Special Types of Bank Customer and How Their Accounts Are Operated

Most banking law assumes a customer who is an adult of sound mind acting for himself. A great many customers are not. A minor cannot contract, a company can act only through its organs, a trustee holds for someone else, and joint holders may fall out with one another. For each of these the bank must know who may give instructions, what happens when one of them dies, and what it must see before it opens the account at all.

Figure 1: The classes of customer the bank must treat differently

1. Minors

• Capacity: under Section 11 of the Indian Contract Act, 1872 a minor is not competent to contract, and Mohori Bibee v. Dharmodas Ghose, (1903) 30 IA 114 settled that an agreement with a minor is void ab initio.
• But a minor may be a creditor: the incapacity is to be bound, not to benefit. A bank may therefore safely accept a deposit from a minor, because the minor is the creditor and the bank is bound, not the other way round.
• Never lend to a minor: an advance or overdraft to a minor is void and irrecoverable. A guarantee of a minor's debt is of doubtful value: High Courts have differed on whether a surety is liable when the principal debtor was never bound, so a bank should not rely on one.
• Accounts in practice: a minor of any age may have an account operated by a natural or legal guardian; the Reserve Bank permits a minor above ten years to open and operate a savings or term deposit account independently, subject to limits the bank may fix on a board approved policy.
• Section 26 of the Negotiable Instruments Act: a minor may draw, endorse, deliver and negotiate a negotiable instrument so as to bind all parties except himself.
• On attaining majority: the bank should obtain a fresh specimen signature and a confirmation of the balance, and the guardian's authority ends.

2. Persons of Unsound Mind and Illiterate Persons

• Unsound mind: a person of unsound mind is not competent to contract under Section 12 of the Contract Act. On notice that an existing customer has become of unsound mind, the bank must stop the account and await the appointment of a guardian or manager under the Mental Healthcare Act, 2017 or the relevant guardianship law.
• Lucid intervals: a person usually of unsound mind may contract when he is of sound mind, so the bank's duty is to act on actual notice and reliable evidence, not on rumour.
• Illiterate persons: an illiterate person is fully competent. The bank takes a thumb impression in place of a signature, attested by a witness known to the bank, together with photographs, and ordinarily requires the customer to attend in person for withdrawals. A chequebook is usually not issued.
• Blind and visually impaired persons: the Reserve Bank requires banks to offer all facilities, including chequebooks, ATM cards and lockers, without discrimination, with the transaction conducted in the presence of a witness where the customer wishes.

3. Joint Accounts

Figure 2: The two basic forms of mandate on a joint account

• The mandate governs: everything turns on the mandate recorded when the account is opened, which the holders may vary by written instructions signed by all of them.
• Either or survivor: either holder may operate during the lifetime of both, and on the death of one the survivor may continue. This is the ordinary form for spouses.
• Former or survivor: only the first named holder may operate during his lifetime, and the second only after the first dies. Latter or survivor is the mirror image.
• Jointly: all must sign. On the death of one the account is stopped, and the balance is payable to the survivor and the legal representatives of the deceased together.
• Countermand by one: any one holder may stop payment of a cheque, whatever the mandate, because the revocation of authority does not require the same formality as its exercise.
• Survivorship is not succession: payment to the survivor gives the bank a good discharge, but it does not decide ownership. The survivor may hold the money for the estate of the deceased, depending on who contributed it and what was intended.
• Nomination: a nomination may be made in a joint account, and operates only after the death of all the holders.

4. Firms, Companies and Other Entities

• Partnership firm: the account is in the firm's name, opened on the partnership deed and a letter of authority signed by all the partners stating who may operate. Under Section 19 of the Indian Partnership Act, 1932 a partner's implied authority extends to acts done in the usual course of the firm's business, so he may draw and endorse cheques, but not open an account in his own name for the firm, submit a dispute to arbitration or transfer immovable property.
• Death, retirement or insolvency of a partner: the bank should break the account to avoid the rule in Clayton's case, which would otherwise apply later credits to the balance for which the outgoing partner was liable.
• Company: the account is opened on the certificate of incorporation, the memorandum and articles, and a certified board resolution naming those authorised to operate and specifying the manner. The memorandum defines the company's borrowing powers, and a bank lending beyond them lends at its own risk.
• Trust: the account is opened on the trust deed, which defines the trustees' powers. Trustees must ordinarily act jointly, trust money may not be set off against a trustee's personal debt, and a bank with notice of a breach of trust must not become party to it.
• Hindu undivided family: the account is operated by the karta, with a declaration signed by the adult coparceners. The karta may bind the family for legal necessity or the benefit of the estate, and the liability of other coparceners is limited to their share in the joint property.
• Executors and administrators: they act on a probate or letters of administration, must ordinarily act jointly unless the will provides otherwise, and the account is kept separate from their own, so that no set-off arises.
• Clubs, societies and associations: an unincorporated body is not a legal person, so the account is opened in its name on the bye-laws, the certificate of registration where it is registered, and a resolution of the managing committee naming the office bearers who may operate.
• Local and statutory bodies: the account is opened on the statute or the rules constituting the body, and the bank must check that the proposed operation is within the powers conferred.

5. Agents and Attorneys

• Power of attorney: a customer may authorise another to operate the account by a power of attorney, which the bank must read strictly, since it is construed narrowly and confers only the powers expressly given and those necessarily implied.
• No delegation: an attorney may not delegate his authority unless the instrument permits it, on the principle that a delegate may not delegate.
• Termination: the authority ends on revocation, on the death, insolvency or insanity of the principal, and on the completion of the business, and the bank must stop acting on it from the moment it has notice.
• Personal benefit: a bank should be alert where the attorney draws cheques in his own favour, since that is the classic form of misuse and may fix the bank with notice of a breach of authority.

6. Non-resident Accounts

• Governing law: accounts of persons resident outside India are governed by the Foreign Exchange Management Act, 1999 and the regulations on deposits made under it, in addition to the ordinary banking law.
• Non-resident external account: maintained in rupees from funds remitted from abroad. The principal and interest are freely repatriable, the interest is exempt from income tax, and the account bears the exchange risk.
• Non-resident ordinary account: maintained in rupees for income arising in India, such as rent, dividends and pension. Repatriation is permitted only up to the limit prescribed in a financial year, and the interest is taxable.
• Foreign currency non-resident account: a term deposit held in a permitted foreign currency, so the depositor carries no exchange risk, with interest exempt from income tax.
• Joint holding: the regulations permit these accounts to be held jointly with residents on specified terms, and prescribe what happens when the holder's residential status changes.

7. Questions Arising

Why may a bank take a deposit from a minor but not lend to one?

Because the incapacity runs one way. A contract that would bind the minor is void under Section 11, so a loan is irrecoverable and a guarantee of it of doubtful value. A deposit binds the bank, not the minor, and the minor is simply a creditor. Section 26 of the Negotiable Instruments Act works on the same principle: a minor may draw and endorse an instrument so as to bind everyone except himself.

If a joint account is either or survivor, does the survivor own the money?

Not necessarily. Payment to the survivor gives the bank a valid discharge, which is all the mandate decides. Ownership depends on who contributed the funds and what the holders intended, and the survivor may hold part of the balance for the estate of the deceased. The distinction is the same one that applies to a nominee, who receives but does not own.

8. Quick Revision

9. Frequently Asked Questions

Can a minor open a bank account in India?

Yes. A minor of any age may have an account operated by a natural or legal guardian, and the Reserve Bank permits a minor above ten years of age to open and operate a savings or term deposit account independently, subject to limits the bank fixes under a board approved policy. A bank must not lend to a minor, since the contract would be void.

What is the difference between an either or survivor and a jointly operated account?

In an either or survivor account any one holder may operate during the lifetime of both, and the survivor may continue afterwards. In a jointly operated account all holders must sign, and on the death of one the account is stopped and the balance paid to the survivor and the legal representatives of the deceased together.

What documents are needed to open a company's bank account?

The certificate of incorporation, the memorandum and articles of association, and a certified copy of the board resolution naming the persons authorised to operate the account and the manner of operation, together with their identification. The memorandum also tells the bank the company's borrowing powers.

Can a bank set off a trust account against the trustee's personal debt?

No. Set-off requires mutuality, that is debts between the same parties in the same right. Money held by a trustee is held in a different right from his personal money, and a bank that combines the two is party to a breach of trust of which it has notice.

What is the difference between an NRE and an NRO account?

An NRE account is a rupee account funded by remittances from abroad, whose principal and interest are freely repatriable and whose interest is exempt from income tax. An NRO account is a rupee account for income arising in India, such as rent or dividends, from which repatriation is permitted only up to a prescribed limit each year and whose interest is taxable.

Why must a bank break the account when a partner retires?

To defeat the rule in Clayton's case. If the account keeps running, later credits are applied to the earliest debits, so the balance for which the outgoing partner was liable is progressively paid off while fresh advances take its place, and he is discharged on the old debt without being answerable for the new. By ruling off the account on the date of retirement and opening a fresh one, the bank freezes his liability at the figure then outstanding.

What is the position of a bank lending beyond a company's borrowing powers?

It lends at its own risk. The memorandum of association fixes the company's powers, and a borrowing outside them is ultra vires the company and cannot be ratified. Since those documents are public, a bank is expected to have read them, and the doctrine of indoor management will not help it where the defect appears on the face of the constitution rather than in the internal procedure. Separately, Section 180(1)(c) of the Companies Act, 2013 requires a special resolution before the board borrows beyond the paid-up capital, free reserves and securities premium, leaving aside temporary loans from its bankers in the ordinary course of business, and Section 180(5) makes a debt above that limit invalid unless the lender proves it lent in good faith without knowledge that the limit was exceeded. A bank should therefore verify both the power to borrow and any ceiling on it before sanctioning.

10. Related Topics and Provisions

• Nature of the banker and customer relationship
• Deposit accounts and the opening of accounts
• Rights of a banker: lien, set-off and appropriation
• Garnishee orders, attachment and termination of the relationship
• Duties of a banker: secrecy, care and honouring cheques