141

2. f the debtor does not intimate and the

the circum
circumstanees
are not indicative, then the creditor
may may apply it
any of the lawful debts payable to him.

3. If the debtor does not intimate and

cred
the cre
falls to appropriate, the payment shall be ann
be applie
discharge of the debts in order of time or
priority by time. order of
Thus the debtor has the rights of
the payment and in default, the creditor appropriatir
can
In default of both, law shall allow elect
appropriation of
debts in order of time

Rule in Clayton's Case: (Devaynes Vs. Noble)

This is an important case in
appropriation c
payments by bank.

There was a partnership firm carrying on banking

business in the joint names of five partners.

Mr. Nathenial clayton had a current account and

deposited huge amounts in the account. Even after one
of the partners died, the firm's business was carried on
by the surviving four partners in the old name of the
firm, despite objections from the executors of the
deceased partner. The firm became insolvent in a
further period of 3 years.

At the time of death of one of the partners of the

firm, Mr. Clayton had 1713 pounds in his current
account.
 142
In the period between the death of the
partner
insolvency of the firm, Mr.Clayton had numerous
and insol

transaactions, having withdrawn money and deposited

y and
oney and the
the balance of the money at the time of
insolvency of the firm was again 1713 pounds.

After insolvency of the firm, Mr. Clayton claimed

his money in the current account from the estate of the
neased partner. His contention was that he did not
ded
withdraw 1713 pounds remaining in his account at the
tin of the death of the deceased partner.

He had withdrawn only the money which he had

deposited after the death of the deceased partner and
the firm was solvent at that time.

Hence the amount of 1713 pounds remained at

the time of the death of the partner must be paid by the
legal representatives of the deceased partner.

His contention was rejected by the court and it

held that Mr. Clayton's account was a running current
account and there was no agreement of any speciiic
appropriation between the bank and him immediately
alter the death of the deceased partner.

n such circumstances, thé presumption is that

Ue
money drawn after the death of the deceased partner
was irom l713 pounds only and not from the subsequent
depeposits made by him. In other words, the 'first
de
pOsited amount was first withdrawn' is the rule ot

appropriation.
 143
The Court also held that the amount 1713
poune
remaining in the current account of Mr. Clayton at
time of insolvency of the firm was a fresh debt the
hence the deceased legal heirs were not liable to
debt and
the amount. pay

The following rules were made:

1. If there is running account, then the rule of

specit c
appropriation of debt will not apply.

2. In of a death of a partner, the bank must cl0s

case
e
the account and start afresh.

3. The rule'first deposited anmount deemed first

withdrawn' applies only in the absence of any other
agreement contrary to it between the banker and
the customer.

4. The above rule is

applicable for the death of a surety
also.

G. RIGHT OF SET-OFF
(GARNISHEE ORDER):
Set-off is mutual claims of both the debtor and
the creditor.

After calculation of mutual debts and credits, botn

debts and credits are adjusted against each other. 1hne
balance amount payable by the debtor is arrived at,
whie
must be paid by the debtor to the
creditor.

The right of set-off is a statutory and legal right.

By this right, the bank can combine two or i ore

accounts in the name of the same account holder and

 144
st
an adjust the debt balance in one account with the
credit
balance in the other account.

Thus this right of set off facilitates the banker

its or other's debts after adjusting payments
to collect
the account holder.
due to

The following conditions are necessarily to be

complied with for exercising the right of set-off:

1, The right to set-off can be enforced only after serving

notice on both the debtor and creditor.

2. The debt and credit must be ascertainable and

definite.

debtor must be in the

3. The different accounts of the
same name and not in different names.

4. There must be an agreement by both the debtor

and creditor for set-dff.

5. There should not be any garnishee order.

GARNISHEE OrDer:
1. When a debtor fails to repay the money to the
creditor, then the usual procedure is that the creditor
will file a suit and get a decree against the debtor
for recovery of the amount.

2. Sometimes the debtor may not have any property,

but there may be some persons/banks who
nave to repay money for the debts owed to him.
 145
Such persons are called 'debtors to a
creditor can now obtain a court decree
debtor The
debtor
ee to ats
attach
the debtor's
properties/money in the hands of su
third party debtors. such
Such order of the court to the third
of the debtor is called Garnishee order.
party debtoors

3. As per the garnishee order, the third

parties who
wh.
have the debtor's money with them
should not
the amount to the debtor but to the pay
creditor wh 10
has obtained the court decree to receive the
amounts
For e.g. A debtor X fails to
repay the debt amount
to the creditor Y. X has some
money in his bank z.
Now Y can attach X's
money in the bank Z by
garnishee order.
4. Garnishee order is enforced against the banker
under
Order 21, Rule 46 of Civil Procedure
Code, 1980.
5. The Civil Court issue
can an interim garnishee order
immediately after filing of the suit to the creditor
under which 'order nisi' is issued to
the banker and
a final
order/absolute order is issued at the final
disposal of the suit.

6. A gamishee order by the court to the banker freezes the

customer's deposit account and other accounts. so tat
such amounts in the bank are
payable to the creditor/s
of the account holder
through such court order.
7. However before the
garnishee order is receiv ed
from the court, there can be set-off and sue"
 146
set-off is valid and is not affected by the subsequent
set-

garnishee court order.

aPurther, the garnishee order is not applicable to

Negotiable le instruments of the account holder/debtor

a.
depositor with the banker for collection.

b. Safe custody deposits.

C. Money held abroad.

AMoney deposited after the receipt of garnishee

order by the banker.

e. Joint accounts, where one of the joint account

holders alone is a debtor.

f. Partnership/firm accounts where one of the

partners alone is a judgment debtor.

g. Trust accounts

In the following cases, set-off arises automatically

and there need not be any agreement or arrangement
for set-off:

i. On death, insanity or insolvency of the account

holder.

ii. On insolvency of a partner of a firm.

ii. On winding up of a company.

v. On receipt of Garnishee Order.
 147

of
of assignment of a customer
a custos
v. On receipt of notice
other person.
credit balance to
some

vi. On receipt of notice of second mortgage for th

mortgaged with the banker

properties first

INCIDENTAL CHARGES:
CLAIM
H. RIGHT TO

to maintain a minim m
A customer is expected
as stipulated
while opening the account.
balance

In case the custamer tails tO maintain such

minimum balance as required, then the banker can

collect special charges called incidental charges.

These charges levied by the bank is cost oriented.

as this accounts are unremunerative accounts.

I. RIGHT TO FILE SUITS:

Sec. 22 of the Indian Limitation Act. 1963 pre

Scribes the limitation period for filing suits regarding
bank deposits.

It is three years from the date of demand Dy the

Customer and it is not from the date of Dsit.
making depu

So for any bank debt, the limitation period is

from the date of deman aits the
 PAYMENT: (Sec on.

DISHONOUR
BY NON 92)
C.
acceptance is onl.

1. Dishonour by non of a bill

exchange. but
dishonour by non-paymentb mentof isfor
negotiable
instrument including a ll
bill
any
exehange

note, a bill of exchange or a che

2. A promissory
dishonoured by non ue
payment, when the e
the note or acceptor of the bill or drawee aker of

chequemakes
default in payment on Dre the
the
for payment.
nent
also dishonoured by non
non payment
3.
3. An instrument is
for payment is excusedent
when presentment
instrument when over due remains unpaid
the

When the maker, acceptor or drawee intentional

4.
prevents the presentment of the instrument
dishonoured.

5. Even after a reasonable search, when the maker

acceptor or drawee cannot be found, the instrument
is deemed dishonoured even without presentment

D. DISHONOUR OF CHEQUES: (MUST)

In the following cases, a banker must dishonour
a customer's cheque.

1. When there is no sufficient funds in the customers

account.

2 When there is material alterations in the che ue

3. When the customer issues payment order or

stop payme
countermands payment.
 494

When the funds of the customer in the account are

meant for some other purpose. E.g.: Bank's lien
over the funds.

5.
When cheque is not properly presented.
When the "customer/Court' gives to the banker
6
notice to close the account.

When the customer becomes insolvent.

7
8.
When the banker receives notice of the customer's
death.

9 When the banker receives notice of the customer's

insanity
10. When the banker receives a garnishee or other
Court order attaching the customer's account.

11. When there is attachment of customer's account

under Sec. 226(3) of Income Tax Act, 1961.

12. When the customer gives notice of assignment of

his account.

13. When the banker suspects that the title of the

person presenting the cheque is defective.

14. When the holder gives a notice of loss of a cheque

to the banker.

15. When the cheque is forged.

16. When the cheque is post-dated.
 495

the cheque is
in nt names,
17. When not
all joint holders signed by
has a claim for set off,
18. Banker

is of doubtful legali..
19. When the cheque ity.
cheque is irregular,
the
20. When
ambiguous, signature
not tallying, mutilated.
has tea
has become
stale.

21. When the cheques sent for collection were noot

cleared and money not collected.

Underwood Vs. Barclay's bank (1924) 1 K.B. 775

A customer deposited certain cheques for

collection by a banker. The entries were made in the
pass book even before the collections were made on
the cheques by the bank.

The customer presented withdrawl cheques to

draw certain amount as against the cheques, he
gave
for collection. The banker refused
payment informing
that the cheques were not
yet cleared.
The Court held that the banker was entitled to
return the
cheques, as the cheques were not clearea
and amounts were
not collected, it could dishonou
the customer's
withdrawl cheques.
E. NOTICE OF DISHONOUR: (Sec. 93)
. When a
negotiable instrument is dishonoured her
by non-acceptance or elu of
by
the
instrument must givenon-payment, the houe
to
a notice of dishono
 128

10.
BANKER'S DUTY TO
MAINTAIN SECREcY

(MOST IMPORTÁNT)

SYNOPSIS:

A. Introduction

B. Meaning
C. Exceptions

D. Effect of wrongful disclosure

E. Precautions by the banker before disclosure

of customer's accounts

A. INTRODUCTION:

A banker has a duty to maintain secrecy of his

customer's account and his other financial transactions.

B. MEANING:

Banker's duty of secrecy means an implied term

of the contract between a banker and his customer that
the banker will not divulge to third person/s without
the express or implied consent of the customer either
the state of the customer's account or any of his
transactions with the bank or any information relating
to the customer regarding his account, unless the
banker is compelled to do so by order of a Court or a
public duty of disclosure or protection of the banker's
own interest.
 129

Provincial and Union .

Tourneir Vs. National 3ank o
461:
England, (1924) 1 K.B.
is to maintain secrer.
The bankers obligation
regard to his
customer's account, for rcerta
except for
which are as foHows:
specific grounds

a. disclosure is due to compulsion by law.

b. duty to the public to disclose.

interests of»the bank.

C. to protect the

d.
d. with the express or implied conseent of th.
customers.
the

Shankarlal Vs. State Bank of India:

ordinance was promulgated on 16th Januar

An
1978 by which high denomination currency notes
were
demonetized. On January 19, 1978 the
petitioner
deposited 261 currency notes of the denomination of
Rs.1,000/: each with the S.B.I. for exchange.

Instead of crediting the amount in the

customers
account, the bank informed the same to
Income Tax
authorities. The petitioner contended
that the bank had
a
duty of secrecy, and hence claimed
said interest for the
amount for the delayed period in crediting tne
amount in his account.

The
Calcutta High Court held
had a
duty of secrecy, in the that though a Da
directed by the R.B.l. instant case, the baiin was
and the c e to
Ministry of Finan
 130

furnish all particulars regarding deposit of such bank

notes to Income T'ax department and hence the
n
petitioner's claim for damages for interest was rejected.

The following Rules were laid down in the above

case
Duty of secrecy is a legal duty and breach of it
gives a right for damages. It is, however, not an

absolute duty and subject to certain reasonable

exceptions, which are as follows:

C. EXCEPTIONS:

1. Duty of the bank to obey an order under the

Banker's Book Evidence Act:

2. Cases where a higher duty than the private duty

is involved. E.g.: danger to the State.

3. When the customer authorises a reference to his

banker.

4. Banker's Books of Evidence Act, 1891:(Sec. 4)

The Act allows certified copies of the entries to

be produced in legal proceedings before Court or

Tribunal in which the bank is not a party.

5. The Reserve Bank of India Act, 1934:

Every banking company is under a statutory

Obligation under Section 45B of the Reserve Bank of
india Act, 1934, to furnish such credit information to
the Reserve Bank.
6. 131
The
Banking Regulation Act, 1949:
As per
Seetion 26 of the
1949, every bank Bankling
king Regulation
of all
is
required to submit Regnla
accounts in India whBeh mit an annual n Art
fos 1U years have not annual retnm
not been operatea
been t
The banks are
deposits in the credit ofrequired
to give the
particular
particas
each account
the close of each
calendar year to R.B.I.within 30 ars
days
7. Foreign Exchange Management
Act, 2002:
Sec. 43 of the Act
empowers the officers of .
Directorate of Enforcement
Banktheto
and the Reserve
inspect the books of accounts and other
any authorised dealer and also to examinedocuments ofnt
or director of a bank or such deale
an official in relation to the
business of such dealer.

8. Income Tax Act, 1961:

As per Sections 131 and

133, the Income Tax
authorities have powers to call for the attendance of
any person or call for necessary
information from
banker for the purpose of assessment of the any customer
of a bank.

9. The Companies Act, 1956:

When the Central Government appoints an

Inspector to investigate the affairs of any Joint-Stock
Company under section 135 or section 137 of the
Companies Act, then the banker must produce all boos
and papers relating to such Company.
 132
10. Gift Tax Act, 1958 and Wealth Tax Act, 1957:

Section 36 of the Gift Tax Act. 1958 confers on

the Gift Tax authorities the powers similar to the
OWers conferred on Income Tax authorities under
Section 131 of the Income Tax Act. The same provisions
are applicable to the Wealth Tax authorities under the
Wealth Tax Act, 1957.

11. Disclosure to Police:

As under the Code of Ciiminal Proced1re, the
nolice oficers conducting an investigation can inspeat
the books of account of a particular customer in a bank
for the purpose of their investigation.

12. Public duty:

If the banker is under a public duty, then he can

disclose the position of the customer's account to the
concerned authority.

The instances are as follows:

a. In times of war, if the banker comes to know

that his customer is trading with an enemy
country, then he must disclose the same to the
government.
b. Account relating to unlawful activities or association.

C. Account of political parties.

d. Account of smugglers and anti social elements.

e. Accounts of terrorists, insurgents, etc.

 140

than the agreed rate of interest. The banker has also got the
right to collect compoune interest, in case the customer
to repay he loan amount and interest in time.
fails

As per the loan agreement with the customer

the banker is also entitled to
the banke levy penal interest, but it
be unreasonable.
must ot
m u s t

As per section 21A of Banking Regulation Act,

1949, a banker can claim interest at the agreed rate
period prior to the date of filing suit by the
for the
the court cannot interfere with the rate
Customer and
f interest collected by the banker for the pre-suit period.

F. RIGHT OF APPROPRIATION OF PAYMENTS:

This is governed by Sec. 59, 60 and 61 of Indian

Contract Act.

When a debtor owes several distinct debts to one

person and makes a paynment not sufficient to satisfy
the whole indebtedness, it is difticult to decide to which
debt the payment should be appropriated.
The rules are as follows:

1. If the debtor intimates at the time of payment that

the payment should be applied towards the discharge
of a particular debt, the creditor must do so.

A owes B, among other debts, a sum of

(E.g)
Rs.1,000/-. B writes to A and demands payment of
this sum. A sent to B Rs.1000/. This payment is to
be applied to the discharge of the debt, of which B
had demanded payment.
 141

2. If the debtor does

2.
are not indicative,
not intimate
circumstances
and the circumes

then the creditor may apph it

may apply
to him.
of the lawful debts payable
any

not intimate and thethe cred.

3.
3. If the
fails to
debtor does

appropriate,
creditor
the payment shall be anni
applied
discharge ofthe debts in order of time or ord.
order ot
priority by time.

of appropriatin.
Thus the debtor. has the rights oI appropriatin
the payment and in default, the creditor can
can al.
eleet
In default of both, law shall allow appropriation.
o
debts in order of time.

(nona Tc ATL1