UNIVERSITY OF CENTRAL PUNJAB

FALL 2018

BANKING LAWS & PRACTICIES

M.COM MORNING

ASSIGNMENT-03
SECTION: A
SUBMITTED TO:
PROF. WAFA FARRUKH

SUBMITTED BY:
Hafiza Sunbal Malik L1F18MCOM7047
Submission Date: 03-Jun-2020
 SHORT QUESTIONS

CHAPTER: 20 - 24

1. BANKER AND CUSTOMER:

BANKER:
• According to J.W. Gilbert

“A banker is a dealer in capital, or, more properly, a dealer in money. He is an intermediate

party between the borrower and the lender. He borrows from one party and lends to another”

• According to Dr. Herbert L. Hart

“A person carrying on a business of receiving money, and collecting drafts for customers
subject to the obligation of honoring cheques drawn upon him from time to time by the
customers to the extent of the amounts available on their current accounts”

• According to Sir John Paged: (considered as an authority on banking law)

“that no person or body corporate or otherwise, can be a banker, who does not (i) take
deposit accounts, (ii) take current accounts, (iii) issue and pay cheques and (iv) collects
cheques crossed and uncrossed for his customers”

• American Version:

“by “banking” we mean the business of dealing in credits, and by a “bank” we include every
person, firm or company having a place of business where credits are opened by deposits or
collection of money or currency, subject to be paid or remitted on cheque or order, or money
is advanced or loaned on stocks, bonds, bullion, bills of exchange or promissory notes or
where these are received for discount or sale”

CUSTOMER:
• According to Sec 131 of Negotiable Instruments Act, 1881

In the above cited section a reference has been made with regard to the Customer-- that
protection shall be available to a banker collecting cheques on behalf of his customer

• According to Sir John Paget:

“To constitute a customer, there must be some recognizable course of habit of dealing in the
nature of regular banking business”
 • According to the judgment in the case cited as “Lad Broke V Todd (1914) given by
Justice Bail Hache, customer’s domain is maintained as under

“in my opinion a person becomes a customer of a bank when he goes to the bank with money
or a cheque and asks to have an account opened in his name, and the bank accepts the money
or cheque and is prepared to open an account in the name of that person; after that he is
entitled to be called the customer of bank. It is further added, “I think such a person becomes
a customer the moment the bank receives the money or cheque or agrees to open an
account.”

2. Rights and Duties of Customer:

• The customer has the following universally accepted rights:

- To draw cheques against his credit balance, or in the absence of credit balance, when there
are arrangements for accommodation made with the banker earlier;

- To receive a statement of his account from a banker.

- To sue the bank for any loss and damages.

- To sue the banker for not maintaining the secrecy of his account.

• The customer has the following duties towards his banker:

i. Section 72 of the Negotiable Instruments Act, 1881, lays down that the customer must
present the cheques for payment and collection within the business hours of his banker.

ii. Section 84 of the Negotiable Instruments Act, 1881, lays down that the customer should
see that the cheques and other instruments are presented for payment within a reasonable
time from the date of their issue.

iii. He should take reasonable care for safe custody of the cheque books. If a customer fails
in this duty, he is to be held responsible for his negligence in leaving his cheques
unprotected.

iv. Any fraudulent alternations and additions. In Yany V Grote, the Lord Chancellor said:

v. "A cheque drawn by a customer is in point of law, a mandate to the banker to pay the
amount according to the tenor of the cheque. It is beyond dispute that the customer is
bound to exercise reasonable care in drawing the cheque to prevent from being misled. If
he draws the cheques in a manner which facilitates fraud, he is guilty of a breach of duty
to himself and the banker, and he will be responsible to the banker for any loss suffered
by the banker as a natural and direct consequence of this breach of duty".
3. Qualifications of a Customer:
Legal Requirements to be qualified as Customer:

-Customer should be of age of majority should be of sound mind

-Not debarred under any law there must be an offer/ proposal and acceptance of that offer/
proposal.

4. Definition of Banking, Banking Company & Forms of Business-- BCO,

1962

“Banking means the accepting, for the purpose of lending or investment, of deposits of
money from the public, repayable on demand or otherwise, and withdraw able by cheque,
draft, payable to order or otherwise;

Banking Company” means any company which transacts the business of banking in
Pakistan.

This all states the legal relationship of banker -who is it and how the different economists,
jurists and statues look at bank & banker.

“Banking Company” means any company which transacts the business of banking in
Pakistan; Forms of business carried out by the banking company under section 7 BCO, 1962:
In addition to the business of banking, a banking company may engage in any one or more of
the following forms of business, namely:-

a) 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, hundies, promissory notes, coupons, drafts,
bills of lading, railway receipts, warrants, debentures, certificates, scripts Dealing in
(participation term certificates, term finance certificates, musharika certificates,
modaraba certificates and such other instruments as may be approved by the State Bank)
and other instruments, the granting and issuing of letters of credit, issuing of traveler's
cheques and circular notes;
(aa) the providing of finance as defined in the Banking Tribunals.
b) Acting agents for any Government or local authority or any other person or persons; the
carrying on of 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 treasurer of a company;
(bb) acting as “modaraba company” under the provision of the Modaraba Companies
and Modaraba (Floatation and Control) Ordinance, 1980 (XXXI of 1980);
 c) Contracting for public and private loans and negotiation and issuing the same;
d) The effecting, insuring, guaranteeing, underwriting, participating in managing and
carrying out of any issue public or private, Government, municipal or other loans or of
shares, stock debentures, (debenture stock or other securities)* 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;
(ee) purchase or acquisition in the normal course of its banking business of any property,
including commodities, patents, designs, trade-marks and copyrights with or without buy-
back arrangements by the seller, or for sale in the form of hire purchase or on deferred
payment basis with mark-up or for leaning or licensing or for rush-sharing or for any
other mode of financing;
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) Acquiring and holding and generally dealing with any property or any right, title or
interest in any such property which may form security or part of the security for any loans
or advances or which may be connected with any such security; for any loans or advances
or which may be connected with any such security;
h) Undertaking and executing trusts;
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 of such persons; granting
pensions and allowances and making payments towards insurance; subscribing to or
guaranteeing moneys 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 purpose of the company;
l) Selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing
of 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, when 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 Federal 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. (2) No banking company shall engage in any form of business other
than those referred to in sub-section (1)
 5. UNENFORCEABLE CONTRACT:

Such contracts are unenforceable before a court of law due to some technical defects such as
non-deposit of court fee, submission of unsigned documents, absence of writing, wherever
writing required, absence of registration, wherever required under law. On removal of these
discrepancies, the contract becomes enforceable.

Such contracts are unenforceable before a court of law due to some technical defects such
as:

• Non-deposit of court fee

• Submission of unsigned documents
• Absence of writing, wherever writing required
• Absence of registration, wherever required under law.

On removal of these discrepancies, the contract becomes enforceable.

6. DEFINITION OF CONTRACT:
“Contract is an agreement enforceable at law.”

ESSENTIALS OF A VALID CONTRACT:

Essentials of a valid contract are discussed under section 10 of the Contract Act 1882:

• Agreement

• Consideration

• Legal Relationship

• Free Consent

• Competent Parties

• Lawful Object

• Legal Formalities

• In such contract all essentials of a contract as mentioned in section 10 are required to be

fulfilled.

• In case breach of contract by one party, the other party has a right to file a suit for this
breach.
7. EXPRESS CONTRACT AND IMPLIED CONTRACT:

EXPRESS CONTRACT:

• An express promise shall lead to an express contract.

• Such a contract may be expressed by words spoken or writte

• Express contracts are contained in the provisions of section 9 of the Contract Act 1882.

IMPLIED CONTRACT:

• Such contracts are inferred from the acts and conduct of the contracting parties.

• The provisions regarding express and implied contract as contained in section 9 are given
below:

Example:
Mr. Aslam was engaged by a business man as a helper at his shop. He has been performing
the job assigned to him, however no appointment letter was issued by the shopkeeper.
Although there is no express agreement as to the employment of Mr. Aslam but the acts and
the conducts of the respective parties shall lead to a conclusion regarding the nature of
contract between them. Since the conclusions shall be inferred from the acts and conduct of
the respective parties, such contract would be called an implied contract. --The provisions
regarding express and implied contract as contained in section 9 are given below: “In so far
as the proposal or acceptance of any promise is made in words, the promises is said to be
express. In so far as such proposal or acceptance is made otherwise than in words, the
promise is said to be implied.”

8. Describe the instances under which agreement are considered as void?

Void contract:

A void contract is the one which is not enforceable by law. It has been provided in section (j)
of the Contract Act.

“A contract which ceases to be enforceable by law becomes void when it ceases to be

enforceable. “

A voidable contract is a good contract as long as it is not avoided by the person who has the
option to avoid whereas a void contract is not a contract at all from the very beginning in the
eye of law.
 Example:

Mr. Aslam resident of Lahore entered into an agreement with Mr. Kamal, a rice dealer at
Gujranwala for the purchase of 100 tons of rice. District Coordination Officer ( DCO) Lahore
had imposed restriction on entry of rice in the territorial jurisdiction of District Lahore well
before the date of the above agreement. The said agreement is not enforceable at law, hence
void.

Situations of void contract

• Impossibility of performance.
• It has been discussed in section 56 Legal contract may became void due to some illegality
afterwards.
• Revocation of a voidable contract by the party at whose option, the contract is avoidable
becomes void contract.
9. What is the difference between Debtor and Creditor Relationship and
Creditor and Debtor Relationship?
Debtor and Creditor Relationship:
Debtor and Creditor Relationship When customer deposits money in a bank the relationship of
debtor and creditor is established, in this case; Banker is Debtor & Customer is Creditor.

Creditor and Debtor Relationship:

When a bank grants loan or other credit facilities to the customer, relationship is reversed, that is
now Customer is Debtor & Banker is Creditor. In such cases it is not the money of the customer
in the hands of the banker but it is the money of the bank in the hands of the customer but in all
such cases when a customer's account is over drawn, the customer does not cease to be a
customer.

10. What is meant by principal and what is scope of duties of principal?

Principal:
The person for who act is done, or who is so represented, is called the Principal.
Duties of the principal are enumerated below:
• Payment of remuneration to the agent
• Not to prevent his agent from performing the duties/ acts assigned to him under the contract
and for which remuneration is payable.
• Any legitimate expenses which have been incurred by the agent in the course of performance of
his duties are to be indemnified by the principal.
11.Define and explain agent and types of agents?
Agent:
Agent is a person employed to do any act for another or to represent another in dealing with a
third persons.
Types of Agent: The agents may be classified as under:
Public Agents- these are representatives of a State
Private Agents—these agents represent individuals or companies
General Agents- these agents pertaining to a business, vocation or profession
Special Agents—such agents are appointed for a specific transaction.
Co-Agents-- Such Agents act along with Principal.
12. Discuss the rights and duties of the agent:
Duties of the Agent:
Duties of agent are contained in sec 211 to 218 of the Contract Act. Some of the important
duties are given below: • To follow principal’s instructions
• To show required skill and diligence
• Agent to render proper accounts
• Agent to pass on any benefits derived by him
Agent’s duty in conducting principal’s business. (sec 211):
An agent is bound to conduct the business of his principal according to the directions given by
the principal, or, in the absence of any such directions, according to the custom which prevails in
doing business of the same kind at the place where the agent conducts such business. When the
agent acts otherwise, if any loss be sustained, he must make it good to his principal, and, if any
profit accrues, he must account for it.
Agent's duty to communicate with principal (section 214):
It is the duty of an agent, in cases of difficulty, to use all reasonable diligence in communicating
with his principal, and in seeking to obtain his instructions. Agent is under a duty to consult
principal in a "difficult" situation so as to save repudiation of his action by principal.
Rights of the Agent:
These are discussed in the following paragraphs:
When agent’s remuneration becomes due-Sec 219:
In the absence of any special contract, payment for the performance of any act is not due to the
agent until the completion of such act; but an agent may detain moneys received by him on
account of goods sold, although the whole of the goods consigned to him for sale may not have
been sold, or although the sale may not be actually complete.
Agent to be indemnified against consequences of lawful acts (sec 222):
The employer of an agent is bound to indemnify him against the consequences of all lawful acts
done by such agent in exercise of the authority conferred upon him.
Agent to be indemnified against consequences of acts done in good faith (sec 223):
Where one person employees another to do an act and the agent does the act in good faith, the
employer is liable to indemnify the agent against the consequences of that act, though it cause an
injury to the rights of third persons.
Compensation to agent for injury caused by principal's neglect (sec 225):
The principal must make compensation to his agent in respect of injury caused to such agent by
the principal's neglect or want of skill.
Enforcement and consequences of agent's contracts (sec 226):
Contracts entered into through an agent, and obligations arising from acts done by an agent, may
be enforced in the same manner, and will have the same legal consequences as if the contracts
had been entered into and the acts done by the principal in person.

13.What are the rights of principal?

Right of principal when agent deals, on his own account, in business of agency without
principal's consent.( sec 215):
If an agent deals on his own account in the business of the agency, without first obtaining the
consent of his principal and acquainting him with all material circumstances which have come to
his own knowledge on the subject, the principal may repudiate the transaction, if the case shows
either that any material fact has been dishonestly concealed from him by the agent, or that the
dealings of the agent have been disadvantageous to him.
Principal's right to benefit gained by agent dealing on his own account in business of
agency (sec 216):
If an agent, without the knowledge of his principal, deals in the business of the agency on his
own account instead of on account of his principal, the principal is entitled to claim from the
agent any benefit which may have resulted to him from the transaction.
14.Write a note on Bailor and Bailee relationship.
Bailor and Bailee Relationship:
In banker customer relationship, bailment is also important types of relations. It may arise in the
following situations:
Availing safe custody services (lockers) Pledge of stocks as security for availing credit from
bank. In these cases--- Customer--- Bailor & Bank---- Bailee
Bailment:
The definition of bailment as contained in section 148 is given here under: A “bailment” is the
delivery of goods by one person to another for some purpose, upon a contract that they shall,
when the purpose is accomplished, be returned or otherwise disposed of according to the
directions of the person delivering them. The person delivering the goods is called the “bailor”.
The person to whom they are delivered is called the “bailee”
Explanation:
If a person already in possession of the goods of another contracts to hold them as a bailee, he
thereby becomes the bailee, and the owner becomes the bailor, of such goods although they may
not have been delivered by way of bailment.

15.Write a note on Mortgagor and Mortgagee Relationship:

Mortgagor and Mortgagee Relationship:
When credit facility is provided by the bank to a customer against the security (collateral) of
immovable property, the relationship of Mortgagor and Mortgagee is established. In this
situation: Mortgagor— Customer Mortgagee— Bank Mortgage Defined: sec 58: (a) A mortgage
is the transfer of an interest in specific immoveable property for the purpose of securing the
payment of money advanced or to be advanced by way of loan, an existing or future debt, or the
performance of an engagement which may give rise to a pecuniary liability.
Mortgagor:
The transferor is called a mortgagor
Mortgagee:
The transferee a mortgagee
Mortgage Money:
The principal money and interest of which payment is secured for the time being are called the
mortgage-money
Mortgage Deed:
The instrument (if any) by which the transfer is effected is called a mortgage deed.
Types of Mortgages:
• Registered Mortgage
• Equitable Mortgage
Registered or Legal Mortgage:
This is created through a formal document called mortgage deed. Mortgage deed is registered
with the Registrar of titles. It is comparatively expensive as it involves stamp duty and
registration fee.
Equitable Mortgage:
This is created by deposit of title deed by the mortgagor. Memorandum regarding deposit of title
deed is also signed by respective parties. Clear title of the mortgagor must be ascertained by the
mortgagee.
Rights of Mortgagee
To sell the mortgaged property in case of default by mortgagor
• Right to fore-closure
• Right to file suit
16. Define Pledger and Pledgee:
Pledger and Pledgee Relationship
When credit facility is provided by a bank to its customers against security (Collateral of
movable property) the Relationship of Pledger and Pledgee is established. In this case:
Pledger—Customer
Pledgee—Bank
Pledge It has been defined in section 172 of the Contract Act which is given below:
"Pledge," "pawnor," and "pawnee" defined. The bailment of goods as security for payment of a
debt or performance of a promise is called "pledge". The bailor is in this case called the
"pawnor." The bailee is called the "pawnee." • The pledge has actual control of pledge
stocks/goods. • Pledge can sell pledged stocks by giving reasonable notice to the borrower. •
Before disposal pledge should publish the notice through news papers etc.
According to J. Milnes Holden:
“Pledge arises when goods or (documents of title of goods thereto) or bearer securities are
delivered by one person (called the Pledger) to another person (called the Pledgee) to be held as
a security for the payment of a debt or for the discharge of some other obligation, upon the
express or implied understanding that the subject matter of the Pledge is to be restored to the
Pledger as soon as the debt or other obligation is discharged.”
17. Describe and explain the general requirements for opening an account?
General Requirements for opening an account
Completion of Account Opening Form (AOF)
Introduction of the prospective customer and preliminary investigations (know your customer
KYC) Obtaining specimen Signatures Mandate regarding operation of Account
• Allocating Account number
• Preliminary investigations /Introduction of Account
Introduction of a new account refers to proper investigations about the credentials of prospective
account holder by the banker. If proper introduction not obtained it would tantamount to
negligence on the part of banker. Retention of photo copy of CNIC of Account Holder as well as
introducer of account after verifying from originals.
Why Introduction & Preliminary Investigation:
(a). To avoid frauds
(b).Safeguard against unintended/inadvertent credits to an account by mistake, in case banker has
conducted proper preliminary investigations and obtained introduction it would be help in follow
up process
Specimen Signatures:
If forged signatures on a Cheque entertained & Cheque passed by bank--bank shall be legally
responsible to make good the loss to Account Holder

18.What are the types of accounts?

Types of Accounts
• Individual’s Account
• Joint Account
• Minor’s Account
Individual’s Account
A banker’s duty to pay cheques can be cancelled on the following conditions as per Negotiable
Instruments Act, 1881:

Countermand of payment (stop payment)

Countermand of payment means stoppage, cancellation or removal of an order or instruction
already given by a customer, to the bank, to pay a certain amount of money. A bank’s duty to
pay is terminated by countermand of payment by the customer.
In other words, Countermand of payment by the customer then ends the legal duty of the bank or
institution to make the payment to the party, as originally specified by the customer.
Joint Account
It is not a partnership account but rather a joint account where any two or three persons can open
this account but there is no profit motive in it. Under the terms of the mandate both of you (in
case of two persons) may have to sign whenever money is taken out of the account i.e. this can
be operated by both of us jointly.
- Either or Survivor /s mandate
This type of account is normally held when more than two individuals start an account jointly.
Here, any of them can operate the account at a time and in case of one account holder’s death,
the other survivor can continue the account.
Minor’s Account
An account can be opened in the name of the minor with the instructions that a guardian operates
it however; a minor cannot open the account on its own. Which means the guardian will do the
operations of the account but the account title will be in the name of the minor.

19.How can an illiterate person open an account?

Opening of Account of an Illiterate Person:
• Photograph on S.S Card Thump impression in the presence of bank officer to be
affixed.
• L.T.I (Gents)
• R.T.I (Ladies)
20.State the documents required for opening accounts of companies.
Documents Required:
• Resolution passed by Board of Directors for opening the account Copy of
Memorandum of Association Copy of Articles of Association Certificate of
Incorporation Certificate of commencement of business Balance Sheet.
• Operation of the account in line with the instructions contained in the board of
directors resolution, authorized directors to operate the account. In case of winding up
of a company, bank should stop operations in the account.
• Copy of Memorandum of Association
• Copy of Articles of Association Certificate of Incorporation
• Certificate of commencement of business Balance Sheet.