S.Y. B.

Com (Sem- III)

Banking Law & Practice
Asst. Prof. Richu Juneja
INTRODUCTION
In a banker-customer relationship, if one of the parties wishes to terminate this
relationship then he has to serve a notice to the other party or under certain
situations under the legal provisions this relationship can be terminated.
There are two terms which needs to be understood before moving further:
i. Stopping an Account, and
ii. Closing an Account

“Stopping an Account” for a customer means there is a time being halt in the
banker-customer relationship and it may restart after sometime, while
“Closing an Account” means the end for ever of the bank-customer
relationship.

When a banker finds that the customer is undesirable (or unwanted) customer
then a banker can prefer to close down his account, and can bring an end to (or
a termination of) banker-customer relationship.
UNDESIRABLE CUSTOMER
Circumstances when a customer is considered to be an undesirable (or
unwanted) customer:
i. When garnishee order from a court is served frequently on his account.
ii. When the holder of the bank’s account is declared offender by forged
signatures on cheques and bill of exchanges.
iii. When he does not maintain minimum required balance in his account.
iv. When there is no sufficient balance and he issues the cheques
frequently.
v. When he issues the cheques without seeking the overdraft facility on
his account.
vi. When he issues post-dated cheques frequently.
vii. When he issues the instructions to the bank frequently for stop-
payment of the cheques issued to the parties.

Banker prefers to close such an account of undesirable customer. But he has

to follow the proper procedure as per the Indian Contract Act, 1872.
Procedure to Close Such Undesirable
Customer Account
 Firstly, the banker is required to serve a notice to such an undesirable
customer to close his account in the bank, within a certain time limit.

 Further if such an undesirable customer does not accept the notice issued,
then the banker should inform him that the banking business transaction
will not be entertained after a particular date under intimation. i.e. No
credit on such account will be entertained, and should also inform the
customer to withdraw his balance immediately. Further all the unused
cheques are required to be collected by the bank from the customer.

 Still then if a customer draws a cheque then it is necessarily required to be

honoured by the bank upto the limit of a balance in his account.
 Methods of Termination of Banker-
Customer Relationship or Closing the
Account
By Mutual Agreement

By Giving Notice to the Other Party

On the Death of the Customer

On the Insanity of the Customer

On the Insolvency of the Customer

In the Case of Closure of a Business by a Banker

or his Customer
By the Assignment of Balance in the Customer’s
Account

By a Garnishee Order on Customer’s Account

Lets discuss these methods in detail:

1. Termination of the relationship by the mutual agreement

(A) Termination by a Customer:

(i) A customer is not satisfied with the new rates of interest or he may not be
able to accept the new service charges claimed by the banker.
(ii) A banker may not be able to provide the desired facility of fund-transfer or
overdraft to his customer
(iii) A customer finds his convenience of banking transactions with some other
banker, nearer to his residence.
(iv) A customer may want some special services which the banker may not be
willing to give or may not be in a position to give due to placement of
himself in the risky situation.

In these situations, it is better to terminate the relationship for a customer. A

customer has to give a written notice to the banker to terminate the relationship.
A current or savings account can be closed immediately; but a fixed deposit
account can be closed on the expiry of the fixed deposit.
(B) Termination by a Banker:
 In case a banker wants to close a customer’s account he sends a written notice
to him about it.
 If the customer does not close his account after receipt of the notice the
banker will send him a cheque for the full amount in his account.
 In case, the customer does not encash that cheque, the banker will continue to
honour the cheque drawn on the account till the funds last, but will not accept
any deposits in the account.

2. Termination of relationship by giving notice to the party

If the customer wants to terminate the banker-customer relationship then he can
do so simply by closing the account by informing to the bank that he is not
willing to continue his account further.

If a banker wishes to terminate the banker-customer relationship then he should

give a reasonable period of notice to his customer to close his account, so that
the customer may be able to make some alternative arrangements regarding his
business dealings. In case of foreign customers, more time should be given.
Reasonable period of time depends on the nature of the business of the
customer and other circumstances.
So, generally a banker cannot close the customer’s account as per his
discretion. But he can close if the account is dormant and has no transactions.

3. Termination of banker-customer relationship on the death

of customer

 As soon as the banker receives information about the death of a customer,

his account should be closed and no payment should be made from such
account.
 Even cheques written before his death but presented after his (drawer’s)
death should not be honoured.
 After the death of the customer, his legal heir inherits the right of his
account and the banker has to act in accordance with his instructions after
the legal heir has obtained a succession certificate from a competent court.
 The successor can open his account as per desire only after producing
succession certificate or can withdraw amount from the account.
 The account of deceased cannot be continued after his death under any
circumstances.
4. Termination of banker-customer relationship on the insanity
of customer
 The banker should close a customer’s account as soon as he hears about his
insanity (i.e. unsound mind).
 But this can be reopened when he is declared to be normal by a competent
authority.
 If any customer had been declared insane by an honourable court then the
banker must stop the operation of account.
 But stopping operation of account merely on the base of rumours is illegal and
bank is responsible for such type of dealings.
 So normally the bankers transact the business with the customers thinking
them of sound mind.

5. Closing the account due to insolvency of customer

 When the customer is declared as insolvent then bank can refuse payment of
cheque as his right.
 The account of a customer should be closed as soon as his banker gets
informaton about his insolvency.
 The government appoints a liquidator to mange the assets and property of
such insolvent person.
 After closing the account of insolvent customer, the said account can be
operated under the instruction of liquidator appointed by the honourable
court, to handle the affairs of the insolvent customer.

6. Termination of relationship due to winding up of business

 In case a partnership is dissolved or a company is liquidated, the banker on

receiving information about such dissolution or liquidation, has to close the
account of such partnership firm or company.
 These accounts can be operated only under instructions of the official
liquidator appointed for the liquidation process.

 When the bank terminates its business, then the relations between customer
and banker also ends.
 When one bank joins with another, then the accounts of customers are
transferred to new bank but there is no difference for the customers. A
customer remains the same but the bank has been changed.
7. Termination of relationship due to assignment of balance in
customer’s account

 When the customer has transferred his right to the balance of his account to
third party and when the banker gets such notice of assignment of right to
the third party, the banker is responsible to pay balance of account to a third
party. In this case, banker remains the same but the customer has been
changed.
 After receipt of such notice, the banker will not honour the cheques
received on the credit balance assigned.
 In case where a part of the credit balance is assigned to the third party, the
relationship between the banker and customer is not terminated, and the
banker may honour the cheques on the remaining part of the credit balance
in the customer’s account.
8. Termination of banker-customer relation due to Garnishee
order on customer’s account

 If a bank receives an order from a court to stop payment from a customer’s

account (i.e. Garnishee order) the banker must not honour cheques drawn
by the customer on such account.
 If the order is to attach the whole balance in the account, the banker cannot
honour any cheque of the customer, i.e. the banker-customer relationship is
temporarily restricted.
 If the garnishee order attaches a part of the balance, cheques may be
honoured only upto the amount that would remain after the garnishee order
has been implemented.
 The relationship between the banker and his customer is continued after the
garnishee order is lifted by the court.