“How can a bank account be closed’’

A Project Submitted

To

ARMY INSTITUTE OF LAW, MOHALI

By

ANURAG MOGA (1858)

Under the Guidance

Of

Miss Upagya Sharma (Banking law)

In the Partial Fulfilment of The Requirement for The Award of Degree of BA LLB.

Punjabi University, Patiala, Punjab

Submission Year:July-december 2021

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 DECLARATION
It is Certified that the project work presented in this report “How can a bank account be
closed” embodies the result of original research work carried out by me. All the ideas and
references have been duly acknowledged.

Date:22 oct, 2021 ANURAG MOGA

Place: Mohali (1858)

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 ACKNOWLEDGEMENT
This project work would not have been possible without the kind support and help of my
teacher Miss Upagya sharma. I would like to extend my sincere gratitude to her for giving me
the opportunity to do this project on a topic which is not only enriching and interesting but also
a means to increase my patience and hard work. I am also highly indebted to Army Institute of
Law and the library staff for their guidance and constant supervision as well as for providing
the necessary information regarding the project and also for their support in completing the
project.

I would like to express my gratitude towards my parents and friends for their kind co-operation
and encouragement which helped me in completion of this project.

Thank You

Anurag Moga

(1858)

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S no. Topic Page
1 Introduction 5-6
2 Voluntarily termination 6
3 Banks desire to close 7
4 Termination by law 8-9
5 Undesirable accounts 10
7 Bibliography 11

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 INTRODUCTION

CLOSING OF A BANK ACCOUNT – TERMINATION OF BANKER-CUSTOMER RELATIONSHIP

Banker-customer relationship is a contractual relationship between two parties and it may be terminated by
either party on voluntary basis or involuntarily by the process of law. These two modes of termination are
described below.

Who is a customer? Meaning of a customer -

According to Black's law dictionary, "a customer is a person who regularly or repeatedly makes purchases of,
or has business dealings with, a tradesman or business.

Customer of the bank -

According to Dr. Heart, " A customer is one who has an account with a Banker or for whom a Banker
habitually undertakes to act as such."

Relationship between banker and customer -

the relationship between a Banker and customer is basically contractual. It is regulated by

(i) The general provisions of the Law of contract

(ii) The rule of agency, where applicable and

(iii) Banking practice

There can be the following type of relationship between banker and customer -

1) Debtor and creditor relationship

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2) Banker as a trustee

3) Banker as agent

4) Bailee and Bailor

Termination of the relationship between a Banker and a customer -

The relationship between banker and customer may be terminated in any of the following ways -

1.By mutual agreement

2. Death of customer

3.Lunacy of customer

4. Notice to terminate

5. Bankruptcy

6. Order of court

7. Transfer of balance amount

A. Voluntary Termination:

This is also known as termination of bank account by mutual agreement.

A customer at his own will at any time may terminate his relationship with the bank closing his account in the
following circumstances:

1) Where a customer is dissatisfied with the services of the bank

2) Where banker is unable to provide better facilities to the customer
3) Where customer looses his confidence in the bank’s reputation/ economic stability.
4) Where he does not agree with the terms of the banker.

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5) Where there is a rumour of winding up of the following company.

These grounds are not exhaustive, there may be some more like conditions for discontinuance of banking
service.

The customer has a right to close his demand deposit account because of change of residence or dissatisfaction
with the service of the banker or for any other reason, and the banker is bound to comply with this
request. However, a banker can close an account only after giving a reasonable notice to the customer.

In Tournier v. National Provincial and Union Bank of England1 it was held that after the closure of the
accounts the relationship of the banker and customer comes to an end and neither party is under a obligation to
the other, except the banker’s duty to secrecy still subsists. However, such cases of closure of an account at the
instance of the banker are quite rare, since the cost of securing and opening a new account is much higher than
the cost of closing an account. If a customer directs the banker in writing to close his account, the banker is
bound to comply with such direction. The latter need not ask the reasons for the former’s direction. The account
must be closed with immediate effect and the customer be required to return the unused cheques.

B. If the Bank desires to close the account:

If an account remains un-operated for a very long period, the banker may request the customer to withdraw the
money. Such step is taken on the presumptions that the customer no longer needs the account. If the customer
could not be traced after reasonable effort, the banker usually transfers the balance to an “Unclaimed Deposit
Account”, and the account is closed. The balance is paid to the customers as and when he is traced.

The banker is also competent to terminate his relationship with the customer, if he finds that the latter is
no more a desirable customer. The banker takes this extreme step in circumstances when the customer is guilty
of conducting his account in an unsatisfactory manner, i.e. if the customer is convicted for forging cheques or
bills or if he issues cheques without sufficient funds or does not fulfill his commitment to pay back the loans or
overdrafts, etc. The banker should take the following steps for closing such an account:

(a) The banker should give to the customer due notice of his intention to close the account and request him to
withdraw the balance standing to his credit. This notice should give sufficient time to the customer to make
alternative arrangements. The banker should not, on his own, close the account without such notice or transfer
the same to any other branch.

(b) If the customer does not close the account on receipt of the aforesaid notice, the banker should give another
notice intimating the exact date by which the account be closed otherwise the banker himself will close the

1
(1924) 1 K.B 461
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account. During this notice period the banker can safely refuse to accept further credits from the customer and
can also refuse to issue fresh cheque book to him. Such steps will not make him liable to the customer and will
be in consonance with the intention of the notice to close account by a specified date.

The banker should, however, not refuse to honour the cheques issued by the customer, so long as his account
has a credit balance that will suffice to pay the cheque. If the banker dishonours any cheque without sufficient
reasons, he will be held liable to pay damages to his customer under Section 31 of the Negotiable Instruments
Act, 1881. In case of default by the customer to close the account, the banker should close the account and send
the money by draft to the customer. He will not be liable for dishonouring cheques presented for payment
subsequently.

C. Termination by Law:

The relationship of a banker-customer can also be terminated by the process of law and by the occurrence of the
following events:

(a) Death of customer: On receiving notice or information of the death of a customer, the bank stops all debit
transactions in the account. However, credits to the account can be permitted. The balance in the account is
given to the legal representative of the deceased after obtaining the letters of administration, or succession
certificate, or indemnity bond as per the prescribed procedure, and only then, the account is closed.

No constructive Notice- There will be no presumptions of notice constructively. In case of United bank of India
vs Smt. Kananbala Devi2, the supreme court held that the notice of the death of the customer in one branch of
the bank will not be taken as constructive notice to all other branches.

(b) Bankruptcy of customer: An individual customer may be declared bankrupt, or a company may be wound
up under the provisions of law. In such an event, no drawings would be permitted in the account of the
individual/company. The balance is given to the Receiver or Liquidator or the Official Assignee and the account
is closed thereafter.

Not only this, but also immediately after knowing the fact that an insolvency petition has been filled against the
customer , the banker should ispo facto stop the transactions of his bank account an thereafter he should act
according to the orders of the court.

(c) Garnishee Order / orders of the court : in certain circumstances under the provisions of CPC, or specific
relief act, court can issue Garnishee orders or seizure orders or attachment orders, that after receiving a
garnishee order from a court or attachment order from income tax authority, the account can be closed as one
of the options after taking the required steps.

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(1987) 62 comp. Cas 705 (S.C)
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(d) Winding up of the company: If a company is wound up, its existence comes to an end. Thus, the account
of the company has to be closed by the bank.

(e) Dissolution of Partnership Firm: Dissolution of the partnership firm determines the existence of the firm,
so, bank should stop the transactions and then close the account of the firm.

(f) Customer of enemy character: During war period relation with persons of enemy country becomes illegal,
the bank is justified in closing of the account of individual, firms and companies belonging to enemy country.

(e) Insanity of the customer: A lunatic/person of unsound mind is not competent to contract under Section 11
of the Indian Contract Act, 1872. Since banker-customer relationship is contractual, the bank will not honour
cheques and can close the account after receiving notice about the insanity of the customer and receiving a
confirmation about it through medical reports.

If the lunatic customer resumes normal condition the banker may resume his account , if he is satisfied with the
conduct of the customer and certificate issued by medical authorities.

In case of Young vs Foynbee3 it has been held that the customer’s insanity should automatically terminate the
authority given to the banker to act as his customer’s agent.

(g) Transfer of balance amount -

If the customer transfers the whole amount of balance of his account to any other person, then the account may
be closed by the banker. In this way the relationship of banker and customer comes to an end.

D Undesirable Accounts

Where a customer doesn't follow the fair and healthy norms of banking I.e failure to follow sound principles of
banking, failure to honor an overdraft agreement , issuing of cheque without sufficient funds , using of account
for illegal and fraudulent purposes flouting the norms of SEBI etc may lead to the undesirable activities.

3
(1910) 1 K.B 215
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In such cases the banker may ask the customer to close his account failing which he may close the account and
stop transactions.

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 BIBLIOGRAPHY

● https://www.academia.edu/

● http:/wikipedia.com/

● https://www.researchgate.net/

● https://www.britannica.com/

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