Chapter 2: Banker & Customer

We will be looking at the UK & Malaysia.

Sources:- statutes, common law, judicial interpretation and text books.

2.1 Definitions: Bank, banking business

At Common Law there is no definition for a bank. Definitions have to be drawn from, text books,
statutes and judicial interpretations. Lord Diplock in United Dominions Trust v Kirkwood (1996)
2QB341 (UDT) laid down the following criteria that a banking business should be engaged in :-

1. the conduct of current accounts

2. the payment of cheques drawn on bankers
3. the collection of cheques for customers

* if any of the above is lacking, evidence of reputation may be considered as in UDT

Lord Denning MR undertook an historical analysis (at pp 974 and 975) and concluded:

There are, therefore, two characteristics usually found in bankers today:

(i) they accept money from, and collect cheques for, their customers and place them to their credit;
(ii) they honour cheques or orders drawn on them by their customers when presented for payment
and debit their customers accordingly

These two characteristics carry with them also a third, namely

(iii) they keep current accounts, or something of that nature, in their books in which the credits and
debits are

entered.

3. See: Lee Mei Pheng and Detta Samen “ Banking Law” Third Edition, Lexis Nexis Chap.2 p 152

Re District Savings Bank Ltd. Exparte Coe (1861) 3 de GF&J 335

Re Birkbeck Building Society (1913) 2Ch 11833

Sinclair v Brougham (1914) AC398

Chettinad v Commissioner of Income Tax Colombo (1948 ) Privy Council[1948] UKPC 31. Commercial
Banking Co of Sydney Ltd. V Fed. Commissioner of Taxation (1950) 81 CLR 263.

Re Securitibank (in Liquidation) (1978) 1NZLR 97

Re Roe Legal Charge(1982) 2 Lloyd's Rep. 370.

Evidence showed that the Plaintiffs were in fact engaged in all 3 acts described in the criteria. The
size of the business was immaterial. The only question was whether the banking business allegedly
carried on was real in terms of its entire business and not a mere cloak for other undertakings. It also
did not matter if its main business was different.

In Malaysia & Singapore too the courts have been guided by the characteristics in UDT though there
are statutory definitions

Bank of China v Lee Kee Pin (1961) MLJ40

Though the institution had been denied a licence under the Banking Ordinance 1958 it was held that
it could still

recover debts due to it as debt recovery proceedings did not amount to ‘carrying on a banking
business’

Koh Kim Chai v Asia Commercial Banking Corpn. Ltd. (1981) 1 MLJ 196 PC

A S’pore bank could accept land in Malaysia as charges to secure loans. The security and charge
were made in

S’pore. As such it did not come within the ambit of s.2 BA 1973 or infringe s. 3 BA 1973

5. Statutory definitions:- UK – not very clear

(i) s.2 English Bills of Exchange Act 1882 – a body of persons whether incorporated or not that carries
on the business of banking

(ii) s. 9(1) English Bankers Books of Evidence Act 1870 – an institution authorized under the Banking
Act or municipal provisions

(iii) s. 5(7) Agricultural Credits Act 1928 – the Bank of England or Post Office.

6. In Malaysia –clear

(i) bank – s. 2 CBM 2009 means BNM and followed in s.2 FSA 2013

Banking business- s. 2 FSA 2013

(a) the business of-

(i) accepting deposits on current account, deposit account, savings account or other similar account;

(ii) paying or collecting cheques drawn by or paid in by customers; and

(iii) provision of finance; and

(b) such other business as prescribed under s. 3;

"authorized business" means a licensed business or an approved business;

s. 3 FSA 2013 The Minister may, on the recommendation of the Bank, prescribe-

(a) any business or activity as an addition to the definition of-

(i) "banking business";

(ii) "investment banking business";

(iii) "financial intermediation activities";

(iv) "factoring business"; or

(v) "leasing business",

and upon such prescription, the definition as added to shall be deemed to be an integral part of this
Act as from the date of commencement of such prescription, or from such later date as may be
specified in the order; and

(b) any business, service or activity in relation to a financial service as a financial advisory business
for the purposes of the definition of "financial advisory business" under subsection 2(1).

Additionally:

s. 8 (1) FSA 2013 No person shall carry on any authorized business unless it is-

(a) licensed by the Minister, on the recommendation of the Bank, under s. 10 to carry on banking
business, insurance business or investment banking business; or

(b) approved by the Bank under s.11 to carry on any of the businesses set out in Division 1 of Part 1
of Schedule 1.

(2) Paragraph (1)(b) shall not apply, in respect of financial advisory business, to persons set out in
Division 2 of Part 1 of Schedule 1.

(3) Any person who contravenes subsection (1) commits an offence and shall, on conviction, be liable
to imprisonment for a term not exceeding ten years or to a fine not exceeding fifty million ringgit or
to both.

Therefore in Malaysia no organization or business can use the name “Bank” or “banking business”
unless:

(i) Authorised by BNM and

(ii) licenced by the Finance Minister

(iii) All banks must be public listed institutions i.e. “ ….Bank Bhd.”

s.28(1) FSA 2013 No person shall hold himself out to be-

(a) an authorised person unless he is authorised; or

(b) a registered person unless he is registered, under this Act.

(2) Any person who contravenes paragraph (1)(a) commits an offence and shall, on conviction, be
liable to imprisonment for a term not exceeding ten years or to a fine not exceeding fifty million
ringgit or to both.

(3) Any person who contravenes paragraph (1)(b) commits an offence and shall, on conviction, be
liable to imprisonment for a term not exceeding eight years or to a fine not exceeding twenty-five
million ringgit or to both.

See: FSA 2013 Schedule 1: APPROVED AND REGISTERED BUSINESSES PART 1 Approved business:
Division 1- Businesses which require approval

Other Malaysian statutes that refer to “Banks”

(ii) Bankers Books (Evidence) Act 1949 – in addition a banker must have been granted a licence

(iv) s.2 Bills of Exchange Act 1949 – a body of persons whether incorporated or not who carry on the
business of banking.
7. Judicial interpretation

Bank of China v Lee Kee Pin (1961) 27 MLJ 40

A bank which was refused a license could still recover debts because it does not amount to carrying
on banking business.

Koh Kim Chai v Asia Commercial Banking Corpn. Ltd. (1981) 1 MLJ 322

the transaction of acquiring and accepting charges of land in Malaysia could not be said to come
within the ambit of banking business in Malaysia

Vernes Asia Ltd. v Tredale Investment pl. & Anor. (1988) 1 MLJ 357

VAL a deposit taking Co. incorporated in Hong Kong. D1 charged property in in S’pore to secure a
loan. D1 let the property to D2 without the knowledge of VAL. Upon default VAL sought to enforce
the loan by foreclosing on the property in S’pore. Defendants alleged that:-

VAL was unlawfully carrying on a banking business in S’pore or

VAL was an unlicenced money lender

HC held: VAL was not conducting its banking business in S’pore nor was it carrying out a
moneylending business in S’pore. As such the loan should be repaid. Upon default Di and D2 should
deliver vacant possession to VAL for foreclosure.

Banque Nationale De Paris v Wan Swee May & Anor (2000) 4CLR 387

BNDP a French bank with a branch in S’pore but none in M’sia had solicited business in M’sia and
offered financial facilities in foreign currency to the 1st. D, a M’sian citizen to purchase shares in
M’sian companies. Upon breach BNDP sued. Held the bank BNDP was not carrying on the business
of banking in M’sia and so s.4 BAFIA was not breached

Sabah Development Bank (SDB) v SKBS & Ors. (1992)1 MLJ 454

SDB was set up by Sabah govt. to provide loans. Ds. Obtained a loan by documentary import and
revolving credit facility. D2 & D3 provided a continuing guarantee. Sole triable issue raised by
Counsel for Ds was that SDB was not a licensed bank under the s.2 BA 1973 and therefore the
purported transaction was void under s. 24 Contracts Act 1950.

HC held:-

SDB was a special development financial institution established to promote industry and agriculture.

Though the Minister of Finance authorized the use of the word ‘Bank’ it was not a ‘bank’ within s.2
BA 1973.

To be a bank you had to carry out all the acts of a banking business. SDB was in the business of a
‘Development ‘ bank’ as capitalists and financiers. So no evidence that they were carrying out the
ordinary business of banking.

Purpose of facility had to be examined. Here Ds were importers of electrical and mechanical
equipment and the loan was for general working capital purpose.

SDB was not in breach of the law as it did not lend to the Ds in the ‘normal’ course of banking
business.
Bank Industri (M) Bhd. v Techno Corpn. Bhd. & Ors. (1998) 6 MLJ 754

The plaintiff, a limited company registered under the Companies Act 1965 was a non-commercial
bank administering funds received from foreign institutions. It granted a fixed loan facility from the
World Bank and an import trade financing facility from the Islamic Development Bank ('IDB') to the
first defendant. The plaintiff sued the second defendant as a guarantor for the loans. The second
defendant contended that the loans granted were illegal as: (i) the plaintiff had not obtained an
exemption under s 2(e) of the Moneylenders Ordinance 1951 and

(ii) the loans were not licensed under the Banking and Financial Institutions Act 1989 ('the BAFIA').

Held: Plaintiff’s claim allowed. Application for exemption was pending and the business of the Bank
was listed under Sch. III BAFIA.

7. In the modern context the traditional conceptof ‘banking business’ has expanded tremendously
depending on the degree of sophistication of the bank to include:-

Deposit taking

Lending

Financial leasing

Money transmission services

Issuing and administering means of payment

Providing guarantees

Trading in money markets, instruments, foreign exchange, financial futures, options etc. both in its
own capacity as well as an agent

Participating in securities issues and providing ancilliary services

Corporate financial advice

Money broking

Investment Portfolio management and advise

Safe keeping and administration of securities

Credit reference services

Safe custody services

2.2 CUSTOMER:- WHO IS A CUSTOMER?

1. No statutory defn. in BAFIA/ FSA or any other M’sian, English or S’pore statutes. Under the BAFIA/

s.2 FSA 2013 ‘depositer’ - a person entitled to the repayment of a deposit whether made by him or
any other person. This is a narrow definition as a customer of a bank need not be a depositer.
2. US – Uniform Commercial Code s. 4-104(1)(e) – a customer is any person having an account with a
bank or for whom a bank has agreed to collect items and includes a bank carrying on an account
with another bank.

Paget’s Banking Law :- to constitute a customer there must be some recognizable course of dealing
in the nature of regular banking business.

3. Generally a customer is one who:-

Has an account with a bank – Great Western Railway Co. v London and County Banking Co. Ltd.
(1901) AC 414 – important factor but not the sole test.

an agreement with the bank to open an account does not give rise to contractual relationship of
banker & customer – Woods v Martins Bank Ltd.(1959) 1 QB 55

includes natural persons as well as legal entities.

There has to be privity of contract

4. In Malaysia and Singapore reliance is placed on judicial interpretation as

accounts can be opened in different circumstances :-

1. Intention to contract :- with the person physically present, named account holder has no
beneficial interest, lack of privity.

Robinson v Midland Bank Ltd. (1925) 41 TLR 402 CA – in a blackmailing conspiracy, the conspirators
deposited a cheque for £ 150,000 /- into an account opened in the name of the plaintiff without his
knowledge or consent, and duly withdrew it. When the plaintiff found out about the money he
sued the bank. The issue was whether the plaintiff was a customer in order to render the bank
legally liable.

HL Held:- there was no contract of banker and customer. A person in whose name an account had
been opened by a third party with no intention to benefit that account holder , that account holder
does not acquire any beneficial interest in the account and will not be able to bring an action
against the bank.

(ii) Thavorn & Anor. V Bank of Credit & Commerce International S.A. (1985) Lloyd’s Reports 259. –
followed above decision

Great Western Railway Co. v London and County Banking Co. Ltd. (1901) AC 414

Mr. Higgins, a rate collector working for the Wantage Rural District Council (WRDC), fraudulently
induced the plaintiffs into thinking that rates were due from the plaintiffs to the Council.
Consequently the plaintiffs drew crossed cheques for £ 142 10s marked “not negotiable” payable to
“Huggins or order”. Huggins duly took the cheques to the Defendant bank and requested them to
credit £25 into the account of WRDC. The balance of the monies was paid in cash to Huggins
although he did not have an account with the bank. This practice continued for 20 years. The Pltfs.
brought an action in conversion against the Defts. The Defts. claimed the statutory protection under
s.82 Bills of Exchange Act 1882 – where a banker in good faith without negligence receives payment
for a customer of a crossed cheque….and the customer has no title or a defective title thereto, the
banker shall not incur liability to the true owner by reason only of having received such payment.”
HL held by a majority that Huggins was not a customer and so the Banks was not entitled to the
protection under s.82. Liable in conversion.

Oriental Bank of Malaya v Rubber Industry (Replanting Board) (1957) MLJ 153

RIRB’s crossed cheque in favour of one Kok Ann Rubber Estate fell into the hands of a fraudster Lee
Man Choi who requested the Central Bank of Malaya at KL to open an account in he name of Kok
Ann Rubber Estate. He produced his ID and a forged registration certificate. He deposited the
cheque and withdrew the proceeds.

HC: Following Ladbroke, and Com. of Taxation, Lee Man Choi was a customer within the meaning of
s. 82 of the Malayan Bills of Exchange Ordinance 1949.

CA: Reversed. RIRB were entitled to maintain an action for conversion of the cheque as there was
negligence on the part of OBM.

Stoney Stanton Supplies (Coventry) Ltd.v Midland Bank Ltd. (1966) 2LR 373

A fraudster Mr. Fox approached a Mr. Taylor who ran a grocery business under R.H. Taylor
(Coventry) Ltd. to buy the business under his company’s name. Mr. Fox registered a company called
Stoney Stanton Supplies (Coventry) Ltd. 2 directors were appointed and Mr Taylor was persuaded to
allow the new company to take over the business before the agreement of sale had been signed.Mr.
Taylor then introduced Mr. Fox to his bank manager for the purpose of opening an account. An
account was later opened in the new company’s name through forged papers. Mr. Fox then
siphoned off funds from the company’s bank account and deposited it into his other accounts. R.H.
Taylor (Coventry) Ltd. then sued SSTC Ltd to recover the money for the sale of the business. SSTC Ltd
in turn sued the bank for wrongfully paying out money without its mandate and / or failing to
exercise due care when paying out on the cheques.

CA Held: a company in whose name an account had been opened by a fraudster had no right to sue
the bank over the money as there was no privity of contract.

4.3 Account opened under an assumed name

Barclays Bank v Okenarhe (1966)LR 87 a fraudster stole a Building Society pass book and opened an
account at the Pltf’s branch at Sloane Square in the name of the owner a Mr. Crouch. The bank was
requested to collect the proceeds of the passbook for the account and later Okenarhe was allowed
to withdraw the proceeds of the cheque before the Building Society’s cheque had been cleared.
Okenarhe who had an account with the Pltf’s branch at Battersea park deposited the monies into his
account at the Battersea branch account. The Pltf. Sought to exercise their right of set-off against
the bank accounts kept at the 2 branches. Okenarhe contended inter alia that he was not a
customer of the bank at Sloane Square as the bank had made a fundamental mistake as to the
identity of the customer and consequently the bank had no right of set off.

Held:- the bank had intended to contract with the person physically present at the Sloane Square
branch when it opened an account in the name of Mr. Crouch. Okenarhe was therefore a customer
of the bank which entitled the bank to a right of set- off between the 2 accounts.

Ashkenasky v Midland Bank Ltd. (1934) 50 TLR 209

When a bank account is opened in the name of another the person that person named as the
account holder has no claim against the bank because there was no privity between the parties.
Similarly, when a 3rd. party opens an account in the name of another without any intention to
benefit the real named account holder

Robinson v Midland Bank Ltd. (1925) 41 TLR 402 CA the bank is not liable to the real named account
holder as there was no privity of contract between them.

4.4 Duration is immaterial, even a single transaction can establish him as a customer. –

Commissioners for Taxation v English, Scottish and Australian Bank Ltd. (1920) AC 683 PC. Here a
taxpayer in Sydney wrote out a cheque” Pay 053 or Bearer” a customary way of writing cheques in
Sydney. 053 corresponded with the last digits of the cheque. The taxpayer left the cheque in the
mailbox of the tax office. A thief stole it and opened an account in the name of ‘Stewart Thallon’
deposited the cheques and withdrew the proceeds the next day. The Pltfs. Sued the Bank for
conversion. The Bank invoked the statutory protection of s.88 Commonwealth Bills of Exchange Act
1909

Held:- A person who had opened an account with a bank a day before he deposited a stolen cheque
became a customer of the bank

4.5 A person is not a customer if the bank only performs a casual service. Tate v Wilts and Dorset
Bank (1899) (Journal of Institute of Bankers V XX 376)

A man presented a cheque for cashing. The cheques was drawn in favour of a person under whose
name he traded. He also informed that he might open an account with the bank with the cheque.
The bank ascertaining that the cheque would be paid, cashed it.

Held:- the man was not a customer at that moment. Only when the cheque was collected towards
opening the account would he become a customer.

Kehar Singh a/l Jasa Singh v Standard Chartered Bank (1987) 1 CLJ 239

a ‘walk-in customer’ signed a contract for the purchase of a bank draft claimed an amount lost
whilst it was placed at the bank’s counter. The Supreme Court held that the though he was only a
walk-in customer’ a contract had been established and the customer’s loss should be equally
apportioned as it was as much his own negligence.

c/f Balmoral Supermarket Ltd. v Bank of New Zealand (1974)2NZLR 155 –

money stolen at the counter is the property of the customer

Woods v Martins Bank Ltd. (1959) 1 QB 55 – relationship of banker & customer existed from the
moment the bank accepted instructions whether to collect money, to make part payment from that
money and retain the balance to the customer’s order even if no account had been opened.

4.6 A bank can be the customer of another bank

If a non – clearing bank regularly employs a clearing bank to clear its cheques, the non- clearing
bank is a customer of the clearing bank. – Importers Co. Ltd. v Westminister Bank Ltd. (1927) 2 KB
297 CA
Tutorial 2

QUESTION 1.

In England, no person, body corporate or otherwise can be a banker that does not:-

1. conduct current accounts

2. pay cheques drawn on itself
3. collect cheques for its customers

Discuss the above with reference to the Malaysian position.

QUESTION 2.

MB Finance Bhd.(MBFB) is a large and reputable financial establishment in Malaysia with its
headquarters in Kuala Lumpur and branches all over Malaysia. The company holds itself out as a
‘merchant bank’. Mr. Sim the MD of M’sia Properties Sdn. Bhd. (MPSB). secured a loan from
MBFB giving as security Bills of Exchange for RM 200,000/-. The bills were not paid and MBFB sued
MPSB. MPSB contends that MBFB is not a bank within the meaning of s.2 FSA 2013 or alternatively
is not a ‘bona fide person’ carrying on the business of banking and the whole transaction is an illegal
money lending transaction under the Moneylenders Ordinance 1951and therefore void abinitio.

Advise MBFB.

Would your answer be different if the parties were both based in London and the contract had been
concluded

in London?

QUESTION 3.

Hi-Tech (HT) is a bank incorporated in Thailand dealing in a wide range of commercial activities, as
well as the usual sundry banking activities. Import Export Bhd. (IEB) is a trading company
incorporated in Malaysia and having business interests all over the ASEAN region. In April 20019 IEB
obtained a loan for RM 500,000/- from HT by charging 2 pieces of land in Kedah as security. Due to
the economic downturn, IEB has now defaulted in its payments. HT commences an action in
Malaysia against IEB. It obtains default judgment against IEB and HT now applies to the court for the
public auction of the 2 pieces of land charged to it. In challenging the application IEB contends that
HT has been conducting a ‘banking business’ in Malaysia contrary to the provisions of s.2 FSA 2013.

Advise HT.

QUESTION 4.

A fraudster stole a crossed cheque drawn by one Setia for the sum of RM5,000/- in favour one Daisy
Dream and opened an account in Trust Bank Bhd. in the name of Daisy Dream using forged
identification papers. The bank clerk looked at the fraudster and the identification photograph
produced and commented that she looked a bit different. In response to this remark the fraudster
just laughed and said that the photo was taken when she was much younger. The bank clerk
accepted the explanation and proceeded to open the current account. The fraudster deposited the
stolen cheque and two days later withdrew the entire amount and disappeared.

Advise whether either the real Daisy Dream or Setia could sue Trust Bank Bhd. to recover the
money.