotiable nor transferable.
Held : No particular form of writing is necessary for an assignment. Assignment becomes effective as soon as the document is signed by one depositor and bank is advised.
(5) Premature withdrawal
(6) Garnishee order under O. 21, R. 46, CPC
(7) DR given is exmpted from stamp duty.
(8) Issue of FDR
Even a small amount of money can be withdrawn or can be transferred from one branch to another at the request of the account holder.
1. Application on the prescribed form
2. Introduction of the applicant
3. Safety against wrong overdraft granted
4. Enquiries about the customer
5. Evidence of negligence
6. Specimen signatures
7. Mandate for the operation of the Account
Also called as Cumulative Time Deposit Accounts (CTD Accounts) - Another form of saving accounts.
(1) Persons (2) P/S Accounts (3) Companies (4) Joint Accounts
Before opening a new account a banker should take certain precautions i.e. the applicant who wants to open an account with a bank must be properly introduced to the banker. If the banker opens account without proper introduction or shows carelessness in this regard, the chance of fraud or misrepresentation may occur.
By opening an account with the banker, a customer enters into relationship with a banker. The banker-customer relationship imposes several obligations on the banker e.g., honouring of cheques drawn by the customer, maintenance of secrecy of the account, etc. To safeguard the interest of banker, it is necessary that bankers should open only for honest, reliable, and responsible parties. Therefore, before opening an account the banker should observe the following precautions:-
1. Application on the prescribed Form: To open an account the customer is required to mention his name, occupation, full address, specimen signature and the name and signature of a person for reference.
2. Introduction of the applicant: A bank should enquire from responsible parties given as references by the customer about the latter's integrity and honesty. If a bank fails to do this it will result in serious consequences not only to it but also for other banks and the general public. By allowing a person to open an account without satisfactory introduction or reference, a banker would be inviting unpleasant consequences. Further, if the person happens to be on undischarged bankrupt the banker would be facing serious consequences.
3. Safety against wrong overdraft granted: At the time of opening an account although the banker may not intend to grant an overdraft to the prospective customer at times an over draft may be granted inadvertently. In such a case the amount can be realized only if the customer is a respectable solvent party.
4. Enquiries about the customer: A banker should retain sufficient information about his customer regarding the latter's financial soundness, nature of business in which he is engaged etc.
5. Evidence of negligence: In any enquiry regarding the new customer may make a banker guilty of negligence, he can not claim protection under Section 131 of Negotiable Instruments Act, 1881. In the course of his judgement in the case of Lad Broke v. Todd Justice Balthackere said that the bank acted negligently for they did not make ordinary enquiries which ordinarily reasonable people should make in opening an account. A contradictory view was given in a more recent case, Bapulal Premchand v. Nath Bank Ltd. (1946). In this case Justice Chaglo held that, it was not obligatory upon a bank to make enquiries as to the respectability of a customer in order to avail itself of the protection given to it under Section 131 of the Negotiable Instruments Act. In view of these contrary ideas, it is therefore safe for a bank not to accept a person as a customer without introduction or some reference except in case of parties personally known to an office of the bank.
6. Specimen Signature: Every customer is required to supply his banker with a few (usually three) specimens of his signature on the specimen signature cards kept by the banker. A recent practice is that bankers take specimen signature of a customer at the top of the ledger sheet where the account of a particular customer is opened. The customer's name and address will also be written there.
7. Mandate for the operation of the account: The banker should get from his customer a mandate if the latter intends operations on his account by another person. His power to draw and endorse cheques does not give him powers to accept bills or overdraw the account. Specimen signature of the persons authorized to operate on the account should be given in the mandate. A banker should supply to the customer free of cost a cheque book, pass book and a pay-in slip book.
If the banker opens an account without introduction the banker runs certain risks which are as follows:
(i) The banker cannot avail of the statutory protection: Section 131 of the Indian Negotibale Instruments Act provides statutory protection to the banker, if he collects bills or cheque etc., on behalf of a customer in case the latter has no title, or defective title thereto. This means the banker should have collected the cheque or bill on behalf of a "customer" i.e., who has been allowed to open the account with proper introduction.
(ii) Risk in case of overdrafts: If a customer who is not properly introduced is granted an overdraft even by mistake or negligence, the banker may not be able to recover the amount under such circumstances of granting overdraft by mistake. The bank can recover the amount only if the customer is a respectable party.
(iii) Risk in case of undischarged insolvent: The deposits received by a banker from an undischarged insolvent without proper introduction carries the risk of attachment.
(iv) Issue of bogus cheques: A customer who is not properly introduced, obtains possession of cheque books and may issue cheques without sufficient balance. As a result of the failure to make necessary enquiries, the banker may enable a dishonest person to obtain for fraudulent purposes, the possession of a cheque book and if such a person happens to be an undischarged insolvent the bank might be placed in a difficult position by unknowingly allowing such a person to operate on his account with the bank.
(v) As per the directives of RBI, bank should immediately obtain introduction for all deposit accounts. Introduction is necessary for all types of accounts except that of a limited company. Also introduction is not required in case of opening a fixed deposit account because a cheque book is not issued under such an account.
The primary function of a commercial bank is to attract deposits of money from the bank. The bank does this by opening accounts. An account in a bank can be opened by any person who (i) is legally capable of entering into a valid contract, and (ii) applies to the banker in the proper manner i.e., he follows the procedure laid down by the banker and accepts the terms of conditions stipulated by the latter. Under the provisions of the Indian Contract Act, 1872, certain persons like minor, insolvent, lunatic and drunkards are incompetent to enter into valid contracts. The bank must take necessary precautions in dealing with such persons in order to safeguard its interests. Institutions like clubs, societies, Colleges, partnership firms and joint stock companies also open account with the banker. The bank should take special care and precautions while dealing with such special types of customers.
According to Section 3 of the Indian Majority Act, 1875 a person who has not completed the age of 18 years, is a minor. If he is under the court of wards the age of majority is 21 years. That is, if a guardian of such person on property is appointed by the court before he completes 18th year, he remains a minor till he completes his 21st year. According to the Indian Contract Act, 1872, a minor is not capable of entering into a valid contract because any contract entered into by a minor is void except a contract for supply of necessaries of life which is regarded as valid contract.
It was decided in the leading case of Mohori Bibi v. Dharmadas Ghose that all contracts entered into by minors are void. Hence as long as a minor is a party, contract for monies lent or to be sent for goods supplied or to be supplied and accounts stated are absolutely void but contract with a minor will be valid if they are for necessities of life or for the benefit of the minor and suitable for the standard of living of the minor.
A minor can effectively discharge his duties as agent since an agent does not require contractual capacity. He can also be a witness to a sign. More than all he can be a beneficiary in any contract and enforce it in his favour.
Usually the banker encourages opening of Saving Bank Accounts in the name of the minor represented by his natural guardian. Father is a natural Guardian. If the father is not alive or available, the mother of the minor will be the natural Guardian. If both of them are not available, then the court of competent Jurisdiction can appoint a Guardian. The bank should record the date of birth of the minor and can take any action on his attaining Majority. The account shall stand in the name of the customer alone. His specimen signature will be brought on record and the minor shall be allowed to operate the account independently. Thus the guardianship can be summarized as follows:-
1. In case of a boy or unmarried girl father is the Guardian, if father is not alive then mother.
2. In case of illegitimate boy or illegitimate unmarried girl mother is the natural guardian if not alive then father.
3. Minor married girl-husband.
4. If both father and mother are not alive a person appointed by competent court.
5. Father and mother as above do not include step father and step mother.
6. Parsis/Christians same as above.
7. In case of Muslims father is the natural Guardian.
On death of father the sequence being-
(a) Executor appointed by father's Will
(b) Father's father
(c) Executor appointed by Will of father's father.
8. Mother as guardian for opening of Account: As per the guidelines of R.B.I., Banks can open Savings Bank and term-deposit accounts in the names of Minors with mother as guardian while father is alive.
9. Testamentary guardian for Hindu Minor: A Hindu father by Will can appoint a guardian in respect of minor's property. Such a testamentary guardian will act as guardian only after the death of father and mother.
If the minor customer dies, the balance in the account will revert to and in favour of the Guardian. But if the Guardian dies, the balance will be available to the minor only on attaining Majority of course it is open to the court to appoint any person as a guardian instead of deceased.
Since the minor can effectively function as agent he can over draw his principal account. The latter is bound by the same. The banker should see that the minor acts within the authority granted to him by his principal-Even if an advance is granted to a minor on the guarantee of a third party in as much as the contract between the creditor and the minor. The banker cannot in any event recover the money even from his customer. If the minor acts without authority or exceeds his authority, the agent will be personally liable and the agent being a minor, the banker cannot proceed against.
There is nothing to prevent a minor from becoming a partner in a firm and transacting business on its behalf. However, he cannot be held liable for any debts of the partnership incurred before he attains majority. In a contract of partnership within six months of his attaining majority, he will be regarded as having ratified the agreement and will become liable as a general partner for all debts incurred by the partnership since he was admitted to the benefits of Partnership.
(1) The bank may open a Saving Bank Account in the name of the minor in any of the following ways:-
(i) In the name of the minor, to be operated upon by the natural guardian of the minor or guardian appointed by the court.
(ii) In the name of minor, to be operated upon himself, if he has attained the age of 14 years.
(2) The bank records the date of birth of the minor as given by the minor or his/her guardian on the attainment of maturity. The account of the minor in the name of the guardian should be closed and the balance paid to the minor or to be offered to a new account of his/her own name in case of a Joint account.
(3) If the father of Hindu minor dies, his mother becomes his natural guardian. After the death of the mother during the minority of the boy, there is either the testamentary guardian or the guardian appointed by the court.
(4) In case if the minor dies, the balance in the account is permitted to be withdrawn by the guardian and in case of Joint account the balance will be held at the absolute disposal of the guardian.
(5) No risk is involved if an Account is operated in the name of a minor so long as the Account is not overdrawn by the minor. But if an overdraft or advance is granted to a minor even by mistake or unintentionally the banker has no legal remedy to recover the amount from the minor.
(6) If an advance is granted to a minor on the guarantee of a third party, such advance cannot be recovered from the guarantor also because the contract of Guarantee is invalid.
(7) A minor may draw, endorse or negotiate a cheque or a bill but he cannot be held liable on such cheque or bill. He cannot be sued in respect of a bill accepted by him during his minority. The banker should therefore be very cautious in dealing with a negotiable instrument to which a minor is a party.
(8) A minor can be admitted to the benefit of partner with the consent of all the partners but he will not be liable for the losses or debts of the firm within six months.
A married woman can enter into a contract in her own name. Such a contract will bind any property which she has acquired either as Stridhan or otherwise. Hindu married women are governed by the Hindu Succession Act, 1956. The status of married women of other religions is governed by the Indian Succession Act, 1925 and by the Married Women's Property Act, 1874.
According to Indian Contract Act, a married woman has the right to enter into contract to acquire and sell property, to lend and borrow money etc. In other words she has all the rights which a man has. A Current Account may be opened in the name of a married woman. A married woman has power to draw cheques and give sufficient discharge. Even if she has separate property the property may be so settled upon her that she is entitled to the income as it falls due but may not touch the corpus or the anticipated income. A married woman cannot make her husband liable except for the necessities of life.
Married women are competent to enter into contracts. A banker may open an Account in the name of a married woman and she can enter into contracts and bind her separate estate.
A married woman can open a Joint Account with her husband. In such a case a banker should obtain clear instructions as to who is entitled to operate the Account and to whom the amount is payable in the event of the death of any one of them. In the absence of clear instructions, the banker should not pay the amount standing in the Joint Account to the widow on the death of the husband, because the question of inheritance is involved in all such cases.
A banker should be very careful in granting an overdraft to a married woman. If she has property, it must have been endowed in such a way that she can enjoy the income of the property but has no right to sell property.
A married woman cannot make her husband responsible for the debts incurred by her except in some cases. If she is authorized to act as an agent of her husband, then her husband can be made liable for the debts.
Her husband can be made liable for the debts of a married woman in following cases:-
(1) If the loan is taken with his consent or authority
(2) If the debt is taken for the supply of necessities of life to the wife in case the husband defaults in supplying the same to her.
Banker does not have any risk in dealing with a married woman so long as the Account shows a credit balance. But if an overdraft is granted to her, he may find it difficult to recover the amount.
(1) The husband of a married woman is not liable for debts contracted by her except insofar as they are for necessities or for house hold purposes. So the banker should not lend money to a married woman simply because her husband has sufficient property.
(2) If she does not have separate property, there will not be sufficient security for overdrafts granted to her. It may be difficult to recover money from her.
(3) If she has separate property the banker must find out the nature of her right to that property, although she may enjoy the income thereform.
(4) If there is a Joint Account in the names of husband and wife and if there is clause to the effect that in the event of the death of one party, the balance should vest in the survivor, the banker's position will be safe.
The banker can open a Account in the name of an illiterate person who cannot sign but banker can take his thumb impression as a substitute for signature. The banker should also take his recent photograph attested by a first class magistrate for the purpose of identification. While drawing cash from the bank, such persons should come to the bank and get cash in the presence of a witness in the office of the Bank Manager.
Illiterate persons cannot sign their names but affix their thumb impression. In such cases the bank may permit the opening of a Savings Bank Account or fixed deposit Account by an illiterate person by taking thumb impression instead of his signature. The bank should also insist on a copy of the photograph affixed on the account-opening form. Withdrawals from his Account will be allowed only if he comes personally to the bank and puts its thumb impression in the presence of some responsible officer of the bank.
Section 3 of the Indian Trustees Act, 1882 defines a trust as "it is a relationship which arises where a person holds a property for the benefit of certain other persons or for some objects allowed by law." The real benefit accrues not to the trustees but only to the beneficiary or the objects for which the trust is created. The person, who has settled the property, is the authority of the trust and is known as a "setter". A trustee is a person entrusted with the responsibility of managing an estate for the benefit of a person or persons according to the trust deed or Will. Person in whom the property is vested is the trustee. He is so called because of trust or confidence reposed in him. The document through which the trust is created is called "trust deed".
While opening an account the names of persons in the capacity as trustee, the banker should take the following precautions:-
1. The banker should thoroughly examine the trust deed, appointing the person as a trustee.
2. He must also inspect the official probate or letter of administration.
3. He must acquaint himself with the names of the trustees, their powers and functions.
4. The banker should obtain specimen signature of person or persons authorized to operate on the Account.
5. A trust is an office of confidence. They cannot delegate their power. They must act personally.
6. The banker must see that the trust funds are not misapplied.
7. He should not allow transfer of trust funds to the personal Account of the trustee.
8. The banker should not lend to a trustee as he does not have general power to borrow.
The banker should take all possible precautions to safeguard the interest of the beneficiaries of the trust, failing which he shall be liable to compensate the latter for any fraud on the part of the trustee.
A customer may appoint an attorney to deal with his bank account. The power of attorney may be either special or general. In the case of special power of attorney, the person so authorized gets power only for some limited purpose mentioned e.g., sale or purchase of property etc. In the case of general power of attorney, the grantor of powers authorizes the other person to act on his behalf in all matters concerning his business.
While opening an Account in the name of an attorney for a person the bank should take the following precautions:-
1. The banker should get a copy of the registered document attested by a notary public and keep it for his own record.
2. The banker should take note of all the terms of the power of attorney which are likely to be of concern to him at any time.
3. It must be seen that specific power is granted for opening and operating a bank Account by the attorney himself.
4. The banker should note down the name and address of the person who has granted the power of attorney.
5. The Account opening form should be signed by the principal and the signature of the attorney must be attested by him.
6. The banker should not accept any conditional power of attorney.
7. The banker should note that the death, insolvency or insanity of the principal revolves the authority vested in the agent and the latter ceases to act as agent of the principal.
One of the conditions of a valid contract is that it must be entered into between persons who are of sound mind. A person is said to be of sound mind for the purpose of making a contract if at the time he makes it he is capable of understanding it and of forming a rational judgment as to its effect upon his interests.
If a person alleges that as a result of intoxication, he was incapable of
under standing the nature and terms of the contract, which fact was known to the other party, he may invoke the protection of a court of law in setting aside the contract. The onus will be on the party who sets up the plea of disability to prove that it existed at the time of the contract. It should, however, be known that if a negotiable instrument in the meantime has been transferred to a holder who takes it in good faith and for value, the drunken person cannot deprive the holder in due course of his right under the instrument. It follows that banks have to be careful in getting documents executed by persons while they are in a state of intoxication.
A drunkard is a person who is under the influence of alcoholic drinks or drugs and stands on the same footing as a lunatic. An agreement made during drunkenness is void. The bank should not honour cheques of a person who has issued them under the influence of liquor. However, it is very difficult to judge whether the person is so intoxicated that he is not capable of understanding the implications of issuing the cheque. When customer presents his own cheque when is drunk, the bank should not make immediate payment. Therefore, it is better and safer that the bank should insist upon such a customer getting a witness to countersign before making any payment against the cheque.
As she remains completely secluded, a presumption in law exists there.
(i) Any contract entered into by her might have been subject to undue influence, and
(ii) The same might not have been made with her free will & with full understanding of what the contract means.
Thus, a contract entered into by pardanashin woman is not a contract free from all defects. The other party to the contract shall have to prove that the contract with her was free from the above mentioned defects in order to enforce the same. The banker should, therefore, take due precaution in opening an account in the name of the pardanashin woman. As the identity of such a woman cannot be ascertained, the banker generally refuses to open an Account in her name.
Therefore, a contract entered into by a pardanashin woman is not a contract free from all defects. The banker should, therefore, take due precaution in opening an Account in the name of such woman. Usually the banker refuses to open an Account in her name as the identity of such woman cannot be ascertained.
Lunatic is a person of unsound mind and hence he is incompetent to enter into a valid contract under the Indian Contract Act, 1872. Since a lunatic does not understand what is right and what is wrong, a contract entered into by him is void.
1. If a lunatic applies to the bank for opening an account, the bank should refuse to open an Account for him.
2. When a person who has an Account with a bank, has become insane or lunatic, the bank should suspend his account and the bank is however, entitled to debit the account of the lunatic customer in respect of all cheques honoured by the bank before getting the notice.
3. While suspending the operating of the Account of any customer on the ground of lunacy, the bank must have sufficient proof (doctor's certificate or a court notice) of his lunacy.
A person of unsound mind can avoid a debt if he or his legal representatives prove that he was of unsound mind at the time of borrowing. On receiving an express notice of a customer's insanity, it is customary for the banker to stop all operations on the Account and await a court order appointing a receiver. It may be stated that reliance on hearsay would be dangerous. The bank should take care to ascertain the correct position. In case a person suffers from temporary mental disorder, it is customary to obtain a certificate from two reliable medical officers regarding his mental soundness at the time the advance is made. It is always safe to avoid lending to persons who fall in this category.
A joint Hindu family possesses ancestral properties and carries on ancestral business. The ownership of such property passes on to the members of the family according to the Hindu Law. While dealing with the Account of a joint Hindu family and granting it a loan, the banker is naturally faced with a difficult task of ascertaining the rights of the members of the joint family.
The following legal precautions should be taken by the banker in this regard:-
1. The family business and its assets are managed by the eldest male member known as the Karta. According to the law, the Karta has an implied authority to take a loan, execute necessary documents and pledge the securities on behalf of the family for the purpose of the business of the family. However to be on the safe side, the loan documents should be executed by all the adult male members of the family or with their consent by the head of the family in his capacity as its Karta or Manager.
2. The power of the Karta to borrow money on the security of the family property is subject to the limitation that the loan should have been taken for the purpose necessary for or beneficial to the family. He can take a loan and pledge the property of the family for the purpose of meeting the needs of usual business of the family and not for any speculative business or for starting a new business. Other coparceners will not be liable for a loan contract for a purpose other than in the interest of the family business.
1. The managers of a joint Hindu family have the power to alienate joint family property so as to bind the interests of both adult and minor coparceners in the property, provided that the alienation is made for legal necessity or for the benefit of the estate the payments of debts incurred for family business or other necessary purpose constitute a legal necessity.
2. The burden of proving legal necessity to support alienation is upon the alienee.
3. The alienee can succeed in proving legal necessity not only on proof of legal necessity but also on the proof that the alience made reasonable enquiries and was satisfied as to the existence of legal necessity. In case of dispute on this point the burden of proof, that the bank was satisfied before granting a loan that the loan was sought for the benefit of the family business lies on the banker himself. He should, therefore, be very careful in ascertaining the purpose of the loan sanctioned on the security of joint family assets.
4. If there is a minor coparcener in a joint family, his guardian must sign the documents on his behalf. When the minor coparcener attains majority he should also sign the documents to give his assent to the undertaking given by major coparceners.
Clubs, societies, charitable and religious institutions, libraries, schools etc. are not engaged in trading activities but their object is to render service to the public. These associations may be registered under the Societies Registration Act or the Indian Companies Act.
Before opening an Account for it the Bank should observe the following points:-
1. Incorporation : A society gets the legal recognition as an entity separate from its members only after its incorporation. Thereafter it is empowered to enter into valid contracts and to sue or be sued. The unregistered society cannot be sued in law.
These institutions may be registered or incorporated according to the Indian Companies Act or the Co-operative Societies Act or the Societies Registration Act. It will have no right to contract with the outside parties.
2. Constitutions : A registered society is governed by the provisions of the Act under which it has been registered. It may have its own constitution charter or Memorandum of Association and rules and by laws etc. to carry on its activities.
Every organization should have a constitution of its own in the name of byelaws or rules or Memorandum of Association and Articles of Association. This will help the banker to deal with such organization properly.
3. Resolution of Managing Committee : Opening a bank account, the Managing Committee of the society must pass a resolution;
(a) Appointing the bank concerned as a bank by the society.
(b) Mentioning the name/names of person/persons who are authorized to operate the account.
(c) Giving any other direction for the operation of the said account.
A copy of the Resolution must be obtained by the bank for its own record.
4. Death or Registration : In case the person authorized to operate the account on behalf of a society dies or resigns, the banker should stop the operating of the societies Account till the society nominates another person to operate its account.
5. While granting loans to such non-trading club the banker should examine the borrowing power from the constitution of the club. A resolution must be passed by the managing committee for this purpose and a copy thereof be received by the banker.
6. Transfer of funds : The banker should take care in case of personal accounts. If the person authorized to operate the society Account, is also having his personal Account with the same branch of the bank, the banker is under an obligation to ensure that the funds of the society are not being credited to the personal Account of the said person or office-bearer.
Executors and administrators are persons who are appointed to conduct the affairs of a person after his death. The executor is appointed by the testator (person making a Will) to execute his Will after his death, but whereas an administrator is appointed by a court for the execution of a Will if the executor is not named in the Will.
If the testator has executed a Will and appointed persons to look after his affairs after his death, the appointees are known as executors. But if there is no such mention in the Will or if the person dies intestate, the court may appoint a person to administer the estate of the deceased. They are known as administrators.
In the case of executors their powers and duties are mentioned in the Will. The only thing is that the Will should be probated, that is certified by competent Court as a bona fide document.
In the case of administrators, who are appointed by courts, their powers, duties and responsibilities will be defined by the letters of administration issued by Courts.
On the death of a customer his account is automatically frozen and the banker should not allow further operations. The executor can be allowed to operate the same on production of probate obtained from the court. In the case of administrator the banker should insist upon the letters of administration issued by the Court of competent jurisdiction. In earlier case the Account of the deceased must be closed and a new Account should be opened, indicating the trust character of the Account of the deceased that is as executors or administrators of the estate of the deceased.
When the appointees are more than one person they shall have a joint interest in the estates of the deceased. The Banker may allow operation of the Account by one or more upon authority in writing by all the executors or administrators. But this authority is revocable and in case of revocation all the executors and administrators should operate the accounts jointly.
The banker should take the following precautions while dealing with executors and administrators:-
1. On the death of a customer, the banker must stop payments from his account. The executor should be permitted to operate the account of the deceased after he has obtained the probate from the court. The administrator is authorized to do so after securing the letter of administration. The banker should examine these documents before the appointed person is permitted to operate the account.
2. When two or more persons are appointed as executors or administrators, they shall have joint interest in the estate of the deceased and this interest is not capable of division. Then they should open a joint Account with the bank. In such cases, the bank should obtain clear instructions regarding the operation of the Account.
3. The banker should be very cautious in conducting the Account of executors/administrators so as to prevent them from misappropriating the funds of the deceased.
4. The banker cannot exercise his right of set-off against the credit balance in the executors personal Account in respect of a debit balance in the account of the deceased.
5. The banker should not permit transfer of funds from the estate Account to the personal Account of the executor.
6. On the death, insolvency, insanity or resignation, of any of the executors or administrators the bank can honour the cheque issued by him and can continue to operate the account, unless otherwise provided in the Will.
7. The executor/administrator may pledge the property of the testator to obtain an overdraft from the banker. The executor may do so only if he is permitted by the Will. Hence the banker should examine the Will before granting any loan to the executor or the administrators must jointly fill the loan document.
The capital of Joint Stock Companies is divided into shares. People who purchase these are the proprietors of the companies concerned. But a Joint Stock Company is a separate legal entity. It has a separate legal existence, apart from that of the shareholder. Although some share holders may die or become bankrupt the company is not dissolved.
The liability of the shareholders is limited. A shareholder cannot, under any circumstance, be called upon to pay any more than the face value of the shares allotted to him. If the assets of the company are insufficient to discharge the debts of the company, it is the creditors of the company that have to suffer, since the liability of the shareholders is limited. A shareholder of a company can sell his shares to others without the approval of the company or that of other shareholders. They cannot get any money from the company.
The management of the companies is entrusted to directors elected by the shareholders from among themselves. Since the number of shareholders is very large, it is not possible to give the right to management to all the shareholders. Hence management is entrusted to certain persons called directors, elected democratically by the shareholders. Directors will have to manage the affairs of the company keeping in view the interests of the company and of the shareholders subject to the conditions, rules and regulations prescribed by law. The establishment as well as the management of companies takes place according to the laws in force in the country. The law generally prescribes what should not be done, and penalties are levied for the infringement of the law, but in the case of companies, the law prescribes what should be done.
The precautions which a banker should take at the time of opening an account in the name of a company and in conducting transactions thereafter are described below:-
1. Before opening an account in the name of a public limited company he must satisfy himself that the company has been duly incorporated. The procedure for incorporating a public limited company is prescribed by the Companies Act. At least seven persons must sign the Memorandum of Association, Articles of Association and submit them to the registrar of Joint stock companies. The Registrar issues a Certificate of Incorporation. The banker must therefore examine the Certificate of Incorporation of the company before opening an account in its name.
2. The banker must then examine the Memorandum of Association and Articles of Association of the company. In the Memorandum are mentioned the name of the company, place of registered office, objects, capital, liability of the shareholders and the willingness of at least seven members to form themselves into a company.
These documents are of utmost importance in the conduct of the affairs of the company. The company must pursue only the objects mentioned in the Memorandum of Association. Anything done which is not sanctioned by the objects clause of the Memorandum of Association is ultra vires the company. Similarly, the conduct of the company must be in accordance with the provisions in the Articles of Association of the company. These are public documents. Anybody who deals with the company is supposed to be acquainted with the provisions of these two documents. The banker, before opening the account in the name of the company should ask for the latest copies of these documents duly certified. By examining these documents, the banker will be able to know the powers of the company to contract debts, to pledge or mortgage the properties of the company, the powers of the directors in this behalf, and so on.
3. Then the banker must ask for a copy of the resolution of the Board of Directors appointing him the banker of the company. He should definitely ascertain the person/persons authorized to conduct bank transactions, to sign cheques, to accept bills of exchange, to entrust valuables for safe custody and so on.
4. The banker must also examine the certificate of commencement of Business. After obtaining the Certificate of Incorporation, the company issues a prospectus. After the minimum subscription is collected and the directors have paid all their dues in full, the registrar issues the certificate of commencement of business. A company cannot begin to operate until this certificate is obtained.
5. If a company which has been operating for some time asks for the opening of a bank account, the banker should also examine the balance sheets and the profit and loss accounts of the company for the last two or three years.
Some of the restrictions imposed on public limited companies do not apply to private limited companies. Provisions relating to the convening of Statutory meeting, submission of the Statutory report, submission of balance sheet to the Registrar, etc. are not applicable to private limited companies. Private limited Companies can commence business immediately after obtaining the Certificate of Incorporation without obtaining the certificate of commencement of Business. A private limited company must file with the Registrar, Articles of Association.
A banker, while opening an account in the name of Private Limited company, must also examine the Memorandum, Articles, resolution appointing him as banker etc. in the same manner as opening an account in the name of a public limited company.
Non-trading and Non-profit making associations may also be incorporated under the Indian Companies Act. They are established for promotion of arts, literature, music, religion and so on. These companies also have distinct legal entity and perpetual succession.
Discuss the precautionary measures regarding advances to companies?
The rights and duties of directors are laid down in the Articles of Association of the company. The banker must examine this document with reference to his own responsibilities in the matter. Although a particular act may be ultra vires the Board of Directors, but being intra vires the company, may be ratified by the Directors at its general meeting.
When a company is under liquidation, the powers of the directors automatically cease. No director can issue cheques or endorse bills etc. All these powers vest in the official liquidator appointed by the Government.
When a company applies for a loan from a bank, the bank must examine the Memorandum and Articles of Association to ascertain whether the company has the power to borrow and if so to what extent. In the case of trading companies the power to borrow must be conferred upon the company by its Memorandum and Articles. Where there is an implied power to furnish the necessary security, to pledge or mortgage the property of the company and so on. Generally, it will be mentioned in the Articles that the company has the right to borrow. Sometimes the right to borrow vests only with the shareholders, in which case the resolution to borrow must be passed at the General Meeting. The banker should also be careful in regard to the securities offered for loan. No registration is necessary if the loan is granted on the security of stock exchange securities of the company or of the personal security of the directors.
When a loan is applied for on the security of fixed assets of the company, the banker should see whether such securities are registered under Section 125 of the Indian Companies Act. The securities obtained by the banker must be registered according to the provisions of that section. Companies cannot lend or borrow on the security of their own shares. A company may borrow by issuing debentures.
According to Section 292 of the Companies Act, loans secured otherwise than by the issue of debentures must be supported by a resolution of the Board of Directors. The amount of the loan is indicated in that resolution. According to Section 293 loans exceeding the paid up capital and reserves must be approved by the shareholders in General meeting. These restrictions do not apply to temporary loans obtained for business purposes.
Cheques drawn in favour of a company may be asked to be credited to the personal accounts of directors or the employees of the companies. In such cases the banker should act with extreme care as otherwise he may be held guilty of negligence, and lose the protection given to the collecting banker under
Section 131 of Negotiable Instruments Act.
Sometimes a sole trader may convert his concern into a private company and ask for loan on the security of the company's assets. If the debts of the previous sole trader concern have not been completely paid off, one of the creditors may bring an action against the trader. It is an act of insolvency for a trader to transfer all the assets of the business to a company. The banker should therefore ascertain whether all the debts of the previous concern have been completely liquidated.
The banker must satisfy himself about the following while opening an account in the name of the company.
As a company is an artificial person, its constitutional powers and objectives, rules and regulations etc. are contained in the following important documents. The banker should thoroughly and carefully examine those documents.
(i) Certificate of incorporation and certificate of commencement of business. The certificates issued by the Registrar of companies, provide a conclusive proof that the company is a duly incorporated body and all the necessary formalities regarding its formation have been fulfilled by the promoters.
(ii) The banker should examine the Memorandum specially to note the objectives for which the company is incorporated because any contract entered into by a company which serves an object other than the objects mentioned in the Memorandum is unenforceable at law and ultra vires.
(iii) The Articles of Association contain the rules and regulations of a company regarding its internal management. It contains in detail all matters which are concerned with the conduct of day-to-day business of the company.
The banker should scrutinize these doicuments very carefully.
Alongwith the application to open an account in the company's name, the banker should obtain a certified copy of the resolution passed by the Board of Directors of the company.
All joint stock companies engaged in trade or industry have the implied powers to borrow money for the purpose of carrying on their business. The borrowing power of the company may be restricted by its Memorandum of Association. The banker should be very careful in ensuring that the total borrowing of the company does not exceed the limit.
(i) The banker should ascertain that the company borrows only for the purpose mentioned in its Memorandum of Association and within the limits if any, specified therein
(ii) A certified copy of the resolution of the Board of Directors should be obtained by the banker for his own record.
(iii) The Board of Directors should also pass a resolution certifying that the company's borrowing including the proposed borrowings are within the limit specified by the Companies Act or the limit sanctioned by the shareholders at their general meeting
The banker of a company having personal accounts of the directors of the company must handle the latter with care. If a director, deposits cheques drawn in favour of the company to be credited to his personal account the banker should first enquire the purpose for which such cheques are intended to be credited to his personal account and on being satisfied about the genuine reason, credit them in his account.
According to Section 4 of the Indian Partnership Act, a partnership is a relation between persons who have agreed to share the profits of a business, carried on by all or any of them acting for all. There are no legal formality for starting a partnership firm. Registration is not compulsory. It may be oral or written.
Opening of a bank account : Since each partner has an implied right to act on behalf of the firm, any partner has the right to open a bank account, unless otherwise stated in the partnership agreement. If there are any provisions regarding the bank account in the partnership deed, bank transactions must take place accordingly. The Account must be opened in the name of the partnership firm, but not in the name of the partner himself. A partner has no implied right to open the firm's bank account in this own name. This has been decided in Alliance Bank v. Kearsley. Section 19(2)(b) of the Indian Partnership Act says that unless there is a custom to the contrary, no partner has the implied right to open a bank account in his own name.
Death of a partner : When a partner dies the partnership comes to an end. The legal heir of the deceased partner does not automatically become the partner of the firm. The legal heir has only the right to recover the money due to him from the partnership firm. The banker may continue the bank account if by the date of the death of the partner there is a credit balance in the account. The banker thus will secure for himself the right to recover the amount from the estate of the deceased partner also.
Bankruptcy of a partner : The partnership also comes to an end when one of the partners becomes bankrupt. The banker should not honour cheques drawn by the bankrupt partner, unless it bears the signatures of the other partner as well.
Insanity of a partner : A partnership is not dissolved when one of the partners becomes insane, but it becomes a sufficient reason for the dissolution of the firm. The relations of the insane partner may file a petition in the court for ordering the dissolution of the firm.
Retirement of a partner : When a partner retires from the partnership firm, he must notify the same to the banker. Otherwise, he also becomes liable for the debts incurred by the firm. After the receipt of retirement notice, if the partnership is indebted to the bank, the bank must stop the account and start a fresh account. In this case, the retiring partner also will be liable for the debt owed by the partnership firm at the date of retirement.
When a trading partnership firm applies for a loan, the banker should call for the balance sheets of the firm of the preceding two or three years. The banker will be able to form an idea of the creditworthiness of the firm, and he will be able to know the other partners in the firm and other relevant information.
The partnership deed contains the details of the agreement reached between the partners. A banker should take the following precautions while operating an account in the name of a partnership firm.
1. Number of Partners : The banker should very carefully examine the partnership deed which is the charter of the firm.
2. Title of the firm's Account : A firm's account should always be opened in the name of the firm and not in the name of the individual.
3. Opening of an account : An account in the name of a firm may be opened by a banker on receipt of an application from one or more of the partners. Banker however insists that all the partners should join to pen the firm's account. Specimen signatures of all the partners is derived to open an account in the firm's name and this fact is within the knowledge of the banker.
4. The partnership letter of mandate : The banker should take a letter signed by all the partners stating :-
(i) The name and addresses of the partners.
(ii) The nature of the business undertaken by the firm; and
(iii) The name/names of the partner/partners who will operate the account on behalf of the firm and will have the authority to draw and accept bills etc. and to sell and mortgage the property of the firm.
5. Revocation of authority to operate the account : The authorities given in favour of a particular partner/partners to operate the firm's account may be withdrawn by any of them by giving a notice to the banker. A partner can also stop the payment of a cheque issued by any other partner on the firm's account.
When an account is opened in the names of two or more persons, who are not partners in a firm or who are not joint trustees, it is called a Joint account. When a Joint account is opened the banker should obtain a comprehensive mandate. The mandate should cover all points because the right to draw cheques conferred upon a person does not automatically confer upon him the right to deal in securities. If one of the Joint account holders obtains an overdraft, the other does not have any liability.
1. Issuing of cheques : It should be clearly specified as to who is authorized to draw cheques. All the Joint customers must sign the cheques. The right to draw cheques may be conferred on one or more of the parties and any one of the Joint account holders can countermand a cheque. In case, the right to sign the cheques conferred on one of the parties is deemed to be temporarily withdrawn.
2. Death of a Joint Account Holder : If one of the Joint account holder dies, according to the English Law, the survivors can continue to transact the business relating to the Joint account.
3. Joint debts : The right to draw cheques given to a Joint customer is limited to the credit balance available in the bank account. If cheques are drawn in excess of the amount, all the joint customers become indebted to the bank. But the right to draw cheques does not extend to contract debts. So, the banker must ascertain whether the person who has the right to draw cheques has also the power to overdraw the account.
4. Joint and several liabilities : According to Indian Law, Joint liability means joint and several liabilities. If one of the Joint customer dies and the account is overdraw, by that time, the banker must stop that account and open a fresh account in order to make the estate of the deceased customer liable for the debt.
5. Safe custody deposits : If Joint account holders deposit valuables for safe custody with the bank, no one of them can take delivery of them. The banker should return the securities only on the requisition of all the joint customers. Similarly, one of the joint customer cannot stand surely on behalf of all the joint customers. No single joint customer can pledge the fixed property of the joint parties without a power of attorney granted to him.
6. Death, insanity or bankruptcy of a joint customer : When the bank is duly informed of the death of one of the joint customers, the banker should not, thereafter, honour cheques presented for payment. Similarly, when a notice is given to him of the insanity or bankruptcy of one of the joint customers the banker should not honour cheques subsequently presented.
7. Garnishee order : If the banker receives a garnishee order in respect of one of the Joint account holders asking him not to make any payment out of the Joint account, he should inform the court that it is a Joint account and request the court to withdraw the garnishee order.
8. Trust accounts : If the Joint account relates to a trust, but the banker is not informed of the same, the banker need not take cognizance of the fact. After he comes to know that it is a trust account, he should be careful to see that it is not overdrawn at any time.
9. Joint account of husband and wife : A Joint account may be opened in the names of husband and wife. If the account is in the name of the husband and he predeceases his wife, the balance will devolve on his legal heirs but not on his wife. To avoid legal formalities, a husband usually opens a joint account with his wife with the term "either or survivor". In this case on the death of one of the parties, the survivor can draw the amount.
10. Others : The banker should take the following precautions in opening and dealing with a Joint account.
1. The application for opening a Joint account must be signed by all the persons intending to open a Joint account.
2. The banker should obtain clear instructions in writing signed by all the Joint account holders regarding the operation of the account. The Joint account may be operated in any of the following ways:-
(a) by all the depositors jointly
(b) by either or survivor of them
(c) by former or survivor of them.
3. Any Joint account holder can stop payment of a cheque issued on a joint account. Banker must honour such order even if an agent or attorney has been appointed to operate the account.
4. The banker should be given clear instructions regarding the withdrawal of securities in the Joint account and the power conferred upon the person operating the account to lodge the securities.
5. The full name of the account holders must be given in the entire document furnished to the banker, even if the account is to be operated upon by one or a few of Joint account holders.
6. The banker should also take a mandate to ascertain whether the persons operating the Joint account are also authorized to overdraw the account.
7. The authority to operate the account can be revoked by any of the persons giving such authority.
In times of death of a Joint account holder, the balance in the Joint account shall be payable to all the Joint account holders together if there is no instruction. If a survivor condition is included, the balance is payable to the survivor or survivors.
Banking is one of the most important services expressly covered under
Section 2(1)(o) of the Consumer Protection Act, 1986. This fact has been well recognised by court also and the remedy has been extended to any kind of deficiency in payment of interest on overdraft, charging of interest at leading rate, wharfage, demurrage, defects in demand draft, wrongful crediting of an amount, delay in crediting, improper maintenance of lockers, passing of forged cheques etc. In Consumer Unity & Trust Society, Jaipur v. Chairman and Managing Director, Bank of Baroda, Calcutta, there was an illegal strike resorted to by the employees of the bank during the pendency of conciliation proceedings in contravention of Section 22 of the Industrial Disputes Act, 1947 and the nature of the agitation and demonstration carried on by them was such as to effectively prevent ingress from the premises of the branches of the bank in the State of West Bengal. The question before the National Commission was that whether a banking company which had been forced to suspend its business operations on account of an illegal strike, by its employees, could be held liable to pay compensation to the account holders for the inconvenience and loss caused to them during the period of the strike. The National Commission held that when the suspension of the business was caused on account of an illegal strike it could not be said that the inconvenience, loss or injury caused to the consumers was due to the negligence of the bank. The Supreme Court, on appeal against the order of the National Commission gave a very wide connotation to the words "service of any description" in the definition of service under Section 2(o) and widened the ambit of the section and extended it to all banking activities but the bank was not held liable to pay compensation to its customers in the present case. Thus, the bank escaped liability because the depositors were prevented to avail the services of the bank not because of any deficiency on the part of the bank but due to strike resorted to by the employees who almost physically prevented the bank from functioning. Accordingly, in State Bank of India v. Jiya Lal Kamboj (Dr.), it has been held that the banking service is actually a service for consideration and when a bank is appointed to handle public issue of a company, the bank renders service to the company for a consideration.
An important case decided on banking service, in which the bank authorities had used harassment tactics to extract bribe from the complainants, is Mike's Private Ltd. v. State Bank of Bikaner and Jaipur. In this case, the preliminary inspection and review of the complainant's application from bank finance was completed and it was agreed in principle that a credit of Rs. 6 lakh could be sanctioned. For sanctioning the credit, the bank manager demanded bribe and following a trap, he was caught red-handed, while taking bribe. The cheques issued by the complainant were maliciously dishonoured because of which it failed to avail valuable export orders. The complainant had to sell its immovable properties and shift to a central building. It also had to retrench several of its employees. Besides the general practice of issuing cheques, the consumers sometimes give stop-payment instructions to banks. In Bank of India v. Mukesh Kumar Shukla (Dr.) the responsibility of the bank to follow the stop-payment instructions has been held by Madhya Pradesh State Commission as a matter relevant to assess deficiency in the banking Service. If a customer gives stop-payment instructions, his intention is that the bank should countermand the payment. Bankers have to follow such instructions and ensure that no payment is made in respect of a cheque for which stop-payment instructions are received from the customer. If the bank makes payment against countermanding instructions that would amount to deficiency in its services and it cannot defend any action for damages on the ground that the customer's instructions were not followed by the bank due to inadvertence or bona fide mistake. In Bhandari
Co-operative Bank Ltd. v. Dilip Madhukar Kambli, the bank debited an amount to the customer's account in respect of purchase of a machine for which loan was sanctioned by the bank. The debit was made by the bank without the written instructions from the customer. The bank argued that the machine had been purchased by the complainant from the supplier who was recommended to him by the bank official.
In Balraj (R) v. The Manager-Grindlays Bank, the Tamil Nadu State Commission found that the complainant had requested his bank to transfer his money to another branch of the same bank. This was regarded by the commission as negligence on the part of the bank which amounted to deficiency in its service.
In the present times, when travellers cheque have become the instruments of popular case during travel, the banks are supposed to extend positive cooperation to consumers in case of loss of such cheques. In Central Bank of India v. Praveen Nayak, the bank issued travellers cheques to the complainant with printed instructions that in case of loss of the cheques, bank should be informed about the loss. He informed the bank about the loss, but the complainant's claim based on the loss was not allowed by the bank. Considering the matter, the District Forum directed the bank to pay to the complainant the principle amount with 12 per cent. interest per annum and also Rs. 2,000 by way of damages for deficiency in bank's service.
In American Express Bank Ltd., Travel Related Services v. Rajesh Gupta, the Bank refused to give to the complainant refund for the loss of traveller's cheques as it found serious discrepancies in his statement. It was found that on earlier two occasions, the complainant had got refund of traveller's cheques which were encashed. The National Commission held that as the refused claim was rejected after holding proper inquiry and investigation, the same did not constitute deficiency in service.
In K.T. Shivaiah (Dr.) v. Canara Bank, the complainant was sanctioned a monthly pension out of which some part was commuted. The commuted part of pension was not credited by the bank to the customer's account. It was held by the National Commission that such conduct of the bank was deficiency in its service.
In United India Insurance Co. Ltd. v. Shatrugan Sharma, under the hyothecation agreement, the customer had entrusted the bank with the task of making payment of insurance premium before the expiry of the insurance cover. The bank failed to do so, and, therefore, the National Commission held that such a failure was deficiency in service.
A customer was considered by the National Commission in the case of Dosen Chemicals Pvt. Ltd. v. United Bank of India. In this case, after receiving the whole amount of loan due from the complainant, the bank refused to return the title deeds of a property which were required by him to obtain loan from another bank to complete the complainant's building complex. The National Commissiom held that there was gross deficiency in service and awarded compensation with interest and costs.
In Purushottam Nagar (Dr.) v. Zonal Manager, UCO Bank, the bank stayed the operation of the personal account of the complainant as per telephonic instructions from the other bank. A complaint was filed by the complainant in the State Commission against the bank. The State Commission partly allowed the complaint regarding operation of the account. In appeal before the National Commission, the Commission held that the action of the bank amounts to deficiency in service and the complainant was entitled to full relief. A bank cannot stop operating a account of its own. In Prem G's International v. Central Bank of India, the complainant was a private trust and the bank account of the trust was opened in 1979 through its managing trustee. In 1991, the operation of the said bank account was stopped by the bank because the formalities were not complied with the complainants. The Delhi State Commisson held that it was deficiency in service on the part of the opposite party.
In Kamal Nagpal v. State Bank of India, a loan of Rs. 85,000 was sanctioned by the bank in favour of the complainant, but only a sum of
Rs. 50,000 was actually paid to him. Balance amount was not paid. Accordingly, in Urmila Bhargawa v. Punjab and Sind Bank, the deficiency in service on the part of bank was not providing adequate and timely working capital. The National Commission upheld this contention and declared that it was deficiency in service.
In State Bank of Hyderabad v. Balri Lingam, the appellant bank had undertaken to provide financing facilities to the unemployed youth. When the complainants approached the bank it agreed to make available its services. On the basis of the consent letter given by the bank, the complainants purchased the land and commenced the necessary constructions for their work. The bank refused to render the financing facilities. On this the National Commission held that the complainants had acted on the promise made by the bank which subsequently refused to perform the services.
In Special Officer Yelayapalin Primary Co-operative Credit Society No. 46, Kodavalur Mondal, Nellor District v. Koreti Chandra Reddy, the complainant was the member of the co-operative credit society and was entitled to avail its services. He applied for loan, which was sanctioned in his favour and also the amount of loan was released. He paid back the entire principal amount but did not pay the interest as the State Government had waived the interest on the loan amount. The matter came for consideration before the Andhra Pradesh State Commission which held that there was deficiency in services rendered by the society to the complainant. Failure to credit an amount received by a bank to customers account within reasonable time is deficiency in service. In Arjun Lal Aggarwal v. State Bank of India, an amount was remitted by telegraphic transfer for transmission to the complainant's account. The amount was duly received by bank with firm instructions to credit to complainant's account. The complainant was not paid the said amount for six months and thus it was delay for six months in transmitting the amount even though the quickest method available for transferring the amount was used. The State Commission held that in the context of a telegraphic transfer remittance, a delay of six months for reaching out the amount to its recipient is clearly a deficiency in the banking service.
In Sovintorg (India) Pvt. Ltd. v. State Bank of India, a cheque deposited by the complainant collected by the bank was not credited to the complainant's account for more than seven years. The bank contended that is was to be adjusted against margin money for bank guarantee. The National Commission held that there was a grave deficiency in service of bank which caused serious damages to complainant's business. Commission awarded compensation for harassment and damage suffered by the complainant in its business.
In Nagbhushana Rao (P) v. Union Bank of India, the complainant had invested certain amount in deposit reinvestment certificate. Due to pressing financial need, he wanted to encash the certificate before maturity. He submitted the certificate for encashment several times. For more than one year, the certificate could not be encashed. On this the Andhra Pradesh State Commission observed that the bank was at fault in not encashing the certificate for a long period and the quality, nature and manner of performance of bank's service were hopelessly inadequate.
In B.H. Canara Bank v. K.R. Hanumantha Rao, the complainant gave three cheques to the bank for realising the amount and crediting in his saving bank account but the said amount was not credited to his account contending that the said cheques were lost. The Karnataka State Commission held that the assertion of the bank that the cheques were lost itself shows that the bank was negligent in dealing with those cheques. It was not possible to know whether the amount of the said cheques was realised by the bank or not. The bank was held guilty of deficiency in service, as the complainant, who had deposited the cheques with the bank, could not be made to suffer on account of the negligence of the employees of the bank.
In Harisaran Abbott v. The Zonal Manager, Bank of India, clear instructions were given by the complainant to the bank that certain remittances were to be credited to the account of the complainant as a beneficiary and not the account of the firm of which he was a partner. There were no instructions to the bank to credit the said amount to the account of the firm of which he was a partner. The Maharashtra State Commission held that the bank had acted contrary to the instructions of the consumer which had put the complainant to loss of interest on the deposited amount for a considerable period. Negligence in comparing signature is also deficiency in service. In Abdul Razak v. South Indian Bank huge sums were withdrawn from the customer's account on the basis of forged signature.
A bank's failure to prevent passing of forged cheques is deficiency in service. In Prakash R. Shenai v. Syndicate Bank, the complainant's five cheques were forged and it was repeatedly pointed out by him to the opposite party that because of the forgery committed by its employees he had been put to a high financial loss. The complainant tried to justify the passing of cheques after due verification of the specimen signature of the complainant from the bank's record. The complainant filed a complaint on the matter in the Maharashtra State Commission for deficiency in service. The Commission held that when the complainant disputed his signature on the cheque, it was the duty of the bank to re-verify the signature and refer the matter to the handwriting expert for his opinion, so that the truth could be found out. As a result of the forgery, the complainant's amount had been embezzled which constituted deficiency in service on the part of the bank.
In Punjab National Bank v. K.B. Shetty, a complaint was made by the customer about loss of jewellery from his locker due to negligence of bank officials. It was observed by the National Commission that even if the locker was left open by the customer's mistake, it was surprising that the fact went unnoticed by the bank officials for almost fifty days. It was held that the loss of jewellery from the locker was due to bank's negligence.
In Mihir Kumar Mukherjee v. United Bank of India (Branch Manager), the National Commission took the view that any increase in the rent of the locker does not amount to deficiency in banking service and the increase in locker rent does not require corresponding increase in service. The increase in locker rent is necessitated due to the increase in the cost of maintenance, there is no deficiency in service or unfair trade practice particularly when the increase in locker rent is not only for the complainant but for all hirers. The complaint in respect of the agreement for locker hire is that of a licenser and a licensee, the bank is authorised to increase the locker rent
In Malati Bhat v. State Bank of India, an engineering diploma student sent his examination fees by draft. The draft was returned by the postal department to the complainant along with application on the ground that the same was not signed by the bank manager. Due to bank's negligence, the student lost six months of his career. The bank was negligent in issuing demand draft and awarded compensation of rupees thirty thousand. The Karnataka State Commission reduced the compensation to rupees twenty thousand. Against this appeal the complainant moved the National Commission, which set aside the State Commission's order and restored the order of the district forum.
In N. Raveendran Nair v. Branch Manager, State Bank of India, two officials had put that their signatures on the demand draft and the specimen signature number of one of the officials was also inserted. The other officials made a slip in putting his signature in the draft and for that reason the draft was dishonoured. The Kerala State Commission, considering the matter, held that for an omission committed by one of the employee of a bank, the customer should not suffer. The dishonour of the draft made by the opposite party was, therefore wrongful. There is no doubt that the service rendered by the opposite party was a defective service.
In Tarun Kumar Kanaiyalal v. Punjab National Bank, Bhuj, a draft prepared by the Punjab National Bank for Gulf Bank in Kuwait was dishonoured. The National Commission allowed the complaint holding that the complainant was not concerned with the internal management problems of the bank. Since he had deposited the money with the bank by way of a fixed deposit through exchange, the bank was bound to return the same on maturity or on request for premature payment. The complainant was held entitled to his money together with contractual interest.
In Bhupendra Kumar Nand Lal Rajguru v. State Bank of India, the draft was purchased by the complainant from State Bank of India branch at Baroda and was payable at Calcutta. Unfortunately, for collection, it was found that the draft was on the printed paper of the State Bank of India and was also, according to the bank, duly signed by the Branch Manager but the signature of the teller was not there. Consequently, one year of the complainant was spoiled and the Gujrat State Commission held that it was a clear case of deficiency in service and negligence. A bank cannot retain the bank guarantee amount beyond reasonable time.
In H.C.L. Ltd. v. Bank of India, the respondent bank failed to make the payment of bank guarantee amount in favour of the complainant. The complainant served a notice on the bank to make the payment of the amount in terms of the guarantee. On negative response of the bank, several reminders were given by the complainant but the amount was not paid. The Commission observed that according to the terms of the guarantee the amount should have been paid when the bank was called to do so. The payment was made by the bank after four years and fifteen days and during this period the money was utilised by the bank. The State Commission accordingly held the bank liable to pay interest on the amount for the period of delay.
In Chandramani Sarangi v. Central Bank of India, complainants deposited two fixed deposit amounts with the opposite party. One was for five years and other was for ten years. The grievance of the complainant was that inspite of maturity the amount was not paid. The Orissa State Commission found that the complainant was a guarantor in two disputed cases regarding which judgments were given by the court. Dates of loans in other suits or dates of filing of other suits were not disclosed by the bank. The Commission, accordingly accepted the submission of the complaint that the cases about loans given to other persons in respect of which he was guarantor were dismissed by the court. Once the two suits had been dismissed and no appeal was filed, the commission held that the deposited amount, due to the complainant, should not remain with the opposite party.
In Patel Kantilal Kevaldas Gavada v. Manager Dena Bank, the complainant was having a saving bank account with the respondent bank. He obtained FDR which was pledged for Gujarat State Transport Corporation as per agreement with the said corporation. The bank credited to the saving bank account of the complainant and credited to the account of the said corporation. The complainant challenged it before Gujarat State Commission. The bank is, therefore, liable to the complainant for the deficiency in services and to give him again the credit of the amount wrongly debited from his account with interest from the date when the entry was reversed. The bank was also directed to pay costs to the complainant.
In Janak M Chandan v. Ahmed Nagar Sahakari Bank Ltd., the customer had pledged certain ornaments against loan given by the bank. He failed to repay the loan even after the expiry of the stipulated period. The bank issued public notice proposing auction of the ornaments. The customer made a conditional offer to the bank that he was prepared to pay to the bank the due amount if the bank was prepared to return the ornaments within 48 hours of such payment. The bank did not agree to return the ornaments. The National Commission held that the question of deficiency in bank's service could arise only if the customer had made repayment of the loan within the stipulated time. Payment after the expiry of the mortgage period did not entitle him to complain about the deficiency. Similarly, in Indo Steel v. Central Bank of India, the National Commission followed the view that the bank's taking possession of securities to protect its interest in respect of huge amount of outstanding overdraft is not deficiency.
Whenever a customer approaches any bank with a request to grant credit facility, the established principle is that the bank has to evaluate such request by applying credit appraisal norms within the framework of the credit policy of the Government of India. Following this principle, in Devidas Kale v. Bank of Maharashtra, the Maharashtra State Commission has held that the bank's denial to provide credit facility on the ground of credit norms does not constitute deficiency in service. Similarly, bank's refusal to provide loan due to credit restriction is not deficiency. In a number of cases, the National Commission has held that the complaints regarding bank's failure to provide finance cannot be made subject-matter of adjudication under the Consumer Protection Act. In Corporation Bank v. Somnath Gupta, it was made explicitly clear by the National Commission that a consumer forum cannot direct a bank to grant loans.
In Prakash R. Shenai v. Canara Bank, insurance policy were pledged with the bank with the condition that the premium would be paid by the complainant. There was, therefore, no compulsion for the bank to pay such premium and, on his failure to pay, make corresponding increase in the amount due from the complainant.
In Indumati Pal v. Punjab & Sind Bank, the complainant was the mother of a deceased customer, who on the death of the customer requested the concerned bank for disbursement of the deposits in her favour. The bank wanted that a succession certificate should be obtained so that the bank could consider the question of disbursement of the deposits made by the deceased. When the complainant wanted the amount in deposit for which she got a succession certificate, the bank did not disclose the same to her.
In Nowsheen Jahan v. Tamil Nadu Electricity Board, the complainant's father had placed fixed deposit in 1975 in the joint name of himself and the complainant for one year payable to either him or survivor. In 1975, the complainant was minor. Her father died within one year of placing the fixed deposit. She attained majority in 1987. It was only in 1991 that the complainant became aware of the existence of the fixed deposit while going through some old papers. She claimed the amount of FDR with interest. The bank agreed to pay the amount of FDR with interest only for one year, as there was no request for renewal. The District Forum and the Tamil Nadu State Commission dismissed the complaint. On appeal the National Commission, held that the complainant should be paid the amount of FDR with nine per cent per annum interest up to the time the complainant attained majority and thereafter at five per cent. interest per annum because the bank had kept the money for all these years.
The bank was not held guilty of deficiency in service where the complainant was himself at fault: In State Bank of India v. Mohinder Singh, the complainant was defaulter in respect to issue the NOC in his favour. The complainant filed a complaint in the District Forum claimimg deficiency in service. From the above illustrative cases, it has become obvious that the case law on banking services has developed to cover many issues relevant to securing the benefit of consumer in different ways. Such on approach would help in imposing the system of banking as well as in extending more and more protection to consumers.
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Life Insurance |
Fire Insurance |
Marine Insurance |
Insurable interest present at time when insurance is affected. |
Present both at time of insurance and at time of loss of subject-matter. |
Present at loss of subject matter. |
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Not a contract of indemnity |
Contract of indemnity |
Contract of indemnity |
Regular premium is to be paid. If not paid contract lapses and can be required subject to fulfilment of certain conditions. |
For a certain period of time, usually a year |
For a particular period or particular voyage. |
Insurance
Q.
After independence we were given a separate status i.e. status of dominion India.
Swadeshi movement gave a new life.
· In 1934, Mr. S.C. Sen was appointed as special officer. A Committee was appointed in 1936 under the Chairmanship of Mr. N.N Sircar to examine reports submitted by S.C. Sen.
· In 1937, whatever suggestions made by this Committee Bill of Insurance was passed in 1937, which in 1938 became first Indian Insurance Act.
· Both Indian as well as foreign companies were governed by this Act. As a result, foreign companies ran away.
· From 1938 to 1950, in a period of stability and consolidation, small industries merge with the big.
· Therefore in 1938 Act amendments were made in the Act and it was modified.
· In 1939 there started a IInd World War. Again Swadeshi movement was on rise.
· After IInd World War, officers invested Capital of Insurance into wrong projects i.e., malpractices were started.
· In 1945, one committee was appointed to review all this under the chairmanship of Cowasji Jehangir. He condemned the malpractices which were going under.
· Government made certain amendments to tighten the shortcomings.
· After 1947, partition took place. After that another Committee was made under chairmanship of S. R. Ranganathan in 1949.
· Therefore in 1950 we got Insurance Amendment Act.
Certain suggestions and changes were made for making:
1. insurance institutions more useful.
2. appointing one Controller of Insurance.
3. two councils (i) Life Insurance Council, (ii) General Insurance Council.
4. Appointment of investigators and administrators for ill-managed and sick companies.
5. As a result, we have to make efforts to see that the foreign exchange should not drain out.
· After 1950-till date, we call it as a period of boom and nationalism.
· In 1956, Nationalisation of Insurance Act was passed.
· Ist Sept., 1956, this Life Insurance Corportion was established (LIC). When LIC started its initial capital was only Rs. 5 crores.
· In 1968, Amendments were passed.
· In 1972, General Insurance business was also nationalised (General Insurance Corporation (GIC).
GIC has four subsidiary companies:
LIC is State under Article 12 because government has control over it.
Cases :
1. Asha Goel v. LIC, MANU/MH/0188/1986 : AIR 1986 Bom 412.
Whether a writ under Article 226 is maintainable under LIC. Yes. It is under State.
2. National Insurance Co. v. Jugal Kishore, AIR 1988 SC 789
Supreme Court said that the LIC is not mere commercial activity, they are kept under higher pedestal (place).
3. Assam & Meghalaya State Road Transport Corporation v. Abdul Razzak, AIR 1988 Gau 67
Q.
· Insurance-security against risk.
· There are two types-Life and General Insurance.
· Insured/Assured-used for person who is taking protection.
· Underwriter/Insurer-The one which provide insurance undertaking to indemnify the person.
· Premium-Consideration paid by insured to the insurer.
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· Insurance - |
Contract |
Offer---Insurer Acceptance---Insured Consideration---Premium |
· Definition-Maclean :
Insurance is a method spread over a large number of persons. A possible financial loss too serious to be borne conveniently by an individual, is covered by it.
· Marine Insurance came first as most of the trade was done by English traders during colonial times.
· Then came fire insurance due to the great fire in London in 1666.
· Bubbles Act, 1720-it gave authority to only two companies to carry on insurance business. Small companies were abolished and these Companies were given entire control.
· Amicable Society was established for Fire Insurance.
· In 1807 a new charter was made and added to Bubbles Act in which modern techniques were adopted.
· Mortality tables calculate life expectancy of a person to determine how much premium has to be taken from each person.
· After this the Insurance business got converted into gambling as no principle were laid down properly (no settled principles).
· To reaffirm people's faith in insurance a new concept of Insurable interest was introduced.
Q.
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Bombay Mutual |
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· 1871 |
only two companies doing insurance |
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Oriental Bank |
· 1900-1912- Small companies cropping up.
· 1912-Indian Life Insurance Act-to regulate all the companies
· 1913-1938-Process of struggle and growth
· FWW, SWW-Loss of Economy
· 1947-Partition
· 1949-Committee under chairmanship of S.R. Ranganathan
· 1950-1938 Act was amended. Changes were made.
(i) for making insurance institutions more useful.
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(ii) for appointing Controller of Insurance. |
Life Insurance Council |
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(iii) for making two Councils |
General Insurance Council |
(iv) for appointing investigations and administration for ill-managed and sick Companies.
(v) For reducing drain of Foreign Exchange.
· 1950-till date-period of Boom and Nationalization
· 1956-Nationalization of Insurance
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· LIC Act was passed |
exclusive articles to carry on Life Insurance |
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· 1st Sept., 1956, LIC was born |
initial capital-> Rs. 5 crores |
· 1968-Amendments were passed in 1956 Act.
· 1972-General Insurance business was also nationalized.
· GIC and four Subsidiary Companies
Q:-Is LIC an instrumentality of the State?
Asha Goel v. LIC, MANU/MH/0166/1986 : AIR 1986 Bom 112.
Q:-Is a writ under Article 226 maintainable against LIC?
Yes, as instrumentality of the State.
National Insurance Co. v. Juggal Kishore, AIR 1988 SC 789.
LIC is neither a commercial enterprise nor commercial activity, so have to keep it on a higher pedestal. It has duty to take care of citizens of State.
Assam & Meghalaya SRTC v. Abdul Razzaq, AIR 1988 Gau 67.
Rs. 60,000 to be paid to a person by LIC, went in appeal against that amount. LIC got Court-bashing.
Contract of insurance means:
A contract of insurance means a contract by which a person, in consideration of a sum of money, undertakes to make good the loss to another against a specified risk e.g. fire or accident or death.
(1) Proposed, (2) Acknowledgement (3), Consideration (4), Must be in writing-Insurance policy.
Case : Medical Defence Union Ltd. v. Deptt. of Trade (1979)
Certain Medical practitioners formed this Union. It undertook few business.
(i) It used to provide education and advice to the practitioners.
(ii) To conduct legal proceedings on behalf of its members.
(iii) Indemnify members against claims for damages and cost.
(iv) Members had the right to ask this union for help.
Annual subscription fee was to be paid by the members of the Union .
· Deptt. of trade said that the union was carring on the business of insurance.
Other clause was: Compensation could be in form of money or money's worth.
Held: That they were not paying only money but also money's worth.
Hence they were not an insurance company.
Insurer: The one who undertakes the risk
Insured: The one whose loss is to be made good.
Premium: Consideration for which insurer undertakes to indemnify the assured against the risk. It may either be a single or periodical payment.
Policy: Instruments in which contract of insurance is generally embodied.
Subject-matter of insurance and insurable interest:
Subject-matter is the thing or property insured in the interest of assured.
There are number of kinds of insurance:
1. Life Insurance:
In this, certain amount becomes payable on the death of the assured or on the expiry of certain fixed period whichever is earlier.
2. Fire Insurance:
It covers losses by fire.
3. Marine:
Losses incidental to marine adventure.
4. Personal accident insurance:
Amount payable is a compensation for any personal injury caused to the assured.
Anson says :All contracts of insurance are wagering contracts even though there is an insurable interest.
A "wager" is a promise to give money or money's worth upon the determination or ascertainment of an uncertain event, the consideration being either something given or promised to be given by the other party in the event determining in a particular way.
Though insurance is a wagering contract it is permitted by and therefore enforced by law.
Case : Carlyll v. Carbolic Smoke Ball Co.
Justice Hawkins observations :
A contract (of wager) by which two persons professing to hold opposite views touching the issue of a future uncertain event mutually agreed, dependant upon the determining of the event, that one shall win from the other a sum of money, neither of the contracting parties having any other interest.
Case : Lucena v. Craufurd
A material distinction was made between the two. A wager may have any speculative chance or expectation as to the subject-matter but in an insurance contract a chance or expectation cannot be a subject-matter as it definitely pre-supposes loss of some right of property either in possession or ownership.
Aleatory: (Speculation) Contract
Contract of insurance is a contract of speculation either to gain or lose.
Q.
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INSURANCE |
WAGER |
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1. It seeks to indemnify the assured for loss suffered by him on happening of an uncertain event. |
1. No indemnity: no intent is there to cover any risk. |
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2. Object: Protect the assured against losses on happening of an uncer tain event. |
2. Object: to earn speculation gains. |
3. Assured must have insurable interest in subject-matter of insurance. |
3. Neither party has procuring interest except that created by the contract itself. |
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4. Parties must have utmost good faith. |
4. Good faith need not be observed. |
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5. It is legally enforceable. |
5. It is void as it is against public policy. |
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6. It is based on scientific to actual calculations of risks. |
6. It is a mere gamble. |
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7. Insured even may cause varying degrees of loss or damage. |
7. A wager either wins or lost. |
Q.
1. Utmost good faith:
As the assured knows more about the subject-matter of the contract than the insurer consequently, it is the duty of assured to disclose all material facts perfectly.
If he does not do this then, Insurer does not know:-
· Whether he should accept the risk.
· What premium he should charge
Insurer can avoid the contract (as held in the case of Mithoolal Nayak v. LIC of India).
If assured has knowledge of all the facts which insurer doesn't know then the assured should not hide those facts and/or tell wrong facts (as held in the case of V. Srinivasa Pillai v. LIC of India).
E.g. a man insures his life from a life insurance company for Rs. 50,000 & truthfully gives answers to the company. After a few days, but before acceptance of proposal by the insurance Co., he suffered from pneumonia and Company, know about the pneumonia for the first time. Therefore Court held Co. not liable to pay. (As held in the case of Looker v. Law Union and Rock Insurance).
2. Indemnity:
This means that the assured, in case of loss against which the policy has been issued, shall be paid the actual amount of loss not exceeding the amount of the policy.
Porter says:
Indemnity is the controller price of insurance law and it is by the reference to this principle that all problems in insurance can be solved.
A contract of Life Insurance is not a contract of indemnity. Therefore, sum is already mentioned in the Policy which is to be paid on such incidence.
Exception (Life, personal accident and sickness insurance).
3. Insurable interest:
Assured must have insurable interest in the subject-matter of the insurance.
In life insurance:
Insurable interest must be present at time when insurance is affected.
In fire:
Must be present both at the time of insurance and at the time of loss of subject-matter.
In Marine:
Must be present at the time of loss of subject-matter.
4. Cause proxima:
Assured can recover loss only if it is proximately caused by any of perils insured against, e.g. ship having cargo or cargoes collided with another. Cargo was destroyed.
Held:
Damage to cargo was not direct result of collusion but of delay and mishandling. Assured could not recover the loss. (as held in the case of Pink v. Fleming, 1899 25 QBD 396).
5. Risk must attach:
Insurer is premium of risk involved. If no risk is involved then it is to be returned. For, example if the subject-matter had already been destroyed or the ship had already returned safely but both the parties were ignorant about it, the risk does not attach and the contract is thus void ab-initio.
6. Mitigation of loss:
Assured to step in so that there is minimum of losses. An insured is bound to do his best under the circumstances, but he is not bound to do at his own peril.
7. Contribution:
Means if there is more than one insurer, then loss is to be paid by them in contribution of the actual amount of loses.
Either one of the Insurer pays and the second will take afterwards from him.
E.g. A insures his house against fire for Rs. 10,000 with X and Rs. 20,000 with Y. A loss of Rs. 12,000 occurs. Here X is liable to pay Rs. 4,000 and Y Rs. 8,000 or, X will pay the whole amount and afterwards take from Y Rs. 8,000.
Formula is: Sum insured with X or Y x loss
Total sum insured For X = 10,000 x 12,000 = Rs. 4,000
30,000
Similarly from Y = Rs. 8,000
8. Subrogation:
According to it, insurer, on making good the loss, is entitled to be put into the place of the assured.
E.g. A insures his goods with B for Rs. 100. Goods were damaged by fire by C. A recovers loss from B and subsequently he recovers loss from C also.
A must hold the amount recovered from C in trust of B.
9. Scope of duty of disclosure :
1. It relates only to material facts.
2. This duty extends to only facts which are within his knowledge and not to those which he ought to know.
3. This duty to disclose extends to the authorised agents only.
4. This duty extends to both the parties i.e. insurer and insured.
5. This duty of disclosure applies only to negotiation proceedings to formation of the contract. When a relevant fact comes to the knowledge of either party after the completion of the contract, there is no duty to disclose.
6. The duty of disclosure is deemed to have been cast on the insured when the insurer specifically asks a question.
7. The duty does not extend to certain types of facts though they are material e.g.
(i) facts which he is not aware of.
(ii) facts which are within the knowledge of the insurer.
(iii) facts of which information is waived by the insurer.
(iv) facts which tend to diminish the risk.
(v) any circumstance which is superfluous to disclose by reason of any express or implied warranty.
10. Period of insurance:
In Life Insurance:
regular premium is to be paid. If not paid contract lapses and can be required subject to fulfilment of certain conditions.
In Fire:
for a certain period, usually a year. Contract automatically comes to an end after a particular period.
In Marine:
for a particular period or for a particular voyage.
Re-insurance:
Person in order to safeguard his own interest he insures the same insured risk either wholly or partially with other insurers in this as Re-insurance.
Re-insurance can be resorted to in all kinds of insurance.
Double insurance:
where the assured insures same risk with two or more independent insurers and Total sum exceeds the value of the subject-matter, the assured is said to be over-insured by double insurance.
E.g. of Double insurance
A insures his house worth Rs. 50,000 with B for Rs. 40,000 and with C for Rs. 30,000. There is double insurance. If he insures Rs. 25,000 each with B and C, there is no double insurance.
· Imp. In Life Insurance, no limit is there, an assured can take any number of policies.
Q.
A contract of life insurance is a contract by which the insurer, in consideration of the payment of certain sums, called premiums, undertakes to pay a certain sum of money on the death of a person whose life is insured or on expiry of a certain period, whichever is earlier? Premium may be paid in a lump-sum or by periodical instalments.
Q.
1. Endowment Policy:
It provides for payment of the sum assured at the end of a specified term of years or at death, whichever is earlier. This is most popular form of life insurance.
2. Children Endowment Policy:
It is taken for purpose of marriage of children when they attain a certain age. It may be for education. After the death of the life of the assured, by way of annuity payments.
3. Whole-Life Policy:
In it, premium is payable throughout the life-time of the life assured, payable only on the death.
4. Limited Payment Life Policy:
Premiums are payable for a selected period of years or until death if it occurs within this period.
5. Joint Use Policy:
Sum assured is payable at the end of endowment terms or on its death of any of the lives assured. Partnership firms in such policies.
6. Convertible Whole-Life Policy:
Policy is to meet the need of young person who are on threshold of their carrier and hence prospects of increase in income is there after some years.
Earlier premium are payable at lower rates, but afterwards assured get the option to convert it into endowment policy. If option not exercised, the policy continues as whole-life policy, the premium ceasing at certain age.
7. Anticipated policy:
It provides for payment of sum assured at the end of specified intervals; say 20% at the end of first 5 years, 20% at the end of next 5 years, and the balance at the end of the term of the policy. If death occurs, full amount is payable.
8. Annuity Policy:
If amount payable by insurer is not in lump-sum, but by monthly, quarterly, half yearly or annually after assured attain certain age.
9. Sinking Fund Policy:
It is useful for companies for redeeming their determines or paying off the loans. A fixed amount is paid annually.
10. Janta Policy:
It concerns risk of death by accident for 1 year only. At death fixed amount is payable.
It is the amount which the insurer is prepared to pay to the assured in case he does not continue a policy for agreed period of time and surrenders his title and interest under the policy of insurer. Before policy acquires any surrender value, it should have undergone for few number of years.
Surrender Value increases as more and more premium is paid.
Q.
1. It is a contract of indemnity which means whatever is the loss, will be only recovered.
2. It is a contract of UBERIMAE FIDEI i.e. assured and insurer have to disclose everything, which is in their knowledge.
3. Assured must have insurable interest in subject-matter both at time of insurance and at time of loss.
4. Risk concerned by it is loss resulting from the fire.
5. It is subject to principles of subrogation and contribution.
6. It is a contract from year to year.
Sum to be recovered = Value of policy x Actual loss/Full value of subject-matter
Q.
1. Specific Policy:
It covers the loss of assured up to a specific amount which is less then the real value of the policy.
2. Comprehensive policy:
It covers losses against risks like fire, theft, burglary, third party risk etc. Such policy is also known as "All-in-one policy."
3. Valued Policy:
Amount payable in case of loss is fixed in it.
4. Floating policy:
It covers the property which is placed at different places, e.g., 2 warehouses at different places having goods.
5. Replacement or reinstalment policy:
It says assured can do any type of fraud so, that he can get the policy money. Therefore, it is stated in the policy that insurer can re-instate new property instead of that damaged property.
Marine Insurance is an insurance whereby an insurer undertakes to indemnify the assured against marine losses.
Policy must contain the following:-
1. Name of assured.
2. Voyage or period of time or both concerned by the insurance.
3. Subject-matter insured and risk insured against.
4. Sum insured.
5. Name or names of insurer or insurers.
Types of policies of marine insurance are:-
1. Voyage Policy:
It is to insure subject-matter from one place to another, e.g., Bombay to New York.
2. Time Policy:
Subject-matter for a definite period of time.
3. Mixed Policy:
Combination of voyage in time policies.
4. Valued:
Agreed value of subject-matter insured.
5. Open or unvalued:
Does not specify value of subject-matter insured.
6. Floating policy:
It describes insurer in general terms. Only amount is mention in it.
7. Wagering policy:
Every such contract is void.
Q.
(1) To prevent the mushroom growth of companies.
(2) To enforce working on sound principles.
(3) To prevent misappropriation of funds and protection of assets.
Q.
(i) Well balanced (ii) Wide
Ist comprehensive piece of insurance legislation in this country.
Q.
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1. Wide Scope |
(a) Application (b) Prohibition |
(a) It applies to all types of insurance business-life, fire, marine etc. done by companies incorporated in India. It also governs:
· Provident companies
· Co-operative societies
· Mutual Offices
(b) Section 2(c) prohibits transaction of insurance business by certain persons. (1) No person shall carry unless he is:
(a) a public company
(b) A registered society
(c) A body corporate incorporated by the law of any country outside India not brief of nature of a private company.
(d) Every notification issued of sub-section (1) shall be laid before Parliament as soon as it is issued.
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2. Requirement as to capital |
Section 6: Requirement as to capital Voting Rights Maintenance of Registers of beneficial winners of shares. |
3. Deposits:
To prevent the growth of insurers of small financial resources or speculative concerns, the Act provided for registration of all insurers with a substantial deposit with the Reserve Bank.
4. Registration :
Section 3(1)
Section 3(2) : Every application for registration shall be accompanied by:-
(a) A certified copy of the MOA and AOA
(b) Name, Address & occupation of directors.
(c) A statement of the class or classes of insurance business done or to be done.
(d) Principal place of business or domicile outside India, a statement verified by an affidavit made by the principal officer of the insurer.
(e) A certified copy of the published prospectus.
(f) The receipt showing payment in the prescribed manner not exceeding Rs. 50,000.
Q.
Contract of Insurance are based on principle indeminity: Goverened by Motor Vehicles Act, 1939.
Now it is 1988 Act. Changes were also made i.e. amendments in 1994 by which maximum limit of compensation was fixed.
Motor Vehicles Act, 1939 amended in 1988. Also amended in 1994. Maximum limit of compensation was fixed.
Q.
To safeguard a person known as insured.
-When a vehicle is propelled mechanically it is known as a MOTOR VEHICLE.
Case :
Lawrence v. Hemllete, (1952) 2 QBD 74
A propelled engine was attached in Bicycle but Piston was removed though petrol was there. It was held that engine was not functional. Therefore, not motor vehicle.
Case :
Floyd v. Bush, (1953) 1 QBD 265
Bicycle with engine but using pedals for running. It was held as motor vehicle.
Case :
Saumitra Auto Rickshaw Sahakari Sangh v. Director of Transport Bombay, AIR 1957 Bom 402
Auto was held as maxi cab thus a motor vehicle.
Q.
Case :
Mangilal v. Paras Ram, MANU/MP/0002/1971 : AIR 1971 MP 5
For plying a motor vehicle at public place, insurance is necessary.
Section 147 and Section 2(34) of Motor Vehicles Act, 1988.
The right of access may be permissive, limited or restricted or regulated by oral or written permission or on payment of fee. It is necessary that the place of payment of fee, must be accessible to members of public and be available for their use, enjoyment etc.
Case :
Pandurang v. New India Life Insurance Co., MANU/MH/0014/1988 : AIR 1988 Bom 248
It was a private factory and inside it certain vehicles were plying and some accident occurred and above definition was needed.
Q.
It includes:
(1) Chasis, (2) Trailer
It does not include:
(1) Anything moving on railway tracks.
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Motor Vehicles Act, 1988- |
Insurance of Motor Vehicles against IIIrd party risks. |
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S-14, S-146, S-147, S-148, S-149 S-145 Definitions |
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-Certificate of Insurance |
Policy should be there |
Policy should be in force |
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-Liability |
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-Policy of Insurance |
Bad condition of car |
More Premium has to be paid |
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-Property |
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-Reciprocating Country |
Good condition of car |
Less Premium has to be paid |
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Insurance is more |
Case :
New India Assurance Co. Ltd. v. B. Saraswati Ammal, (1991) ACC 512
The owner of the goods who accompanies his goods in the lorry transporting them can't be said to be person employed by the person insured by the policy and that either the injury or death arose out of and in the course of his employment. Insurance company is not liable.
This case has been overruled by 1994 amendment. Owner of goods is also part of policy, now.
Case :
National Insurance Co. v. Jugal Kishore, 1988 ACJ 270 (SC)
Comprehensive insurance of the vehicle and payment of higher premium do not mean that the limit of the liability covering third party risks becomes unlimited or higher than the statutory liability fixed under Section 147(2) of the Act. For this purpose a specific arrangement has to be arrived between owner and Insurance Company and separate premium has to be paid on the amount of the liability undertaken by the insurance company in this behalf. Likewise if risk of any other nature for driver or passengers in excess of statutory liability is sought to be covered, it has to be clearly specified in the policy.
Case :
United India Insurance Co. v. K. Subramanium, (1991) ACC 520
Insurance company can't be made liable to pay compensation, if the offending vehicle was being driven by a person not holding a valid driving licence at the time of accident.
Health insurance is a safeguard against rising medical costs. A health insurance policy is a contract between an insurer and an individual or group in which the insurer agrees to provide specified health insurance at an agreed-upon price (the premium). Depending on your policy, your premium may be payable either in a lump sum or in instalments. Health insurance usually provides either direct payment or reimbursement for expenses associated with illness and injuries. The cost and range of protection provided by your health insurance will depend on your insurance provider and the particular policy you purchase. These days, most companies give the benefit of health insurance to its employees. However, in case your employer does not offer a health insurance plan, it is advisable to opt for a health insurance scheme.
Health insurance has become a necessity in today's world. The cost of medical care and treatment has soared to new heights in recent years and is expected to rise even further in the years to come. Think for a moment about the enormous medical costs you would incur if you suffered a major injury tomorrow or were suddenly stricken with a life-threatening illness. Uninsured people live with such risk every day of their lives; health insurance can shield you from that risk. Even if you are healthy today and have never had any major problems in the past, you simply cannot predict the future.
The health insurance industry in India is going to take a big leap with the opening up of the insurance sector. As of now there are only two players in this field, Life Insurance Corporation and the General Insurance Corporation with its four subsidiaries.
The General Insurance Corporation (GIC) was formed by a legislative act. It is a merger of more than a hundred private companies. It was then regrouped into the four subsidiaries of GIC.
· National Insurance Company with its Head Quarter in Calcutta
· New India Assurance Company with its Head Quarter in Mumbai
· Oriental Insurance Company with its Head Quarter in New Delhi
· United India Insurance Company with its Head Quarter in Chennai.
These are the main companies that compete with each other for business in all parts of the country.
Some of the existing health insurance schemes currently available are individual, family and group insurance schemes, senior citizens insurance schemes, long-term health care and insurance cover for specific diseases.
The insurance schemes offered by GIC include:
· Individual and Group Mediclaim Insurance Scheme
· Bavishya Arogya (Insurance for Senior Citizens)
· Jan Arogya and Cancer Insurance.
The Life Insurance Corporation (LIC) offers:
· The Asha Deep plan. It provides cover for cancer, paralytic stroke, renal failure, and coronary artery disease.
· Jeevan Asha. The Jeevan Asha policy is the other health care product offered by LIC.
The other medical insurance products are those that are channelised from the two insurers, but mainly the GIC's Mediclaim. These institutions include the UTI with its senior citizens unit plan, Unit linked insurance plans, credit cards offering medical insurance and new service providers like Medicare, Paramount and Sedgwick Parekh which provide additional services around the basic insurance plans being offered by GIC.
Q.
Social Insurance programs mitigate risks by providing income support in the event of illness, disability, work injury, maternity, unemployment, old age, and death.
Programs include.
· Unemployment insurance to deal with frictional or structural unemployment
· Work injury insurance to compensate workers for work-related injuries or diseases.
· Disability and invalidity insurance, linked to old age pensions, to cover full or partial disability.
· Sickness and health insurance to protect workers from diseases
· Maternity insurance to provide benefits to mothers during pregnancy and post-delivery.
· Old-age insurance to provide income support after retirement
· Life and survivor insurance to ensure that dependents are compensated for the loss of the breadwinner.
Q.
It states the security which society furnishes through appropriate organisation against certain risks to which its members are exposed. The individual of small means are exposed to risks which are essentially contingencies against the means which cannot be effectively provided by his own ability or even in private combination with his colleagues.
A system of social assistance scheme can only be assured through security of employment, security of income and security against health. It is also committed to assure and implement such assistance to its citizen through a welfare state.
It is mainly a 20th Century concept. The condition of human existence compels the state to give security to its citizens. The very important aspect of social justice provides security to man against ravages of social conflicts and inadequacies. Social Justice leads to social security. In a way both are two sides of the same coin, because where there is social Justice there is social security. The social measures which every welfare state should endeavour to provide for its citizens are-
1. Unemployment benefits
2. Maternity benefits
3. Family allowances
4. Old age grants
5. Death grants
6. Industrial injury benefits
7. Nationalised health services
8. The weaker sections of the society
Q.
In the 19th century the ill consequences of the Industrial revolution in the western world compelled by the governments of those countries to introduce a spate of welfare measures and social assistance schemes. The role of the International Labour Organisation was to provide social security measures not only in the advanced countries but in the developing world as well since its inception in 1919 gave an added dimension to the effectuation. The ILO exerted its influence to extend the range of security and the classes of persons protected thereunder through many conventions and recommendations. The basic principles and common standards of social security are influencing the social security measures throughout the world.
Its emergence in India:
Social Security Legislations are of more recent origin in India. Workmen's Compensation Act, 1923, gave the first piece of social security legislation in India to protect the workers against employment injury. Some States followed it by maternity legislations. The more areas are highlighted in many conferences which are in need of more social security measures and the extension thereof. We witnessed the emergence of more and more social security legislations and measures only after independence.
The welfare state of India designed under the Constitution is committed to secure Justice-social, economic and political. The directive principles emphasize the need of social security schemes which are reinforced by the five year plans. They provide the benefits for better implementation, wide coverage of employees and better benefits. The society and the nation have to shoulder the responsibility and measures which are based on the accepted proposition that many of the so-called misfortunes, disabilities and accidents are social.
Effects of social security measures:
It signifies two angles, (1) that they constitute an important step towards the goal of a welfare state, (2) that they enable workers to become more efficient and thus reduce wastage arising from industrial disputes. It prevents the formation of a stable and efficient labour force with a lack of social security measures. The social security measures are not a burden but a wise investment which yield good dividends.
Social security measures against Employment injuries:
The Workmen's Compensation Act, 1923, provides for payment of compensation by employers to workmen and their dependants against death or employment injuries which includes occupational diseases arising out of and in the course of employment. The Act applies to the workers who were given less wages towards their work per month in factories, mines, plantations, transport, construction work, railways and specified hazardous occupations. The scope of the Act is to serve any class of persons whose occupations are considered hazardous in the Central and the State Governments.
The benefits to workers and their dependants in cases of sickness, maternity and employment injury is covered by the Act of Employees State Insurance Act, 1948 which provides the cash benefits. The measure of security against sickness and industrial injuries are introduced. All non-seasonal factories except mines and railway running sheds are applied by this Act. The employees engaged by or through contractors are covered by all employees, namely clerical and supervisory. The wages of the employees should not exceed Rs. 3000 per month. The Act was drawn and implemented in most parts of India through Employees State Insurance Schemes. The Scheme discharges creditable services to employees and their dependants under the Employees State Insurance hospitals.
Maternity Benefits:
The Maternity Benefits legislations are passed both by the Centre and the States in order to safeguard the health and interests of pregnant women and the children. Current Maternity Benefits Act, 1961 of the Centre is adapted by many States. Both the Central and State Acts provide payment of cash on behalf of maternity for a certain period and the government also provides for grant of leave and many other facilities to women employees in certain conditions.
Retirement Benefits:
The Employees Provident Fund Act, 1952, the schemes thereunder, the Payment of Gratuity Act, 1972 are certain major steps towards providing some security against minimum economic requirements to employees after retirement. The system of compulsory contributory provident fund is introduced by the Provident Fund Act. Apart from these there are State enactments and Plantation Provident Funds Acts, Seamen's Provident Fund Acts.
Security of Employment:
The Industrial Disputes Act provides incorporating provisions for lay-off and retrenchment compensations and operates as security against involuntary unemployment. The lay-off and retrenchment conditions and compensation thereof act as deterrent against any hasty and capricious action. They provide some relief and safeguard against such contingencies.
The list of legislation and measures like-
1. Bonus Act,
2. Minimum Wages Act
3. Payment of Wages Act
4. Factories Act
5. Employment of Children Act etc.
which are focussing towards healthy factory conditions, better working conditions and maintenance of a tolerable standard of life.
The welfare State emphasised the felt need of such social security measures with the National Commission on Labour. All social security collections in a single fund with different agencies can draw upon for disbursing various benefits according to needs.
Insurance, like banking is an important service sector specifically covered under the definition of "service" in Section (1)(o) of the Consumer Protection Act. The insurance schemes have multiplied over the years to cover various types of risks to life and property. Since "insurance" has been included in the definition of service, any deficiency in the services of an insurance company would enable the aggrieved party to make complaint for redressal of its grievances under the Article 225
The protection granted under the Act, is of course, very wide and extends to all the cases of unilateral repudiation of the insurance contract by the insurer, delay in settlement of claims, breach of terms of the policy and all other actions affecting the interests of the insured. The consumer fora can adjudicate any dispute regarding such matters. Even if there is unilateral repudiation of the insurance contract by the insurer, jurisdiction of consumer fora to conduct adjudication of the complainant is not affected. All this is explained by the National Commission in LIC of India, A.P. v. Bhavanam Srinivas Reddy, that if the unilateral repudiation of an insurance contract is held to oust the jurisdiction of the consumer fora, such an interpretation may lead to abuse and grave public mischief. The insurance company has to satisfy the court that the repudiation is justified. Further, in terms of Section 3 of the Consumer Protection Act, the provisions of the Act are in addition to and not in derogation of any other law. In this view of the matter, a consumer forum cannot be debarred from investigating the unilateral repudiation of the claim.
This proposition was followed by the National Commission in National Insurance Co. Ltd. v. Lal Chand Jain & Sons and Tanawala Synthetic Textile Ltd. v. Oriental Insurance Co. Ltd. and held that a long delay of more than three years on the part of an insurance company in deciding the claim of the insured is a deficiency in service.
In United India Insurance Co. Ltd. v. Mrs. Pooja Gyanchandra Joshi, the National Commission held that the settlement of a claim by any insurance company on the plea of belated report of the surveyor amounts of deficiency in service. The State Commission accepted the complaint and declared the complainant entitled to the claim. The National Commission also upheld the view of the State Commission.
In New India Assurance Co. Ltd. v. Sakar Iran Industries, the complainant had taken a burglary and house breaking insurance policy. During the insurance period, theft took place in his factory and the insurance company refused the claim. The commission directed the opposite party to pay to the complainant compensation along with interest. On appeal the National Commission upheld the order of the State Commission.
In MCD/DESU v. Basant Devi, the National Commission has held that if an insurance policy, taken by an employee under salary deduction scheme lapses due to fault on the part of the employer in remitting premium deducted from the salary, the employer is liable for deficiency in service and not the insurance company.
The National Commission has held in Ozma Shipping Company v. Oriental Insurance Co. Ltd., that an insurance company cannot be justified in assessing and paying lower amount than the amount agreed in the policy. Taking a similar view in Oriental Insurance Co. Ltd. v. Padmanabha Acharya, where FIR was registered in respect of dacoity in a shop and challan was filed after investigation the National Commission held that refusal of a claim on the ground that no dacoity took place was unjustified. The company was held liable to satisfy the claim as per agreed terms of the policy. The National Commission has held that an insurance company is liable to pay repair cost to a complainant as agreed. Any failure to pay in the settled terms would make the company guilty of deficiency in service.
Delay in making payment of a claim has been simply held as deficiency in service. In such cases of deficiency, proper interest on the withheld claims should be paid to the complainants. Further, Compensation for financial loss and mental stress may be allowed in such cases. In National Insurance Co. Ltd. v. Nagendra Prasad Singh, a claim had been made in respect of a taxi which had met with an accident.
An interesting issue of medi-claim policy has been favourably considered by the consumer fora in New India Assurance Co. Ltd. v. Ambalal Chandulal Shah. In this case, while taking a medi-claim policy, the complainant had disclosed in the proposal that he was mildly hypertensive. Meanwhile, the complainant underwent coronary angiography and was thereafter admitted for coronary by-pass surgery, but his claim for reimbursement of expenses was repudiated by the insurance company. The State Commission and National Commission refused to interfere with the decision of the district forum.
All the above cases indicate that the machinery for the settlement of consumer disputes is working in accordance with the spirit of the legislation and is protecting the consumer interest to the optimum possible.
Section 2(i)(o)-Service
1. Unilateral Repudiation of insurance contract
2. Delay in settlement of claims
3. Breach of terms of the policy
4. Other actions affecting the interests of insured deficiency in Service- Section 2(1)(g)
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