Legal & Regulatory Aspects of Banking

Unit – 8 : Different Types of Borrowers

Minor

A minor is a person who has not attained the age of 18 years. A person will become major at the age of 18 whether guardian is natural or appointed by a court of law.

Guardians: There can be three types of guardians.

• Natural guardians like father, mother.
• Testamentary Guardian: A Guardian appointed by Will (Vasiyat). Natural guardian may appoint somebody to act as guardian after his or her death through will. But such guardian will come into picture only on the death of natural guardian (in case of Hindus on the death of father as well as mother).
• Legal guardians: A Guardian appointed by Court. If neither natural or testamentary guardian then appointed by court.

When guardian of a Hindu minor ceases to be a Hindu or he becomes a hermit or sanyasi he ceases to be natural guardian.
As per section 11 of the Indian Contract Act, 1872 a minor is not competent to enter into a contract and the contract entered into by him is void ab-initio. 

Types of Borrowers

• Individual
• Partnership Firm
• Hindu Undivided Family : Joint Hindu Family is governed basically by two schools of thought. They are Dayabhag and Mitakshara schools
• Companies
• Statutory Corporations
• Trusts and Cooperative Societies

Accounts of Visually Challenged (Blind) Persons

• A visually challenged person is competent to the contract like any other person.
• Signature or thumb impression of the blind person should be attested by an independent witness to the effect that all terms and conditions were properly explained to the blind person in his presence.
• Cash deposit and withdrawal by blind person should be handled by the officer of the bank.
• RBI has advised banks to ensure that all the banking facilities such as cheque book facility including third party cheques, ATM facility, Net banking facility, locker facility, retail loans, credit cards etc. are invariably offered to the visually challenged without any discrimination.

Accounts of Illiterate Persons

• An illiterate person is competent to contract like any other person.
• Cheque book is not issued to illiterate depositor for cash payments.
• Cheque book can be issued formaking statutory payments, post dated cheques for repayment of instalments of loan. In such cases, the cheques will be crossed account payee and thumb impression of the illiterate depositor will be verified on such cheques at the time of issue of cheque book by competent authority of the bank.

Joint accounts

• Either or Survivor (E or S): It means anyone can operate the account till both are alive. After the death of either of them, the bank can pay the balance to the survivor without any formality.
• To be operated jointly: Account will be operated by both jointly till both are alive and, if one of the two expires, the bank would pay the final balance to the survivor, along with all the legal heirs of the deceased.
• Jointly or by Survivors: Account can be operated by both / all the person jointly during their lifetime and, in the event of death of any one, the balance is payable to the surviving persons jointly
• Former or Survivor: in such accounts, till the first named person is alive, the second named person has no right to withdraw/operate the account. After the death of the first named person, the payment will be made to second named person.

Partnership Firms

• Partnership is governed by Indian Partnership Act 1932.
• Partnership is created by agreement.
• Partnership is created to run a business for profit.
• Minimum number of partners is 2 and maximum can be 10 for banking business and 20 for other business.
• Who can become a partner: An individual, partnership firm, limited company.
• Who cannot become a partner: Minor, insolvent, insane cannot become partner because they are not competent to contract.
• Though a minor cannot become partner, he can be admitted for sharing the benefits.
• As per Supreme Court Judgement, HUF cannot become partner as HUF cannot be liable for action of others.
• Trust cannot become partner because partnership is established for business.
• A partnership firm is registered with registrar of firms.
• Registration of a partnership firm is optional. It is not necessary that the firm be registered. But an unregistered firm can not file suit against others for recovery of its debt whereas others can file suit against the firm.
• Liability of a partner: Every partner is liable, jointly with all other partners and also personally, for all acts of the firm while he is a partner. His liability is unlimited.
• Operational Aughority: In Partnership accounts operation authority is given by all partners.
• Any change in the operational authority is also with the consent of all partners.
• Partner cannot delegate authority.
• Every partner including a sleeping partner has authority to stop payment of a cheque issued by another partner of the firm but revocation can be done only as per operational authority.
• Death of a partner: On the death of a partner, the partnership is dissolved.
• The cheques signed by the deceased, insane or insolvent partner will be paid after obtaining consent of surviving partners.
• If the account is in credit, operations are allowed for winding up of the firm.
• It the account is in debit, operations in the account should be stopped to retain liability of the deceased /insolvent partner or his/her estate and to avoid operations of the Clayton's rule.

Limited Companies

• A limited company is an artificial person with perpetual succession incorporated under the Companies Act.
• Company is a legal person, created through process of incorporation for which Registrar of Companies issues Certificate of
• Incorporation.
• Shareholders are owners of the Company and directors are agents of the company to manage company.
• A limited company may be private limited or public limited.
• Members in a private limited company: minimum 2; maximum excluding employees can be 50.
• Members in a public limited company: minimum 7 and there is no ceiling on maximum number.
• Number of Directors: A private limited company should have minimum 2 directors whereas a public limited company should have minimum 3 directors. No limit on maximum number of directors. In a public limited company, if directors are more than 12, permission from central govt required.
• Public company: When minimum 51% shares with government.
• Documents for opening the account: Memorandum of Association, Articles of Association, Certificate of Corporation, Certificate of Commencement of Business (only for public limited companies) and Board Resolution. No introduction is required as Certificate of Incorporation is enough introduction. However, KYC norms to be applied on all persons authorized to operate
• the account.
• Memorandum of Association: It contains name of the Company, its authorised capital, registered office and liability of shareholders, objects of the company etc.
• Ultra Vires: Anything done by the directors beyond the objects stated in the memorandum of association is called ultravires
• The directors can not delegate their authority to any other person.
• In case a director dies, the cheques signed by him presented for payment can be paid if these are dated prior to his death.
• If a director stops authority of other director it is of no use. Bank will allow operations as per Board Resolution.
• Common Seal of the Company is to be affixed on documents as per Articles of Association or Board Resolution.
• Cheque favouring company should not be credited to the personal account of the director. Such cheques should not be paid in cash. These should be credited to the account of company only.

Hindu Undivided Family (HUF) : HUF is neither a legal person nor a natural person. It is not created by agreement_ It is not incorporated under any Act. It is from a common ancestor and membership is by birth or adoption.

• The eldest member of family is the Karta and others are co parceners. Daughter can also be Kerta.
• Seniormost member continues to be Karta even when he/she lives outside India.
• Operational authority to operate the account is with Karta
• Karts can appoint any other coparcener or third party to conduct business of HUF and/or operate the account.
• Co parcener can not stop payment of the cheque unless he is authorized to operate the account.
• Karta is personally liable.
• The liability of a co parcener is limited up to his share in the firm. He is not liable personally.
• HUF can not be partner as per Supreme Court Judgement.

Trusts :

• Trusts can be of two types - private trusts where beneficiaries are certain specified individuals or groups and public trusts where beneficiary is public at large.
• Private trusts are governed by Indian Trust Act, 1882, public trusts are governed by Public Trusts Act of the concerned state.
• The docuinent creating a trust is called 'trust deed'. Public Trusts are registered with the Charity Commissioner.
• The operation and other aspects of the bank account are to be conducted as per the Trust Deed. If trust deed is silent about operational authority, all trustees have to operate the account jointly.
• Stop- payment will be as per operational authority. Revocation of stop payment as per operational authority.
• Trustees can't delegate their powers to an outsider even by mutual consent.
• Loan to a trust Loan can be allowed provided it is permitted by Trust Deed and it is for the purposes of Trust.
• On the death of a trustee, the trust property is passed on to the next trustee while in the event of death of sole trustee or last surviving trustee, the court can appoint a trustee.
• Death or insolvency of a trustee does not affect the trust property and the bank can pay cheques issued by the deceased trustee prior to his death.

Clubs and Societies

• For opening account of Clubs and Societies bank will require Certificate of Registration, Bye laws of the Society, and resolution of Managing Committee or Executive Committee.
• Operational Authority will be as per resolution of Managing Committee.
• Change in Operational authority as per resolution of Managing Committee.
• Stop payment and revocation of stop payment as per Operational Authority.
• Cheque signed by the secretary or treasurer or president of society and presented after his death can be paid if otherwise in order.

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