Introduction
A bank is a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly or through capital markets. A bank connects customers with capital deficits to customers with capital surpluses. Banking is generally a highly regulated industry, and government restrictions on financial activities by banks have varied over time and location. The current set of global bank capital standards is called Basel II. In some countries such as Germany, banks have historically owned major stakes in industrial corporations while in other countries such as the United States banks are prohibited from owning non-financial companies. In Japan, banks are usually the nexus of a cross-share holding entity known as the keiretsu. In Iceland banks had very light regulation prior to 2008 collapse. The oldest bank still in existence is Monte dei Paschi di Siena, headquartered in Siena, Italy, which has been operating continuously since 1472. It is sometimes said that a banker to whom a customer has paid in moneys for his current account is a trustee of such moneys, but this is a mistake. The true relation between a banker and customer is that of debtor and creditor only, with an obligation on the part of the banker to discharge the debt in a particular manner. So clearly is this the case that if, after paying money into the hands of a cashier to the credit of his account, which is not overdrawn, the customer should suddenly suspect the solvency of the bank, he cannot withdraw it except by check. In the same way, the moment a bank clerk in cashing a check has placed notes or money in the control of the person presenting the check there is actual delivery and possession, and he cannot take them back. Should a customer overdraw his account the bank is not bound to offer the sum really due him, but can rightly refuse to honor the check?
Before examining the relationship between banker and customer, it appears necessary to explain, as far as possible, legal meaning of the tow terms. The former, until the passing of Indian companies amendment act, 1936, had no statutory definition in India, and the legal decisions on its interpretations, were by no means satisfactory. The latter has never been defined in any statute and the Indian judicial decisions on this point also fail to give any satisfactory guidance.
Much time, ink and paper have been consumed in an effort to define what exactly constitutes banking. Even the best authorities have found it rather a hard nut to crack, mostly on account of the multifarious functions and services, e.g,. Dealing in stocks and shares, trusteeship, executorships, etc., which modern banks perform, in addition to or in conjunction with what is distinctive and characteristic banking business? In most cases, either the term banker has been defined in the negative, or in a manner which lays itself open to the charge of petito prinipii. For instance, section 3 of the Negotiable instrument Act, 1899 also failed to lay down what exactly was meant by banking business, and what conditions were required to be fulfilled by a person, so as to be regarded as a banker for the purposes of either of these Acts. Even the English law as failed to provide us with satisfactory definitions of the terms banker and customer.
American Definition-----the terms banker is often used in a very broad sense, embracing the capitalist; the financier, the stock broker, and even high bank officials. Many attempts were made to explain the exact significance if the term, but nearly all of them had their own pitfalls. The earliest successful; attempts was made by legislators in the United States of America, who enacted the following definition.
By “banking” we mean the business of dealing in credits and by a “bank” we include every per bonds, son, firm or company having a place of business where credits are e opened by the deposit or collection of money or currency, subject to be paid or remitted on draft, cheque or order, or money is advanced or loaned on stocks, bullion, bills of exchange, or promissory notes, or where stocks, bonds, bullion, bill of exchange or promissory notes are received for discount or sale.
This definition, which is more like a description, is used in an Act of the congress. To define banking merely as dealing in credit is wanting in precision and exactitude. Strictly speaking, the term banker should apply to the credit merchant only when he uses the credit and funds of others. He is otherwise more a capitalist than a banker, if he uses only his own credit and funds. The Japanese Bank Act of 1927, which came into force from 1st January, 1928, defined banks as “institutions” which carry on operations of giving, as well as receiving credit.
English Law---there being no statutory definition in England for this terms, some of the leading writers on banking law have, from time to time, attempted to deduce the essentials in the concept of the term, from the decided cases.
Hart’s Definition---Dr.Herbet L.Hart, the author of the well-known treatise, law of banking says “A banker is one who ordinary course of his business, honors cheques drawn upon him by persons from and for whom he receives money on current accounts. This definition is based upon the dicta given in a number of decisions beginning with Foley V. Hill (1848) 2 H.L.C 28. According to this definition the essential function to enable a person, firm, or institution, to be regarded as a banker or a bank, is that of receiving current deposits against which cheques may be drawn.
Halsbury’s Definition----Halsbury has defined banker as follows: an individual, partnership or corporation, whose sole predominating business is banking, that is the receipt of money on current or deposit account and the payment of cheques drawn by and the collection of cheques paid in by a customer.
Sir John Paget’s Definition ----the view expresses above, is further borne out by Sir John Paget, another great authority, according to whom there are four essential functions which persons desiring to be called bankers, must perform:
1. Take deposit accounts,
2. Take current accounts,
3. Issue and pay cheques,
4. Collect cheques crossed and uncrossed, for his customers,
Sir John Paget further adds that one claiming to be a banker must profess himself to be one, and the public must accept him as such; his main business must be that of banking from which, generally, he should be able to earn his living. This definition is fairly exhaustive, although it makes no mention of many other important functions of the present day banker, which may be put under two heads;
A. Agency services, comprising the collection of bills, promissory notes, coupons, dividends, payment of subscription and insurance premium, and acting as a trustee, attorney or executor of his customers, and
B. General utility services, e.g. issue of credit instruments, the transaction of foreign exchange business, the safeguarding of valuables and documents against fire. Theft, etc. there seems to be no doubt that, according to English law, a person claiming to be treated as a banker, should perform the functions as given by Sir John Paget.
INDIAN LAW
Money lenders not bankers----in India, till the passing of the banking companies Act, 1949, no restrictions were imposed on the use of the term “bank” or “banker” by moneylenders. Within two years of the enforcement of this Act, all companies carrying on banking business are required to use as part of their names any of the words “bank” “banker” or “banking” mere money lending does not constitute banking business. This was held in cases Bank of commerce Ltd Vs. kunj Behari Kar, AIR 1945.
Banking company defined by statute -----the earliest attempt in India in the direction of formulating a definition was that of the Hilton Young commission, which in para 162 of its report, put forward the recommendation that “the term Bank or banker should of its report, put forward the recommendation that the term bank or banker should be interpreted as meaning every person, firm, or company using in its description or its title, banker or banker or banking and every company accepting deposits of money subject to withdrawal by cheque, draft or order” the Indian Companies (Amendment) Act, 1936, though rejecting the former part of the definition proposed above and rightly so substantially accepted its latter part.
The banking Regulation Act, 1949, defines banking company: “as a company which transacts the business of banking in India,” and the word “banking” has been defined as “accepting”, for the purpose of lending or investment, of deposits of money from the public, “repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise,” vide section 5 (b) and (c). under section 6 read with section 3 (5) of the Nationalizing Acts in addition to the business of banking, banking company and the 20 nationalized banks may engage in anyone or more of the following forms of business, namely;
A. The borrowing, raising, or taking up of money; the lending or advancing of money either upon or without security; the drawing, making accepting, discounting, buying, selling, collecting and dealing in bills of exchange, handis, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures, certificates, scrips and other instruments, and securities whether transferable or negotiable or not; the granting and issuing of letters of credit, transferable or negotiable or not; the granting and issuing of letters of credit, travelers cheques and circular notes; the buying, selling and dealing in bullion and species; the buying selling of foreign exchange including foreign bank notes; the acquiring, holding, issuing on commission, underwriting and dealing in stocks, funds, shares, debentures, debenture stock, bounds, obligations, securities and investments of all kinds; the purchasing and selling of bonds, scrips or other form of securities on behalf of constituents or others, the negotiating of loans and advances; the receiving of all kinds of bonds, scrips or valuables on deposits or for safe custody or otherwise; the providing of safe deposit vaults; the collecting and transmitting of money and securities;
B. Acting as agents for any government or local authority or any other person or persons; the carrying on agency business of any description including the clearing and forwarding of goods, giving of receipts and discharges and otherwise acting as an attorney on behalf of customers, but excluding the business of a managing agent or secretary and treasurer of a company;
C. Contracting for public and private loans and negotiating and issuing the same;
D. The effecting, insuring, guaranteeing, underwriting, participating in managing and carrying out of any issue, public or private of state municipal or other loans or of shares, stock, debenture stock of any company, corporation or association and the lending of money for the purpose of any such issue;
E. Carrying on and transacting every kind of guarantee and indemnity business;
F. Managing, selling and realizing any property which may come into the possession of the company in satisfaction or part satisfaction of any of its claims;
G. Undertaking and executing trusts;
H. Acquiring and holding and generally dealing with any property or any right, title or interest in any such property which may form the security or part of the security for any loans or advances or which may be connected with any such security;
I. Undertaking the administration of estates as executor, trustee or otherwise;
J. Establishing and supporting or aiding in the establishment and support of associations, institutions, funds, trusts and conveniences calculated to benefit employees or ex-employees of the company or the dependents or connections or such persons; granting pensions and allowances and making payments towards insurance; subscribing to or guaranteeing money for charitable or benevolent objects or for any exhibition or for any public, general or useful object;
K. The acquisition, construction, maintenance and alteration of any building or works necessary or convenient for the purposes of the company;
L. Selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing or turning into account or otherwise dealing with all or any part of the property and rights of the company;
M. Acquiring and undertaking the whole or any part of the business of any person or company, which such business is of a nature enumerated or described in this sub-section;
N. Doing all such other things as are incidental or conducive to the promotion or advancement of the business of the company;
O. Any other form of business which the central government may, by notification in the official Gazette, specify as a form of business in which it is lawful for a banking company to engage.
No banking company shall engage in any form of business other than those referred to above.
What constitutes a customer?
Sir John Paget’s view---there is as yet, no statutory definition of “customer” either in England or in India. Although the earlier legal decisions are conflicting, the later rulings of English courts on these points are quite clear. According to the older view, as expressed by Sir john Paget, “to constitute a customer, there must be some recognizable course or habit of dealing in the nature of regular banking business….it is difficult to reconcile the idea of a single transaction with that of a customer. The word surely predicates even grammatically, some minimum of custom antithetic to an isolated act. It is believed that tradesmen differentiate between a customer and a casual purchaser”. According to this view, in order to constitute a customer of a bank, a person had to satisfy two conditions. Firstly, that there was to be some recognizable course or habit of dealing between him and the bank and secondly, that the transactions were to be in the nature of between him and the secondly, that the transactions were to be in the nature of regular banking business. As regards the first of the conditions, it was held in Mathews VS. Williams, Brown &co., that in order to constitute a person a customer of a bank, he should have some sort of an account with the bank, but that the initial transaction in opening an account did not set up the relation of a banker and customer, and there had to be some measure of continuity and custom.
Duration Theory----the “duration theory” of which Sir john Paget was, exponent, was exploded by Mr. Justice Baihache who in the course of his judgment in the case of Ladbroke Vs. Todd, 30 TLR (1914) observed:” the relation of banker and customer begins as soon as the first cheque is paid and accepted for collection and not merely when it is paid”. This view was confirmed in commissioner of Taxation Vs. English Scottish and Australian Bank, (1920) AC 683. Lord Dunedin, who delivered the judgment of the Board of the privy council said, “the word customer signifies a relationship in which duration is not of the essence….A person whose money has been accepted by the bank on the footing that the bank undertakes to honor cheques up to the amount standing to his credit, is in the view of their Lordship, a customer of the bank in the sense of the statute irrespective of whether his connection is of long or short standing”
In central bank of India Ltd Vs. Gopainthan Nair, AIR 1970 Ker 74, the Kerala High court observed that the term “customer” is not defined in the Negotiable Instrument s Act. Broadly speaking, a customer is a person who has the habit of resorting to the same place or person, to do the business. So far as banking transactions are concerned he is a person, whose money has been accepted on the footing that the banker will honor up to the amount standing to his credit, irrespective of his connection being of short or long standing.
When does custom begin? ----even a single, isolated transaction thus appears sufficient to give the status of a customer to any person. This, where a person approached the wilts and Dorset bank for collection of a cheque, and at that point of time having no account with the bank, but stating that he might open an account with the cheque, DARLING J., deciding in tate Vs. Wilts and Dorset Bank, (1899) legal decisions affecting bankers 286, was prompted to comment: “he was not a customer at the moment, but he was going to become a customer if that cheque was collected”
The dealings with the person and the bank should be only those relating to the business of banking. In Ladbroke Vs. Todd, (1914) 30 TLR 433, it was laid down that the relationship of a banker and customer would commence as soon as the first cheque presented by a person is paid or accepted for collection by the bank, and not merely from the point of time when the cheque is indeed collected.
Bailhache J. said: “it is true that it was the first transaction that had taken place between them; but what needs to be looked into is the relationship between the parties created by the loding of the cheque by the customer with the bank. Was he already a customer of the bank when he landed the cheque for collection? There must be a time anterior to the lodging of the cheque for collection when he began to be a customer”. A person, in one manner of speaking, begins to become a customer of a bank when he goes to the bank with money or a cheque and asks to have an account in the name of that person; it is then and only then that he is entitled to be called a customer of the bank. It is not necessary that he should have drawn any money or even that he should be in a position to draw money.
The Taxation Commissioners Vs. English Scottish and Australian Bank, (1920) A.C 683, saw the word customer to signify a relationship in which the duration of time for a person to have remained in the status of a customer of the bank was not of the essence. The judicial committee of the Privy Council in the case cited, interpreted section 82 of the English Bills of Exchange Act 882 in the manner so as to make a customer out of person whose only dealing with the bank on a day was to present a cheque, payable to bearer, and receive cash himself. Improving over a colonial decision, the privy council declared: “A person whose money has been accepted by the bank on the footing that the bank will undertake to pay cheques up to the amount standing to his credit, is a customer of the bank in the sense of the statue, irrespective of whether his connection is short or long standing. The contrast is not between an habitué and a newcomer, but between a person for whom the bank performs a casual service, such as for instance, cashing a cheque for a person introduced by one of their customers, and when the bank performs such service to a person who has an account of his own at the bank”.
Relying on the above cases one may conclude that a customer is one who has either a current or a deposit account or in the absence of it, some relation with the bank in the ordinary course of business, that can be seen as banking business.
Habit forms custom---
Paget is an aggressive subscriber to the view that to constitute a customer there must be some recognizable course or habit on the part of a person of dealing with the bank in the nature of regular banking business; that an isolated transaction or a series of transactions not commonly associated with banking is not sufficient. Sir Paget does not seem to favor the school, which thinks that duration of relationship is not of the essence.
The more reasonable and just, and which may be called, the modern view, by virtue of the dicta in the commissioners of Taxation case, hold that a person becomes a customer of a bank as soon as he is accepted as such by the banker, provided that the latter takes the necessary precautions which should prevent his obtaining and undesirable client and which are considered in law to be an essential feature in his claim to immunity from the charge of conversion. The relationship commences as soon as the banker agrees to honor cheques drawn against a balance created by the newcomer. Unless a contrary can be shown, this means that as soon as the banker receives cash as deposit into an account, or a cheque for collection, with the strict intention.
1. Not to permit drawing in the depositors account until (i) the cheque is cleared—unless he is prepared to grant an overdraft; (ii) the precautions taken do not bring to light any reason why the desired relationship should not exist; and
2. Of terminating relations for reasons indicated
This must mean all cases where the accepted practice is followed.
Single transaction may constitute a customer----in Savory & co. Vs. Lloyds Bank Ltd., (1932) TLR 344, the plaintiffs were a firm of London stockbrokers. They had two clerks in their employ, named Mr. Perkins and Mr. Smith. The plaintiffs sent out a number of cheques drawn on their bankers, the Midland Bank Ltd., and made payable to number of payees or bearer. These cheques were handed over to Perkins or Smith for posting. Instead of posting them as directed, Perkins and Smith stole the cheques and took them to a London branch of Lloyds Banks Ltd., and paid them in with instructions, that in the case of perkins, the amount of the cheques should be credited to his account, which he had at a branch of the Lloyds Banks Ltd., at Wellington, and in the case of Smith, to an account in the name of his wife at the red hill branch of the same bank. The first of these cheques was received before Mr. Smith in fact became a customer. The plaintiffs subsequently discovered the fraud of their clerks and sued the defendants, the Lloyds Bank Ltd., to recover the amount of these cheques, on the ground of conversion.
It was held that though Mr. Smith and perkins had only one transaction with Lloyds Bank, they were its customers as single transaction may constitute a customers of the bank.
Frequency anticipated-----in conclusion frequency of transactions is not essential to constitute a person as a customer, but it is true to say that his position must be such that transactions are likely to become frequent. It means that, as soon as the banker receives cash or cheque to be collected t on the definite understanding
1. Not to permit drawing against it until (a) the cheque is cleared, (b) the precautions taken do not bring to light any objection to the relationship and
2. To terminate relations in case he finds any reason for discontinuing the same, the relationship between the banker and his customer may be said to have begun. Banker satisfy themselves regarding the bona fides and respectability of new customers, and if they take necessary precautions as indicated above, the persons opening accounts come in the category of customers for the purpose of protection given to the banker under the negotiable instruments act 1881.
3. Dealing to be banking nature---. Another requirement is that the dealing must be of a banking nature. This is in contradistinction to the casual services, rendered by a banker, goes to a cashier of bank and get cheques cashed or deposits, valuables or securities for safe custody, or buys a few stamps, he does not thereby become a customer of the bank, as such transactions are not regarded in the nature of the real banking business. According to the judgment of the judicial committee of the privy council in commissioner of taxation Vs the English, Scottish and Australian Bank already referred to, “the contrast is not between an habitué and a newcomer, but between a person for whom the bank performs a casual service, e.g., cashing a cheque for a person introduce by one of their customers and a person who has an account of his own at the bank.
It should, however, be remembered that a banker cannot protect himself by opening a short account or crediting an item to sundries account, as it cannot invest the party for whom it is collected with the status of a customer.
Customer under Sec. 131 of the Negotiable instruments Act, 1881 and sec, 82 of the bills of Exchange Act 1882— it is customary for bankers to satisfy themselves as regard the identity of the person who desires to open account with them. This is necessary to draw protection under section 131 of Negotiable Instruments Act, 1881 which lays down: a banker who had in good faith and without negligence received payment for a customer of a cheque crossed generally or specially to himself shall not, in case the title to the cheque proves defective, incur any liability to the true owner of the cheque by reason only of having received such payment.
Nowhere in this section, nor elsewhere in the negotiable instruments act, is it made clear that a person does not become a customer only for the reason that the banker has performed service to him, either as a collecting banker, or a paying banker, without obtaining a reference on him. The act of obtaining references on newcomers is merely an act of precaution to derive protections under the act. Even when they are not so observed, there is no gainsaying that the newcomer nevertheless becomes the customer, within the meaning of the protective provisions of the negotiable instruments act, whether
1. The cheque with which the account is opened is cleared or not;
2. The replies received to the enquiries are satisfactory or not;
When replies to such enquiries are not satisfactory, the banker may be liable to lose protection under section 131 of the act, but such replies do not reduce the newcomer from becoming a customer.
A person is a customer of a bank within the meaning of section 4 of the Cheques Act 1957 (which has replaced section 82 of the Bills of Exchange Act, 1882), and in the general sense of the word also, if he keeps either a current or deposit account with the bank, or it would seem, if the bank undertakes habitually to act for him as such.
In the leading case Great Western Railway Vs. London and County Banking Co., (1901) a certain Huggins having, by false pretences, obtained from the appellants a cheque crossed”& co” and marked “not negotiable “took it to the respondent bank. The bank at his request paid a part of the amount of the cheque into the account of one of their customers, and handed the balance to Huggins. After the respondents had received payment of the cheque from the bank on which it was drawn, Huggins’s fraud was discovered, and the appellants sued the respondents for the amount. It was found as a fact that the respondents received the payment in good faith and without negligence. They had for years been in the habit of cashing cheques for Huggins in similar manner. He had no account or passbook with them. It was held that Huggins was not a customer of the respondent, and that they did not receive payment of the cheque for him within the meaning of section 82 of the Bills of Exchange Act, 1882 and were not protected by that section; that Huggins having no title to the cheque, the respondents took no title to it or to the money and that they were liable to the appellants for the amount of the cheque.
LORD DAVEY, in the course of his judgment, said “there is no definition of a customer in the Bills of Exchange Act, 1882, but it is a well known expression, and I think that there must be some sort of account, wither a deposit or a current account or some similar relation to make a person a customer of a banker. On the facts proved in this case I do not think the respondents undertook any duty towards Huggins.
LORD BRAMPTION dealt with the contention that Huggins was a customer of the bank as follows of the report: “Juggins had no banking account at all anywhere. It is not necessary to say that the keeping of an ordinary banking account is essential to habitually lodged with a bank for presentation on behalf of the person lodging them, and that when honored the amount was credited and paid out to such person, whether with or without any profit to the bank for so presenting them, I would not say that such transaction might not constitute such person a customer with the meaning of the 82 section; indeed, I think they would”.
Bank itself as a customer of another--- where a bank has a drawing account with another bank for convenience of business, especially when such account holding bank is not a member of the clearing house, employing such latter bank to clear its cheques, the non clearing bank is in every sense of the word the customer of the clearing bank. Holding that the German correspondent bank was deemed to be a customer of the English bank within the meaning of the erstwhile section 82 of the bills of exchange act. The court said: “what does the expression customer of a bank cover? The most ordinary meaning, I suppose is a person who keeps an account at the bank, such a person is obviously a customer. But banks do various kinds of business and in all those the individuals or the companies with whom they do the business may properly be called customers; and they can properly be so called whether they are individuals or whether they are banks. In this case this class of business of collecting cheques was done between bank and bank, and it seems to be impossible to contend, as a matter of law, that the bank for which the respondents were doing business were not in reference to that business, their customer.
