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Legal and Regulatory Aspects of Banking Iibf2nd Edition PDF
Legal and Regulatory Aspects of Banking Iibf2nd Edition PDF
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LEGAL AND REGULATORY ASPECTS OF BANKING 2nd Edition
INDIAN INSTITUTE OF BANKING & FINANCE
MACMILLAN 'THE ARCADE', WORLD TRADE CENTRE, CUFFE
PARADE MUMBAI400005
Established on 30th April 1928
MISSION
To develop professionally qualified and competent bankers
and financial professionals primarily through a process of
education, training, examination, consultancy/counselling and
continuing professional development programs.
VISION
To be the premier Institute for developing and nurturing
competent professionals in banking and finance field.
OBJECTIVES
To facilitate study of theory and practice of banking and
finance.
To test and certify attainment of competence in the
profession of banking and finance.
To collect, analyse and provide information needed by
professionals in banking and finance.
To promote continuous professional development.
To promote and undertake research relating to Operations,
Products, Instruments, Processes, etc., in banking and finance and
to encourage innovation and creativity among finance
professionals so that they could face competition and succeed.
COMMITTED TO PROFESSIONAL EXCELLENCE Website:
www.iibf.org.in
FOREWORD
The world of banking and finance is changing very fast and banks
are leveraging knowledge and technology in offering newer services
to the customers. Banks and technology are evolving so rapidly that
bank staff must continually seek new skills that enable them not
only to respond to change, but also to build competence in
handling various queries raised by customers. Therefore, there is a
need for today's bank employees to keep themselves updated with a
new set of skills and knowledge.
The Institute, being the main provider of banking education,
VI
The team, who developed the book, has made all efforts to cover
the entire syllabus prescribed for the subject. However, the
candidates could still refer to a few standard textbooks to
supplement this material which we are sure, will enhance the
professional competence of the candidates to still a higher degree.
We have no doubt that the study material will be found useful and
Mumbai 3-7-2008
R. Bhaskaran
Chief Executive Officer
RECOMMENDED READING
The Institute has prepared comprehensive courseware in the form
of study kits to facilitate preparation for the examination without
intervention of the teacher. An attempt has been made to cover
fully the syllabus prescribed for each module/subject and the
presentation of topics may not always be in the same sequence as
given in the syllabus.
Candidates are also expected to take note of all the latest
developments relating to the subject covered in the syllabus by
referring to Financial Papers, Economic Journals, Latest Books and
Publications in the subjects concerned.
PAPER 3-
CONTENTS
Foreword v
MODULE A - REGULATIONS AND COMPLIANCE
1. Legal Framework of Regulation of Banks 3
2. Control Over Organisation of Banks 15
xii
373 377 381 385 389 393 397 399 405 411 415 419 425 429 437 443
453 457 463 469 475
1.1 INTRODUCTION
Banking in India is mainly governed by the Banking Regulation
Act, 1949 and the Reserve Bank of India Act, 1934. The Reserve
Bank of India and the Government of India exercise control over
banks from the opening of banks to their winding up by virtue of
the powers conferred under these statutes.
All the regulatory provisions are not uniformly applicable to all
banks. The applicability of the provisions of these Acts to a bank
depends on its constitution; that is, whether it is a statutory
corporation, a banking company or a co-operative society. In this
unit, we look at the definition of banking, the constitution of
different types of banks and applicability of regulatory laws, the
general framework of the regulatory laws and the role of regulators
namely, the Reserve Bank of India and the government.
(c) Contracting for public and private loans and negotiating and
issuing the same.
(d) Insure, guarantee, underwrite, participate in managing and
carrying out any issue of state, municipal or other loans or of
shares, stock, debentures or debenture stock of companies and
lend money for the purpose of any such issue.
(e) Carry on and transact every kind of guarantee and
indemnity business.
(f) Manage, sell and realise any property which may come into
its possession in satisfaction of any of its claims.
(g) Acquire, hold and deal with any property or any right, title
or interest in any such property which may form the security for
any loan or advance.
(h) Undertake and execute trusts.
(i) Undertake the administration of estates as executor, trustee or
otherwise.
10
necessary in public interest after consultation with the Governor.
Thus, the government can exercise control over banks by
influencing decision-making by the Reserve Bank and has also got
appellate authority in respect of several matters in which the
Reserve Bank has been conferred the power to decide at the first
instance. Thus, under the Banking Regulation Act appeal lies with
the Central Government on removal of managerial personnel under
Sections 10B and 36AA of the BR Act. Similarly, there are also
provisions for appeal in respect of cancellation of banking licence
(under Section 22) and refusal of certificate regarding floating
charge on assets (Section 14A).
iii. The government has the power to suspend the operations of the
Banking Regulation Act or to give exemption from any of the
provisions of the Act on the representation/recommendation of the
Reserve Bank under Sections 4 and 53 of the Act, respectively. The
government has also the power to notify other forms of business
which a bank may undertake under Section 6(1 )(o) of the Act.
11
1.9 REGULATION BY OTHER AUTHORITIES
i. Banks may be subject to the control of other regulatory agencies
in the conduct of their business. For instance, a banking company
will be subject to the control of the authorities under the
Companies Act in respect of company matters. Similarly, a bank is
answerable to labour authorities in respect of the terms and
conditions of service of its workmen, opening and closing of its
premises, engagement of contract labour, etc. Banks are also liable
12
(Controller
Authorities under the Companies Act, SEBI) (v) Trading in shares
and securities by banks is subject to regulation by .
of Capital Issues, SEBI, Company Law Board)
1.13 ANSWERS TO 'CHECK YOUR PROGRESS'
A. 1. (i) True; (ii) False; (iii) True; (iv) False; (v) False.
2. (i) RBI Act (ii) a body corporate created under a special
statute
(iii) Reserve Bank (iv) BRAct
(v) for regulating banking companies.
B. 1. (i) True; (ii) False; (iii) False; (iv) False; (v) True.
2. (i) Multi-State Co-operative Societies Act
(ii) On recommendation of RBI (iii) Reserve Bank
13
UNIT
2
STRUCTURE
2.0 Objectives
2.1 Introduction
2.2 Licensing of Banking Companies
2.3 Branch Licensing
2.4 Paid-up Capital and Reserves
2.5 Shareholding in Banking Companies
2.6 Subsidiaries of Banking Companies
2.7 Board of Directors
2.8 Chairman of Banking Company
2.9 Appointment of Additional Directors
2.10 Restrictions on Employment
2.11 Control Over Management
2.12 Corporate Governance
2.13 Directors and Corporate Governance
2.14 Let Us Sum Up
2.15 Keywords
2.16 Check Your Progress
2.17 Answers to 'Check Your Progress'
2.18 Terminal Questions
16
2.0 OBJECTIVES
The objectives of this unit are to understand the laws that govern
banking companies, in respect of:
Licensing and branch licensing
Paid up capital and reserves
17
18
2.3 BRANCH LICENSING
i. Apart from the requirement of licence for commencing or
carrying on banking business, banks have to obtain the prior
permission of Reserve Bank for opening a new place of business or
changing location of the existing place of business. Under Section
23 of the Banking Regulation Act, 'Place of business' for this
purpose includes any sub-office, pay office, sub-pay office or any
20
they receive more than the specified percentage of their shares for
transfer to one party, the bank's board must refer the matter to the
Reserve Bank. The banks shall not transfer the shares without
receiving Reserve Bank's acknowledgement. This is with a view to
ensure that the controlling interest in a banking company does not
change hands without the knowledge and approval of the Reserve
Bank.
iii. Reports on shareholding: A report regarding the particulars of
shareholding of the chairman, managing director or chief executive
officer, by whatever name called, of every banking company,
requires submission to the Reserve Bank. Such report should
contain the full particulars and extent of value of shares held
directly or indirectly and of any change in the extent of holding or
of any variation in the rights attaching thereto. The Reserve Bank
may also order for any other information relating to those shares.
21
ii. Shareholding in other companies: Apart from the restriction on
subsidiaries, there is also a ceiling [Section 19(2)] on shareholding
in companies other than subsidiaries. Thus, the holding of shares
by a banking company in any company as pledgee, mortgagee or
absolute owner shall not be exceeding thirty per cent of the paid-up
share capital of that company or the paid-up share capital and
22
2.8 CHAIRMAN OF BANKING COMPANY
i. Whole-time Chairman/Managing Director: Section 1 OB of the
Banking Regulation Act provides that every banking company
should have a full-time or part-time chairman, appointed from
among its directors. The chairman, if appointed on a whole-time
basis is entrusted with the management of the entire affairs of the
bank. The chairman on a part-time basis has to be appointed with
the prior approval of the Reserve Bank and such an appointment
shall be subject to any conditions that may be imposed by the
Reserve Bank while granting approval. In the absence of a
chairman, the management of the whole of the affairs of the
banking company shall be entrusted to a managing director. The
exercise of powers by the whole-time chairman or managing
director is subject to the superintendence, control and directions of
the board of directors. The whole-time chairman and a managing
director shall hold office for a period not exceeding five years as the
board may fix and is also eligible for reelection or reappointment.
Although the chairman is in full-time employment of the bank, he
may be a director of a subsidiary of the bank or of a company
registered under Section 25 of the Companies Act. The Reserve
Bank may also permit the whole-time chairman or the managing
director to undertake part-time honorary work not likely to
interfere with the duties of the chairman or the managing director.
23
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invnivina mortal
24
(c) a person whose remuneration or part thereof is by way of
commission or share in the profits
of the company;
(d) a person whose remuneration is excessive in the opinion of
the Reserve Bank. Before forming
an opinion regarding the remuneration, the Reserve Bank has to
consider the financial condition
and history of the banking company, its area of operation,
resources, volume of business and
the trend of its earning capacity, number of its branches,
qualifications, age and experience of
the person concerned, remuneration of other personnel in the bank
or persons holding similar
positions in other banks and the interest of depositors.
The above restrictions are applicable to workmen as well as
management personnel, as held by the Supreme Court in Central
Bank of India vs Their Workmen (AIR 1960 SC 12). However, the
restriction on remuneration does not affect payment of bonus
according to a settlement or award or in accordance with a scheme
framed by the bank or in accordance with the prevailing practice in
banking business. Commission paid to brokers, auctioneers,
forwarding agents, etc., who are not regular members of the bank's
staff, is also not covered by these provisions.
ii. Persons who are directors of any company other than a
subsidiary of a banking company or company registered under
Section 25 of the Companies Act are also prohibited from
25
iii. Effect of the order of removal: On the Reserve Bank passing a
removal order, the person concerned ceases to hold office which
he/she was holding till then. Further, he/she is prohibited, from
directly or indirectly taking part in the management of any banking
company for a period not exceeding five years as may be specified
in the order. Contravention of the order is punishable with a fine of
Rs. 250 for each day during which the contravention continues.
iv. Appointment of a suitable person: When any chairman,
director, chief executive officer, other officer or employee is
removed by the Reserve Bank under Section 36AA as above, the
Reserve Bank may appoint a suitable person in his place. Such
person shall hold office at the pleasure of the Reserve Bank.
26
iii. Corporate Governance and Banks: Banks hold a special position
in corporate governance as they accept and deploy large amounts
of public funds in fiduciary capacity and also leverage such funds
through credit creation. The position of banks is also important for
the smooth functioning of the payment system. Accordingly, legal
prescriptions for ownership and governance of banks laid down in
the statutes are supplemented by regulatory prescriptions. The
Basel Committee on Banking Supervision has issued guidance
(February 2006) for promoting the adoption of sound practices of
corporate governance by banking institutions. This guidance,
entitled Enhancing Corporate Governance for Banking
Organisations, highlights the importance of:
the roles of boards of directors (with a focus on the role of
independent directors) and senior
management
effective management of conflicts of interest
the roles of internal and external auditors, as well as internal
control functionaries
governing in a transparent manner, especially where a bank
operates in jurisdictions, or through
27
acquisition will be with the prior approval of RBI and in
accordance with the guidelines of 3 February, 2004 for grant of
acknowledgement for acquisition of shares.
(iii) Where ownership is that of a corporate entity, the objective will
be to ensure that no single individual/entity has ownership and
28
29
(iv) Banking companies are permitted to give brokerage up to two-
and-half per cent of the paid-up
value of shares.
(v) No person can hold the shares of banks beyond ceiling specified
under the BR Act. (vi) A banking company cannot hold shares in
any other company other than a subsidiary.
3. Fill in the gaps choosing the answer from the brackets.
(i) A director of a banking company should not have in any other
company, (beneficial
interest, any interest, substantial interest)
(ii) At least of the directors should have the qualifications
prescribed under Section
30
. (such conditions as the Central Government may specify;
such conditions as the
Reserve Bank may think fit to impose; confirmation by the Central
Government).
2. Reserve Bank is not empowered to cancel the licence
granted to a banking company on the
ground that . (the company ceases to carry on any of its business;
UNIT
3
STRUCTURE
3.0 Objectives
3.1 Introduction
3.2 Power to Issue Directions
3.3 Acceptance of Deposits
3.4 Nomination
3.5 Loans and Advances
3.6 Regulation of Interest Rate
3.7 Regulation of Payment Systems
3.8 Internet Banking Guidelines
3.9 Regulation of Money Market Instruments
3.10 Banking Ombudsman
3.11 Reserve Funds
32
3.0 OBJECTIVES
The objectives of this unit are to understand the law, in particular
the provisions of the Banking Regulation Act, relating to:
issue of directions by Reserve Bank to banks
regulation of acceptance of deposits by banks
regulation of loans and advances
regulation of interest rates of banks on deposits and
borrowing
maintenance of reserve fund
maintenance of cash reserve by scheduled banks and other
banks
maintenance of liquid assets
maintenance of assets in India
3.1 INTRODUCTION
The Banking Regulation Act provides for regulation of the business
activities of banking companies. Accordingly, the Act empowers the
Reserve Bank to issue directions for regulating terms and
conditions of making of loans and advances and other matters
33
iii. Bonafides: The powers of the Reserve Bank to issue directions
have to be exercised with bonafide intentions, as held by the
Gujarat High Court in RBI vs Harisidh Co-op. Bank Ltd. (AIR 1988
Guj 107). In that case the Court considered the power of the
Reserve Bank to issue directions for superseding the board of a co-
operative bank for securing its proper management and upheld the
action taken by the Reserve Bank on the finding that it was without
mala fide.
iv. Caution and Advice: Apart from giving directions, the Reserve
Bank may also caution or give advice to banking companies.
Section 36 of the Banking Regulation Act provides that the Reserve
Bank may caution or prohibit banking companies generally or any
banking company in particular against any transaction or class of
34
3.4 NOMINATION
i. Repayment of Deposits: Section 45ZA of the Banking Regulation
Act provides that a depositor or depositors of a banking company
(including co-operative banks) may nominate one person in the
prescribed manner as nominee to whom the deposit may be
35
(iv) Maximum amount up to which guarantees may be given by a
banking company on behalf of any company, firm, association of
persons or individual. In this case, also the paid-up capital,
reserves, deposits and other relevant considerations have to be
taken into account for determining the maximum amount.
(v) Rate of interest and other terms and conditions on which
advances and other financial accommodation may be made or
guarantees may be given.
The Reserve Bank issues directions from time to time regulating
the lending operations of banking companies in exercise of these
powers vested under Section 21. Apart from this, the general
powers to give directions under Section 35A are also available for
regulation of loans and advances.
iii. Selective Credit Control
(a) Purpose: Banks have been traditionally financing trade and
commerce and against items they
deal in even before the country started industrializing. To ensure
that prices of essential
commodities like food grains, pulses, edible oils, sugar, jaggery and
cotton and textiles are not
increased by certain sections of the business community with a
motive of profit maximisation
by hoarding with the help of bank finance, these restrictions have
been put in place. These
36
advising the bank regarding management of all or any of its affairs.
It is open to the Reserve Bank to specify any transaction as not
being a loan or advance for this purpose by a general or special
order. In so doing the bank has to consider the nature of the
transaction, period, manner and circumstances in which the
amount is likely to be realised, the interest of depositors and other
relevant considerations. If there is any doubt or dispute as to
whether a transaction is a loan or advance, the decision of the
Reserve Bank in the matter shall be final.
vi. Restrictions on power to remit debt: For remitting any debt to
its directors, a banking company requires prior permission of the
37
iii. Usurious loans Act, 1918: The Usurious Loans Act, 1918
38
authorising the payment and settlement systems, determining
criteria for membership to these systems including continuation,
termination and rejection of membership.
3.8 INTERNET BANKING GUIDELINES
The Reserve Bank has issued guidelines in respect of internet
banking. These guidelines cover:
(i) technology and security issues; (ii) legal issues;
(iii) regulatory and supervisory issues.
These guidelines apply, in addition to Internet banking, to other
forms of electronic banking to the extent relevant. All banks
offering internet banking have to make a review of their systems in
the light of these guidelines and report to the Reserve Bank the
types of services offered, extent of their compliance with the
39
3.
40
41
acceptance of the award in full and final settlement of his claim
within a period of fifteen days from the date of receipt of copy of
the award. If the complainant fails to furnish his/her letter of
acceptance within this time or within extended time of fifteen days,
the award will lapse. However, on a written request for extension of
time, the banking ombudsman may grant extension of time up to a
further period of fifteen days for such compliance. Within one
month from the date of receipt by the bank of the acceptance in
writing of the award by the complainant (or within such time not
exceeding a period of fifteen days that may be granted by the
banking ombudsman), the bank has to comply with the award.
However, if the bank or the complainant is aggrieved by the award,
it/ he can make an appeal to the appellate authority (Deputy
Governor, Reserve Bank) under the scheme.
4. Banking Ombudsman and Reserve Bank Directions: The
legal position of banking ombudsman vis
a-vis the Reserve Bank has been considered by the Supreme Court
in Canara Bank vs P.R.N.
Upadhyaya (AIR 1998 SC 3000). The court observed that since an
ombudsman is appointed by
virtue of the scheme framed under S 35A of the Banking Regulation
42
in relation to its deposit liabilities, the Reserve Bank may
recommend to the Government of India for exemption from the
requirement of transfer of profits to reserve fund. Thereupon, the
Government may pass an order in writing, exempting the banking
company from Section 17(1) for such period as may be specified in
the order. No such order shall be made unless the amount already
in the reserve fund together with the amount in the share premium
account is not less than the paid-up capital of the banking
company.
iii. Appropriation from Reserve Fund/Share Premium Account:
Appropriation of any amount from the reserve fund or the share
premium account has to be reported to the Reserve Bank within
twenty-one days of such appropriation. The banking company has
also to explain the circumstances in which such appropriation was
made. It is open to the Reserve Bank in any particular case to
extend the period for submitting the report or to condone the delay
in making the report.
iv. Foreign Banks: The provisions of Section 17(1) of the Banking
Regulation Act for creating a reserve fund do not apply to foreign
banks operating in India. In their case, instead of creating a reserve
fund under Section 17(1), Section 11(2) of the Act requires them to
deposit and keep deposited with the Reserve Bank an amount
calculated at twenty per cent of the profit for each year in respect of
all the business transacted through their branches in India. The
amount may be deposited in cash or unencumbered approved
43
average daily balance, being 'such per cent of the total of the
demand and time liabilities in India of that bank as shown in the
return referred to in the sub-Section (2), as the Reserve Bank may
from time to time, having regard to the needs of securing the
monetary stability in the country, notify in the Gazette of India'.
Thus, under the amended statute, the Reserve Bank can, in order to
secure monetary stability in the country, determine the CRR for
scheduled banks without any ceiling or floor rate (as against a
statutory minimum of three per cent earlier). 'Average daily
balance' for this purpose means the average of the balances held at
the close of business of each day for a fortnight. The liabilities, for
this purpose do not include paid-up capital and reserves and any
credit balance in the profit and loss account.
44
waived. When penalty is imposed for a default, the amount has to
be paid within fourteen days of the notice demanding payment. On
failure to pay accordingly, Reserve Bank may obtain a direction
from the Principal Civil Court for levying the penalty and obtain a
certificate for the amount which may be enforced like a decree of a
civil court.
vi. Cash Reserves of Non-Scheduled Banks: In the case of banking
companies, which are not scheduled banks under Section 18 of the
Banking Regulation Act, the cash reserve need not be maintained
with the Reserve Bank. It may be with the bank itself, or in a
current account with the Reserve Bank or by way of net balance in
current accounts or in one or more of these ways. The balance
maintained should not be less than three per cent of the demand
and time liabilities as on the last Friday of the second preceding
fortnight. The bank has also to submit a return to the Reserve Bank
before the twentieth day of every month showing the amount so
held on alternate Fridays during the month, along with particulars
of its demand and time liabilities in India on such Fridays. If the
Fridays concerned fall on holidays under the Negotiable
Instruments Act, the returns have to be filed as on the preceding
working day.
3.13 MAINTENANCE OF LIQUID ASSETS
Every banking company has a duty to maintain a certain
percentage of their assets in India under Section 24 of the Banking
Regulation Act in the form and manner specified by the Reserve
45
3.14 ASSETS IN INDIA
i. Quarterly position of assets: Every banking company has to
maintain in India certain amount of assets as required under
Section 25 of the Banking Regulation Act. Accordingly, at the close
of business on the last Friday of every quarter, such assets shall not
be less than seventy five per cent of the demand and time liabilities
of the banking company in India. If the last Friday is a holiday
under the Negotiable Instruments Act, the assets are based upon as
at the close of business on the preceding working day. 'Quarter' for
this purpose means the period of three months ending on the last
day of March, June, September and December. This provision is
meant to ensure that the resources mobilised by banks operating in
46
47
(ii) Reserve Bank (iv) in Public Interest (vi) Usurious Loans Act
1.
2. 3.
4.
(i) Loans and Advances (iii) a bank and its customer/s (v) Selective
Credit Control
(i) True; (ii) True; (iii) False; (iv) True; (v) False; (vi) True
(i) 20 per cent
(ii) last Friday of every quarter (iii) 3 per cent over bank rate
(iv) banking companies which are not scheduled banks (v) not
inclusive (vi) civil court
(i) True; (ii) True; (iii) False; (iv) False; (v) False; (vi) False
48
(ii) (iii)
7. (i)
(ii)
(iii)
8. (i)
00
(iii)
9. (i) (ii)
(iii)
10. (i)
(ii)
(iii)
UNIT
4
STRUCTURE
4.0 Objectives
4.1 Introduction
4.2 Annual Accounts and Balance Sheet
4.3 Audit and Auditors
4.4 Submission of Returns
4.5 Preservation of Records and Return of Paid Instruments
4.6 Inspection and Scrutiny
4.7 Board for Financial Supervision
50
4.0 OBJECTIVES
The objectives of this unit are to understand the laws applicable to
banking companies in respect of
preparation of accounts and balance sheet
audit of accounts
filing of returns
inspection and scrutiny
acquisition of assets by the Central Government
amalgamation with other banks
winding up
penalties for default or contravention
4.1 INTRODUCTION
Banking companies have to prepare their balance sheet and
accounts annually as provided in the Banking Regulation Act. The
accounts have to be audited by duly qualified auditors as stipulated
in the Act. The audited balance sheet and accounts have to be
submitted as returns to the Reserve Bank and copies thereof have
to be submitted to the Registrar of Companies. Banking companies
have to file many other returns to the Reserve Bank. The Banking
Regulation Act also provides for inspection and scrutiny of the
51
Act that are inconsistent with the provisions of the Banking
Regulation Act are not applicable to banking companies. However,
those provisions of the Companies Act that are consistent with the
Banking Regulation Act are applicable. The forms specified in the
third schedule of the Banking Regulation Act may be modified by
the Central Government from time to time by notification in the
official gazette.
iv. In the case of banking companies, the profit and loss account,
52
i. Powers and Functions of Auditors: The powers, functions and
duties of the auditors and the liabilities and penalties to which they
are subjected to under Section 227 of the Companies Act are
applicable to auditors of banking companies. In addition to the
above, the auditor of a banking company has to give certain
additional information in his audit report. In the case of banks
incorporated in India, the additional matters are as under:
(a) Whether or not information and explanation, required by
him were found to be satisfactory;
(b) Whether or not the transactions of the company, as noticed
by him were within the powers of
the company;
(c) Whether or not returns from branches were adequate for the
audit;
(d) Whether or not profit and loss account shows a true picture
of the profit and loss for the
period covered;
(e) Any other matter, which the auditor considers necessary to
bring to the notice of the shareholders
of the company.
In dealing with bank accounts, the responsibility of the auditor is
53
on the last Friday of the previous month. Such a return has to be
submitted before the close of the month succeeding to which it
relates. The return has to be in the form prescribed under Rule 14A
of the Banking Regulation (Companies) Rules, 1949. Apart from
this, the Reserve Bank may also call for statements and
information relating to the business or affairs of a banking
company at any time. The bank may direct the banking company to
submit such statement or information within such time as it may
direct. The Bank may also call for information every half year
54
4.6 INSPECTION AND SCRUTINY
i. Inspection: The Reserve Bank is empowered under Section 35 of
the Banking Regulation Act to conduct an inspection of any
banking company. The bank may conduct such an inspection at any
time. The Central Government may also direct the Reserve Bank to
conduct inspection of any bank and in that case, the Reserve Bank
is bound to comply with such a direction. After inspection of the
books and accounts of the banking company, a copy of the
inspection report has to be given to the banking company. The
directors and officers of a banking company are bound to produce
for inspection all books, accounts and other documents in their
custody. The inspecting team may also require the bank to furnish
any statements or information relating to the affairs of the banking
company within the time specified by them. The inspecting officer
is authorised to examine any director or officer of a banking
company on oath.
ii. Powers of the Government: A copy of the report of inspection
has to be sent to the Central Government in all cases where
inspections have been conducted as directed by the Central
Government. In other cases, it is optional for the Reserve Bank to
send copies of inspection to the Government. On consideration of
the report, if the Central Government is of the opinion that the
affairs of a banking company are being conducted to the detriment
of the interests of the depositors, the Government may -
(a) Prohibit the banking company from receiving fresh deposits.
(b) Direct the Reserve Bank to apply for winding up of the
55
members, the Governor has to make the nominations to the board
in consultation with the central board of the Reserve Bank (Central
Board) for a specified period,
iii. Functions and Powers: The board performs the functions and
exercises the powers of supervision and inspection under the
Reserve Bank of India Act and the Banking Regulation Act, in
relation to different sectors of the financial system, including
banking companies. The board shall also perform any other
function as may be notified by the central board of the Reserve
Bank. The board is assisted by the department of supervision in the
Reserve Bank and may also draw personnel from outside. The
chairman, vice-chairman and members can jointly and severally
exercise the powers vested in the board, as may be specified by the
56
ii. Power to make scheme: The Central Government is empowered
under Section 36AF to make a scheme for any acquired bank. Such
a scheme is framed in consultation with the Reserve Bank. The
57
period of moratorium is extendable from time to time. However,
the total period of moratorium shall not exceed six months. During
the period of moratorium, the banking company shall not make
any payment to depositors or discharge any liabilities or
obligations to any other creditors unless otherwise directed by the
Central Government in the order of moratorium or at any time
thereafter.
iv. Scheme of Amalgamation:
(a) During the period of moratorium, Reserve Bank may
prepare a scheme either for reconstruction
of the banking company, or for amalgamation of the banking
company with any other banking
institution. Such a scheme may be prepared if the Reserve Bank is
satisfied that it is necessary
to do so:
(i) in the public interest;
(ii) in the interests of the depositors;
(iii) for securing the proper management of the banking company;
58
bank and any other banking company concerned in the
amalgamation, for their suggestions and objections, if any. The
Reserve Bank may specify the period for receipt of such suggestions
and objections. In the light of any suggestions and objections
received, modification may be made in the draft, as considered
necessary by the Reserve Bank. Thereafter, the scheme, may be
placed before the Central Government for sanction. The
59
60
Act, which are not inconsistent with the Banking Regulation Act
shall be applicable to such a liquidator. The liquidator has to make
a preliminary report to the High Court within two months of the
winding up order on the availability of assets for making
preferential payments under Section 530 of the Companies Act and
for discharging liabilities to depositors and other creditors. Within
fifteen days of the winding up order, the liquidator has to give
notice calling for claims for preferential payment and other claims
from every secured and unsecured creditor. Under Section 43 of
the Act, the depositors need not make claims. The claims of every
61
offence. The court will not take cognizance of an offence under the
Act (except offences relating to acceptance of deposits under the
Chapter IIIC) otherwise than on a complaint by an officer of the
bank generally or specially authorised in writing in this behalf by
the Bank. A metropolitan magistrate or magistrate of the first class
or court superior thereto shall try the offences.
ii. Penalties under the BR Act: The provisions of the Banking
Regulation Act, relating to penalties, are provided in Section 46
thereof. Accordingly, making wilfully any false statement in any
return, balance sheet or other document or information given
under the Act is punishable. Similarly, wilful omission to make any
material statement is also punishable. In both cases, punishment is
up to three years imprisonment and fine.
Failure to produce any book, account or other document or to
furnish a statement or information that is obligatory to be
produced under Section 35(2), during inspection or scrutiny is
punishable with fine up to Rs. 2,000. Similarly, failure to answer
any question relating to the business of the banking company
during inspection is also punishable. Continuance of the offence is
punishable with fine of Rs. 100 for every day during which the
offence continues. Acceptance of deposits against an order
prohibiting acceptance of deposits under Section 35(4) is
62
4.13 KEYWORDS
Amalgamation; Board for Financial Supervision; Continuing
Offence; Inspection; Moratorium; Scrutiny; Winding up.
4.14 CHECK YOUR PROGRESS
63
for carrying out the purposes of part IIC of the BR Act, in relation
to an acquired bank.
(scheme, plan, memorandum)
may apply to the High Court for winding up of a banking
company under
(iii)
Section 38 of the BR Act. (Registrar of Companies, Reserve Bank,
Central Government) (iv) The High Court shall order winding up of
a banking company if the banking company is
unable to (pay its debts, file returns in time, eliminate non-
performing assets)
(v) In a winding up proceeding the depositors shall for the
amounts shown in the
books of the bank standing to their credit, (be deemed to have filed
claim, have to file claim,
have no claim)
(vi) The may apply to the Central Government for an order of
moratorium in
respect of a banking company, (banking company, Registrar of
Companies, Reserve Bank) (vii) The provisions of a scheme of
64
board of the banking company and approved in general meeting;
specified by the Department of Company Affairs; in the form set
out in the Third Schedule to the BR Act or as near thereto as
circumstances admit)
2. A banking company has to submit three copies of its
accounts and balance sheet together with
auditors' report . (to the Reserve Bank and also to the Registrar
of Companies; only
to the Reserve Bank; only to the Registrar of Companies).
3. The expenses incidental to a special audit under Section
UNIT
5
STRUCTURE
5.0 Objectives
5.1 Introduction
5.2 State Bank and Its Subsidiaries
5.3 Regional Rural Banks
5.4 Nationalised Banks
5.5 Application of Banking Regulation Act to Public Sector
Banks
5.6 Disinvestment of Shares by Government
5.7 Co-operative Banks
5.8 Let Us Sum Up
5.9 Keywords
5.10 Check Your Progress
5.11 Answers to 'Check Your Progress'
5.12 Terminal Questions
67
economy, nominated by Reserve Bank, nominated by Central
Government and elected by shareholders other than Reserve Bank.
The chairman and managing directors are appointed for a period
not exceeding five years and are eligible for reappointment. Their
services can be terminated by the Central Government by giving a
three month's notice or notice pay in lieu thereof, after consultation
with the Reserve Bank.
Local boards are set up at each place where there is a local head
office to exercise all powers and to perform the functions and
duties of the bank delegated under Section 2 IB of the Act. The
local board consists of the chairman and other elected and
nominated members as specified in Section 21 of the Act.
iv. Business of State Bank: The State Bank shall act as an agent of
the Reserve Bank at the places where it has a branch and where
Reserve Bank has no branch, if so required, by the Reserve Bank,
for transacting Government business and other business entrusted
to it by the Reserve Bank. The terms and conditions thereof shall
be as agreed between the Reserve Bank and the State Bank. If
68
bank vests in its board of directors and the board may exercise all
the powers and carry out all functions with the assistance of the
managing director, subject to the directions and instructions given
by the State Bank from time to time.
69
x. Rules and Regulations: The Central Government is empowered
to make rules under Section 62 of the Act for giving effect to the
purposes of the Act. The State Bank is also empowered to make
regulations under Section 63 with the approval of the Reserve Bank
for giving effect to the purposes of the Act.
5.3 REGIONAL RURAL BANKS
The Regional Rural Banks (RRBs) are public sector institutions,
regionally based, rural oriented and engaged in commercial
banking. They were first set up in 1975 under the Regional Rural
Banks Ordinance, 1975. The ordinance was later replaced by the
Regional Rural Banks Act, 1976. The formation of these banks was
the result of the growing realisation that the ethos and attitude of
the existing public sector banks were not fully conducive to meet
the credit needs of the rural people. As stated in the preamble to
the Act, the object of setting up regional rural banks is to develop
rural economy by providing credit and other facilities for the
purpose of development of agriculture, trade, commerce, industry
and other productive activities in rural areas, particularly to small
and marginal farmers, agricultural labourers, artisans and small
entrepreneurs.
i. Establishment of RRBs: Section 3 of the Act authorises the
70
other date as the Central Government may specify. The auditors
have to be appointed with the approval of the Central Government.
A person qualified to act as an auditor of companies under Section
226 of the Companies Act is qualified to be an auditor of a regional
rural bank. The auditor's report and report on the working of the
bank has to be laid before the Parliament. The sponsor bank is
empowered to monitor the progress of the RRBs by inspection,
internal audit and scrutiny and suggest corrective measures.
v. Amalgamation: Two or more RRBs may be amalgamated by the
Central Government by notification in the official gazette. Such
notification shall provide for all terms and conditions of
amalgamation including continuation of service of employees and
shall be binding on the banks and all other parties concerned.
71
Government may also amend or vary the scheme in consultation
72
upon the balance sheet as stipulated in Section 10 of the Act. The
auditor shall send copies of the report to the bank and the Reserve
Bank. The bank has to furnish copies of the balance sheet, profit
and loss account and auditor's report along with the report of the
board of directors on the working and activities of the bank to the
Central Government and the Reserve Bank. The auditor's report
and report of the board have to be laid before the Parliament.
Without prejudice to the above, the Centra] Government is also
empowered to appoint auditors as it thinks fit at any time to
examine and report on the accounts of a Nationalised bank.
A Nationalised bank may pay dividends out of profits after making
72
upon the balance sheet as stipulated in Section 10 of the Act. The
were made in the statutes governing public sector banks. The State
Bank of India Act, was amended by the State Bank of India
(Amendment) Act, 1993. Section 4 was modified to divide capital
into shares of Rs. 10 each instead of Rs. 100. The restriction on
voting rights (which existed under Section 11, being up to two
hundred shares only) was modified as up to ten per cent of the
issued capital and restriction on dividends was deleted.
The Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1970 (and also the 1980 Act) were modified by
Amendment Acts of 1994 and 1995, for facilitating public holding
of shares. Section 3 was amended to provide for an authorised
capital of Rs. 1,500 crore, divided into shares of Rs. 10 each, to
increase or reduce the authorised capital between Rs. 1,500 crore
and Rs. 3,000 crore, for transferability of shares, other than those
held by the Government, raising of capital through public issue,
voting rights of shareholders (limited to one per cent per
shareholder) and keeping register of shareholders including in
floppies. Section 10A was amended to declare dividends, as earlier
74
i
Ii
ij
75
(b) Every co-operative bank has to submit a return in the
prescribed form showing the unsecured loans and advances
granted by it to companies in which its directors are interested as
director, managing agent, or guarantor. Such returns have to be
filed before the close of the month succeeding to which the return
relates. If it appears to the Reserve Bank on examination of any
return that the loans or advances were granted to the detriment of
the interest of depositors, Reserve Bank may prohibit granting of
such further loans or advances. The Reserve Bank may also impose
other restrictions on the grant of such loans and direct the co-
operative bank to secure the repayment of the loan or advance
within a stipulated time.
Note: It must be noted here that RBI with effect from 1 October
76
purpose, any balance maintained by a scheduled private co-
operative banks and state co-operative bank with the Reserve Bank
in excess of the balance required under Section 42 of the RBI Act
shall be accounted. Similarly, cash or balances maintained in India
by a non-scheduled co-operative bank with itself or with the state
co-operative bank or in current account with Reserve Bank or net
balance in current accounts in excess of the requirement of Section
18 would be accounted. In the case of primary co-operative banks,
such balances maintained with the Central co-operative bank of the
district concerned will also be taken into account.
The co-operative banks have to file a return with the Reserve Bank
and every co-operative bank, other than a primary co-operative
bank has also to furnish a copy thereof to the National Bank.
viii. Accounts and Audit: Every co-operative bank has to prepare a
balance sheet and profit and loss account of its business as on the
last working day of the year. The balance sheet and accounts have
77
Reserve Bank if so required by the Reserve Bank in the public
interest or for preventing the affairs of the bank being conducted in
a manner detrimental to the interests of the depositors or for
securing the proper management of the bank.
71
trade, farmers, artisans, etc. The State Bank and its subsidiaries
and the Nationalised banks also act as agents of the Reserve Bank
to transact the banking business of the Central Government. All
public sector banks are governed by their respective, statutes and
the rules, regulations or schemes made under these statutes. In
addition to this, these banks are also governed by certain
provisions of the Banking Regulation Act as stipulated in Section 51
of that Act. The provisions of the Reserve Bank of India Act are also
applicable to them.
2. The co-operative banks, functioning in one state only are
registered under the state laws on co-operative societies. The co-
operative banks operating in more than one state, are registered
under the multi-state Co-operative Societies Act. The Banking
Regulation Act is applicable to co-operative banks as provided in
Section 56 of that Act with certain modifications. For this purpose,
a co-operative bank means a state co-operative bank, Central co-
operative bank and a primary co-operative bank. While, the
constitution of the bank is governed by the cooperative laws, the
business of banking undertaken by them is regulated by the
Reserve Bank under the BR Act.
5.9 KEYWORDS
2. 3.
79
3.
4.
Central Government
BRAct
notified area
1. (i) body corporate (ii)
(iii) Agent of Reserve Bank (iv)
(v) SBI (vi)
(vii) its board of directors
2. (i) True; (ii) False; (iii) True; (iv) False; (v) True; (vi)
False; (vii) True
3. (i) Banking company (ii) Director
(iii) Rs. 1 lakh (iv) Holding of shares
MODULE -B
LEGAL ASPECTS OF BANKING OPERATIONS
Unit 6. Case Laws on Responsibility of Paying Bank
Unit 7.Case Laws on Responsibility of Collecting Bank
Unit 8. Indemnities
Unit 9. Bank Guarantees
Unit 10. Letters of Credit
Unit 11. Deferred Payment Guarantee
Unit 12. Laws Relating to Bill Finance
Unit 13. Various Types of Securities
STRUCTURE
6.0 Objectives
6.1 Introduction
6.2 Negotiable Instruments Act and Paying Banks
6.3 Liability of Paying Banker when Customer's Signature on
Cheque is Forged
6.4 Payment to be in Due Course for Bank to Seek Protection
6.5 Payment in Good Faith, without Negligence of an
Instrument on which Alteration is not
Apparent
6.6 Payment by Bank Under Mistake Whether Recoverable
6.7 Let Us Sum Up
6.8 Keywords
6.9 Check Your Progress
6.10 Answers to 'Check Your Progress'
' L.K.A.D-7
85
Protection to paying banker: For a paying banker to claim
protection under the Negotiable Instruments Act, one of the
criteria he has to satisfy, is that the payment is in due course. As to
what is, payment in due course has been stated in Section 10,
which reads as follows:
Payment in due course: 'Payment in due course' means payment in
accordance with the apparent tenor of the instrument in good faith
and without negligence to any person in possession thereof under
circumstances which does not afford a reasonable ground for
believing that he is not entitled to receive payment of the amount
therein mentioned.
From the above definition, it can be seen that payment in due
course requires the payment to be made
(a) in accordance with the apparent tenor of the instrument;
(b) in good faith;
(c) without negligence;
(d) to the person in possession of the instrument; and
(e) while making payment the banker should not have reasons
to 'believe' that the person in possession
86
pay. As such a banker is not entitled to debit the customer's
account on such forged cheque: Canara Bank vs Canara Sales
Corporation and Others [(1987) 2 Supreme Court Cases 666]: The
company had a current account with the bank which was operated
by the company's Managing Director. The Company's accountant
in whose custody the cheque book was, forged the signature of the
Managing Director in forty-two cheques totalling Rs. 3,26,047.92
over a period of time. This was detected by another accountant.
The company immediately on detection of the fraud demanded the
88
!!
89
On appeal, the District Judge, while agreeing that no abnormal
features to suspect the genuineness of the cheque could be found
on visual inspection of the cheque, was of the view that the
appellant bank was not entitled to protection for the lapse in
subjecting the said cheque for scrutiny under the ultraviolet ray
lamp.
On further appeal, the High Court of Bombay, while accepting the
finding that the cheque in question apparently did not show any
sign of alteration, held that the appellant bank did not act with
proper care and caution in not providing necessary device for
detecting forged cheques. Since the absence of such a lamp
amounted to negligence on the part of the appellant bank, no
protection was available because payment was not made in due
course.
The appellant bank preferred this appeal to the Supreme Court.
The Supreme Court allowed the appeal of the bank on the following
grounds:
(i) Section 89 of the Negotiable Instruments Act gives protection to
the paying banker of a cheque which has been materially altered
but does not appear to have been so altered, if payment was made
according to the apparent tenor thereof at the time of payment and
otherwise in due course.
(ii) Section 10 of the said Act defines payment in due course to
90
In this case B who was a member of the royal family of Nepal had
an overdraft account with the bank, for which certain securities
were deposited with the bank. The overdraft limit was not a fixed
limit and fluctuated depending on the securities deposited. In April
1946, B requested the bank to enhance the overdraft limit which
however, was not agreed to by the bank and the limit was Rs.
91
iv. Bareilly Bank Ltd. vs Naval Kishore (AIR 1964 All 78): N opened
an account with the bank by making a cash deposit of Rs. 19,900. N
was issued a cheque book containing 25 cheques. 17 months after
the opening of the account N drew a cheque for the first time for
Rs. 5,900 which was dishonoured by the bank. On enquiries N was
informed that 11 months back three cheques aggregating Rs.
19,500 were paid by the bank and the present balance in the
account was a mere Rs. 437. N denied issuing of the cheques and
sued the bank.
In evidence it came out that 3 cheques used to withdraw the
amounts were not from the cheque book issued to N and were from
a different cheque book. Though bank was not in a position to
explain this lapse, they made an attempt to counter the contentions
of N by producing his specimen signature which appeared to be
similar to the ones on the cheques. N however denied that the
specimen signature was his and the Court concluded that the
alleged specimen signature were totally different from N's regular
signature. Evidence also was led to show that the bank's own
employees were involved in the forgery since the ledger page of N's
account showed that certain erasures and scorings were made and
92
the mistake that was committed by the plaintiff bank that it had to
suffer the loss of the said sum of Rs. 5,200. Upon the consideration
of the principles of law as noticed above, it seems to us that so long
as the status quo is maintained and the payee has not changed his
position to his detriment, he must repay the money back to the
payer. If, however, there has been a change in the position of the
payee who, acting in good faith, parts with money to another
Rs.
;as >ay ho,
:is of ide
UNIT
7
STRUCTURE
7.0 Objectives
7.1 Introduction
7.2 Statutory Protection to Collecting Bank
7.3 Duties of the Collecting Bank
7.4 Let Us Sum Up
7.5 Keywords
7.6 Check Your Progress
7.7 Answers to 'Check Your Progress'
94
7.0 OBJECTIVES
After studying this unit you should be able to understand:
the duties of a collecting banker when opening an account
and collecting cheques in the account;
the protection granted under the Negotiable Instruments
Act to a banker collecting a cheque.
7.1 INTRODUCTION
In the earlier unit, we had studied the duties imposed on a paying
banker under the Negotiable Instruments Act and the protection
95
7.3 DUTIES OF THE COLLECTING BANK
Since no specific enactment has been laid down prescribing the
nature of duties a banker will have to observe while acting as a
96
(b) that the banker should receive payment for a customer, i.e.
act as mere agent in the collection of
the cheque, and not on his account as holder;
(c) that the person for whom the banker acts must be his
customer;
(d) that the cheque should be one crossed generally or specially
to himself.
The High Court stated that if the draft was drawn in favour of a
fictitious person, it could not be said that the ownership stood
transferred to a non-existent person for the purpose of examining
the question whether the bank as a collecting banker acted
negligently or not. The ownership would pass to the true owner.
The High Court did not consider it necessary to decide as to what
extent a person obtaining a draft in favour of a fictitious person
would lose the ownership in favour of a bona fide 'holder in due
course'.
In view of the aforesaid, the appellant bank was held to have acted
without taking any care, and was found negligent throughout and
97
when D told the manager of collecting banker that he had not until
then opened any account although he had come from Indore to
Salem to do business, the collecting banker, before opening the
account, should have been more alert.
ii. Duty to Confirm the Reference where the Referee is not known
98
held liable for negligence. In this case, two dishonest clerks of a
stock broker stole bearer cheques belonging to their employer
which were collected in an account maintained by one of the clerks
and in another account in his wife's name. It was held that the bank
had been negligent in opening the clerk's account inasmuch as they
had not obtained his employer's name while opening the account
and that in the case of his wife's account the bank was negligent
inasmuch as it had not obtained the husband's occupation and his
employer's name while opening the account.
(c) In the case of Australia and New Zealand Bank vs Ateliers de
Constructions Electriques de
Cherleroi [1967] 1 AC 86 PC, an agent paid his principal's cheque
into his personal account
and the bank was charged with conversion. However, the bank
defended the same because
there was implied authority from the principal to his agent to use
INDEMNITIES
STRUCTURE
8.0 Objectives
8.1 Introduction
8.2 Contract of Indemnity Defined
8.3 Distinctive Features of Indemnity Contract and Guarantee
8.4 Scope and Application of Indemnity Contracts to banks
8.5 Rights of an Indemnity Holder
8.6 Let Us Sum Up
102
8.0 OBJECTIVES
After studying this unit, you should be able to understand:
the definition and concept of indemnity;
distinctive features of an Indemnity Contract and how it
differs from a guarantee;
when and why bankers take indemnities;
know the rights of an indemnity holder;
know the liabilities of the indemnifier.
8.1 INTRODUCTION
The word indemnity means 'to save from loss'. This loss could be
either due to the act of the party giving the indemnity or due to the
act of a third party. The law regarding indemnity as laid down in
Sections 124 and 125 of the Indian Contract Acts, is not exhaustive.
The law of indemnity is much wider than as stated in the Contract
Act, since Courts applying the principles of equity have developed
it. A Contract of Indemnity is a contingent contract, i.e. its
performance is made dependent upon the happening or non-
happening of some event.
8.2 CONTRACT OF INDEMNITY DEFINED
Section 124 of the Indian Contract Act, 1872 defines contract of
indemnity as follows:
Sectionl24. 'Contract of Indemnity' defined: A contract by which
one party promises to save the other from loss caused to him by the
103
8.3 DISTINCTIVE FEATURES OF INDEMNITY CONTRACT
AND GUARANTEE
i. Number of Parties to the Contract of Indemnity: In a contract of
indemnity there are two parties, viz., the indemnifier and the
indemnified whereas in a contract of guarantee there are three
parties, viz., the debtor (the person on whose behalf the guarantee
is given), the creditor (the beneficiary, the person to whom the
guarantee is given) and the surety (the person who gives the
guarantee).
ii. Contingent Risk: In an indemnity, the risk is contingent whereas
in a guarantee the liability is
subsisting. ,
iii. Nature of Liability: In a contract of indemnity, the indemnifier
is required to make good the loss as soon as it occurs and he cannot
rely on the fact that the person on whose behalf the indemnity is
104
been prudent for the promisee to make in the absence of any
contract of indemnity, or, if the promisor authorised him to
compromise the suit.
105
8.8 CHECK YOUR PROGRESS
BANK GUARANTEES
STRUCTURE
9.0 Objectives
9.1 Introduction
9.2 Bank Guarantees
9.3 Various Ttypes of Bank Guarantees
9.4 Banker's Duty to Honour Guarantee
9.5 Issuance of Bank Guarantee - Precautions to be taken
9.6 Payment Under Bank Guarantee - Precautions to be taken
9.7 Let Us Sum Up
108
9.0 OBJECTIVES
After studying this unit, you should be able to understand:
various kinds of bank guarantees, their nature and scope;
the precautions to be taken while issuing a bank guarantee;
the precautions to be taken on invocation of a bank
guarantee.
9.1 INTRODUCTION
In commercial transactions, bank's customers are sometimes
required to give a bank guarantee. This is mostly as an alternative
to keep cash as a security deposit. The third party who seeks the
guarantee, not being aware of the customer's financial standing,
prefers a bank guarantee. In turn, the bank, which very well
understands the financial standing of the customer, undertakes to
guarantee the customer's financial commitments or the
performance of contracts by him. The bank charges a commission
for this service which depends on the security available and the
financial stability of the customer. In this Chapter, you will learn
what exactly is a bank guarantee, the various types of bank
guarantees, the precautions to be taken while issuing a bank
guarantee and on making payment on a bank guarantee the
distinction between a bank guarantee and an ordinary guarantee,
why in a bank guarantee the banker's duty to honour the guarantee
is of prime importance and the limit to which this duty can be
109
are mad, insist on an Earnest Money Deposit. However in lieu of
the earnest money government departments are generally willing
to accept a bank guarantee. This also helps the contractor who can
utilise the funds for fulfilling his obligations under the contract. In
case the contractor does not take up contract of awarded then the
Government departments invoke the guarantee and collect the
money from the banks.
ii. Performance Guarantee: These are guarantees issued by the
bank on behalf of its customer whereby the bank assures a third
party, that the customer will perform the contract entered into by
the customer as per the condition stipulated in the contract, failing
which the bank will compensate the third party up to the amount
specified in the guarantee. These types of guarantees are usually
issued by bankers on behalf of their customers, who have entered
into contracts to do certain things on or before a given date.
Though the bank assures, that the conditions as stipulated in the
contract will be complied with by the customer in practice, the
110
and the debtor. The first of the cases wherein the bank's
commitment to honour its guarantee was discussed was the
English case of R.D. Harbottle Ltd. vs National Westminster Bank
Ltd. (1978) OB 146, wherein Justice Kerr held as follows:
Such guarantees even though having their genesis in the primary
111
given by it on behalf of a company that was being wound up, the
facts of which; in a nutshell are as follows:
The Cochin Malleable Private Limited (Company) entered into a
contract with Maharashtra State Electricity Board, Bombay (Board)
for supply of goods from time to time. As per the terms of the
contract, the company furnished a bank guarantee for Rs. 50,000
as earnest money deposit. As per the guarantee given by Canara
Bank Limited (Bank), the bank agreed unequivocally and
unconditionally to pay within forty-eight hours on demand in
writing from the board a sum not exceeding Rs. 50,000. On 30
July 1973, a petition for winding up of the company was presented
and the High Court, Kerala, on 16 September 1974, ordered the
company to be wound up. On 27 August 1973, the board called
upon the bank to pay the guarantee amount of Rs. 50,000 followed
by several reminders and final demand was made on 23 July 1974.
On 4 November 1974, the Bank wrote to the official liquidator
stating that the company was liable to the bank for payment of Rs.
1,64,353.12 which included the guaranteed amount. Thereupon,
the official liquidator filed an application before the company
Judge, praying for an order restraining the board from realising the
amount covered by the bank guarantee on the ground that since
the company was ordered to be wound up, the board could not
112
On invocation of the guarantee the contractor, therefore, submitted
that the contract of erection, etc., entered into by the contractor
with the company stood suspended.
On behalf of the company, it was submitted that the bank
guarantee was an independent contract between the bank and the
company and was not affected or suspended by operation of the
above referred to Act or the notification.
The High Court observed that the company had not invoked the
113
Escorts supplied generator sets to Modern Insulators the
performance of which were guaranteed by the bank. Modern
invoked the guarantee, whereupon Escorts moved the Court to
restrain Modern from recovering the amount and the bank from
making payment of the guaranteed sum. The Court granted
injunction since the guarantee was not invoked properly.
Thereafter Modern invoked the guarantee once again but the bank
did not pay. The matter came before the High Court and Escorts
pleaded that Modern had played a fraud and hence were not
entitled to the guaranteed amount. The High Court held that
averments of fraud have to be pleaded and proved, which was not
done by Escorts. Of importance in this judgement is the Court's
remark as regards the conduct of the bank. The Court remarked
that the bank should have approached the Court for appropriate
directions if it had any doubts. Merely because an application for
injunction was made, would not be a ground for the bank not to
honour its commitment under the bank guarantee.
114
stating the amount, that the bank would guarantee to pay, care
should be taken to state whether or not the amount is inclusive of
all interests, charges, taxes and other levies. This is important to
avoid unnecessary disputes regarding the liability of the bank. On
invocation, the bank is liable to pay the whole amount of the
guarantee unless as stated earlier a case of fraud has been brought
to its notice.
ii. Period of Guarantee: Banks always specify the period for which
their guarantee subsists and an additional period during which a
claim has to be made on the bank to make payment. The former
115
guarantee, and until such time the cash margin and the security of
the debtor (customer) has to be retained.
iii. Counter Guarantee and Other Security: Though a bank
guarantee is a contingent liability, it is always prudent for a banker
to secure this contingent liability to cover himself in case it is
enforced. This can be done by obtaining a counter guarantee-cum-
indemnity executed by the customer in favour of the bank. The
counter guarantee-cum-indemnity, should be carefully drafted to
ensure, that in case the bank were to make payment on behalf of
the customer, then the customer in turn 1 should not only make
good the amounts paid by the bank to the creditor but also any
expenses connected therewith including costs of attorney, any
interest on delayed payment, taxes and other levies. It is to take
care of all the above payments that the counter guarantee also
includes an indemnity aspect. The counter guarantee should also
include a clause that it would remain in force until the guarantee
given by the bank subsists, viz., until the bank is duly discharged by
the beneficiary or a certificate to this effect is issued by the
beneficiary.
Though a counter guarantee-cum-indemnity is taken as a security
for every guarantee issued by the bank, its value would depend on
the financial standing of the person/company giving the counter
guarantee. As such, it is preferable that keeping in mind the
116
1. The invocation is within validity period.
2. The invocation amount is not more than the guaranteed
amount. In case it is more then only the
maximum amount stipulated in the guarantee need be paid.
3. The authority invoking the guarantee is competent or
empowered to invoke the guarantee. In
guarantees issued to Government departments the authority to
invoke is usually designated by the
118
7. State in brief the precautions to be taken while issuing a
bank guarantee.
8. While issuing a guarantee the bank omits to mention the
amount and the period of the guarantee.
Can the bank still be held liable? What would be the extent of the
liability?
9. What is a validity period and claim period in a bank
guarantee?
LETTERS OF CREDIT
STRUCTURE
10.0 Objectives
10.1 Introduction
10.2 Letters of Credit - General Consideration
10.3 Parties to a Letter of Credit
10.4 Types of Letters of Credit
10.5 Documents Under a Letter of Credit
10.6 Uniform Customs and Practice for Documentary Credits -
UCPDC 600
10.7 Payment Under Letter of Credit - Banks Obligation Primary
10.8 Let Us Sum Up
10.9 Keywords
10.10 Check Your Progress
10.11 Answers to 'Check Your Progress'
120
10.0 OBJECTIVES
After studying this unit, you should be able to understand:
what is a letter of credit and its purpose;
the parties involved in a letter of credit transaction;
the various types of letters of credits;
121
exchange (Bills) under the LC and presents it to its bankers, the
Barclays Bank, for negotiating the bill and to obtain the payment.
Barclays Bank, on their part, receive the bill and the documents
from M/s Edward & Co. and checks that they are as per the terms
of the LC. On finding them to be in order, Barclays Bank negotiates
the bill and makes payment to M/s Edward & Co. Barclays Bank
thereafter sends the bill and documents to Bank of India. Bank of
India on its part verifies the bill and documents and if found in
order sends the bill to M/s Bharath & Co. for payment. M/s
Bharath & Co. on receiving the bills checks the documents or pays
the bill. On M/s Bharath & Co. making payment, Bank of India will
release the shipping document so that M/s Bharath & Co. can
collect the goods from the shipping company.
The above illustrates the simplest form of payment under a letter of
credit. The terms of an LC are sometimes complicated and various
kinds of LCs have been devised since the concept of LC was
introduced, which requires a banker to be very well versed in this
aspect of financing.
Before we proceed to understand the parties to a letter of credit
and the various types of letters of credit, it would be worthwhile to
examine the advantages of a letter of credit (LC). As regards the
Buyer, i.e. M/s Bharath & Co. in the above illustration the major
advantages are as follows:
122
(iii) Beneficiary-Exporter-Seller: Is the person who is entitled to
receive the benefit under a LC (letter of credit), i.e. the right to
receive payment or to draw bills and receive payment as per the
terms of the LC. In the illustration - M/s Edward & Co..
(iv) Advising Bank: The bank in the beneficiary/exporters country
through which the letter of credit is advised to the beneficiary. The
123
any of the terms in the LC have to be changed then the concurrence
of all the parties would be necessary.
iv. With Recourse and Without Recourse Credits: When a
beneficiary draws a bill under a letter of credit, he is generally
liable to any negotiating LC bank if the drawee fails to make
payment under the Negotiable Instruments Act. In other words, his
liability is extinguished only on the drawee making payment. LC
calling for these kinds of bills is with recourse LCs. However, the
beneficiary can exclude this liability by adding to the bill the
following words 'without recourse', which means that the right
(recourse) against the drawer under the bill is not available to any
endorsee of the bill of exchange. This defence however is available
to the beneficiary only on the bills drawn by him. In case there is
any discrepancy in the documents submitted then the beneficiary
cannot avail any protection on a bill with the endorsement 'without
recourse'. However, as per the current guidelines from RBI, banks
are not supposed to accept any inland bill drawn 'without recourse'
for negotiation.
v. Transferable Credits: As stated earlier, a letter of credit is not a
negotiable instrument, though the bills of exchange drawn under it
are negotiable. As such, the rights under an LC cannot be
transferred and is vested in the beneficiary. A transferable credit is
124
Within the sweep of the strict compliance doctrine comes the duty
of a banker to "ensure that the documents tendered are strictly
those specified in the letter of credit. In this regard it would be
worth noting the observation given more than half a century back
by LORD SUMNER in Equitable Trust Co. vs Dawson Partners (27
Lloyds Law Reports 49).
There is no room for documents which are almost the same or
which will do just as well.
In this case, the credit required inter alia a certificate testifying to
125
iv. Bills of Lading: Bills of Lading are of two types - one, the
traditional ship bill of lading and the other, the 'Combined
Transport Bill': a creation of modern age containerisation of
shipments which permits more than one means of carriage and is
also known as 'Multimodal Transport'. Bill of lading is a document
to title to goods, i.e. they are representatives of the goods and
holder of the same is entitled to get possession of the goods. A bill
of lading, to a certain extent is negotiable inasmuch as a bona fide
transfer of the same by endorsement entitles the transferee the
right to the goods. A bill of lading is issued in sets of 2, 3, or 4 and
all are termed as originals. A banker should see that all the
originals are received. Unless otherwise specified in the letter of
credit, a bill of lading must be a 'shipped' bill of lading and a
'received for shipment' or 'transportation' bill of lading or a 'charter
party' bill of lading is not acceptable. This is because the shipped
bill indicates that the goods have been taken on board of a specified
ship and the journey has commenced while in the case of received
for shipment bill though the goods have been delivered to the
transporter the journey is yet to commence.
v. Airway Bill: This is a document, which evidences that the goods
126
The new UCP 600 also contains within the text the 12 Articles of
the eUCP, ICC's supplement to the UCP governing presentation of
documents in electronic or part-electronic form.
10.7 PAYMENT UNDER LETTER OF CREDIT - BANKS
OBLIGATION PRIMARY
127
II. In United Commercial Bank vs Bank of India (AIR 1981 SC
1426)
(i) Facts of the case: The question, considered by the Supreme
Court in this appeal was whether the Court should grant injunction
at the instance of the beneficiary of an irrevocable letter of credit,
restraining the issuing bank from recalling the amount paid under
reserve from the negotiating bank, acting on behalf of the
beneficiary, against a document of guarantee/indemnity at the
instance of the beneficiary.
Facts were rather complicated, but briefly, the relevant facts were
that G agreed to supply to B 1000 metric tonnes of 'Sizola Brand
Pure Mustard Oil'. A letter of credit was opened in favour of G by
the appellant bank. The goods were supplied in two lots. When the
documents were presented by G for payment of the amount against
first lot, the appellant bank refused to make payment except under
reserve on the ground of discrepancies in the documents presented
to it. The main discrepancy was that the goods were described in
the railway receipts as 'Sizola Brand Pure Mustard Oil
"Unrefined"'. Bank of India, under instructions of G, accepted
payment under reserve. Regarding the second lot, also payment
was made and accepted under guarantee in favour of United
Commercial Bank, whereby the Bank of India unconditionally
agreed to hold the United Commercial Bank harmless and
129
130
(ii) undertakes on its part the liability under the LC
(iii) undertakes to make timely delivery of the documents and
bills to the buyer or his bank
(iv) none of the above
(j) Reimbursing bank is the bank
(i) that reimburses the seller
(ii) that reimburses the negotiating/paying or confirmingbank
(iii) that reimburse the buyer on the goods being found defective
(iv) none of the above
3. Fill in the blanks.
(a) Ordinary letters of credit are usually , i.e. the bills drawn
hereunder have to be
paid immediately.
(b) Letter of credit under which usance bills can be drawn is
called an .
(c) In a revocable LC the credit can be amended or cancelled by
the .
(d) Only letters of credit can be confirmed.
(e) Credit in which the beneficiary is not liable for the bills
STRUCTURE
11.0 Objectives
11.1 Introduction
11.2 Purpose of Deferred Payment Guarantee
11.3 Method of Payment
11.4 Let Us Sum Up
11.5 Keywords
11.6 Check Your Progress
11.7 Answers to 'Check Your Progress'
132
11.0 OBJECTIVES
After studying this unit, you should be able to understand:
a deferred payment guarantee,
purpose of a deferred payment guarantee,
various methods of payment under a deferred payment
guarantee.
11.1 INTRODUCTION
Though we had touched this type of guarantee while studying bank
guarantees, we shall deal with it here in more detail, since this type
of a guarantee is regularly issued by banks. 'Deferred Payment
Guarantee' as the name itself suggests, is a guarantee that indicates
that deferred (postponed) payments. Suppose a bank's customer
were to import capital goods on a deferred payment credit where
133
134
(ii) A deferred payment guarantee is mostly based on a primary
contract between the buyer and
the seller, (iii) A deferred payment guarantee differs from other
kinds of guarantee issued by banks as
regards payment liability of the bank on invocation, (iv) In a
deferred payment guarantee the banks liability comes into
existence only if all the
instalments are not paid and not on the non-payment of any one
instalment by the customer.
11.7 ANSWERS TO CHECK YOUR PROGRESS
1. (i) False; (ii) True; (iii) False; (iv) False.
er and nks as
ill the tomer.
STRUCTURE
12.0 Objectives
12.1 Introduction
12.2 Class of Bills and Law Governing Bills
12.3 Classification of Bills
136
BEGUL/
12.0 OBJECTIVES
After studying this unit, you should be able to understand:
basic law relating to bill finance;
legal position of banker in case of bill finance.
12.1 INTRODUCTION
Bill finance is one of the modes of lending by a banker. As
compared to other modes of financing, Bill finance offers a banker
an easy mode of lending. From the banker's point of view, bill
finance has many advantages. Bill finance involves discounting or
purchase of commercial bills arising out of sale of goods. Bill
finance, as compared to cash credit and overdraft, has the following
advantages:
(a) The underlying transactions are easily identifiable
(b) There is definite date of repayment
(c) The bill will carry more than one signature if it is on usance
basis
(d) It represents an easily transferable asset and in case of need
the same can be rediscounted to
137
the apparent tenor of bill of exchange to the holder or holder in due
course in good faith and without negligence.
Section 14 'Negotiation': When a bill is transferred for
considerations to any person so as to entitle him to claim the
amount represented by bill, then such transfer is called
'Negotiation'.
Section 15 'Endorsement': If the holder of instrument signs the bill
of exchange for the purpose of transferring it, such signing is called
'Endorsement'.
Section 30 'Liability of Drawer': The drawer of a bill of exchange or
cheque is bound in the case of dishonour (failure to pay) by the
drawee or acceptor thereof, to compensate the holder, provided
due notice of dishonour has been given to, or received by, the
drawer.
Place
Inland bills
Period
3. Demand bills
4. Usance bills
Nature
1.
5. Clean bills
2. Foreign bills 4. Usance bills 6. Documentary bills
1. Inland Bills: Bills drawn or made in India and made payable
138
li
139
3. Advance Against Bills for Collection: When the bank advances
against the bills, which are in course of collection, the facility is
known as advance against bills for collection. Under this facility, a
prescribed margin is kept by the bank and the amount, in
consideration of this is allowed to the customer. The bill thereafter
is sent for collection.
In all these cases, the legal effect is that the banker, who lends
140
In the case of Morvi Merchantile Bank Ltd. vs Union of India
-^ rtrr? ATIM.
3. Bill purchase facility is granted in the case of demand bills.
(True /False)
4. facility is granted in the case of usance bills.
5. of the bill is bound in case of dishonour of bill.
STRUCTURE
13.0 Objectives
13.1 Introduction
13.2 Various Kinds of Securities
13.3 Let Us Sum Up
13.4 Keywords
13.5 Check Your Progress
144
13.0 OBJECTIVES
After studying this unit, you should be able to understand:
various kinds of securities;
advantages and disadvantages of the various securities.
13.1 INTRODUCTION
An advance made by a banker may be secured by a collateral
security. The effectiveness of a security would largely depend on
the nature of the security. The effectiveness of the securities can be
broadly classified on two aspects, the first being the economic
aspect, that is the marketability, valuation and other economic
factors that has a bearing on the value of the security. The other the
legal aspect is the validity and enforceability of the security. The
requisites of a good and acceptable security are as follows:
1. The borrower should have a good title to the security.
2. It should be easily and freely transferable.
3. It should not have any encumbrance or liability for, e.g.,
partly paid shares.
4. It should be easily marketable.
5. It should not be liable to wide price fluctuations.
6. Its value should be easily ascertainable.
7. Its storing should not be difficult.
8. It should be durable.
9. It should be easily transportable.
We shall now study the various kinds of securities in the light of
above requisites and understand their advantages and
145
146
(d) Latest sale transaction of neighbouring properties.
(e) Calculations based on the annual rental value.
(vi) Registration: Where the principal money secured is Rs. 100 or
more, a mortgage charge
is required to be registered unless the charge is an equitable
mortgage, (vii) Documentations: The mortgage deed must be
drafted carefully considering all the legal
stipulations. It should be witnessed by at least two persons. In case
of simple mortgage it
attracts ad-valorum stamp duty, (viii) Verification of Tax Receipts:
147
(ii) Updating the amount that can be lent against a particular share
148
(ii) There are possible risks of fraud or dishonesty on the part of the
borrower. For example, when 10,000 tins of cashew nuts are
shown in the godown as security for an advance, it is not possible
for the banker to verify the quality and quantity in every tin. It is
not even possible to verify whether all the 10,000 tins contain
cashew nuts. A fraudulent borrower may not store the full stocks as
declared in the godown.
(iii) The value of the security in certain cases more particularly
electronic consumer goods are subject to wide fluctuations.
Therefore, the valuation of such goods is difficult. Even in the case
of necessaries, there being several varieties, unless the banker has
expert knowledge, the valuation may be misleading. Disposing of
large quantities of goods within a short time may be difficult and
may not fetch the expected / declared price.
(iv) The banker may find it difficult to store the goods.
(v) Transporting the goods from the borrower's premises to the
banker's premises and thereafter to the market in case of sale is a
considerably costly and time-consuming affair.
(vi) When the banker releases goods for sale on the execution of
trust receipts, the money realised by the sale of such goods may not
be deposited with the banker and the borrowers may default to the
bankers.
(vii) If the goods are warehoused, the warehouse keeper enjoys a
lien over the goods for any unpaid charges. The banker therefore,
has to ensure periodically that all charges are duly paid.
Valuation of Goods
149
periods certificates regarding the quantity and valuation of the
goods, which should be physically verified by the banker.
Documents of Title to Goods: What are Documents of Title to
Goods?
As per the Section 2(4) of the Sale of Goods Act, 1930, a document
of title to goods is 'a document used in the ordinary course of
business as a proof of possession or control of goods authorising or
purporting to authorise either, by endorsement or delivery, the
possessor of the documents to transfer or receive the goods thereby
represented.' Thus, the essential requisites of a document of title to
goods are:
(i) The mere possession of the documents creates a right either by
virtue of law or trade usage,
to possess the goods represented by the documents, (ii) Goods
represented by the documents can be transferred by endorsement
and/or delivery of
the documents.
(iii) The transferee of the documents can take delivery of the goods
150
(v) In the case of lost documents, delivery of the goods is allowed
on the execution of an indemnity bond, this option may be misused
by the borrower by selling the goods to some other customer who
may take delivery of the goods declaring that he had lost/misplace
the document and indemnifying the carrier. To avoid such a
contingency, the banker can give notice to the carrier regarding his
interest and the pledge.
151
6.
152
(iii) The banker must serve notices of assignment on debtors, who
must be asked to acknowledge its receipt and confirm:
(a) The amount of the debt.
(b) His right of set off, if any, and
(c) Whether he has received notice of prior assignments, if any.
(iv) An undertaking from the borrower should be taken that the
amount of debts collected directly if any by him will be passed on to
the banker, towards the loan account and operations in account be
controlled to ensure this compliance.
(v) Where the book debts are as assigned by a joint stock company,
the charge must be registered with the Registrar of Joint Stock
Companies.
7. Fixed Deposit: When money deposited by a customer is not
repayable on demand and is payable on
the expiry of a specified period from the date of deposit such a
deposit is called a 'Fixed Deposit'.
The banker evidences a deposit by issuing a receipt known as fixed
deposit receipt. Interest is paid
at regular intervals at a specified rate on such deposits. Banks
usually permit depositors to borrow
against the deposit. This security is certainly the most valuable, as
153
payments based on work done, for which he has to submit bills in
accordance with the terms and conditions of the contract.
Similarly, parties who have accepted tenders for supply of goods
over a period are entitled to payments on the supply of goods, for
which they submit bills in accordance with the terms of the
contract. These bills are known as supply bills.
Procedure followed in respect of supply bills
(i) The supplier delivers the goods supported by a delivery challan
154
in the settlement of final bills, banks should prefer the interim bills
for advancing and final bills only for collection. Keep sufficient
margin to cover advance with interest thereon from proceeds to be
received.
(vi) Banker must reserve the right of demanding the repayment of
advance, if the bills remain unpaid for a specified period. The
banker, in other words, treats the bills as only items for collection
and the advances are recovered.
13.3 LET US SUM UP
The effectiveness of a security offered to a banker would largely
depend on the nature of the security, which includes its
marketability, valuation and other economic factors and certain
legal aspects, like the borrower's title, existing encumbrance or
liability attached to the security. The various kinds of normally
acceptable securities include land/real estate, stocks and shares,
debentures, goods, life policies, book debts, fixed deposit receipts
and supply bills.
The securities depending on their nature have various advantages
and disadvantages. The banker however, has to verify the worth of
the security and its readability, before accepting it. Of all the kinds
of security, fixed deposit receipt of the bank is the best and most
reliable compared to other forms of security. The security of goods
can be created either by pledging the goods directly or by pledging
STRUCTURE
14.0 Objectives
14.1 Introduction
14.2 Mortgage
14.3 Let Us Sum Up
14.4 Check Your Progress
14.5 Answers to 'Check Your Progress'
156
14.0 OBJECTIVES
After studying this unit, you should be able to understand:
various types of mortgages and law relating thereto;
essential features of various types of mortgages.
14.1 INTRODUCTION
When land/building is offered as a security, it is charged to the
bank by a mortgage. Mortgages are of six kinds, though as a banker
you would be dealing in only three of them. The law, relating to
iOf
02 of
he
he
id
157
158
mortgagor fails to sue for redemption within thirty years, the
mortgagee becomes the absolute owner of the property.
Bankers do not prefer this form of mortgage for the following
reasons:
(i) There is no personal covenant to repay the debt.
(ii) As the mortgaged money can be recovered only by the
appropriation of rents and/or profits, it will take a very long time to
recover money through this process.
English Mortgage
According to Section 58(e) of the Transfer of Property Act, an
'English Mortgage' is a transaction in which, the mortgagor binds
himself 'to repay the mortgage money on a certain date and
transfers the mortgaged property absolutely to the mortgagee, but
subject to the provision that he will retransfer it to the mortgagor
upon payment of the mortgage money as agreed'.
159
(iii) Anomalous mortgages are usually a combination of two
mortgages. Examples of such mortgages are:
(a) a simple and usufructuary mortgage, and
(b) an usufructuary mortgage accompanied by conditional sale.
There may be other forms,
Pledge Mortgage
Pledgee acquires only a limited interest in the property and
ownership remains with the right of pledger.
The Pawnee has 'special property' in the goods pledged and can sell
the same in the event of default by the pledger of course, after
giving reasonable notice. Pawnee has no right of foreclosure. He
can only sell the property to realise his dues. Here the legal
ownership passes to mortgagee, of course, subject to the mortgagor
to redeem the property. The mortgagee as a rule takes decree of a
Court of Law before having recourse against the property
mortgaged. In certain cases, the mortgagee can foreclose the
property.
5. Priority of Mortgages: Indian Law of Priorities is provided in
Section 48 of the Transfer of Property Act. The rule is based on
maxim 'He has a better title who was first in point of time.' It lays
the
160
general rule regarding priority of rights created by transfer by a
person at different times in or over the same immoveable property
and provides that, as between such rights, each later created right
is subject to the rights previously created. We may further see, as
how the rule of priorities operate in respect of different
instruments creating mortgages.
(a) Priority among registered instruments: Section 47 of the
Registration Act, 1908 provides
that a registered document operates, not from the date of its
registration, but from the time
of its execution. Thus, a document executed earlier, though
registered later than another,
has priority over the documents executed later.
(b) Priority between registered and unregistered instruments:
Let us now deal with the exceptions
to the rule that priority is determined by order of time which either
have been created by
statute or owe their origin to the ancient rule of Hindu Law, which
required delivery of
possession in the case of a security of land. There are also some
exceptions recognised in
the Indian system founded upon those general principles of justice
and equity, which in the
absence of any express enactment, Indian judges are bound to
administer, and which have
been mostly borrowed from the English Law.
161
2. Transfer of Property Act, contemplates six types of
mortgages, they are:
(a) Simple mortgage(b) Mortgage by conditional sale
(c) Usufructuary mortgage (d) English mortgage
(e) Mortgage by deposit of title deeds (f) Anomalous mortgage
3. In Simple mortgage, the mortgage is by deposit of title deeds
and in English mortgage, the
possession of the mortgaged properties is not given to the
mortgagee.
4. In usufructuary mortgage and in mortgage by conditional
1. Mortgage is
in the immoveable property.
2. Simple mortgage is created by an instrument in writing.
(True/False)
3. Mortgage by deposit of title deeds is required to be
registered. (True/False)
4. In the case of usufructuary mortgage the possession of the
properties is given. (True/False)
5. In mortgage by way of conditional sale the property is sold
with a condition for re-conveyance.
(True/False)
6. All successive mortgages created will rank equally and no
mortgage will have a greater priority
over the other. (True/False)
7. To decide as to which mortgage will have priority over the
other in the case of two or more
mortgages on the same immoveable property, the date of
mortgage is pertinent.
8. Limitation period for filing a suit for sale of mortgaged
properties is years from the
date the mortgage debt becomes due.
9. Mortgage suits are filed in the Court within whose
jurisdiction the mortgagee resides. (True/
False)
14.5 ANSWERS TO CHECK YOUR PROGRESS'
STRUCTURE
15.0 Objectives
15.1 Introduction
15.2 Pledge
15.3 Hypothecation
15.4 Let Us Sum Up
15.5 Check Your Progress
15.6 Answers to 'Check Your Progress'
164
15.0 OBJECTIVES
After studying this unit, you should be able to understand:
the law relating to security of pledge and hypothecation;
basic features of pledge and hypothecation.
15.1 INTRODUCTION
A banker, in his business of lending takes security of pledge and
hypothecation of moveable goods to secure cash credit and
overdraft. These are popular securities obtained by a banker. In
this unit, we will learn about the law relating to security of pledge
and hypothecation.
15.2 PLEDGE
165
key of the warehouse where the goods are stored or something may
be done which is equivalent to delivery that is keeping of goods
without any actual delivery, as if the pawnee has the possession or
effect of possession.
(c) Pledge can be created only in the case of existing goods
166
4.
167
5.
6.
(d) When the goods are pledged, there is the implied condition that
the pawnor has title to the goods pledged. However, in practice the
banker obtains the pawnor's signature to a document known as an
agreement of pledge. The following are the important points
usually covered in the document:
(i) The pledge is in respect of all the goods delivered and upon all
documents of title to
goods deposited by the pawnor (ii) A declaration that the securities
deposited would cover the existing and future debt,
interest and expenses (iii) The letter stipulates that it will be a
continuing security without the operation of the
rule in Clayton's case, (iv) Pawnors title to the security is clear, that
the goods will be insured adequately at his
expense and that sufficient margin will be maintained as agreed
upon, (v) A promise to pay all the money secured by the pledge on
demand, and in the case of
default in repayment, the bank to have the right of sale, (vi) Where
the pawnor fails to insure the goods, the banker reserves the right
to effect
such insurance and debit the premium and other charges to the
account of the customer, (vii) A declaration by the pawnor not to
hold the bank responsible for the default of any
broker employed to sell the goods. The pawnor undertakes to pay
the rent and other
charges incidental to warehousing, (viii) The banker reserves the
right of general lien and nothing in the agreement, shall be
construed as excluding such right, (ix) The pawnor undertakes to
168
7. Cases Relating to Pledge
(a) Morvi Mercantile Bank Ltd. vs Union of India AIR 1965 SC
1954. In this case M/s Harshadrai
Mohanlal & Co., a firm, entrusted on 4 Octobe, 1949 to GIP
Railway, 4 boxes of menthol
crystals belonging to the firm for transport from Thane to Okhla
near Delhi. Further, on 11
October 1949 the firm sent two more boxes to Okhla from Thane
through the railways. The
firm was issued railway receipts. The firm endorsed the railway
receipts in favour of Morvi
Mercantile Bank. On failure of railways to deliver the goods, the
bank, claiming as an endorsee
of the railway receipts for valuable consideration, filed a suit
against railways for recovery of
169
15.3 HYPOTHECATION
Until recently there was no legislative definition of the term
'hypothecation'. This term came to be defined in the S ARFAESI
Act, 2002. As per the definition contained in the Act, the term
'Hypothecation' means a charge in or upon any moveable property,
existing or future, created by a borrower in favour of a secured
creditor, without delivery of possession of the moveable property to
such creditor, as a security for financial assistance and includes
floating charge and crystallisation of such charge into fixed charge
on moveable property.
The mortgage of moveable property is called 'Hypothecation'. It
may be described as 'a transaction whereby money is borrowed by
the debtor (owner of the goods) on the security of the moveable
property without transferring either the property or the possession
to the creditor'. Hart describes hypothecation as 'a charge against
property for an amount of debt where neither ownership nor
possession is passed to the creditor'. Hypothecation differs from
pledge because goods remain in the possession of the borrower and
are equitably charged in favour of the creditor under documents
signed by the borrower. However, the document provides for a
170
(e) According to Section 534 of the Companies Act, 1956, any
floating charge on the undertaking or property of the company
created within a period of twelve months preceding the
commencement of the winding up, becomes invalid under certain
circumstances.
2. Precautions to be taken in the case of Hypothecation: Although
171
(h) The bank reserves the right to call upon the borrower to pay to
the bank the loan amount together with interest and other charges
STRUCTURE
16.0 Objectives
16.1 Introduction
16.2 T^pes of Borrowers
16.3 Let Us Sum Up
16.4 Keywords
16.5 Check Your Progress
16.6 Answers to 'Check Your Progress'
175
In our country there are various businesses and economic activities
conducted by a single person which are called sole proprietary
concerns. In the eyes of the law there is no distinction between the
assets and liabilities of the person and the business conducted in
the name of the sole proprietor.
2. Partnership Firm: 'Partnership Firm' is another entity with
which a banker deals within the course of his business. The Indian
Partnership Act, 1932 governs the 'Partnership Firm'. Section 4 of
the Act says, that a partnership is the relation between persons who
have agreed to share the profits of a business, carried on by all or
any of them acting for all. The relationship between the partners is
governed by partnership deed.
Legal position of a partnership
A partnership is not distinct from its partners. Under the law, the
name of a partnership firm, is regarded as an abbreviation of the
names of partners. The Indian Partnership Act, 1932, provides for
registration of a partnership and it is necessary that a banker
dealing with a partnership firm should verify as to whether the firm
is registered or not. This would help him know all the names of
partners and their relationship.
Authority of the partners
Section 19 of the Indian Partnership Act, 1932 deals with the
implied authority of a partner as an agent of the firm and Section
22 deals with the mode of doing acts to bind the firm. In view of the
provisions of Sections 19 and 22, it should be noted that the acts of
176
Insolvency of the partner
If at the time of insolvency of one of the partners, the firm's
account is in credit then the other partners can operate the same,
but the banker should obtain a fresh mandate and all previous
cheques issued by the insolvent partner may be paid provided the
other partners confirm the same. In case, the account is in debit
then further transactions in the account should be stopped so that
the rule in Clayton's case does not apply.
Death of a partner
In case of death, the principles as stated in Insolvency of a partner
applies. Since the death of a partner dissolves the partnership firm,
upon receipt of such information, banks are required to stop the
transactions of the firm in a running credit facility like cash credit,
overdraft to crystllise the liability of the deceased partner and make
his/her estate liable for its dues. Banks allow the transactions in a
separate account so that the business of the firm is not adversely
affected.
3. Hindu Undivided Family: 'Hindu Undivided Family' otherwise
177
Powers
(a) Right to possession and management of the joint family
property
(b) Right to income from the joint family property
(c) Right to represent the joint family
(d) Right to sell the joint family property for family purpose.
Duties
(a) Duty to run the family business and manage the property for
the benefit of the family
(b) Duty to account for the income from the joint family
business and property.
178
They define the powers of the officers of the company. Articles of
Association are subordinate to Memorandum of Association and it
contains the following details among other things:
(a) Number of directors of the company
(b) Procedure for conducting meetings of the shareholders,
ite to
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180
16.5 CHECK YOUR PROGRESS
um
:nt;
STRUCTURE
17.0 Objectives
17.1 Introduction
17.2 Types of Credit Facilities
17.3 Cash Credit and Overdraft
17.4 Term/Demand Loans
17.5 Bill Finance
17.6 Let Us Sum Up
17.7 Check Your Progress
17.8 Answers to 'Check Your Progress'
182
17.0 OBJECTIVES
After studying this unit, you should be able to understand:
various types of credit facilities and the laws governing
them;
laws affecting credit facilities granted by the bank.
17.1 INTRODUCTION
Lending is a principal activity of a bank. The advances portfolio of a
bank indicates its dynamic personality. A banker to grow in the
business of banking should have a thorough knowledge of the
183
whole of the amount up to the limit as the same may not required
from day one, but can draw such amounts as and when required.
Cash credit/overdraft is a contract of a loan between a bank and its
borrower. The contract of cash credit or overdraft can be express or
implied.
In the case of Bank of Maharashtra vs United Construction Co. &
184
11
185
Non-Fund Based Facilities
In the business of lending, a banker also extends non-fund based
facilities. Non-fund based facilities do not involve an immediate
outflow of funds. The banker undertakes a risk to pay the amounts
on happening of a contingency. Non-fund based facilities can be of
following types among other:
(a) Guarantee facility; (b) Letter of credit facility;
(c) Underwriting and credit guarantee.
(a) Guarantee facility: The banker in his business of lending
186
STRUCTURE
18.0 Objectives
18.1 Introduction
18.2 What are 'Unsecured Loans' and 'Secured Loans'?
18.3 Why a Secured Loan?
18.4 Registration of Firms
18.5 Consequences of Non-registration of Firm
18.6 Incorporation of a Company
18.7 Let Us Sum Up
188
18.0 OBJECTIVES
After studying this unit, you should be able to understand:
what is a secured and unsecured loan;
the law governing bankers' securities;
the procedure for registration of firms and incorporation of
companies.
18.1 INTRODUCTION
In the earlier units, we have studied about type of borrowers, credit
facilities and the laws governing them. In this unit, we will
endeavour to understand the securities for bank's lending business,
legal status of a banker in the case of unsecured loans, and more
about law relating to partnership firms and companies, their
registration and incorporation.
18.2 WHAT ARE 'UNSECURED LOANS' AND 'SECURED
LOANS'?
Unsecured Loans
Most of the loans granted by banks in India are generally secured
by tangible security being assets purchased out of the bank funds
and/or some valuable collateral such as bonds, shares and
merchandise deposited either in the bank's godowns or in the
godowns of the borrowers under agreement of hypothecation, and
immoveable property, but occasionally loans are granted even
without any security.
An unsecured loan is one for which the banker has to rely upon the
ib'U
Section 63 provides for the recording of a change in and the
dissolution of a firm and also the recording of withdrawal of a
)rding n that
ter of i him.
:d the bring ssion ation rtain sion.
strar ntial
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vas
ion or lot or
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191
instituted in any Court, by or on behalf of any person suing as a
partner in a firm against the firm or against any other partner of
the firm. This prohibition applies to the claim of set off or other
proceeding to enforce a right arising from a contract.
The Supreme Court in the case of Loon Karan Sethia (AIR 1977 SC
336) has held that this provision for registration is mandatory in
character and its effect is to render a suit by the plaintiff in respect
of a right vested in him or required by him under contract, which
he entered into as a partner of a unregistered firm, whether
existing, or dissolved as void. In other words, a partner of an
erstwhile un-registered partnership firm cannot bring a suit to
enforce a right arising out of a contract falling within the ambit of
192
18.6 INCORPORATION OF A COMPANY
We have seen in the earlier units that among others 'company' is
193
(iii) The shares of joint stock companies are freely transferable and
in the case of a private limited company, the Companies Act has
put certain restrictions on the transferability of shares. Every
member who owns fully paid-up shares is free to dispose of his
shares according to his choice but subject to any regulation of the
company. Any absolute bar or restriction on the right to transfer
shares is void.
(iv) The member's/shareholder's liability in a company is limited to
the extent of the nominal value of the shares held by them. Under
no circumstance, is a member/shareholder directed to pay
anything more than the unpaid value of his shares. As regards a
company limited by guarantee, the members are liable only to the
extent of the amount guaranteed by them and not beyond and that
too only when the company goes into liquidation.
(v) As a corporate person, a company is entitled to own and hold
property in its own name.
(vi) A company being a body corporate can sue and be sued in its
own name.
194
(d) Articles of Association: The other important document of a
company is the articles of association,
which contains the rules and regulations relating to the internal
195
Though the certificate of incorporation makes the existence of a
company legally valid, it does not mean that the certificate legalises
an illegal object mentioned in the memorandum. In fact, it is for
the purpose of incorporation only that the certificate is made
conclusive by law.
(h) Certificate of Commencement of Business: Once a certificate of
196
company or a private company, as described above, following must
however be noted in this regard:
In the memorandum of association of such a company, a
clause stating the amount of guarantee
will have to be added in addition to the other necessary clauses to
this effect.
A guarantee company may be a company with the share
capital or without the share capital.
A company formed with no intention to generate profit is
usually formed as a guarantee
company.
A company limited by guarantee can either be a private or a
public company.
18.7 LET US SUM UP
1. An insecured loan is one for which the banker has to rely
upon the personal security of the
borrower.
STRUCTURE
19.0 Objectives
19.1 Introduction
19.2 What is a Charge?
19.3 Procedure for Registration of Charge
19.4 Effect of Non-registration of Charges
198
19.0 OBJECTIVES
After studying this unit, you should be able to briefly understand:
the creation of charge over the properties, registration of
charges under different enactments;
registration of charges with the various authorities.
19.1 INTRODUCTION
We have seen in earlier units, the types of loans granted by a
banker and methods of securing a loan. In this unit, we will focus
on the meaning of 'charge' under the Companies Act and
registration of charges.
19.2 WHAT IS A CHARGE?
1. Before studying the meaning of word 'charge' and provisions
relating to the registration of charges, we will learn the general
meaning of the word 'charge'.
It may be noted that the word 'charge' is used to mean any form of
security for debt, unless the word is used otherwise. We have seen
in the earlier chapters, that a banker accepts different types of
securities to secure a loan granted to borrowers. Section 125(4) of
the Companies Act, 1956 provides, that for the purpose of
registration under the said Act, it includes all the following charges:
(a) A charge for the purpose of securing debentures
(b) A charge on uncalled capital of the company
199
From the above, it can be noted that when the charge is floating,
the company may, in the ordinary course of business, deal with the
property in any manner until the charge attaches. In other words, a
floating charge is an equitable charge which does not fasten on any
specific property but covers the whole of the company's property
whether it is or is not subject to fixed charge.
When floating charge becomes fixed or crystallised/attaches
When the debtor company ceases to carry on business or goes into
liquidation or the debenture holder or creditor, in whose favour
charge is created, intervenes by getting a receiver appointed or
doing some other act which affects the powers of the company to
dispose the assets charged. A floating charge may also crystallise on
the happening of an event specified in the creating a charge deed.
Effect of floating charge becoming fixed or crystallised
When a floating security upon all the property or assets of the
company becomes fixed, it constitutes a charge upon all the
property or assets then belonging to the company. It has priority
200
19.5 PROVISIONS OF LAW RELATING TO REGISTRATION OF
CHARGES
Sections 124 to 145 of the Companies Act, 1956 provides for the
registration of charges. They can be stated briefly as follows:
Section 124: This Section provides that 'charge' means and includes
mortgage over any or all properties of the company.
Section 125: This Section provides that the charge created over the
properties of the company shall be registered with the Registrar of
Companies within thirty days of creation of charge. It also provides
that if the charge is not registered then the charge created would be
invalid as against the liquidator and other creditor of the company
in its winding up.
201
Section 138: Under this Section, the company shall give intimation
to the Registrar of the payment or satisfaction in full, of any charge,
relating to the company and requiring registration under this part,
within thirty days from the date of such payment or satisfaction.
Thereafter the Registrar of Companies shall record such
MODULE -C
BANKING RELATED LAWS
204
206
20.0 OBJECTIVE
The objective, of this unit is to see why there was a need for the
new legislation, viz., Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest, 2002 (SARFAESI Act
2002) and why it was enacted. The Act has created a new legal
framework, new concepts about security and new procedures for
recovery of dues by banks and financial institutions.
20.1 INTRODUCTION
1. Banks and Financial institutions lend money by obtaining
security, except for the category of clean
loans. The security obtained is to act as a protection for the money
advanced and in the case of
need, the money can be realised by the sale of securities.
2. The lender's rights over the securities, both moveable and
immoveable, for realisation of the
amount advanced, were limited and less effective since they were
required to take help of the legal
208
(b) To mortgage securities only.
(c) Where the security interests are created for repayment of
financial assistance given by the
bank or a financial institution.
(d) To the properties owned by the defaulter borrower, but
those that are not charged to the
bank.
4. In the Mardia case what did the Supreme Court declared as
invalid?
(a) Entire SARFAESI Act, 2002.
(b) Creation of security interest.
(c) Formation of Reconstruction Companies.
(d) Condition to pay seventy-five per cent of the amounts as
pre-condition while preferring
appeal to the DRT.
Ans. I. (b); 2. (b); 3. (c); 4. (d).
UNIT
21
STRUCTURE
21.0 Objective
211
21.0 OBJECTIVE
The objectives of this unit, are to understand:
The purpose of enacting the Act;
Important definitions given in the SARFAESI Act, 2002.
21.1 INTRODUCTION
For any Act, different concepts and effects revolve mainly around
certain defined words. The Act also takes some definitions from
some other Acts, to the extent it is relevant and applicable. The
preamble to the Act gives in a nutshell, the purpose of the
enactment.
21.2 PREAMBLE
212
(iv) a person who becomes the borrower of a securitisation
company or reconstruction company, consequent upon acquisition
by it of any right or interest of any bank or financial institution, in
relation to such financial assistance.
21.8 CENTRAL REGISTRY
Under this Act, 'Central Registry' means the registering office, set
up or caused to be set up by the Central Government. With this
proposed set up, all the transactions of asset securitisation,
reconstruction as well as transactions of creation of security
interests, will have to be registered with this authority. The
registration system will operate on a priority of registration basis,
i.e., first in time to register gets priority over the person doing
registration at a later time. The registry will also serve the purpose
of maintaining credit information for the lenders.
21.9 DEBT RECOVERY TRIBUNAL
These tribunals were established under the Recovery of Debts Due
to Banks and Financial Institutions Act, 1993, to deal with the cases
of recovery of debts above Rs. 10 lakh due to the banks and
financial institutions.
21.10 DEFAULT
1. When the borrower does not pay any principal debt or any
213
21.13 FINANCIAL INSTITUTION
The financial institution means:
(i) A public financial institution within the meaning of the
Companies Act, 1956.
(ii) Any institution specified by the Central Government under the
Recovery of Debts due to Bank
and Financial Institutions Act, 1993. (iii) The 'International
Finance Corporation', established under the International Finance
Corporation
(Status, Immunities and Privileges) Act, 1958. (iv) Any other
institution or non-banking financial company as defined in the
Reserve Bank of India
Act, 1934, which the Central Government may specify as a financial
institution for the purpose
of this Act.
21.14 HYPOTHECATION
1. Hypothecation means:
a charge in or upon any moveable property
21.16 ORIGINATOR
Originator is the owner of a financial asset that is acquired by a
securitisation company or reconstruction company for the purpose
of securitisation or asset reconstruction. In plain meaning, when
the bank or financial institution lends money against security they
are the originator.
21.17 OBLIGOR
214
21.18 PROPERTY
1. Property means:
(i) Immoveable property, (ii) Moveable property,
(iii) Any debt or any right to receive payment of money whether
secured or insecured, (iv) Receivables, whether existing or future,
(v) Intangible assets such as; know-how, patents, copyright,
trademarks, licence, franchise or any other business or commercial
right of a similar nature.
2. Definition of property is made much wider by this Act. Prior
to this Act, property has been defined
under various Acts such as Transfer of Property Act, Registration
Act, etc. By this Act, the addition
of properties stated at sub-clauses (iii), (iv) and (v) here above is
made. Due to this, now security
interest can be created against these properties for raising loans
from the banks and financial
institutions.
21.19 QUALIFIED INSTITUTIONAL BUYER
1. Such buyer means a financial institution or an insurance
215
any security. Now SARFAESI Act has made the loans secured by
mortgage or other charges transferable.
On acquisition of a financial asset, the securitisation or
reconstruction company becomes the owner of the financial asset
and steps into the shoes of the lender bank or financial institution.
This acquisition can also be said to be, as a sale of asset without
recourse to the bank or financial institution. RBI is the regulatory
authority for all securitisation or reconstruction companies.
3. As per present guidelines of 29 March, 2004, the minimum
capital requirement for the securitisation or reconstruction
company is Rs. 2.00 crore at the time of registration and these
companies are required to maintain capital adequacy of fifteen per
216
The type of interest depends on the nature of charge created over
the security. Until now, such interest of the lender in the security
was not defined in any law. SARFAESI Act has, for the first time
defined this. Now, any type of charge or any type of security has
come under one wide scoped definition, called the security interest.
21.29 SECURITY RECEIPT
1. A receipt or another security issued by a securitisation
company or reconstruction company to any
qualified institutional buyer pursuant to a scheme evidencing the
purchase or acquisition by the
holder thereof of an undivided right, title or interest in the financial
asset involved in securitisation
217
21.33 ANSWERS TO 'CHECK YOUR PROGRESS'
1. False; 2. False; 3. in possession, NPA; 4. Sixty, take possession; 5.
True; 6. True; 7. False.
21.34 MULTIPLE CHOICE TERMINAL QUESTIONS
1. When any bank or financial institution obtains a charge
against property, with which authority
STRUCTURE
22.0 Objectives
22.1 Introduction
22.2 Registration of Securitisation Company or Reconstruction
Company
22.3 Cancellation of Certificate of Registration
22.4 Acquisition of Rights or Interest in Financial Assets
22.5 Notices to Obligor and Discharge of Obligation of Such
Obligor
22.6 Issue of Security Receipts and Raising of Funds by
Securitisation Company or
Reconstruction Company
22.7 Exemption from Registration of Security Receipt
22.8 Measures of Assets Reconstruction
22.9 Other Functions of Securitisation Company or
Reconstruction Company
22.10 Resolution of Dispute
22.11 Power of Reserve Bank to Determine Policy and Issue
Directions
22.12 Let Us Sum Up
22.13 Keywords
220
22.0 OBJECTIVE
The objective of this unit is to understand the regulatory
framework, in which the securitisation and reconstruction
companies are required to work, how they have to raise the funds,
acquisition of assets and other such functional modalities.
22.1 INTRODUCTION
The SARFAESI Act has streamlined the functions of the
securitisation and reconstruction companies for dealing with
financial assets of banks and financial institutions. For this
purpose, procedures as well and regulatory control measures were
required. In this unit we will consider these aspects.
22.2 REGISTRATION OFSECURITISATION COMPANY
OR RECONSTRUCTION COMPANY
1. The securitisation or reconstruction company can
commence or carry business, only after complying
the following two conditions:
(i) It obtains certification of registration from the Reserve Bank of
India by applying in prescribed
format; and (ii) It has the owned funds at the time of registration
not less than Rs. 2 crore or such other
amount not exceeding fifteen per cent of the total financial assets
acquired or to be acquired
as the RBI may specify.
221
22.3 CANCELLATION OF CERTIFICATE OF REGISTRATION
1. The registration granted to the securitisation or the
reconstruction company by the Reserve Bank
of India is cancellable on following grounds:
(i) The company ceases to carry on the business of securitisation or
asset reconstruction, or (ii) The company ceases to receive or hold
any investment from a qualified institutional buyer,
or (iii) The company fails to comply with any of the conditions
subject to which the certificate of
registration was granted, or (iv) The company fails to,
(a) comply with any of the directions issued by the Reserve
Bank, or
222
223
225
226
22.9 OTHER FUNCTIONS OF THE SECURITISATION
COMPANY
OR RECONSTRUCTION COMPANY
1. Any securitisation company or reconstruction company
registered under the SARFAESI Act may,
(i) Act as an agent for any bank or financial institution for the
purpose of recovering their dues from the borrower on payment of
fees or charges as may be mutually agreed upon between them.
(ii) Act as a manager for the secured assets, of which the possession
is taken by any bank or financial institution for such bank or
financial institution on fees as may be mutually agreed upon
between the parties. However, if acting such as manager gives rise
to any pecuniary liability on the securitisation or reconstruction
company, then no such acting as manager can be done.
(iii) Act as receiver if appointed by any Court or Tribunal.
2. The securitisation company or reconstruction company can
act as stated above without the prior
approval of the Reserve Bank of India. For any other acts as well as
business other than securitisation
or asset reconstruction prior approval of the Reserve Bank of India
is required.
227
(iv) Capital adequacy based on risk weights for the assets,
(v) Deployment of funds by the said companies.
Whenever, the Reserve Bank of India decides the policy, and issues
directions, the securitisation company or the reconstruction
company is bound to follow the same as it has a statutory effect.
3. In addition to the above stated powers vested with the RBI
for making policy or giving directions
generally, the RBI has the powers to make policy or issue directions
to any particular securitisation
or reconstruction company or a class of such companies or all such
companies. In such cases, in
addition to the aspects given above, on which the policy can be
228
22.12 LET US SUM UP
229
(a) They are automatically deemed to be registered.
(b) They are required to stop functioning.
(c) Existing companies do not require registration
(d) They have to get registered within six months from the
commencement of the Act.
2. Which, from amongst the following, is a reason for the
cancellation of registration of the securitisation company and
reconstruction company without giving a hearing opportunity?
(a) The company does not keep accounts as per the RBI norms.
(b) The company ceases to carry on the business of
securitisation or reconstruction.
(c) The company fails to hold investment from the qualified
investor.
(d) The company does not fulfil any of the conditions imposed
at the time of registration.
Ans. 1. (d); 2. (b).
UNIT
23
232
23.0 OBJECTIVES
We know that when immoveable property is obtained as security by
way of mortgage for its sale and realisation of money, Court
intervention is required. Similarly, in the case of moveable
property also, except for the pledged security, Court intervention is
required for sale of property and realisation of money. Now with
the provision of this Act, there are changes in the procedures for
sale of securities. The creditor can also take the help of the District
Magistrate or the Chief Metropolitan Magistrate. We will see all
233
4. The Act does not Contemplate a reply from the borrower to
the notice. But the borrower may reply
or make representation to the notice, so received by him. The
Supreme Court in Mardia Chemicals
Ltd. case, has laid down certain guidelines about what the bank or
the financial institution should
do when the borrower submits any reply or representation to the
said notice. These guidelines
broadly are as under:
(i) The secured creditor must apply his mind to the objection raised
by the borrower in reply or representation to the notice served on
him by the secured creditor.
(ii) An internal mechanism must be particularly evolved to
consider the reply of the borrower.
(iii) There may be some meaningful consideration in the objection
raised by the borrower and the rejection of the points raised by the
borrower should not be ritually followed by execution of drastic
action under the Act.
(iv) The reasons for overriding the objections of the borrower must
be communicated to him by the secured creditor.
(v) While directing that the reasons for the rejection must be
conveyed to the borrower, the Supreme Court has clarified that the
communication to the borrower giving the reasons for not
accepting the objections of the borrower does not give an occasion
234
(i) Firstly, towards costs, charges and expenses incidental towards
preservation and protection of securities, insurance premiums,
etc., that are recoverable from the borrower.
(ii) Secondly, towards the due of the secured creditors.
(iii) Thirdly, if there is any surplus it will be paid to the person
entitled thereto, in accordance with the right and interests.
The above stated order of payment thus gives the right of secured
creditors to realise their securities in preference to all other
creditors and even the other preferential payments like the dues
235
12. When the borrower receives the notice from the creditor
under Section 13(2), the borrower shall
not transfer by way of sale, lease or otherwise, other than in the
ordinary course of business, any
of his secured assets referred to in the notice without prior written
consent of the secured creditor.
Non-compliance with this provision attracts penal provisions
under the SARFAESI Act that provide
for punishment of imprisonment of one year or fine or both.
13. The provision of Section 13 at different sub-sections gives
power to the secured creditor for
taking the security into possession and then sell the same. This
entire process involves several
236
the secured creditor can take the help of the Chief Metropolitan
Magistrate or the District Magistrate. For seeking such help the
secured creditor has to make a request in writing to the said
authority within whose jurisdiction the secured asset or documents
related to it are situated.
2. On such request being made the Chief Metropolitan Magistrate
or the District Magistrate, as the case may be, shall take possession
of the security asset and documents relating thereto.
For compliance of the provisions of the Act as stated above, the
Metropolitan Magistrate or the District Magistrate may take or
cause to be taken such steps and use or cause to be used such force
as may be in his opinion necessary. Any act of the Metropolitan
Magistrate or the District Magistrate for and while taking
possession of the security shall not be called in question in any
Court or before any authority.
A very important aspect of these provisions is that the powers of
taking possession, or causing the same, are given to the judicial
authority, who will take the possession and hand it over to the
secured creditor.
23.4 MANNER AND EFFECT OF TAKE OVER OF
MANAGEMENT
1. When the secured creditor takes over the management of
business of a borrower, he may publish
a notice in a newspaper published in the English language and in a
237
5. Where the management of the business of a borrower has been
taken over by 'the secured creditor', on realisation of the debt in
full the secured creditor shall restore the management of the
business of the borrower to him.
238
2. No pecuniary limit is fixed by the Act for the appellate
jurisdiction. The jurisdiction of the DRT is Rs. 10 lakh and above
under the Recovery of Debts due to Banks and Financial
Institutions Act, 1993. However, the SARFAESI Act does not
provide any pecuniary limit. Therefore, appeal before the DRT
against the actions initiated by the secured creditors in cases even
below Rs. 10 lakh would lie.
23.9 LET US SUM UP
In this chapter, we have seen the details about enforcement of
securities by banks and financial institutions and the procedural
requirements thereof. We have discussed how, on default being
committed by the borrower, the creditor can enforce the securities
as per provisions of the Act. For this no Court intervention is
required as earlier. The service of notice calling for payment and on
failing to pay, the creditor can invoke the provisions for the take
over of the asset/management. After the notice, transfer by the
borrower is prohibited. The reply to the notice needs consideration
on lines with Supreme Court directions as in Mardia case. Creditor
can also call for payment due to the borrower from a third party.
For the remaining dues after sale of assets, the remedy at Civil
239
)RTis
is Act, before )lakh
itions
iy the
:ourt
Y, the
nsfer
lourt
)arty.
tfion.
ision
:hief
aken
(a) Ignore the notice as the law does not provide for any reply
option to the bank.
(b) Wait until the borrower initiates any legal action based on
his reply.
(c) Give due consideration to the reply as per the guidelines
issued in the Mardia Chemical case
by the Supreme Court and reply to it.
(d) Take the matter before DRT for resolving issues raised in the
reply.
2. On sale of the security asset, the sale proceeds are appropriated
firstly.
(a) Towards the satisfaction of dues of secured creditor.
(b) Towards the payment of dues of labour.
(c) Towards payment of cost, charges and expenses for the
preservation and protection of
securities, insurance premiums, etc.
(d) Towards payment of legal costs incurred by the creditor for
taking possession and for
effecting sale.
Ans. 1. (c); 2. (c).
s of
ion
CENTRAL REGISTRY
STRUCTURE
24.0 Objectives
24.1 Introduction
24.2 Central Registry
24.3 Central Registrar
24.4 Register of Securitisation, Reconstruction and Security
Interest Transactions
24.5 Filing of Transactions of Securitisation, Reconstruction and
Creation of Security Interest
24.6 Modification of Security Interest Registered
24.7 Satisfaction of Security Interest
24.8 Right to Inspect Particulars of Securitisation,
Reconstruction of Security Interest
Transactions
24.9 Let Us Sum Up
24.10 Keyword
24.11 Check Your Progress
24.12 Answers to 'Check Your Progress'
24.13 Multiple Choice Terminal Questions
242
24.0 OBJECTIVES
The SARFAESI Act has brought in a new concept of security and
the enforcement of security. For a proper noting and registering of
the charges created in favour of the secured creditors against the
properties that would eventually be enforced, the charges created
need to be noted with authority. It is like the charges noted with
the Registrar of Companies in case of charges created against the
property of the Company. This unit deals with the central registry
created under the SARFAESI Act.
24.1 INTRODUCTION
The creation of a security interest in property has gained
importance and significance with the provisions of the SARFAESI
Act. It has given various powers to the creditor. The securitisation
and reconstruction companies will be carrying on transactions of a
different nature in accordance with the provisions of the Act.
Therefore, both of these need an authentic registration. In this
unit, we will see about the central registry with whom the
transactions above and the creation of charges over security will be
required to be registered. In this unit, we will see the provisions
about the same.
24.2 CENTRAL REGISTRY
1. The Central Government is authorised to set up or cause to
be set up a 'Central Registry' by issue
of notification from such date as may be specified in the
notification for the purpose of registration
of following transactions:
243
(i) Securitisation of financial assets,
(ii) Reconstruction of financial assets,
(iii) Creation of security interests shall be maintained.
The record of central registrar can be kept fully or partly on
computer, floppies, diskettes, or any other electronic form. Any
entry made with the central registrar shall be a reference to any
such transaction. The central registrar shall have the control and
management of the central register.
24.5 FILING OF TRANSACTIONS OF SECURITISATIQN,
RECONSTRUCTION AND CREATION OF SECURITY INTEREST
Under the SARFAESI Act, now filing of details of transactions of
securitisation, reconstruction and the creation of security interest
is required to be filed with the central registrar. The period of filing
such details in proper form as may be prescribed, is thirty days
after the date of transaction or the creation of security. The central
registrar has to prescribe fees for such filing. The particulars are
required to be filed as stated above by the securitisation company
or the reconstruction company or the secured creditor, as the case
may be. The delay in filing the said particulars can be condoned by
the central registrar for a period of next thirty days after the first
thirty days prescribed, on payment of fees not more than ten times
244
24.9 LET US SUM UP
Central Government has to set up or cause to set up central registry
for registration of securitisation and reconstruction transaction
and creation of security interest. Registration under other
applicable laws will continue. All transactions and creation of
security interest needs to be noted. Modification and satisfaction
also needs noting in prescribed form with payment of fees.
24.10 KEYWORD
Central Registry.
24.11 CHECK YOUR PROGRESS
1. After coming into operation, the provisions relating to
central registry the banks and financial
rial
the
)be
STRUCTURE
25.0 Objectives
25.1 Introduction
25.2 Penalties
25.3 Penalties for Non-compliance of Directions of Reserve Bank
of India
25.4 Offences
25.5 Cognisance of Offences
25.6 Let Us Sum Up
25.7 Keyword
25.8 Check Your Progress
25.9 Answers to 'Check Your Progress'
25.10 Multiple Choice Terminal Questions
ons
246
25.0 OBJECTIVE
The objective of this unit is to know the penal provision of the Act.
For effective implementation of the law and as a deterrent step to
prevent improper actions by parties concerned penal provisions are
kept in laws.
MISCELLANEOUS PROVISIONS
STRUCTURE
26.0 Objective
26.1 Introduction
26.2 Non-Applicability of the Provisions of the SARFAESI Act in
Certain Cases
26.3 Protection of Action Taken in Good Faith
250
26.0 OBJECTIVE
The objective of this unit is to understand the exceptions of
securities to which this Act is not applicable. At the same time, the
person or the organisation utilising the provisions and powers
given under this Act should know about the legal protections the
Act has given when it is implemented properly and in good faith. At
the same time, if any of the provisions are not followed, then it has
penal provisions also.
26.1 INTRODUCTION
In this unit, we will see some miscellaneous provisions about
implementation of the Act. Section 31 gives some exclusions of
securities to which the Act is not applicable. For creditor it is
important to note these exclusions. The Act has given many strict
251
can be taken against the secured creditor or his officers. This
protection is given so that actions contemplated and authorised
under SARFAESI Act, can be taken without fear of counteraction
from the borrower or any other person having interest in the
252
for the banks and financial institutions to comply with the
limitation aspect. If after sale of securities the claim is not fully
satisfied and still there are any dues to be recovered from the
borrower, the creditor is required to file civil suit before the Civil
Court or a claim before the debt recovery tribunal within the
limitation period. Therefore, the secured creditor will have to make
an assessment, before taking possession of the security, whether it
would be possible to sell the security and make an eventual claim
for shortfall within the limitation period.
26.8 POWER OF CENTRAL GOVERNMENT TO MAKE RULES
1. For carrying out the provisions of this Act, the Central
Government can frame rules and notify
them in the Official Gazette. The Act also allows the Government to
notify the rules in the Electronic
Gazette as defined in the Information Technology Act, 2000, i.e. on
the website of the Government.
2. Whenever the Government makes a rule under the Act, the
rule is so required to be kept before
each House of Parliament, while in session for a total period of
thirty days. Both the Houses should
253
26.11 LET US SUM UP
The Act is applicable to securities not in possession of the creditors.
We have seen a list of securities to which the Act is not applicable.
Contravention of the provisions of the Act is punishable. Act has
dealt with the situations for offences committed by individuals,
partnerships and a company. By debarring Civil Court or any other
authority for jurisdiction for giving injunction, etc., the
implementation of the Act is made effective by removing legal
hindrance, which otherwise the borrower can bring. We have also
seen how and when the Act has an overriding effect. The Act has
provided that the provisions of the Limitation Act are applicable for
the actions under this Act also. The Central Government has
STRUCTURE
27.0 Objective
27.1 Introduction
27.2 Object of Scheme and Extent
27.3 Definitions
256
27.0 OBJECTIVE
The objective of this unit is to understand the purpose of
introduction of the scheme, viz., 'The Banking Ombudsman
Scheme 2006, various words and the terms used in the scheme and
how the appointment of banking ombudsman is done, its
establishment and powers.
27.1 INTRODUCTION
In this unit, we will see the definitions of the words used in the
scheme. The definitions are important, as they have an assigned
meaning in the scheme and these words are used in the scheme in
the context of definitions. If the definitions are well mastered, it is
easy to understand the scheme. We will also see the provisions
relating to establishment of office of banking ombudsman. The RBI
decides his appointment and other terms of office, his secretariat,
his powers, etc. The RBI also decides the territorial jurisdiction of
the banking ombudsman. The scheme has come in force with effect
from 1 January 2006.
a banking company,
and includes a corresponding new bank,
a Regional Rural Bank,
State Bank of India and its Subsidiary banks as defined in
Part I of the Banking Regulation Act,
1949,
and also includes a scheduled primary co-operative bank
and included in the second Schedule
to the RBI Act, 1934 having a place of business in India.
257
27.4 APPOINTMENT AND TENURE
The Reserve Bank may appoint one or more of its officers in the
rank of Chief General Manager or General Manager to be known as
the banking ombudsmen to carry out the functions entrusted to
them by or under the scheme. This appointment may be made for a
period not exceeding three years at a time.
27.5 TERRITORIAL JURISDICTION AND LOCATION OF
OFFICE
1. The Reserve Bank shall specify the territorial limits to which
258
27.11 ANSWERS TO CHECK YOUR PROGRESS'
1. True; 2. False; 3. False; 4. False
27.12 MULTIPLE CHOICE TERMINAL QUESTIONS
1. What is the object of introducing the banking ombudsman
scheme, 2006?
(a) For effective monitoring of the NPA accounts in the banks.
(b) It is the RBI agency to regulate the disputes amongst the
STRUCTURE
28.0 Objective
28.1 Introduction
28.2 Grounds of Complaint
28.3 Procedure of Filing Complaint
28.4 Power to Call for Information
28.5 Settlement of Complaint by Agreement
28.6 Award by the Banking Ombudsman
28.7 Rejection of the Complaint
28.8 Proceeding Before the Review Authority
28.9 Banks to Display Salient Features of the Scheme for
Common Knowledge of Public
28.10 Let Us Sum Up
28.11 Keywords
28.12 Check Your Progress
28.13 Answers to 'Check Your Progress'
28.14 Multiple Choice Terminal Questions
260
28.0 OBJECTIVE
The objective of this unit is to understand the procedure adopted
by the banking ombudsman for dealing with the grievance of the
262
(f) It is made before the expiry of the period of limitation
prescribed under the Indian Limitation Act 1963 for such claims.
28.4 POWER TO CALL FOR INFORMATION
1. The banking ombudsman may require the bank named in
the complaint or any other related bank to
provide any information or furnish certified copies of any
document relating to the subject matter
of the complaint that is or is alleged to be in the possession of such
bank. In the event of the failure
of a bank to comply the requisition without any sufficient cause,
the banking ombudsman may
draw the inference that the information, if provided or copies if
furnished, would be unfavourable
to such bank.
2. The banking ombudsman shall not disclose any information
263
4. A copy of the award shall be sent to the complainant and the
bank named in the complaint. An
award shall not be binding on a bank against which it is passed
unless the complainant furnishes to
it within a period of fifteen days from the date of receipt of copy of
the award, a letter of acceptance
of the award in full and final settlement of his claim in the matter.
If the complainant does not
accept the award passed by the banking ombudsman and fails to
furnish his letter of acceptance
within such time, without making any request for extension of time
to comply with such
requirements, the award shall lapse and be of no effect.
5. The bank shall within one month from the date of receipt by
it, of the acceptance in writing of the
award by the complainant comply with the award and intimate the
compliance to the banking
ombudsman.
28.7 REJECTION OF THE COMPLAINT
1. The banking ombudsman may reject the complaint at any
stage if it appears to him that the complaint
made is:
(i) frivolous, vexatious, mala-fide; or (ii) without any sufficient
cause; or
(iii) that it is not pursued by the complainant with reasonable
diligence; or ! (iv) prima facie, there is no loss or damage or
264
28.9 BANKS TO DISPLAY SALIENT FEATURES OF
THE SCHEME FOR COMMON KNOWLEDGE OF THE PUBLIC
1. The banks covered by the scheme shall ensure that the
purpose of the scheme and the name and
address of the banking ombudsman to whom the complaints are to
be made by the aggrieved party
are displayed in all the branch/office premises.
2. The banks covered by the scheme are required to ensure that
a copy of the scheme is made
available with the designated officer of the bank for perusal in the
265
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UNIT
29
STRUCTURE
29.0 Objective
29.1 Introduction
29.2 Constitutional Validity of the Act
29.3 Preamble, Extent, Commencement, Application and
Definitions
29.4 Let Us Sum Up
29.5 Keywords
29.6 Check Your Progress
268
29.0 OBJECTIVE
The objective of this unit is to understand the purpose of this
specific legislation viz., Recovery of Debts due to Banks and
Financial Institutions Act, 1993 (DRT Act 1993). This is an Act
enacted to cope up with the much felt requirement of time. The Act
is quite procedural in nature.
29.1 INTRODUCTION
Recovery of the dues from the borrowers through courts was a
major cause of concern for the banks and financial institutions due
to huge back log of pending cases with various courts. Even in
recovery of decreed debts, considerable difficulties were faced by
them prior to the passing of this Act in 1993 it was observed and
felt that the existing laws are not adequate to solve the issues faced
by the banks and financial institutions, and huge assets were
blocked as unproductive assets. Besides, in this process of recovery
considerable manpower of the banks and financial institutions gets
involved wasting their productivity. Because of delays involved in
finalising of cases the industrial assets were getting damaged and
deteriorating in value in 1991, the Recovery of Debts due to Banks
and Financial Institutions Act, 1993 (DRT Act, as commonly known
or called) was passed and it came into operation from 24 June
1993. This Act constituted the special, 'Debt Recovery Tribunals'
for speedy recovery.
In this unit, we will see how the Act received legal challenges and
269
3. Some important definitions as per this Act are as under:
(i) 'Appellate Tribunal'It is a body established for the purpose of
preferring an appeal against the order passed by the tribunal. It is
established under the sub-Section (1) of Section 8 of the Act. (ii)
'Application' means an application made to a tribunal for recovery
of the debt, under section
19. (iii) 'Appointed day' in relation to a tribunal or an appellate
tribunal, means the date on which such
tribunal is established.
(iv) 'Bank' means, a banking company, a corresponding new bank,
i.e., bank commonly known as Nationalised Bank established with
270
various courts. Introduction of the NPA norms aggravated the
problems. This affected the financial sector. The Act was
introduced in 1993. Initially, Delhi High Court decided the Act as
constitutionally invalid. Supreme Court then decided the Act as
valid. Applicability to co-operative banks was decided only recently
kh)
me
e.
STRUCTURE
30.0 Objective
30.1 Introduction
30.2 Establishment of Tribunal
30.3 Composition of Tribunal
30.4 Qualification for Appointment as Presiding Officer and
Term of Office
30.5 Staff of Tribunal
30.6 Establishment and Composition of Appellate Tribunal
30.7 Qualification for Appointment as Chairperson of the
Appellate Tribunal and
Term of Office
30.8 Filling up of Vacancies at Tribunal and Appellate Tribunal
272
30.0 OBJECTIVE
The objective of this unit is to understand about the appointment
of the tribunals, appellate tribunals and their powers.
30.1 INTRODUCTION
For implementation of the Act, establishment of the authorities
and conferring on them required powers is essential. Their
jurisdiction is also to be decided. All these powers are with the
Central Government. Appellate authorities are also required to be
set up. All the authorities need the appropriate staff. In this unit we
will see about all these establishment aspects.
30.2 ESTABLISHMENT OF TRIBUNAL
The Central Government is empowered to establish one or more
tribunal to be known as debt recovery tribunal to exercise the
jurisdiction, powers and authority conferred on such tribunal by or
under this Act. The section also empowers the Central Government
to decide and specify the areas within which the tribunal may
exercise jurisdiction for entertaining and deciding the applications
filed before it. When the Government exercises these powers and
273
2.
274
30.11 KEYWORDS
Jurisdiction of Tribunal; Appellate Tribunal; Chairperson.
30.12 CHECK YOUR PROGRESS
1. Debt recovery tribunals are established by
2. Debt recovery tribunals consist benches of three persons.
(True/False)
3. Jurisdiction of appellate tribunal is with the respective High
Courts. (True/False)
30.13 ANSWERS TO 'CHECK YOUR PROGRESS'
1. Central Government; 2. False; 3. False.
30.14 MULTIPLE CHOICE TERMINAL QUESTIONS
UNIT
31
STRUCTURE
31.0 Objective
31.1 Introduction
31.2 Jurisdiction, Powers and Authority of Tribunals
31.3 Bar of Jurisdiction of Civil Courts
31.4 Let Us Sum Up
31.5 Keywords
31.6 Check Your Progress
L.R.A.B-19
276
31.0 OBJECTIVE I
i
The objective of this unit is to know the jurisdiction, powers and
authority of the Tribunal and Appellate Tribunal.
277
31.5 KEYWORDS
Tribunal; Appointed Day; Jurisdiction; Powers; Authority; High
Court; Spreme Court; Jurisdiction.
31.6 CHECK YOUR PROGRESS
1. A decree passed by the foreign court can be executed by the
Tribunal. (True or False)
2. For reasons the Chairperson of the Appellate Tribunal can
transfer any case from one Tribunal to
other Tribunal within his jurisdiction. (True or False)
3. For the matters for which the Tribunals are empowered the
Civil Courts have no jurisdiction.
(True or False)
PROCEDURE OF TRIBUNALS
280
32.0 OBJECTIVE
The objective of this unit is to know the procedure followed at the
Tribunals for dealing with the cases before them.
32.1 INTRODUCTION
Filing of the application before DRT and its dealing with
application involves procedural aspects. The procedure has various
stages and requirements that need to be followed very strictly. This
unit gives such procedure.
32.2 APPLICATION TO THE TRIBUNAL
1. The purpose for filing application is for recovery of the debt
due to them. The procedure has to be
followed properly and the interim relief and remedies are required
281
282
(iv) confer powers to the receiver in respect of the property given in
his possession for bringing suits or defend it, file applications,
collection of rents and profits, preservation, realisation,
management, protection, execution of documents, etc., and as the
tribunal may deem fit;
(v) appoint a commissioner for preparation of an inventory of the
properties of the defendant or for sale thereof.
20. If the recovery certificate is granted against a company
registered under the Companies Act, 1956,
283
matter. However, if the order was made by the Tribunal with the
consent of the parties no appeal shall lie.
2. The appeal is required to be filed within forty-five days from
the date on which copy of the order
is received. At the time of filing the appeal as per Section 21 of the
DRT Act, 50% of the amount
(Max.) shown as due in the order passed by the Tribunal is
required to be deposited by the
appellant. The appeal is required to be in the form prescribed and
along with the prescribed fees.
The appeal filed after forty-five days may be entertained by the
Appellate Tribunal if it is satisfied
about the cause for not filing the appeal in time.
3. On receipt of the appeal the Appellate Tribunal after giving
284
3. The Tribunal and the Appellate Tribunal are deemed to be a Civil
Court for all purposes of Section 195 and Chapter XXVI of the Code
of Criminal Procedure, 1973. Any proceeding before Tribunal and
the Appellate Tribunal is deemed to be a judicial proceeding.
32.6 LIMITATION
For application to be filed before the Tribunal the Limitation Act,
1963 apply. This means that the application must be filed by the
bank or the financial institution within three years from cause of
action.
32.7 LET US SUM UP
Bank has to file application for recovery of loan taking into
consideration jurisdiction and cause of action. Other bank or
financial institution can join the application. Application has to be
with fees, documents and evidence. For transfer from Civil Court to
Tribunal no fresh fee is required as transfer is due to effect of law.
The section has given elaborate provisions for summons and
hearing. Tribunal can pass interim orders to prevent defendant
m
RECOVERY OF DEBTS DETERMINED BY TRIBUNAL AND
MISCELLANEOUS PROVISIONS
33.0 Objective
33.1 Introduction
33.2 Modes of Recovery of Debts
33.3 Validity of Recovery Certificate and Amendment Thereof
33.4 Stay and Amendment for Recovery Proceeding and
286
33.0 OBJECTIVE
The objective of this unit is to understand the recovery procedure
through the recovery officers appointed under the Act.
33.1 INTRODUCTION
The tribunal issues Recovery Certificate to the applicant. There are
recovery officers appointed under the Act and attached to the
tribunal. They are given adequate powers to recover the amount
287
time for the payment of the amount. If such time is granted, the
recovery officer has to stay the proceedings until expiry of the time
granted.
2. If after recovery certificate is issued there is any payment by
the defendant or any time is granted
for payment, the Presiding Officer has to keep the recovery officer
informed.
3. If the order passed by the Presiding Officer of the Tribunal is
modified in appeal by the Appellate
Tribunal and the amount of recovery certificate is changed, the
Presiding Officer who has issued
the recovery certificate, has to amend or withdraw the recovery
certificate accordingly.
33.5 OTHER MODES OF RECOVERY
1. In addition to the modes of recovery given at Section 25,
Section 28 of this Act has given additional
modes that can be adopted by the Recovery Officer. These powers
are similar to the powers given
to the Tax Recovery Officer under Section 226 of the Income Tax
Act, 1961. These powers are
also similar to passing of garnishee orders in respect of debt, share
and other property not in
possession of the judgement debtor under Order XXI, Rules 46 and
46A to 461 of the Code of Civil
Procedure, 1908.
288
33.6 APPLICATION OF CERTAIN PROVISIONS OF THE
INCOME TAX ACT
1. Provisions of Section 29 of this Act, are linked to certain sections
of the Income Tax Act, 1961. For its effective purpose and to avoid
its repetition in this Act, it is stated that these provisions will apply
as if provided in this Act and Rules framed there under. This also
makes it possible that any amendment made in the Income Tax Act
to those provisions will automatically become applicable for this
Act without there being requirement to amend this Act.
The section says that the provisions of the Second Schedule and
Third Schedule to the Income Tax Act, 1961 and the Income Tax
(Certificate Proceedings) Rule, 1962, as in force from time to time
shall, as far as possible, apply with necessary modifications as if
those provisions and rules refer to debt due under this Act.
Due to this provision the debt due from the defendant to the bank
or financial institution is treated on par with Income Tax arrears
and can be recovered like the arrears under the income tax.
33.7 APPEAL AGAINST THE ORDER OF RECOVERY OFFICER
The Recovery Officer is given powers under Sections 25 and 28 to
recover the amount mentioned in the recovery certificate. As per
Section 26, the defendant cannot question or dispute before the
Recovery Officer about the correctness of the amount mentioned in
289
33.9 POWER OF TRIBUNAL TO ISSUE CERTIFICATE OF
RECOVERY IN CASE OF DECREE OR ORDER
1. If there is a decree or order passed by any court before coming
into operation the DRT Act and the decree or order is not yet
executed, the decree-holder may apply to the Tribunal for issue of
recovery certificate. There is fresh hearing or trial, etc., in such
cases and the tribunal has to directly issue the recovery certificate
based on the decree of the Civil Court.
33.10 CHAIRPERSON, PRESIDING OFFICER AND STAFF OF
APPELLATE TRIBUNAL AND TRIBUNAL PUBLIC SERVANTS
The Chairperson of an Appellate Tribunal, the Presiding Officer of
290
(E) Moneys realised under DRT Act, distribution between bank
and other secured creditors, when
winding up proceedings pending in company court, priority of
secured creditors is subject to
provisions of 529A of Companies Act (the said section mentions
291
33.15 LET US SUM UP
On receiving recovery certificate the recovery officer has to proceed
for the recovery by attachment and sale of movable and immovable
property of defendant, arrest and detention in prison of defendant
and appointment of receiver. Defendant is debarred from disputing
the correctness of the amount given in recovery certificate. The
presiding officer can correct the clerical or arithmetical errors. The
section has given wide enabling provisions to call money from third
party in whose hands defendants money are lying. When amount of
defendant is in the hands of third party and recovery officer issues
notice calling money the third party failing to pay is deemed as
defendant. Orders of recovery officer applicable within thirty days
to the Tribunal. If there is already a decree passed by the Civil
Court, the DRT can issue recovery certificate thereon. The
chairperson, presiding officer and staff of both Tribunals are
deemed public servants. They are also protected from any action
for their acts done in good faith. The act has overriding effect when
there is inconsistency with any other law.
33.16 KEYWORDS
STRUCTURE
34.0 Objective
34.1 Introduction
34.2 Applicability and Definitions
34.3 Conditions in the Printout
34.4 Mode of Proof of Certain Entries in Bankers' Books
34.5 Case in which Officer of Bank not Compellable to Produce
Books
34.6 Inspection of Books by Order of Court or Judge
34.7 Costs of Application
34.8 Let Us Sum Up
34.9 Keywords
(I::
294
II!
34.0 OBJECTIVE
The objective of this unit is to understand the special provisions
made for giving evidentiary value to the extracts of the books of
bankers while producing any evidence in the courts for proving or
establishing anything the original evidence is relied upon.
34.1 INTRODUCTION
Banks keep their accounting and its details in various ledgers,
registers, etc. When any claim of the bank is required to be
established or proved in the Courts of Law or any other such
forums, these books are required to be produced in original. It is
difficult to do so. Therefore, its extracts and statement of accounts
are produced. To facilitate the production of such evidence in easy
way and to have evidentiary value to the extracts and copies, 'The
Bankers' Books Evidence Act, 1891 was enacted to amend the Law
of Evidence with respect to bankers' books.
34.2 APPLICABILITY AND DEFINITIONS
295
(i) if maintained in the written form, a copy of any entry in such
books together with a certificate written at the foot of such copy
mentioning that
(a) it is a true copy of such entry
(b) that such entry is contained in one of the ordinary books of
the bank
(c) that such entry was made in the ordinary course of business
(d) that such book is still in the custody of the bank
296
properly at the material time, he was provided with all the relevant
data and the printout in question represents correctly and is
appropriately derived from the relevant data.
34.4 MODE OF PROOF OF CERTAIN ENTRIES IN BANKERS'
BOOKS
A certified copy of any entry in a bankers' book shall in all legal
proceedings be received as prima facie evidence of the existence of
such entry. Further it shall be admissible as evidence of all the
matters, transactions and accounts therein recorded in every case
as the original entry itself.
In Chandrahdar Goswami vs Gauhati Bank Ltd. AIR 1967 SC 1058,
the Supreme Court has held that to make a person liable mere
entries in books of account are not sufficient even though the books
of account are kept in regular course of business. There has to be
further evidence to prove payment of the money by the bank which
appear in the books of account to make the person liable, except
where the person accepts the correctness of the books of account.
34.5 CASE IN WHICH OFFICER OF BANK NOT
COMPELLABLE TO PRODUCE BOOKS
In any proceeding where the bank is not a party, no officer of a
bank shall be compellable to produce any bankers' book contents of
297
3. Any order passed under this section awarding costs may on
application to any Court of Civil Judicature be executed by such
court as if the order is a decree for money passed by itself.
However, the court who passed the order can also have the powers
to enforce of its own orders with respect to the payment of costs.
34.8 LET US SUM UP
The definition clause gives the meaning of different words in the
context of the Act. The certified copy needs a certificate giving
some declarations. When the books of bank are taken in printout
form they need a further certificate as detailed in the Section.
When data is stored in computer form a certificate from person in
charge of the computer system is required. Certified copy is a
prima facie evidence and admissible in evidence as if original is
STRUCTURE
35.0 Objective
35.1 Introduction
35.2 Organisation of Lok Adalats
35.3 Jurisdiction of Lok Adalats
35.4 Cognisance of Cases by Lok Adalats
35.5 Disposal of Cases by Lok Adalats
300
35.0 OBJECTIVE
The objective of this unit is to familiarise the readers with the
301
35.6 NATURE OF AWARD
The award of Lok Adalat shall be deemed to be a decree of a civil
court or an order of any other court. In case of compromise or
settlement arrived at by a Lok Adalat the court fee paid in the case
shall be refunded in the manner provided under the Court fees Act,
1870. Every award shall be binding on all the parties to the dispute.
No appeal shall lie to any court against the award.
35.7 LET US SUM UP
Lok Adalats are organised under the Legal Services Authorities Act,
1987.
They are intended to bring about a compromise or settlement in
respect of any dispute or potential dispute. Lok Adalats derive
jurisdiction by consent of parties or on an application made to the
court by one of the parties to the dispute or the court is satisfied
that the dispute between the parties could be settled by Lok Adalat.
In respect of a potential dispute, any party may request the
Authority or Committee organising Lok Adalat to refer the dispute
for determination. Lok Adalats shall be guided by the principles of
justice, equity, fair play and other legal principles. In case of
settlement, the Award shall be binding on the parties to the
dispute. No appeal shall lie in any court against the Award. If no
settlement, the case shall be remitted back to the court which
referred the matter to the Lok Adalat. In case of potential court
case, the Lok Adalat shall advise the parties to seek remedy in
court.
35.8 CHECK YOUR PROGRESS
UNIT
36
STRUCTURE
36.0 Objective
36.1 Introduction
36.2 Purpose of the Act, Preamble and Extent
36.3 Definitions
36.4 Act not Overriding on any Other Law
36.5 Let Us Sum Up
36.6 Keywords
304
36.0 OBJECTIVE
The objective of this unit is to get the knowledge of the purpose of
this special enactment, viz., The Consumer Protection Act, 1986
and the particular word defined for appropriate use therein.
36.1 INTRODUCTION
To protect the interests of the consumers, 'The Consumer
Protection Act was enacted.' The word consumer and services has
been defined in the Act very elaborately. In this unit, we will see the
purpose of enacting the Act and various definitions of words used
in the context of this Act.
36.2 PURPOSE OF THE ACT, PREAMBLE AND EXTENT
1. The Act was enacted with the objective, 'for better protection
of the interests of consumers".
Different authorities were established for the settlement of
consumers' disputes. The Act is social
welfare benefit oriented legislation for the consumer providing self-
contained quasi-judicial machinery
to provide speedy and simple redressal to consumer disputes. The
said quasi-judicial machinery is
established at the district, state and central levels. They observe the
principles of natural justice and
are empowered to give relief of specific nature and, if required,
award compensation to the
305
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rd
lal
ry is id
tie se
of
se
nt w
ds
nt
:e
er
306
7. 'Defect' means any fault, imperfection, shortcoming in the
quality, quantity, potency, purity or
standard which is required to be maintained by or under any law or
under any contract, express or
implied or as is claimed by the trader in any manner whatsoever in
relation to any goods.
8. 'Deficiency' means any fault, imperfection, shortcoming or
inadequacy in the quality, nature and
manner of performance which is required to be maintained by any
law or has been undertaken to
be performed by a person in pursuance of a contract or otherwise
in relation to any service.
In Jagannath Meher vs Branch Manager, State Bank of India
(1993) II CPJ 146, it was held that where a loan was sanctioned by
the bank but the complaint that the loan was inadequate to start
the industry is not tenable. It was held that the Consumer Forum
cannot override the decision taken by the bank as that was a power
of discretion of the bank and there was no reason that the bank
acted otherwise than in good faith.
9. 'District Forum' means a Consumer Dispute Redressal
Forum established under Clause (a) of
Section 9 under this Act.
307
18. 'Service' means
(i) service of any description which is made available to potential
users and includes, but not limited to, the provision of facilities in
connection with banking, financing, insurance, transport,
processing, supply of electrical or any other energy, boarding or
lodging or both, housing construction, entertainment, amusement
or the surveying of news or other information. However, this does
not include the rendering of any service free of charge or under a
contract of personal service.
The definition gives elaborately what amounts service from various
sectors and lines. It has specifically included the services rendered
308
(ii) expressed on anything attached to, inserted in or accompanying
as an article offered or displayed for sale or on anything on which
the article is mounted for display or sale; or
(iii) contained in or on anything that is sold, sent, delivered,
transmitted or in any other manner made available to the public, is
deemed to be a statement made to the public by the person who
has caused the statement to be so expressed, made or contained.
B. Permits the publication of any advertisement for sale of
goods or supply of service in the
newspaper or otherwise at a bargain price that are in fact not at
bargain price. Bargain price
means a price stated to be a bargain price by reference to an
ordinary price or a price at which
the product is ordinarily sold or otherwise.
C. Permits
(i) offering of gifts, prizes or other items with the intention of not
providing them as offered or creating impression that something is
being given or offered free of charge when actually it is not so;
(ii) the conduct of any contest, lottery, game of chance or skill for
the purpose of promoting the sale, use or supply of any product or
business interest.
D. Withholding of any participants of any scheme offering gifts,
prizes or other items free of
charge and informing the final results on the closure of the scheme.
E. Permits the sale or supply of goods intended to be used by
309
consumers establishing the consumer councils and authorities. The
provisions of the Act are not overriding on any other law.
36.6 KEYWORDS
Quasi-judicial Authorities; Appropriate Laboratory; District
Forum; State Commission; National Commission; Restrictive
Trade Practice.
36.7 CHECK YOUR PROGRESS
1. Consumer Protection Act is enacted to protect the
manufacturing conditions of the Industries.
(True/False)
2. The agencies appointed under Consumer Protection Act are
quasi-judicial in nature. (True/False)
3. Can a voluntary consumer association file a complaint on
behalf of consumer? (Yes/No)
4. A consumer has purchased goods for resale. Can he file
complaint? (Yes/No)
UNIT
37
STRUCTURE
37.0 Objective
37.1 Introduction
37.2 Central Consumer Protection Council
37.3 Procedure for Meeting of the Central Council
37.4 Objects of the Councils
37.5 State Consumer Protection Council
37.6 District Consumer Protection Council
312
37.0 OBJECTIVE
The objective of this unit is to understand the appointment and
functions of the consumer councils appointed. They have to
discharge the functions and use their power keeping in mind the
purpose of the enactment to protect the rights of the consumers.
37.1 INTRODUCTION
To promote and protect the right of the consumer councils are
established. Their scope is not regarding directly dealing with the
consumer complaints at initial or appellate scope but to promote
and protect the rights of consumer. The function is more of
promoting the rights and spreading awareness by education. The
highest council is the Central Council who has the jurisdiction for
the entire country. Then below it is the State Council for each state.
Below that is the District Council for each district. This unit gives
the provisions for establishment of these councils, their objects and
procedure for their meetings.
37.2 CENTRAL CONSUMER PROTECTION COUNCIL
The Central Government has established a council known as the
Central Consumer Protection Council, called as Central Council.
The Central Council shall consist of the following:
(i) The Minister-in-Charge of the Consumer Affairs in the Central
Government, who shall be the
313
(i) the Minister-in-Charge of the Consumer Affairs in the State
Government who shall be the Chairman
of the Council, (ii) such number of official and non-official
members representing such interests as may be prescribed
by the State Government, (iii) such number of other official and
non-official members not exceeding ten, as may be nominated
by the Central Government.
The State Council shall meet as and when necessary. There has to
be at least two meeting every year. For transacting the business of
the meeting the procedure shall be as may be prescribed by the
State Government.
37.6 DISTRICT CONSUMER PROTECTION COUNCIL
1. For every district the State Government establishes the
District Consumer Protection Council
called as District Council.
The District Council shall consist of following members:
(i) the Collector of the district who shall be the Chairman of the
Council, (ii) such number of other official and non-official
members representing such interests as may be prescribed by the
State Government.
2. The District Council shall meet as and when necessary.
There has to be at least two meeting every
year. For transacting the business of the meeting the procedure
shall be as may be prescribed by
the State Government.
37.7 LET US SUM UP
STRUCTURE
38.0 Objective
38.1 Introduction
38.2 Establishment of Consumer Disputes Redressal Agencies
38.3 Composition of District Forum
38.4 Jurisdiction of District Forum
38.5 Form of Complaint
38.6 Procedure on Admission of Complaint
38.7 Finding of the District Forum
38.8 Appeal
38.9 Composition of the State Commission
38.10 Jurisdiction and Procedure of State Commission
38.11 Transfer of Cases
38.12 Appeals
38.13 Composition of the National Commission
38.14 Jurisdiction and Powers of National Commission
38.15 TVansfer of Cases
38.16 Finality of Order if no Appeal is Preferred
38.17 Limitation Period
38.18 Enforcement of Orders
38.19 Dismissal of Frivolous or Vexatious Complaints
38.20 Penalties and Protections
316
38.0 OBJECTIVE
In this unit we are looking at different agencies that function for
redressal of the complaints of the consumers. The purpose of the
Act itself is the protection of the consumer interest. Therefore the
functions of these agencies have much significance.
38.1 INTRODUCTION
For resolving and dealing with the consumer complaints different
fora are established at district level, state level and national level.
These forums have different laid down composition. They have to
work and deal with the complaints in the prescribed manner. Their
jurisdiction and powers are decided. All these aspects are laid down
in the Act in detail giving full procedural particulars. In this unit,
we will see these issues. They are on various aspects and with
minute details.
38.2 ESTABLISHMENT OF CONSUMER DISPUTES
REDRESSAL AGENCIES
1. For the purposes of this Act, there shall be following agencies
established by the state government or the Central Government, as
the case may be.
(i) District Forum established by the state government at each
district. The government may
317
4. The salary or honorarium and other allowance payable to, and
other terms and conditions of service of the member, of the District
Forum shall be such as may be prescribed by the state government.
38.4 JURISDICTION OF DISTRICT FORUM
1. Subject to the other provisions of the Act, the District Forum
has jurisdiction to entertain complaints
where the value of the goods or services and the compensation, if
any, claimed does not exceed
Rs. 20 lakh.
2. A complaint has to be instituted in a District Forum within
the local limits of whose jurisdiction
(i) the opposite party actually and voluntarily resides or carries on
business or has a branch
office or personally works for gain, or (ii) the cause of action,
wholly or in part arises.
Anyone of opposite parties reside provided District Forum gives
318
(i) Refer a copy of complaint within twenty-one days from the date
of admission to the opposite party to give his version of the case.
The opposite party is required to give his version within thirty days
or extended period of not more than fifteen days.
(ii) If the opposite party denies or disputes the allegation contained
in the complaint or fails to submit any of his version, then the
319
7.
Civil Court under the Code of Civil Procedure, 1908 while trying a
civil suit in respect of the following matters:
(i) the summoning and enforcing attendance of any defendant or
witness and examining the
witness on oath;
(ii) the discovery and production of any document or other
material object producible as evidence; (iii) the reception of
evidence on affidavits; (iv) the requisitioning of the report of the
analysis or test concerned from the appropriate laboratory
or from any other relevant source;
(v) issuing of any commission for the examination of any witness;
and (vi) any other matter that may be prescribed.
10. pay such sum, which shall not be less than 5 per cent of the
value of such goods sold or
services provided as may be determined if loss or injury has been
suffered by a large number
of consumers who are not identifiable conveniently and pay to such
consumer and utilise
such sum so obtained as may be prescribed;
11. issue corrective advertisement to neutralise the effect of
misleading advertisement at the cost
of the opposite party responsible for issuing such misleading
advertisement;
12. provide for adequate costs to the parties.
320
4. The procedure relating to the conduct of the meetings of the
District Forum, its sittings and other matters shall be as may be
prescribed by the state government.
In Narsuns Battery Manufacturing Company vs General Manager,
Andhra Bank 1992 CPC 707 (NC), the National Commission has
passed an order that bank asking from a small-scale industry main
as well as collateral security four times the values of loan was
within the bank's power of advancing money and asking for
adequate security. The contention of the applicant-borrower that
excessive security was asked and asking collateral security from a
small-scale industry was against the guidelines of the IBA was not
accepted by the National Commission.
38.8 APPEAL
Any person aggrieved by the order passed by the District Forum
may prefer as appeal to the State Commission within a period of
thirty days from the date of order, in the form and manner as may
be prescribed. The State Commission has the powers to condone
delay in preferring an appeal on getting satisfied about the cause of
delay. If the order of the District Forum involves payment of any
amount by the person preferring the appeal, the appeal cannot be
filed without payment of 50 per cent or the amount ordered to be
paid or Rs. 25,000, whichever is less.
321
is equality in differing members, then the point of difference has to
be referred to the President. The President may hear the point of
difference himself or refer it to some other member for hearing.
The point of difference has to be then decided by majority of the
members who heard the case initially and after reference of
difference.
4. Every member of the State Commission shall hold office for a
term of five years or up to the age of sixty-seven years, which ever
is earlier. But he will be eligible for appointment for another term
of five years or up to the age of 67 years whichever is earlier. A
member may resign from his office under his hand addressed to
the state government.
38.10 JURISDICTION AND PROCEDURE OF STATE
COMMISSION
322
may grant adjournment on sufficient cause shown by the party
seeking adjournment and the
4.
5.
323
If the Members of the Bench differ on any point, the point has to be
decided by majority. If there is equality in differing members, then
the point of difference has to be referred to the President. The
President may hear the point of difference himself or refer it to
some other member for hearing. The point of difference has to be
then decided by majority of the members who heard the case
initially and after reference of difference.
Every member of the National Commission shall hold office for a
term of five years or up to the age of seventy years, which ever is
earlier. Member will be eligible for reappointment for another term
of 5 years or up to age of 70 years. A member may resign from his
office under his hand addressed to the Central Government.
The salary or honorarium and other allowance payable to, and
other terms and conditions of service of the member of the
324
38.18 ENFORCEMENT OF ORDERS
1. If any interim order passed under this Act by the District
Forum, State Commission or National
Commission, as the case may be, is not complied with the District
Forum, State Commission or
National Commission may order that the property of the person
who is not complying the order be
attached.
325
3.
STRUCTURE
39.0 Objective
39.1 Introduction
39.2 Definition
39.3 Limitation and its Computation
m
328
39.0 OBJECTIVE
The objective of this unit is to familiarise the aspects relating to the
Limitation Act, 1963 in so far as they are relevant to the banks and
financial institutions.
39.1 INTRODUCTION
The Limitation Act, 1963 has significant application to the banks
and financial institutions. These entities provide financial
assistance to borrowers and in default by the borrowers; they are
required to take appropriate action for the recovery of the money
lent. The Recovery of Debts due to Banks and financial institutions
Act, 1993 and the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002 specifically
state that actions under those Acts are permissible only if the claim
is within the period of limitation. The Limitation Act, 1963 is an Act
to consolidate and amend the law for the limitation of suits and
other proceedings.
39.2 DEFINITION
Period of limitation is always in relation to a document which
entitles the beneficiary to take action in a court of law. Period of
329
(e) For filing any suit of which notice has to be given, or for
which the previous consent or sanction
of the Government or any other authority is required, in
accordance with the requirements of any
law for the time being in force, the period of such notice, or the
time required for obtaining such
consent or sanction shall be excluded.
(f) In computing the period of limitation for any suit, the time
during which the defendant has been
330
TAX LAWS
STRUCTURE
40.0 Objective
40.1 Introduction
40.2 Income Tax
40.3 Fringe Benefit Tax
40.4 Banking Cash Transaction Tax
40.5 Service Tax
40.6 Let Us Sum Up
40.7 Check Your Progress
40.8 Answers to 'Check Your Progress'
332
40.0 OBJECTIVE
This unit is intended to provide an outline on the basic aspects of
the laws relating to Income tax, fringe benefit tax, banking cash
transaction tax and service tax limiting the discussions on the
applicability of the above tax laws to banks and financial
institutions.
40.1 INTRODUCTION
The banks and financial institutions are required to implement the
provisions of the tax laws by deducting taxes at source, crediting
the tax deducted at source to the income tax authorities and also
have regard to the provisions relating to Banking Cash Transaction
Tax, Service Tax, etc., in their day to day operations.
40.2 INCOME TAX
The law relating to taxation of income is governed by Income Tax
Act 1961.
This Act envisages taxation of income of an assessee on the basis of
his
(a) Residence; (b) Place of source of income.
Meaning of Income
The definition of 'income' is inclusive and not exhaustive in nature.
Thus no precise definition as to what constitutes income.
Assessee and Assessment year
The income accruing, or arising, to a person (called 'Assessee') is
taxed on the basis of 'Assessment Year'. The term Assessment Year
represents the period of 12 months beginning from 1st April every
333
Income Tax Act, 1961 envisages taxation of income under following
heads:
1. Salaries 2. Income from house property
3. Profits and gains from business or profession 4. Capital gains
5. Income from other sources
Computation of income
Computation of Taxable income involves the following steps.
Income arising under various heads to income is computed
separately as per the relevant sections covering such incomes. After
having computed the income under each head separately, the 'gross
total income' representing the sum of above amounts computed
under such heads is arrived at. Chapter VIA of the Income Tax Act
provides for various deductions allowable from the gross total
income. The taxable income of the assessee is arrived at after
deducting such amounts covered under Chapter VIA of the Income
Tax Act.
Income exempt from tax
Certain categories of income are exempt from tax and such income
is not taken into account in the computation of income. They are
excluded from the computation at the beginning.
Assessment Proceedings
Every person whose total income in a previous year exceeds the
maximum amount which is not liable to tax is required to file his
return by the due date prescribed in section 139. A company or
partnership firm has to file its return of income.
A corporate assessee is required to file its return of income in the
334
(c) By December 15-60 per cent
(d) By March 15-100 per cent of the advance tax payable.
The advance tax which is paid by an assessee on the basis of
estimation of income may at times fall short of the tax payable as
per the return of income. Such a shortfall if any shall be paid by
way of 'self-assessment tax' under Section 140A of the Income Tax
Act.
Deduction/collection of tax source
Members of Co-operative bank are exempted from TDS. Apart
from advance taxes and self-assessment, income tax is also payable
through other modes, viz.. Deduction of Tax at Source (TDS) and
Collection of Tax at Source (TCS).
The provisions relating to TDS are important in the normal day-to-
day business activities of a bank and are relevant when payments of
specific nature are made. The following payments generally occur
during the course of business activities of a bank and are covered
under TDS under the Income Tax Act, 1961.
(i) Salaries - Section 192
(ii) Interest on securities - Section 193
(iii) Payment of interest, other than interest of securities - Section
194A (iv) Payment to contractors or sub-contractors - 194C (v)
335
added back and treated as income of the bank in the computation
of income and the bank will be liable to pay tax on the same.
Besides, improper or non-compliance with regard to TDS also
attracts levy of interest, penalty and prosecution.
Non-compliance with provisions relating to TDS attracts
1. Levy of interest @ 12 per cent p.a. on the amount on tax
payable at source from the date on which
it is deductible until the date of payment.
2. Recovery of tax deductible at source from the person
responsible for deduction.
336
(i) Fifty thousand rupees, in cash such withdrawal is from the
account maintained by any
individual or Hindu undivided family (ii) One lakh rupees, in case
such withdrawal is from the account maintained by a person other
than any individual or Hindu undivided family or
____.._-______ 337
I:
the month in which the income is received [except in the month of
March when it is required within the same month]. The return in
Form ST-3 is required to be filed half yearly on April 25 and
October 25 and every year covering half period ending 31st March
and 30th September respectively.
Cenvat Credit
If service tax paid is by an assessee for input services, the same can
be set off to the extent of 20 per cent of the liability on output
services. Such set off to the extent of 20 per cent of the service tax
liability is across all input services. Rule 6[l][iii] of Cenvat credit
rules, also provides for set off to the extent of 100 per cent of
service tax liability in respect of service tax paid on certain
specified input services. In other words, service tax paid on input
service includes specific category of service, the limit of 20 per cent
mentioned above can be breached and credit for the entire amount
paid for input service can be taken against the liability on output
service.
Export and Import of Services
Service tax is not applicable when service are rendered outside
338
6. Assessment is of two types (a) summary assessment and (b)
scrutiny assessment (True/False)
7. Partnership firm, if it has no income, need not file a tax
return. (True/False)
8. Tax assessed by AO shall be paid within days. (30/45)
9. Entire advance tax is to be paid by 15th March. (True/False)
HI
MODULE -D
COMMERCIAL LAWS WITH REFERENCE TO BANKING
OPERATIONS
Unit 41. Meaning and Essentials of a Contract
Unit 42. Contracts of Indemnity
Unit 43. Contracts of Guarantee
Unit 44. Contract of Bailment
Unit 45. Contract of Pledge
Unit 46. Contract of Agency
Unit 47. Meaning and Essentials of a Contract of Sale
Unit 48. Conditions and Warranties
Unit 49. Unpaid Seller
Unit 50. Definition, Meaning and Nature of Partnership
Unit 51. Relations of Partners to One Another
Unit 52. Relations of Partners to Third Parties
Unit 53. Minor Admitted to the Benefits of Partnership
Unit 54. Dissolution of a Firm
Unit 55. Effect of Non-Registration
Unit 56. Definition and Features of a Company
Unit 57. Types of Companies
Unit 58. Memorandum of Association and Articles of Association
Unit 59. Doctrines of Ultra Vires/Constructive Notice/Indoor
Management
UNIT
41
STRUCTURE
41.0 Objective
41.1 Introduction
41.2 Meaning of Contract
41.3 Key Components to Form a Contract
41.4 Essentials of a Valid Contract
41.5 Let Us Sum Up
41.6 Keywords
41.7 Check Your Progress
41.8 Answers to 'Check Your Progress'
342
343
The Contract Act defines consideration as under.
When, at the desire of the promisor, the promisee or any other
person
has done or abstained from doing, or
does or abstains from doing, or
promises to do or to abstain from doing something.
such act or abstinence or promise is called a consideration for the
promise.
344
In this case a minor borrowed a certain sum and as a security to
repay it, he gave a mortgage of certain immoveable property. Later
on, the minor sued for setting aside the mortgage. The mortgagee
demanded the return of the money given by him to the minor. The
CONTRACTS OF INDEMNITY
un
ed
he UNIT
42
ind
en. an
ab STRUCTURE
ue;
42.0 Objectives
42.1 Introduction
42.2 Rights of Indemnity Holder
42.3 Let Us Sum Up
42.4 Check Your Progress
42.5 Answers to 'Check Your Progress'
me
3.46
42.0 OBJECTIVES
The objective of this unit is to enable the candidates to understand:
What can be construed as a Contract of Indemnity?
What are the rights and liabilities of the indemnity holder
and the indemnifier?
42.1 INTRODUCTION
A Contract of Indemnity is a contract by which one party promises
to save the other from loss likely to be caused to him. This loss can
be, either by the conduct of the promisor himself or by the conduct
of any other person.
42.2 RIGHTS OF INDEMNITY HOLDER
The indemnity holder (i.e. the promisee or the person who is
indemnified) has the following rights when sued (i.e. when a legal
action is taken against the person who has indemnified).
The promisee is entitled to recover from the promisor, in respect of
the matter to which the promise to indemnify applies:
1. All damages which he may be compelled to pay in any suit.
2. All costs which he may be compelled to pay in any suit.
3. All sums paid in compromise, not contrary to indemnity.
Illustration
Mr A contracts with C, that B will not sue C in respect of Rs.
1,00,000, which C owes to B. If B sues C, any consequences of such
a suit will be borne by A according to the contract. Is such a
CONTRACTS OF GUARANTEE
STRUCTURE
43.0 Objective
43.1 Introduction
43.2 Parties to the Contract
43.3 Basic Principles of Contract to be Complied
43.4 Consideration
43.5 The Liability of the Surety
43.6 Continuing Guarantee
43.7 Death of Surety
43.8 Variance in the Terms of a Contract
43.9 Discharge of Principal Debtor
43.10 Forbearance to Sue
43.11 Release of One Co-surety does not Discharge Other
43.12 Surety can Claim His Dues from the Principal Debtor
43.13 Security
43.14 Misrepresentation Made by the Creditor
43.15 Implied Promise by the Principal Debtor to Indemnify the
Surety
43.16 Co-sureties for the Same Debt
43.17 Let Us Sum Up
43.18 Keywords-
43.19 Check Your Progress
43.20 Answers to 'Check Your Progress'
349
(b) A sells and delivers goods to B. C afterwards requests A to
forbear to sue B for the debt for a year
(i.e. not to take legal action for recovery) and promises that if he
does so C will pay for them in
case of default by B. A agrees to forbear as requested. This is a
sufficient consideration for C's
promise.
(c) A sells and delivers goods to B. C afterwards, out of nothing
and without any request or promise
to him by any party, agrees to pay for the goods in default of B. This
is a void (invalid) contract
as there is no consideration for C's promise.
43.5 THE LIABILITY OF THE SURETY
The liability of the surety is co-extensive with that of the principal
debtor. This means that once, if the principal debtor is unable to
pay the debt, the surety takes the place of the principal debtor.
Therefore, any sum of money owed by the principal debtor
becomes payable by the surety. This includes, even the interest that
the principal debtor may owe to the creditor. Again, once the surety
has paid the debt, he then occupies the place of the original
creditor. He can then claim from the principal debtor, the entire
sum he has paid to the original creditor.
Illustration
'A' guarantees to B the payment of a bill of exchange by C, the
acceptor. The bill is dishonoured by C. A is liable not only for the
amount of the bill, but also for any interest and charges which may
II:
350
guaranteed by him, between the principal debtor and the creditor
discharges the surety as to transactions subsequent to the variance.
In a Contract of Guarantee, the surety gives his guarantee on his
own terms. If the principal debtor and the creditor change the
terms of the guarantee without the consent of the surety, obviously,
this would not be fair to the surety. Therefore, if there is any
variance in the terms of the guarantee, the surety will be
discharged from liability for any future debts, incurred after any
such variance.
Illustration
Let us assume that in the above example, the surety that Mr. A had
given strict instructions to the shopkeeper not to allow his wife to
buy any cosmetics on credit. If the shopkeeper allows Mrs. A to buy
these items, the terms of the guarantee are changed and therefore,
Mr. A would not be liable to pay to the shopkeeper for any future
transactions from that point onwards.
43.9 DISCHARGE OF PRINCIPAL DEBTOR
The surety is discharged if the principal debtor is released by the
creditor. Illustration
A gives a guarantee to C for goods to be supplied by C to B. C
supplies goods to B and afterwards B contracts with his creditors
(including C) to assign/sell them certain properties of his, in
consideration of all the creditors, releasing B from all their
351
security or not. If the creditor loses such security, then the surety is
discharged to the extent of the value of the security.
Illustration
A, as a surety for B, makes a bond to C, to secure a loan from C to
B. Afterwards, C obtains from B a further security for the same
debt. Subsequently, C gives up the security. A is not discharged in
this case because the security was not in existence at the time when
the contract of surety-ship was entered into (i.e. when the bond
was made). If the security was taken simultaneously at the time of
getting the surety or prior to that, then A would have been
discharged from his surety-ship to the extent of the value of
security.
43.14 MISREPRESENTATION MADE BY THE CREDITOR
Any guarantee obtained by means of misrepresentation made by
the creditor is invalid. Any guarantee which the creditor has
obtained by means of keeping silent as to the material
circumstance is also invalid.
Illustration
A engages B as a clerk to collect money for him. B fails to account
for some receipts and A calls upon him to furnish a security for his
due accounting. C gives his guarantee for B's due accounting. A
352
43.17 LET US SUM UP
A Contract of Guarantee is a contract to perform the promise, or
discharge the liability, of a third person in case of his default.
43.18 KEYWORDS
Discharge; Express; Implied; To Revoke; To forbear; Mere;
Misrepresentation; Co-Surety;
43.19 CHECK YOUR PROGRESS
1. Identify whether the following statements are True or False.
(i) In a Contract of Indemnity the indemnifier is primarily liable.
(ii) In a Contract of Guarantee the liability of the surety is
secondary.
(iii) Anything done for the benefit of the principal debtor is a
sufficient consideration to the surety
for giving the guarantee, (iv) Where there are co-sureties, a release
by the creditor of one of them does not discharge the
others, (v) Principal debtor need not pay the surety after the surety
CONTRACT OF BAILMENT
STRUCTURE
44.0 Objective
44.1 Introduction
44.2 Meaning of Bailment
44.3 Bailor Bound to Disclose to the Bailee
44.4 Bailee to Take Care of Goods
354
44.0 OBJECTIVE
The objective of this unit, is to make the candidates aware as to
when a contract of bailment arises and what constitutes a bailment
and the rights and duties of the bailor and the bailee.
44.1 INTRODUCTION
A 'bailment' is the delivery of goods by one person to another for
some purpose. When the purpose is accomplished, the goods are to
be returned or otherwise disposed of according to the direction of
the person delivering them.
The person delivering the goods is called the 'bailor'.
The person to whom they are delivered is called the 'bailee'.
We come across the applicability of this law in case of pledge
facilities granted to borrowers including pledge of jewellery articles
and also when we take over the assets of a defaulting borrower in
our efforts to recover the bank's dues.
44.2 MEANING OF BAILMENT
When one person delivers to another, certain goods to be used for a
certain purpose, the contract is known as a contract of bailment.
355
A contract of Bailment is voidable at the option of the bailor, if the
bailee does any act with regard to the goods bailed, inconsistent
with the conditions of the bailment.
If the bailee makes any use of the goods bailed, which is not
according to the conditions of the bailment, he is liable to make
compensation to the bailor for any damage arising to the goods
from or during such use of them.
Illustrations
(a) A lends a horse to B for his own riding only. B allows C, a
member of his family, to ride the horse.
C rides with care but the horse accidentally falls and the horse is
injured. B is liable to make
compensation to A for the injury done to the horse.
(b) A hires a horse in Mumbai from B to go to Lonavla. A rides
with due care but marches to Khandala
instead. The horse accidentally falls and is injured. A is liable to
make compensation to B for the
injury to the horse.
44.5 EFFECTS OF MIXING OF GOODS AND EXPENSES
(a) If the bailee (with the consent of the bailor), mixes the goods
356
Rights of Bailee with Regard to Goods
(a) The bailor is responsible to the bailee for any loss which the
bailee may sustain because of the
reason that the bailor was not entitled to make the bailment or to
receive back the goods.
(b) If the bailor has no title to the goods and the bailee, in good
faith delivers them to the bailor or
according the directions of the bailor, the bailee is not responsible
to the owner in respect of such
delivery.
(c) If the goods are to be kept or to be carried, or to have work
done upon them by the bailee for the
CONTRACT OF PLEDGE
STRUCTURE
45.0 Objective
45.1 Introduction
358
45.0 OBJECTIVE
The objective of this unit is to highlight a particular form of
bailment known as pledge and the purpose of such a contract.
45.1 INTRODUCTION
The bailment of goods as security for payment of a debt or
performance of a promise is called 'pledge'. The bailor is in this
case called 'pawnor'. The bailee is called 'pawnee'.
45.2 NATURE OF PLEDGE
(a) If the pawnor makes default in payment of the debt in
respect of which the goods were pledged,
the pawnee may bring a suit against the pawnor and retain the
goods pledged as a security (or) he
may sell the goods pledged, after giving notice of the sale to the
pawnor.
(b) If the proceeds of such sale are less than the amount due, in
respect of the debt, the pawnor is still
liable to pay the balance. If the proceeds of the sale are greater than
the amount so due, the pawnee
shall pay over the surplus to the pawnor.
For example, say A takes a loan of Rs. 20,000 from B. As an
assurance that he will pay this money back, A keeps his car, as
CONTRACT OF AGENCY
STRUCTURE
46.0 Objective
46.1 Introduction
46.2 Meaning of Agency
46.3 Normal Rules of Contract
46.4 Persons to be Majors and of Sound Mind
46.5 Consideration \
46.6 Authority of an Agent
46.7 Extent of Agent's Authority
46.8 Agent's Authority in an Emergency
46.9 When Agent cannot Delegate
46.10 Right of Person as to Acts Done for Him Without His
Authority - Effect of Ratification
360
46.0 OBJECTIVE
The objective of this unit is to understand:
The concept of entering into contracts through agents
The parties involved in such contracts
The role, duties and liabilities of the principal and the agent
46.1 INTRODUCTION
To understand contracts of an agency, it is first necessary to
understand what the terms 'agent' and 'principal' mean.
361
46.7 EXTENT OF AGENT'S AUTHORITY
An agent having an authority to do an act, has authority to do every
lawful thing which is necessary; in order to do such act. An agent
having an authority to carry on a business has authority to do every
lawful thing necessary to conduct such business.
Illustration
A is employed by B (residing in London) to recover at Mumbai a
debt due to B. A may adopt any legal process necessary for the
purpose of recovering the debt and may give a valid discharge for
the same.
46.8 AGENT'S AUTHORITY IN AN EMERGENCY
In an emergency, an agent has authority to do all acts to protect his
principal from loss as would be done by a person in his own case.
Illustration
A consigns goods (say eatables) to B at Mumbai with directions to
send them immediately to C at Ahmedabad. B may sell the goods at
Mumbai if they will not bear the journey to Ahmedabad without
getting spoiled.
46.9 WHEN AGENT CANNOT DELEGATE
362
46.12 AGENT'S DUTY IN CONDUCTING PRINCIPAL'S
BUSINESS
An agent is bound to conduct the business of his principal
according to the directions given by the principal. In the absence of
any such directions, conduct business according to the customs,
which prevails in doing business of the same kind at the place
where the agent conducts such business. If the agent, acts
otherwise and if any loss be sustained, he has to make it good to his
principal and if any profit accrues, he must account for it.
Illustrations
(a) A, an agent, engaged in carrying on for B, a business, in
which, it is the custom to invest from
time to time at interest the money which may be in hand, makes
such an investment. A must make
good to B the interest usually obtained by such investments.
(b) B, a broker in whose business it is not the custom to sell on
credit sells goods of A on credit to C,
whose credit at the time was very high. C, before payment, becomes
insolvent. B must make
good the loss to A.
46.13 AGENT'S ACCOUNTS
An agent is bound to render proper accounts to his principal on
363
(b)
364
46.21 KEYWORDS
STRUCTURE
47.0 Objective
47.1 Introduction
47.2 Meaning of Some of the Important Terms Defined Under
the Sale of Goods Act
47.3 Meaning of Contract of Sale of Goods
47.4 Features of Contract of Sale of Goods
47.5 Sale and Agreement to Sell
47.6 Distinction between a Sale and an Agreement to Sell
47.7 Let Us Sum Up
47.8 Keywords
47.9 Check Your Progress
47.10 Answers to 'Check Your Progress'
366
47.0 OBJECTIVE
The objective of this unit on the Sale of Goods Act, is to provide a
basic level knowledge and understanding to the candidates about
the contractual rights and liabilities of the seller and the buyer in a
contract for sale of goods. These rights and liabilities are in
addition to the rights and liabilities of the parties to a contract as
laid down in the Contract Act.
47.1 INTRODUCTION
367
immoveable property like land and building. The contracts relating
to transfer of immoveable property are governed by the Transfer of
Property Act and not Sale of Goods Act. (d) No particular form: The
Sale
1. A sale is a contract in which the parties have
already performed their part.
2. In a sale the ownership of goods have already
passed, irrespective of whether the goods are
delivered or not.
3. The risk in goods is with the buyer.
4. In a sale, if the seller does not deliver the goods,
the buyer can file a suit and demand specific
performance and delivery of the goods.
5. If the buyer does not pay for the goods the
seller can claim file a suit and demand the price.
He also has the right to stop the deliver of goods
p onnds
368
47.7 LET US SUM UP
A sale involves two persons, the buyer and the seller. A contract of
sale of goods is a contract under which the seller transfers the
goods to the buyer for a price. When the property in the goods is
transferred from the seller to the buyer, the contract is called a sale.
The consideration for a sale of goods is the money payable for the
transfer of goods. The Sale of Goods Act covers only the sale of
moveable goods and not immoveable property.
When the transfer of the property in the goods is to take place at a
future time or subject to some condition thereafter to be fulfilled,
the contract is called an agreement to sell. An agreement to sell
becomes a sale when the time elapses or the conditions are
STRUCTURE
48.0 Objective
48.1 Introduction
48.2 Meaning of Condition and Warranty
48.3 Implied Conditions and Warranties
48.4 Let Us Sum Up
48.5 Keywords
370
48.0 OBJECTIVE
CONDI
371
372
If goods are bought by description from a seller who deals in
goods of that description, there is an
implied condition that the goods shall be of merchantable quality.
However, if the buyer has examined
the goods, there is no implied condition as regards defects which
can be revealed by examination.
The usage of trade may give an implied warranty or
condition as to quality or fitness of goods for
any particular purpose.
It is to be noted that an express warranty or condition given by any
party is always in addition to the implied warranties or conditions
as explained above.
H. Caveat Emptor (Buyer beware)
Caveat means a warning, a caution. According to the doctrine of
caveat emptor, the person who buys goods must keep his eyes
open, his mind active and be cautious while buying the goods. In
other words, the buyer must examine the goods thoroughly. Later
on, if the goods do not serve his purpose or he depends upon his
own judgement and he makes a bad choice, he cannot blame the
seller for selling him such goods. The Sale of Goods Act also
enshrines doctrine by stating that 'There is - ( implied warranty or
condition as to the quality or fitness of goods for any particular
UNPAID SELLER
STRUCTURE
49.0 Objective
49.1 Introduction
49.2 Rights of an Unpaid Seller
49.3 Let Us Sum Up
49.4 Check Your Progress
49.5 Answers to 'Check Your Progress'
374
49.0 OBJECTIVE
The objective of this unit is to impart knowledge on the meaning of
an 'Unpaid Seller' in a contract of sale and the rights of such a
person.
49.1 INTRODUCTION
The seller of goods is deemed to be an 'unpaid seller',
(a) When the whole of the price has not been paid or tendered;
(b) When the payment for the goods is received in the form of a
cheque or other negotiable instrument
Table 49.1 Rights of Unpaid Seller Against Goods and the Buyer
375
nt
le
\
_J
to ith
ing
atil
right to lien on all goods. The seller may exercise the right of lien
notwithstanding that he is in possession of the goods as an agent or
bailee for the buyer.
Termination of lien
The unpaid seller of goods loses his lien thereon:
(a) when he delivers the goods to a carrier or other bailee for
the purpose of transmission to the
buyer without reserving the right of disposal of the goods;
(b) when the buyer or his agent lawfully obtains possession of
the goods;
(c) by waiver of lien.
However, the lien is not lost just because the seller obtains a decree
for the price of the goods. Right of stoppage in transit
When the buyer becomes insolvent, the unpaid seller who has
parted with the possession of the goods has the right of stopping
them in transit. He may retain them until payment of the price.
Duration of transit
Goods are deemed to be in course of transit from the time when
they are delivered to a carrier or other bailee for the purpose of
transmission to the buyer and the transit ends, when the buyer or
his agent takes delivery of them from such carrier or other bailee.
How stoppage in transit is affected?
The unpaid seller may exercise his right of stoppage in transit
either by taking actual possession of the goods, or by giving notice
of his claim to the carrier or other bailee in whose possession the
goods are.
376
(b) in case of insolvency of the buyer, a right of stopping the
goods in transit after he has parted with
the possession of them;
(c) a right of resale;
(d) right to withhold delivery of goods.
49.4 CHECK YOUR PROGRESS
GO (iii)
1.
2.
Fill in the gaps from the available options given in the brackets.
has not been paid
(i) The seller of goods is deemed to be an unpaid seller when the
(price/interest/damages/penalty)
There is no as to the quality or fitness of goods for any particular
purpose.
(implied condition/implied warranty/express condition/express
warranty)
When the is in possession of goods, a lien can be exercised,
55
51
UNIT
50
STRUCTURE
50.0 Objective
50.1 Introduction
50.2 Meaning and Nature of Partnership
50.3 types of Partnership
50.4 Let Us Sum Up
50.5 Check Your Progress
50.6 Answers to 'Check Your Progress'
378
50.0 OBJECTIVE
The objective of this unit is to give the candidates a broad view of
the legal aspects involved in a partnership business and the
determination of the rights and liabilities arising out of partnership
business.
50.1 INTRODUCTION
The Partnership Act lays down the important provisions relating to
partnership contracts. However, the general principles of the
Contract Act also continue to apply to the partnership contracts. A
business can be carried on by a single individual by using his own
funds or by two or more persons together in which case some of
them would bring in money and some of them would use their
business skills. These persons agree to share the profits and losses
of their venture and it amounts to a contract. The rights and
liabilities arising out of such a mode of carrying on business are
379
The contract between the partners may be oral or written.
The partnership must be formed to carry on some lawful
business.
The business must be carried on to earn and share the
profits and returns of the business.
HI:
380
(ii) Registration of firms is compulsory under the Partnership Act.
(iii) It is compulsory to enter into a partnership deed, (iv) The
partners are free to decide their mutual rights and liabilities.
(v) A partnership deed can even provide that a particular partner
would not take part in the day-to-day business decisions of the
partnership firm, (vi) Consent of all the partners is necessary to
change the nature of business carried on by the
firm, (vii) A partnership at will can be dissolved by notice.
50.6 ANSWERS TO 'CHECK YOUR PROGRESS'
1. (i) True; (ii) False; (iii) False; (iv) True; (v) True; (vi) True; (vii)
True.
.11:
STRUCTURE
51.0 Objective
51.1 Introduction
51.2 General Duties of Partners
51.3 Duty to Indemnify the Loss caused by Fraud
51.4 Determination of Rights and Duties of Partners by Contract
between the Partners
51.5 The Conduct of the Business
51.6 Mutual Rights and Liabilities
382
51.0 OBJECTIVE
The objective of this unit is to understand the relationship of
partners amongst themselves and their mutual rights and duties.
51.1 INTRODUCTION
Partners are bound to carry on the business of the firm to the
greatest common advantage. The partners are responsible to each
other for the conduct of the business of the firm.
51.2 GENERAL DUTIES OF PARTNERS
The partners should not make secret profits. They have to be just
and faithful to each other. They must render true accounts of the
business and full information of all things affecting the firm to all
the partners or their legal representatives.
51.3 DUTY TO INDEMNIFY THE LOSS CAUSED BY FRAUD
Every partner is bound to indemnify the firm for any loss caused to
the partnership firm by his fraud, in the conduct of the business of
the firm. For example, if a partner commits a fraud upon a
customer of the partnership firm for which the firm is held liable
51.4
The partners of a firm can decide their mutual rights and duties
and change them from time to time with the consent of all the
partners. This may be implied (i.e. understood by the dealings
between them/ with outsiders) or may be expressed (i.e.
specifically discussed and made clear). These should however, be
not against the provisions of the Partnership Act. Such contracts
(defining their rights and duties) may even provide that a partner
shall not carry on any business other than that of the firm while he
is a partner.
51.5 THE CONDUCT OF THE BUSINESS
Subject to a contract between the partners (i.e. the agreement and
understanding arrived between themselves)
(a) every partner has a right to take part in the conduct of the
business;
(b) every partner is bound to attend diligently to his duties in
the conduct of the business;
(c) any difference arising as to ordinary matters connected with
383
themselves (except in cases where consent of all partners is
required as stated above). However, if they have no specific
understanding on these matters, the above applies to them.
51.6 MUTUAL RIGHTS AND LIABILITIES
Subject to a contract between the partners (i.e., the agreement and
understanding arrived between themselves),
(a) a partner is not entitled to receive remuneration for taking
part in the conduct of the business;
(b) the partners are entitled to share equally in the profits
earned and liable to contribute equally to the
losses made by the firm;
(c) where a partner is entitled to interest on the capital
subscribed by him such interest is to be paid
only out of profits of the firm;
384
(c) Mutual rights and duties remain same for additional
undertaking/adventure carried out.
(d) On the matters stated above, the partners are free to have an
understanding other than in the
manner stated above. However, if they have no specific
STRUCTURE
52.0 Objective
52.1 Introduction
52.2 Partner is an Agent of the Firm
52.3 Implied Authority of Partner as Agent of the Firm
386
52.0 OBJECTIVE
The objective of this unit is to understand the rights and liabilities
of the partners with respect to contracts entered into with third
parties.
52.1 INTRODUCTION
A partner is the agent of the firm for the purpose of the business of
the firm. Every partner plays a dual role in a partnership. One is
the role of a principal, i.e. on his own behalf and the other the role
of an agent for every other partner. It must be noted that every
partner is an agent of every other partner only in the business of
the firm.
52.2 PARTNER IS AN AGENT OF THE FIRM
A partner can make the firm liable by his acts, if done in the name
of the firm and in the ordinary course of business of the firm. A
partner, who contracts in his own name, incurs only a personal
387
say that since he is the partner in a firm XYZ it is implied that the
partners are bound to pay for the goods. For example, he should
sign as 'For and on behalf of XYZ'.
52.7 LIABILITY OF A PARTNER FOR ACTS OF THE FIRM
Every partner is liable jointly with all the other partners and also
severally for all acts of the firm done while he is a partner. This is a
core principle of partnership business.
52.8 LIABILITY OF THE FIRM FOR WRONGFUL ACTS OF A
PARTNER
If a partner commits some wrongful act or omits doing of
something in the ordinary course of the business of the firm with or
without the authority of other partners and consequently a loss or
injury is caused to any third party, the firm is liable thereof to the
same extent as the partner.
52.9 LIABILITY OF FIRM FOR MISAPPLICATION BY
PARTNERS
The firm is liable to make good the loss of money or property from
388
52.13 CHECK YOUR PROGRESS
1. State whether the following statements are True or False.
(i) A single partner can be authorised to carry on business and sign
documents on behalf of the
firm.
(ii) Every partner is liable jointly with all other partners and also
severally for all acts of the firm done while he is a partner.
52.14 ANSWERS TO 'CHECK YOUR PROGRESS'
1. (i) True; (ii) True.
STRUCTURE
390
53.0 OBJECTIVE
The objective of this unit is to understand whether or not a minor
can be a partner in a partnership firm and what are his rights and
liabilities in a firm. Further the consequences of retirement of a
partner and adjudication of a partner as insolvent are also
discussed.
53.1 INTRODUCTION
As mentioned in the Indian Contract Act, 1872 a minor is not
competent to enter into a contract. Hence, he is not eligible to enter
into a contract of partnership. A person who is a minor cannot be a
partner in a firm but with the consent of all the partners, he may be
admitted to the benefits of partnership. In no circumstances, the
minor can be made a party to the liabilities of the firm.
391
53.4 RETIREMENT OF A PARTNER
A partner may retire
(a) with the consent of all other partners
(b) in accordance with an express agreement by the partners, or
(c) where the partnership is at will, by giving notice in writing
to all the other partners of his intention
to retire.
UNIT
54
DISSOLUTION OF A FIRM
STRUCTURE
54.0 Objective
54.1 Introduction
54.2 Dissolution by Agreement
54.3 Compulsory Dissolution
54.4 Dissolution on the Happening of Certain Contingencies
54.5 Dissolution by the Court
54.6 Liability for Acts of Partners Done after Dissolution
54.7 Let Us Sum Up
54.8 Check Your Progress
54.9 Answers to 'Check Your Progress'
394
54.0 OBJECTIVE
To understand as to when and how a partnership firm may be
395
(e) that a partner (other than the partner suing) has transferred
the whole of his interest in the firm to
EFFECT OF NON-REGISTRATION
STRUCTURE
55.0 Objective
55.1 Introduction
55.2 Registration
398
55.0 OBJECTIVE
The objective of this unit, is to understand as to whether a
partnership firm is required to be registered with any
governmental authorities and what are the benefits of registration
and the consequences of non-registration of a partnership firm.
55.1 INTRODUCTION
A company is compulsorily required to be incorporated and
registered with the Registrar of Companies under the Companies
Act, 1956. However, a partnership firm is not required to be
compulsorily registered with the Registrar of Partnership Firms.
55.2 REGISTRATION
The partner's may or may not enter into a partnership deed and
may decide to have an oral partnership if they have a strong
understanding amongst themselves. Further, even if a partnership
deed is entered into by the partners they may not opt for
registration of the partnership firm. However, the Partnership Act
casts certain disabilities on a partnership firm that is not registered
with the Registrar of Partnership Firms. Due to this provision
which is stated in the Section 69, a majority of the partnership
firms decide to register the firm to avoid future hassles and
complexities on solving issues amongst the partners as well as with
third parties. The provisions of the Section 69 are briefly stated
hereunder:
A partner of an unregistered firm cannot enforce by way of a suit,
d >f
UNIT
56
:s :d
IP :d
is
tie or
ist
lOt
ts.
400
56.0 OBJECTIVE
In this unit, an attempt is made to explain the nature of a company
and the fundamental legal aspects of the form of organisation of a
company as evolved by courts and as enshrined under the
Companies Act, 1956.
56.1 INTRODUCTION
In today's trade world, companies are the rivers of commercial
prosperity of the country. The form of organisation of a company is
relatively more advantageous than other forms of business
organisations. The features of limited liability, perpetual existence
and separate entity serve as advantages to set up a company.
56.2 DEFINITION OF A COMPANY
Section 3 of the Companies Act, 1956 defines a company as 'a
401
company owed Salomon 10,000 pounds and created a charge on
the company's assets. One share was given to each remaining
member of the family. Within a year, the company went into
liquidation and the state of affairs was broadly like this - assets
6,000 pounds liabilities - Salomon's debentures at 10,000 pounds
and ordinary insecured creditors at 7,000 pounds. Thus, after
paying off the debenture holder (Salomon) nothing would be left
for the insecured creditors. The insecured creditors filed a case
against the company and contended that though incorporated
under the Companies Act, 1956 the company never had an
independent existence at all. It was Salomon himself trading under
another name and that he cannot pay off himself first for the
402
necessary to look at the persons who are behind the corporate veil.
The corporate veil is said to be lifted or pierced when the Court
403
(k) Agency
The members of a company are not the agents of each other or of
UNIT
57
TYPES OF COMPANIES
STRUCTURE
406
57.0 OBJECTIVE
The objective of this unit is to enable the candidates to understand
the various types of companies that can be formed under the
Companies Act, 1956 and their peculiar features.
57.1 INTRODUCTION
There are various types of companies that can be formed under the
Companies Act, 1956 and they can be classified as per the mode of
incorporation, on the basis of liability, on the basis of public
interest, as holding and subsidiary companies, etc. This unit
examines these in brief.
57.2 CLASSIFICATIONS OF COMPANIES
THE BASIS MODE OF INCORPORATION
1. Statutory Company
40/
member is required to pay the amount of the fixed share capital as
in the case of a company limited by shares in addition to the
guarantee. Thus the liability is restricted to the amount of the share
capital plus the amount of guarantee. Such a company may also be
a private company or a public company.
57.3.3 Company with Unlimited Liability
408
(i) A private company can have only two members and two
directors. A public company has to
409
57.7 CHECK YOUR PROGRESS
1. State whether the following statements are True or False.
(i) In case of a company limited by shares the creditors of the
company can recover the money
from the members if the company is not making profits, (ii) A
member cannot transfer shares in a public company without the
consent of other members.
2. Fill in the blanks from the options given in the brackets.
(i) The minimum number of members required in a private
company is . (3/7/12/2)
(ii) The minimum number of members required in a public
company is (3/7/12/2)
(iii) The maximum number of members in a private company can
be (7/12/50/2)
(iv) The maximum number of members in a public company can be
. (any number/
12/50/15)
(v) A private company should have a minimum paid-up capital of
Rupees . (five
crore/five lakh/one crore/one lakh)
(vi) A public company should have a minimum paid-up capital of
Rupees . (five
crore/five lakh/one crore/one lakh)
(vii) In a government company the government holds at least per
cent of the paid-up
UNIT
58
STRUCTURE
58.0 Objective
58.1 Introduction
58.2 Memorandum of Association
58.3 Articles of Association
58.4 Distinction between the Memorandum of Association
and Articles of Association
58.5 Let Us Sum Up
58.6 Check Your Progress
58.7 Answer to 'Check Your Progress'
412
58.0 OBJECTIVE
To understand the concept and importance of the constitutional
documents which form the basis of incorporation and
413
which business areas they want to invest their mo.iey. A company
can have any lawful objectives. This means that a company cannot
have objectives contrary to law to carry on activities prohibited
under the law.
The objectives clause, of the memorandum of association of a
company are to be classified and stated under two sub-clauses as
'main clause' and 'other objectives'.
The Main Objectives clause must contain the main objectives which
are to be pursued by the company immediately on incorporation
and objectives which are incidental or ancillary to the attainment of
the main objectives of the company.
The Other Objectives clause must contain other objectives which
are not included in the above clause.
D. Liability clause
If the company is to be incorporated with limited liability the
liability clause must state that the liability of the members shall be
limited by the unpaid amount on shares.
E. Capital clause
In case of companies having a share capital this clause must state
that the amount of share capital which the company will be
authorised to raise and the number and the value of shares into
which it is divided.
414
58.4 DISTINCTION BETWEEN THE MEMORANDUM OF
ASSOCIATION AND
ARTICLES OF ASSOCIATION
The memorandum of association contains the fundamental
conditions (objects) upon which the company is incorporated. The
conditions are introduced for the benefit of the creditors, the
shareholders, and the outside public.
The articles of association are the internal regulations of the
company and they provide the manner in which the proceedings of
the company are to be carried on.
The memorandum of association is a dominant instrument as it
states the purposes of the company and the reasons for which it has
come into existence.
The articles of association are always held to be subordinate to the
memorandum of association because the articles of association are
merely the internal regulations of the company while the
memorandum of association states the objects of the company
beyond which the company cannot go.
STRUCTURE
59.0 Objective
59.1 Introduction
59.2 Doctrine of Ultra Vires
59.3 Effects of Ultra Vires Transaction
59.4 Constructive Notice of Memorandum of Association and
Articles of Association
59.5 Effect of the Doctrine of Constructive Notice
59.6 Doctrine of Indoor Management
59.7 Let Us Sum Up
59.8 Check Your Progress
59.9 Answers to 'Check Your Progress' s
416
59.0 OBJECTIVE
The objective of this unit is to understand the implications of the
doctrines of ultra vires/constructive notice/indoor management
which govern the interpretation of the memorandum and articles
of association.
59.1 INTRODUCTION
These three doctrines deal with the rights and duties of the
company with respect to the members, amongst the members, and
417
Personal Liability of Directors
If a director of a company makes an ultra vires payment he is
personally liable to the company and he can be compelled to refund
the money. In the case of deliberate misapplication, criminal action
can also be taken for fraud.
418
any irregularity in the internal management of the company. This
is known as the doctrine of indoor management.
The doctrine of indoor management was first illustrated in the case
of Royal British Bank vs Turquand
(1856) 6 E & B 327: (1843-60) All ER Rep 435. The facts of the case
are as under:
The directors of a company (Royal British Bank) borrowed a sum of
money from Turquand, and issued a bond to him. The articles of
association of the company provided that the directors might
borrow on bonds such sums as may be from time to time be
expressly authorised by the resolution of the shareholders. The
shareholders claimed that there had been no such resolution
authorising the loan.
The company, however, was held bound by the loan because
Turquand had the right to assume that the necessary resolution
must have been passed.
Exception
The doctrine of indoor management has the following exception:
Knowledge of internal irregularity
Where a person dealing with the company has actual knowledge of
the internal irregularity of the company he is not entitled to claim
protection of this doctrine because he could have taken measures
for self-protection.
Acts outside apparent authority of an officer of company
MEMBERSHIP
STRUCTURE
60.0 Objective
60.1 Introduction
60.2 Who is a Member of a Company?
60.3 Various Modes of Becoming Member of a Company
60.4 Who can be Members of a Company?
60.5 Cessation of Membership in a Company
60.6 Register of Members
60.7 Place of Keeping and Inspection of Register of Members
60.8 Rights and Duties (Liabilities) of Members of a Company
60.9 Rights of Embers
60.10 Let Us Sum Up
60.11 Check Your Progress
60.12 Answers to 'Check Your Progress'
420
60.0 OBJECTIVE
The objectives of this unit, are to understand the concept of
membership in a company, who can be a member in a company
and what are the rights of a member of a company.
60.1 INTRODUCTION
The words member and shareholder have been used
interchangeably in the Companies Act, 1956 and generally
speaking, except for a few cases they are synonymous, e.g. in the
case of companies having no share capital there are members but
not shareholders.
60.2 WHO IS A MEMBER OF A COMPANY?
422
(a) the name and address, and the occupation, if any, of each
member;
(b) in the case of a company having a share capital, the shares
held by each member, distinguishing
each share by its number except where such shares are held with a
depository and the amount
paid or agreed to be considered as paid on those shares;
(c) the date at which each person was entered in the register as
a member; and
(d) the date at which any person ceased to be a member.
A company may, after giving not less than seven days previous
notice by advertisement in some newspaper circulating in the
district in which the registered office of the company is situated,
423
9. To approach the CLB to order an investigation into the affairs of
the company. 10. To file a petition to the High Court to order the
winding up of the company.
(b) Documentary Rights: These rights are conferred upon the
members by the memorandum of
association and the articles of association of the company.
(c) Proprietary Rights:
PROSPECTUS
STRUCTURE
61.0 Objective
61.1 Introduction
61.2 What is a Prospectus?
61.3 Compliance with Respect to Prospectus
61.4 Misstatements in a Prospectus and Remedies
61.5 Let Us Sum Up
61.6 Check Your Progress
61.7 Answers to 'Check Your Progress'
426
61.0 OBJECTIVE
The objective of this unit is to understand the meaning and
implications of misstatements in the prospectus and the liabilities
of the company, the promoters and the directors for such
misstatements.
61.1 INTRODUCTION
As explained in the previous units, a public company can raise
funds for its business from the public by issuing a document known
as the prospectus. This document has to contain all the material
427
(g) Registration of the Prospectus: Before the issue of a prospectus
UNIT
62
DIRECTORS
STRUCTURE
430
62.0 OBJECTIVE
To have an overview of the legal provisions of the Companies Act,
1956 relating to the requirement, appointment and removal of
directors in a company.
62.1 INTRODUCTION
The ownership of a company is with the shareholders who are
scattered all over and due to free transferability of shares, the
shareholders keep on changing quite frequently. In such a scenario,
the management of the company needs to be entrusted with a
professional body, i.e., the board of directors. The ownership and
management of the company is thus bifurcated. The board of
directors control the day-to-day working and management of the
company as well the long-term strategic planning of the company.
No body corporate, association or firm can be appointed as director
of a company, and only an individual can be appointed. The
important provisions of the Companies Act, 1956 pertaining to
directors are discussed hereunder.
62.2 MINIMUM NUMBER OF DIRECTORS
Every public company must have at least three directors. A public
company having
(a) a paid-up capital of Rs. 5 crore or more;
(b) one thousand or more small shareholders can elect a
431
432
(b) An additional or alternate director, or a person filling a
casual vacancy reappointed as director, on
the expiry of his term of office).
(c) A person named as a director of the company under its
articles as first registered.
62.13 WHOLE-TIME DIRECTOR
Every public company, or a private company which is a subsidiary
of a public company, having a paid-up share capital of Rupees five
crore must have a Managing or Whole-time Director or a Manager,
(under the entire Companies Act, 1956 the term manager does not
mean a manager as we understand it normally like assistant
manager/deputy manager/senior manager/chief manager).
Manager under the Companies Act, 1956 means a person having
substantial powers of the management of the company and one
who is in control of the entire affairs of the company under the
supervision of the board.
62.14 QUALIFICATION SHARES
A director is required to hold certain shares as qualification shares
if such requirement is there in the articles of association of the
company. This requirement is not applicable to a private company,
433
62.17 CERTAIN POWERS CAN BE EXERCISED ONLY AT
MEETINGS OF THE BOARD
The board of directors have the general powers to do all the acts on
behalf of the company but certain powers can be exercised only at
meetings of the board and not by circulating papers amongst the
directors and passing the resolution by such circulation. These are
some significant matters which need deliberations and discussions.
These are the powers to
(a) make calls on shareholders in respect of money unpaid on
their shares;
(b) issue debentures;
(c) borrow moneys otherwise than on debentures;
(d) invest the funds of the company;
(e) make loans; and
(f) authorise a particular buyback as stated in Section 77 A.
62.18 RESTRICTIONS ON POWERS OF BOARD
The board of directors of a public company, or of a private
434
and he can influence the price to be paid to the partnership firm.
Such interested director cannot participate or vote for decision by
resolution and in the discussions on such matters in which he is
interested.
62.21 ALTERNATE DIRECTOR
The board of directors can appoint an alternate director to act for a
director ('the original director') during the original director's
absence for a period of not less than three months from the state in
which meetings of the board are ordinarily held if the articles or a
shareholders resolution have authorised the directors to make such
appointments. The alternate director vacates the office when the
original director returns or when the term of office of the original
435
10t : is
r') ch he or
or of m >n
STRUCTURE
63.0 Objective
63.1 Introduction
63.2 Meaning of Certain Important Terms Used in FEMA
63.3 Regulation and Management of Foreign Exchange
63.4 Powers of RBI with Respect to Authorised Persons
63.5 Contravention, Penalties, Adjudication and Appeals
63.6 Directorate of Enforcement
63.7 Check Your Progress
63.8 Answers to 'Check Your Progress'
438
63.0 OBJECTIVE
This unit aims to show the broad structure of the Foreign Exchange
Management Act, 1999 which is enacted to regulate foreign
exchange transactions in India. By a reading of this unit, it would
be clear that the FEMA does not specify the details of each and
every procedure and matter concerning the regulation of foreign
439
(iii) drafts, travellers cheques, letters of credit or bills of exchange
drawn by banks, institutions or persons outside India, but payable
in Indian currency.
Under the FEMA 'security' is defined to include shares, stocks,
bonds and debentures, Government securities, savings certificates,
deposit receipts and units of any mutual fund etc. However, it does
not include bills of exchange or promissory notes other than
Government promissory notes or any other instruments which may
be notified by the RBI.
Under the FEMA, the term 'foreign security' means any security as
stated above. Under the FEMA a 'person' is defined to include the
following entities:
(i) an individual;
(ii) a Hindu Undivided Family;
(iii) a company;
(iv) a firm;
(v) an association of persons or a body of individuals, whether
incorporated or not;
(vi) every artificial juridical person; and
(vii) any agency, office or branch owned or controlled by such
person.
'Person resident in India' means the following:
(i) a person residing in India for more than one hundred and
eighty-two days in the preceding financial year but does not include
(A) a person who has gone out of India or who stays outside
India:
440
A person resident in India can hold, own, transfer or invest in
foreign currency, foreign security or any immoveable property
situated outside India if it was acquired, held or owned by such
person when he was resident outside India,
There is no bar on a person resident outside India to hold, own,
transfer or invest in foreign currency, foreign security or any
immoveable property situated outside India.
Every exporter of goods and services has to furnish the necessary
data by way of a declaration to the RBI. Such export proceeds
cannot be held in foreign countries and has to be repatriated to
India. Non-repatriation is a violation of the provisions of the
FEMA.
63.4 POWERS OF RBI WITH RESPECT TO AUTHORISED
PERSONS
RBI has the following powers under FEMA:
1. To appoint authorised persons: The said authorised persons
441
Government to exercise the powers and discharge the duties of the
director of enforcement or any other officer of enforcement.
63.7 CHECK YOUR PROGRESS
1. State whether the following statements are True or False.
(i) Authorised person is an individual appointed by the RBI to deal
in foreign exchange.
(ii) A current account transaction alters the assets or liabilities
outside India of persons resident
in India, (iii) A capital account transaction includes payments due
in connection with foreign trade in the
ordinary course of business, (iv) Foreign exchange includes
UNIT
64
STRUCTURE
64.0 Objective
64.1 Introduction
64.2 Sale of Immoveable Property
64.3 Mortgage of Immoveable Property
64.4 Types of Mortgage
64.5 Sale without Court Intervention
64.6 Enforcement of Mortgages through Court
64.7 Leases of Immoveable Property
64.8 Enforcement of Mortgages through Court
64.9 Actionable Claims
64.10 Check Your Progress
64.11 Answers to 'Check Your Progress'
444
64.0 OBJECTIVE
We have seen that the transactions relating to moveable goods and
the rights and liabilities of the parties in a contract for the sale of
moveable goods are stated in the Sale of Goods Act. Sale of Goods
Act does not cover transactions of immoveable property. The
objective of this unit is to learn briefly the aspects of the
transactions of immoveable property as contained in the Transfer
of Property Act which concerns a banker, i.e., sale, mortgage, lease
and actionable claims.
64.1 INTRODUCTION
Transfer of property means an act by which a living person conveys
property, in present or in future, to one or more other living
persons, or to himself and one or more other living persons. (Living
person includes a company or any such association whether
incorporated or not.)
Every person competent to contract and entitled to transferable
property is competent to transfer property.
64.2 SALE OF IMMOVEABLE PROPERTY
Sale is a transfer of ownership in exchange for a price paid or
promised or part-paid and part-promised. The sale of tangible
immoveable property for a consideration exceeding Rs. 100/- can
be made only by a registered instrument. Delivery of tangible
immoveable property takes place when the seller places the buyer
(or such person as directed by the buyer) in possession of the
property.
64.3 MORTGAGE OF IMMOVEABLE PROPERTY
445
64.4 TYPES OF MORTGAGE
(A) Essentials of a simple mortgage:
(i) The mortgagor does not deliver possession of the mortgaged
446
(iv) In the case of limited companies, the company has to pass a
resolution authorising the director/ officer to deposit the deeds for
raising a loan and after memorandum of entry is recorded, charge
is required to be filed with registrar of charges.
64.5 SALE WITHOUT COURT INTERVENTION
One of the important provision of the Transfer of Property Act,
which permits the mortgagee (i.e., the lender) to sell the mortgaged
property without the intervention of the Court is as explained
hereunder.
Section 69 of the Transfer of Property Act is as under-Power of sale
when valid
1. A mortgagee or any person acting on his behalf has power to
sell the mortgaged property or any
part thereof, in default of payment of the mortgage-money, without
the intervention of the Court,
in the following cases namely
(a) where the mortgage is an English mortgage, and neither the
mortgagor nor the mortgagee is a
Hindu, Mohammedan or Buddhist or a member of any other race,
sect, tribe or class from
time to time specified in this behalf by the State Government, in
the official gazette;
(b) where a power of sale without the intervention of the Court
447
in the Debts Recovery Tribunals. Since the banks and financial
institutions advance loans/facility below Rs. ten lakh, and if they
were secured by a mortgage on the borrower's immovable
ol-ioll i-f i
111 J-
448
vacate your land. In case we remove our structure before the
stipulated period, we shall be liable to pay to you, the rent for all
the 30 years, as agreed to above. ... In case I were to sell away the
buildings, which I shall be constructing on the above land, to
anyone else, then, the purchaser shall be bound by all the terms in
this lease-deed.'
The trouble between the parties started when the respondent
commenced construction on the rest of the land in a fashion so as
to be in close vicinity to the western boundary of the leased land to
house an industry, called Sudha Industries.
The appellant filed the suit in 1958, out of which this appeal arises,
urging that the said lease was a permanent lease. The Trial Court
partially decreed the appellant's suit.
.-^""T.1*:-^,"*:.;-1
For the academic interests of the students, a summary of a couple
of case laws are stated hereunder: Dena Bank vs Bhikhabhai
Prabhudas Parekh and Co. and others 2000 AIR (SC) 3654
This judgement is regarding issue of priority of dues of
Government vis-a-vis the bank dues. The Honourable Supreme
Court held that crown debts gets priority over others debts. In this
case the Court has examined the various provisions of the Sales Tax
Act, the Land Revenue Act and the precedents prevailing in India
as well as in England and finally come to the conclusion that the
debts of the crown (Government) prevail over the others provided
there are statutory provisions to that effect in the respective
statutes.
Sirpur Paper Mills Ltd v/s The Collector of Central Excise. AIR
1998 SC 1489.
In this case the Honourable Supreme Court held that just because
plant and machinery had to be installed in earth for better
functioning it does not automatically become immoveable
property. Property liable to excise duty. In this case, the issue was
whether plant and machinery installed in the earth can be treated
451
3. Multiple Choice Questions. Select the alternative as applicable.
(i) The power of sale without intervention of the Court is given to
the mortgagee in the case of:
(a) Equitable mortgage (b) English mortgage
(c) Simple mortgage (d) Usufructuary mortgage
(ii) A lease for an agricultural or manufacturing purpose is deemed
to be a lease for:
(a) year to year (b) month to month
(c) week to week (d) with infinite period
64.11 ANSWERS TO 'CHECK YOUR PROGRESS'
1. (i) False; (ii) True; (iii) True; (iv) True; (v) True; (vi) True;
UNIT
65
STRUCTURE
65.0 Objective
65.1 Introduction
65.2 Applicability
65.3 Definitions
65.4 Let Us Sum Up
65.5 Keywords
65.6 Check Your Progress
65.7 Answers to 'Check Your Progress'
65.8 Multiple Choice Terminal Questions
454
65.0 OBJECTIVE
The objective of this unit is to provide salient features of the Right
to Information Act, 2005. The Act has application to most of the
banks and financial institutions that will come under the purview
of public authority as defined in the Act.
455
STRUCTURE
66.0 Objective
66.1 Introduction
66.2 Obligations of Public Authorities
458
66.0 OBJECTIVE
This unit explains the obligations of public authorities, the
procedure for obtaining information and the information exempt
from disclosure etc.
66.1 INTRODUCTION
Every public authority shall maintain all its records duly
catalogued and indexed which facilitates the right to information
and ensure that all records that are appropriate to be computerised
are, within a reasonable time and subject to availability of
resources, computerised and connected through a network all over
the country on different systems so that access to such records is
facilitated.
66.2 OBLIGATIONS OF PUBLIC AUTHORITIES
PIOs (Public Information Officers) are officers designated by the
public authorities in all administrative units or offices under it to
provide information to the citizens that request for information
under the Act. Any officer, whose assistance has been sought by the
459
(b) the reasons for the decision, including any findings on any
material question of fact, referring
to the material on which those findings were based;
(c) the name and designation of the person giving the decision;
(d) the details of the fees calculated by him or her and the
amount of fee which the applicant is
required to deposit; and
(e) his or her rights with respect to review of the decision
regarding non-disclosure of part of the
information, the amount of fee charged or the form of access
provided.
If information sought has been supplied by a third party or is
treated as confidential by that third party, the PIO shall give a
460
treated as confidential by that third party, the Central Public
Information Officer shall within five days from the date of receipt
of the request give a written notice to such third party that he
461
(b) who has been refused access to any information requested
under this Act;
(c) who has not been given a response to a request for
information;
(d) who has been required to pay a fee which he considers
unreasonable;
(e) who believes he has been given incomplete, misleading or
false information; and
(f) in respect of any other matter under this Act.
Any person who does not receive a decision within the time
specified (normally thirty days) or is aggrieved by a decision of the
Central Public Information Officer may within thirty days from the
expiry of such period or from the receipt of such decision, prefer an
appeal to the officer who is senior in rank to the Central Public
Information Officer in each public authority. The appellate
authority has the power to condone the delay in filing the appeal if
he is satisfied that the appellant was prevented by sufficient
reasons from filing the appeal in time.
If the appeal is against the third party information, the appeal by
the concerned third party shall be made within thirty days from the
date of the order.
462
66.8 LET US SUM UP
The Right to Information Act, 2005 gives right to every citizen to
seek information from any public authority under the Act. He need
not give reasons for requesting the information. Every public
authority is required to display specified information about the
organisation, its employees, etc., and continue to update the
information periodically. Every public authority is required to
designate one or more of its officials as Central public information
officer and at branch, district levels Central assistant Public
Information Officers. The central assistant public information
officers are required to receive the request for information and
forward the same to the Central Public Information Officer within
five days of its receipt. Fees has been prescribed both for the
application and for the cost of furnishing information. Information
1C
UNIT
67
464
67.0 OBJECTIVE
The objective of this unit is to familiarise the students with the
requirements of the Prevention of Money Laundering Act, 2002
and the rules made there under in so far as the banking
transactions are concerned.
67.1 INTRODUCTION
The Prevention of Money Laundering Act, 2002 was enacted to
prevent money laundering and to provide for the confiscation of
property derived from, or involved in, money laundering. The
465
67.5 RULES FRAMED
The Central Government in consultation with the Reserve Bank of
India has framed 'The Prevention of Money Laundering
Maintenance of Records of the Nature and Value of Transactions,
the Procedure and Manner of Maintaining and Time for Furnishing
466
(c.) foreign exchange contracts, currency, interest rate and
commodity and any other derivative
instrument in whatsoever name it is called; or (d) letters of credit,
standby letters of credit, guarantees, comfort letters, solvency
certificates
and any other instruments for settlement and/or credit support.
(v) collection service in any currency by way of collection of bills,
cheques, instruments or any other mode of collection in
whatsoever name it is referred to.
67.7 INFORMATION CONTAINED IN THE RECORDS
The record shall contain the following information:
(a) the nature of the transaction
(b) the amount of the transaction and the currency in which it
was denominated
(c) the date on which the transaction was conducted; and
(d) the parties to the transaction.
67.8 PROCEDURE FOR MAINTAINING INFORMATION
The information as to the transactions shall be maintained in hard
467
2. Memorandum and articles of association
3. Board resolution or the power of attorney
4. Officially valid document in respect of the person, operating
the account
(c) Partnership firm
1. Registration certificate;
2. Partnership deed;
3. Officially valid document in respect of the person acting in
the transaction.
(d) Trust
1. Registration certificate;
2. Trust deed; and
3. Officially valid document in respect of the person acting in
the transaction.
(e) Unincorporated association
STRUCTURE
68.1 Introduction
470
68.1 INTRODUCTION
The General Assembly of the United Nations by the resolution
A/RES/51/162, dated 30 January, 1997 has adopted the Model Law
on Electronic Commerce adopted by the United Nations
Commission on International Trade Law. The said resolution
recommends inter alia that all States give favourable consideration
to the said Model Law when they enact or revise their laws, in view
of the need for uniformity of the law applicable to alternatives to
paper-cased methods of communication and storage of
information. It is considered necessary to give effect to the said
resolution and to promote efficient delivery of Government services
by means of reliable electronic records.
Therefore in May 2000, both the houses of the Indian Parliament
passed the Information Technology Bill. The Bill received the
assent of the President in August 2000 and came to be known as
472
240, Bills enacted as President's Act under the sub-Clause (a) of
(a) the initial electronic record was affixed with the digital
signature by the use of a private key
corresponding to the public key of the subscriber;
(b) the initial electronic record is retained intact or has been
altered since such an electronic
record was so affixed with the digital signature.
68.3 ELECTRONIC GOVERNANCE
Chapter III of the Act deals with electronic governance and
provides that information or any other matter shall be in writing or
in the typewritten or printed form, then notwithstanding anything
contained in such law, such requirement shall be deemed to have
been satisfied if such information or matter is -
(a) rendered or made available in an electronic form; and
(b) accessible so as to be usable for a subsequent reference. The
said chapter also details recognition
of Digital signatures.
The said chapter also details the legal recognition of Digital
Signatures.
68.4 CERTIFYING AUTHORITIES
Chapter IV of the said Act gives a scheme for Regulation of
Certifying Authorities. The Act envisages a Controller of Certifying
473
68.6 PENALTIES
Chapter IX of the said Act talks about penalties and adjudication
for various offences. The penalties for damage to computers,
computer system, etc., has been fixed as damages by way of
compensation not exceeding Rs. 1 crore to affected persons. The
Act talks of appointment of any officers not below the rank of a
director to the Government of India or an equivalent officer who
shall adjudicate whether any person has made a contravention of
any of the provisions of the Act or rules framed there under. The
said adjudicating officer has been given the powers of a Civil Court.
68.7 APPEAL
Chapter X of the Act talks about the establishment of the Cyber
Regulations Appellate Tribunal which shall be an appellate body
where appeals against the orders passed by Adjudicating Officers
BIBLIOGRAPHY
Balachandran, P, Foreign Exchange: A Practical Approach, 2nd
Edition.
Bare Act, Rules, Regulations and RBI Circulars.
Bharat 'FEMA, Rules, Regulations', RBI Circulars with allied Acts
and Rules including Master Circulars.
Bhashyam and Adiga, The Negotiable Instruments Act.
Chatterjee, Arun, Bank Lending, Vol. 1.
Companies Act, 1956 Bare Act.
Darashaw, J. Vakil, Transfer of Property Act, Commentaries on
Transfer of Property Act by Soli Sorabjee, Wadhwa and Company,
Nagpur.
Dastoor, Case Book on Law of Banking.
Debt Recovery Tribunal Cases (DRTC), Law Publishers (India) Pvt.
Ltd., Allahabad.
Gutteridge, HC, and Megrah Maurice; The Law of Bankers'
Commercial Credits, 7th Edition.
Indian Contract Act, 1872 - Bare Act.
Indian Partnership Act, 1932 - Bare Act.
IT Act 2000.
Kapoor, N.D., Mercantile Law, Sultanchand and Company, New
Delhi.
Keshkamat, W, Finance of Foreign Trade, 6th Edition.
Majumdar and Kapur, Company Law and Practice, Taxmann, New
Delhi.
476
Swami M. Radha and Vasudevan S.V., A Textbook of Banking, 1st
Edition. Tannan, Banking Law & Practice in India.
, Law of Banking.
The Foreign Exchange Manual.
The Prevention of Money Laundering Act, 2002 - Bare Act.
The Right to Information Act, 2005 - Bare Act.