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Q # 8: (a) Discuss rules and practices regarding operation of “Joint Account” (b) Partnership Account/Special Accounts maintained by commercial Banks. Explain its all kinds briefly.

Joint Account:

Introduction:-

This is an important type of Bank Account. These accounts are the accounts of two or more persons who are neither partners nor trustees.

Opening of Joint Account:-

Procedure is comprises of six steps, introduction, literacy of customer, preliminary investigation, Have Account opening from, inquiries from other Bankers and signature on specimen signature. While opening a Joint Account all parties should be present in Bank. Parties of the Joint Account should sign all documents and forms and on specimen signature.

Operation of Joint Account/Mandate for Joint Account:-

When such an account is opened, it is necessary that the banker should obtain clear directions as to whether one or more of them shall operate upon the Account. This is called a ‘mandate for Joint Account’.

However in the absence of such directions the banker should allow the operation under the signatures of all the joint account holders. The general principal of law regarding debts which a debtor can pay to one of the several joint creditors is not applicable to debts due from a banker to his customer.

Stop Payment in a Joint Account:-

Any one joint account holder may stop payment a cheque drawn by any other or others; but the removal of the stop – payment should be signed by all the joint account holders. If the joint account holders wish to delegate their authority on the account to an outside party, all the joint parties should signed this authority.

Prof. A.A Dogar .(M. com,M.A Eco, CMA-p II) GOVERNMENT POST GRADUATE COLLEGE OF COMMERCE SIALKOT

Special case:

The mandate given to one or more persons to draw on a joint account is automatically revoked by the death, bankruptcy or insanity of either or any of the accountholder.

Survivorship:-

Situation:

When one of the joint account holders dies the problem created about the relationship of the parties to the account & banker and customer. Therefore, the banks obtain a ‘survivorship’ mandate in such accounts, instructing about the course of operation on the account. The authority to operate upon the account should also state as to whom the balance is to be paid in the event of the death of one or more of the joint account holders.

Law of Devolution:

Instructions are not absolutely necessary in ordinary joint account, because under the law of Devolution, the survivor or survivors are generally entitled to the whole amount on the death of one or more of the joint account holders.

Similarly where customers are indebted to the bank jointly and not jointly and severally, the estate of the deed jointly account holder will be free from liability. However, in case of joint and several liabilities, the banker can claim against the estate of the deceased joint – debtor to the extent of the debt due at the time of his death.

Joint Account of Husband & Wife:-

The instructions on operation or mandate are very helpful when a joint account is opened by a husband and wife, because it will indicate the intention of the deceased for the payment of balance in the event of death of any one of them.

Marshall v. Curtwell:

It appears that where an account is opened by a husband of r his convenience, “The balance cannot be claimed by his widow, but it will be brought into the deceased’s estate.”

Foley v. Foley:

It was clearly stated that if the joint account was opened with the intention of making a provision to the wife in case of the husband’s untimely death, the widow receives the money.


Bankruptcy of Joint Account Holder:-

When the banker comes to know of the bankruptcy of one or more of the joint account holders, the operation on the account should be immediately stopped, and instructions should be sought from the solvent customers and the officials assignee in whom all the credit balance will vest.

Clayton’s Case:

In case of debit balance, the rule of Clayton’s case will operate against the bank, under which withdrawals will be the responsibility of the solvent customers, while every credit entry to the account will reduce the liability of the insolvent estate.

Safe Custody Item in Joint Names:-

The mandate should clearly indicate about the withdrawal of securities etc. left for safe custody in joint account, as they cannot be handed over to the survivors in the event of the death of one of the joint holders. These valuables should be delivered with the consent of the official assignee or the Manager of Lunacy, as the case may be.

Conclusion:-

Joint Accounts can be beneficial for customer who have some common Liabilities, but sometimes become headache of banker because of problems. In these cases banker should be very careful for sorting that.

(b) Account of Special Customers:

* Introduction:-

Every person can open bank account but the capacity of certain classes of persons to make valid agreements in subject to well recognized restrictions, firms and case of agent, Trustee, Executor, Administrators firms and Joint stock Companies etc.


Kinds

Partnership Account

Joint Stock Companies

Accounts of Clubs, Societies And Associations

Accounts of Special Agent’s Account

Customers:- Trust Account

Executor’s & Administrator’s Account

Account of Local Bodies

(1) Partnership Account:

Definition of Partnership:-

According to Section 4 of The Partnership Act, 1932:

“Partnership is the relation between persons who have agreed to share the profits of the business carried on by all or any of them acting for all.”

Therefore, a partnership can be created either by an oral agreement or by a written agreement; persons who have entered into partnership are individually called ‘partners’ and their collective group is called a ‘firm’. The maximum number of partners in a Banking business is 10 for other businesses it is 20.

Registration of Firm:-

According to Section 58 of Partnership Act, 1932:


This requires that every firm should be registered with the: Registrar of Firms,

as non – Registered firms cannot bring suit to enforce a right arising out of a contract against outsiders. Moreover, a suit field by an unregistered Firm is not maintainalle. A partner of a firm cannot sue his un – registered firm for damages for wrongful dismissal or for share of profits.

Bank Account:-

Therefore, banker should always open a firm’s account in the firm’s name and get the account – opening form signed by all the partners who must also state the nature of firm’s business, the names and addresses of all the partners and names of those who are authorized to operate on the account in the name of firm. All mandates and authorities are automatically revoked by any in the constitution of the firms either by death or bankruptcy of a partner or on retirement.

Operation of Firm’s Account:-

The account is to be operated according to the instructions given at the time of opening of account.

a) According to Section 19 of Partnership Act: Every partner in a firm has an implied power to bind his co – partner by drawing and indorsing of cheques, bill of exchange, promissory notes and accepting of cheques, bills of exchange and Promissory Notes. Every partner has an implied authority also to countermand payment of any cheque drawn on the firm’s account; and the banker is bound to comply with the instructions issued by that partner.

b) Partnership Letter: In addition to account – opening form, specimen signature card, a partnership letter duly signed by all partners in their personal capacity is also obtained. This letter is obtained from both registered and unregistered firm.

c) According to Section 25 of Act 1932: Partnership letter is not a substitute for the partnership deed in a registered firm.

Borrowing by a Partnership Firm:-

a) Authority to Borrow: A partner in a trading firm has the implied authority to borrow for the partnership firm and bind his partners for such borrowings in the ordinary course of business.

b) Documentation: A prudent Banker will not rely on the implied authority of a partner to borrow for the trading firm. He would rather obtain the signatures of all the partners on any


deposit, letter, charge and security documents. This procedure is helpful for banker, it becomes an evidence and the letter of partnership contains admission of Joint – and Several

Liability of the partners arising on the debt. c) Responsibility : Dr. Hart says in his ‘Law of Banking’, “The mere fact that the firm

(liable to pay) has had the benefit borrowed by a partner, will not render the firm liable to pay it. If money be lent to a partner on his individual credit, the fact that it is applied in discharge of the firm will not enable the lender to sue the firm for its payment.”

Admission of New Partners:-

a) Legal Provision: Section 31 of Partnership Act, provides that an incoming partner does not become liable to the creditors of the firm for anything done before he becomes a partner. He may, however, by an express agreement entered into the time of admission, and becomes liable to such debts.

b) Effects on Bank Account: The operation on the account should not be stopped at the time of new admission, but a fresh mandate/partnership letter duly signed by all the partners should be obtained and account will be subjected to the Rule in Clayton’s case. In case the new partner not agreed to accept the debit balance of old partners, the operation

on the account should be stopped further with. The new partner will have to sign his agreement to the retention of existing tangible securities covering the borrowing of the new firm.

Retirement of A Partner:-

a) Legal Provision: Section 32 of Partnership Act: lays down that unless expressly agreed, a retired partner is liable for the debts already incurred, and he remains liable for the future acts of the firms till the time he gives the notice of his retirement.

b) Effects on Bank Account: When a banker receives the notice of retirement, he will make necessary changes in his record. If the balance is credit then operation should not be stopped and if balance is debit then determining the liability of retiring partner and retaining security to that extend the account can be stopped for some time.

Bankruptcy/Insolvency of a Partner:-


a) Legal Provision: Section 34 of The Contract Act, 1872: provides that if there is no agreement to the contrary, a partnership is dissolved as soon as a partner is adjudicated insolvent or bankrupt. The solvent partners are empowered to continue business for winding it up, but they are accountable to the official assignee of insolvent partner’s interest.

b) Banking Operation: The banker should not pay the cheques signed by the insolvent partner before the order of his adjusdication without the approval of the solvent partners. If the balance is debit for determining of liability of insolvent partner’s account can be stopped and in case of Cr. Balance account continue normal operations.

Death of Partner:-

a) Legal provision: The death of a partner dissolves the firm and the deceased’s personnel representatives have no right to act on his behalf, though they can claim the deceased partner’s share in the assets of the firm.

b) Effects on Bank Account: If the account has a credit balance the operation on the account should not be stopped and the banker can presume that the surviving partners will account to the representatives of the deceased, but in case of debit balance operation should be stopped immediately, to fix the liability on the estate of the deceased partners.

Insolvency of the Firm:-

a) Legal Provision: Section 39 of the Partnership; In case of firm is adjusticated as insolvent the business of the partnership vests in the officials assignee who winds up the business. The debts on each estates are primarily payable out of the assets of each estate, and every surplus on private estate is applied towards the settlement of the creditors of the firm.

b) Operation of Account: The operation on the account is adjudicated as insolvent, and the personal account of each and every partner also becomes in operation.


(2) Joint Stock Companies Account:

Definition:-

Section 2 of the Companies Act 1982, defines;

“An association of individuals for the purpose of profit, possessing a common capital contributed by the members contributing it, such capital being commonly divided into shares, of which each possesses one or more and which are transferable by the owner.”

Status of Company:-

When such an association is incorporated according to law, it becomes “an artificial person created by law with a common seal and perpetual succession” and it is regarded as a legal person, separate and distinct from its members. Such a company is called Joint Stock Company.

Opening of Bank Account:-

Before an account of a public limited company is opened the banker must ask the person authorized to do so to submit the certified copies of the following;

a) Resolutions of the Board of Directors: The companies managing and Election of Directors order, 1972 prescribes that the minimum number of Directors in a public limited company is 7, and for opening bank account all the directors of the company have authorized to do so. This authorization should be in the form of a resolution specifying the following:Name of the banker the names of the persons authorized to operate Account and an undertaking that as and when the resolution will be revoked or the Directors be changed, the bank would be informed immediately. These resolutions should be signed by the secretary of the company, indicating the meeting number, and date on which the resolution was passed and it should be countersigned by Authorized Person.

b) Memorandum And Articles of Association: Section 15 to 25 and 29 of companies’ ordinance 1984: According to these sections Memorandum and Articles of Association are the most important documents, as it is the


charter of the company. The Articles of Association contain rules and regulations for the internal management of the company.

c) Certificate of Incorporation: Section 33 of companies’ ordinance 1984; This is very important document for banker, it is conclusive evidence that all the requirements of the law in regard to the formation and registration of the company have been duly compiled with.

d) Certificate of Commencement of Business: Section 146 of Companies’ Ordinance 1984; when the Registrar is satisfied that the company has fulfilled all the requirement for the commencement of business with regard to the subscription of shares by the public as well as the Directors, he issues certificate of commencement of business.

e) Balance Sheet: A balance sheet can be submitted by only such companies which have been operating long enough to compile one. A banker can also draw conclusions from the previous year’s Balance Sheet about the position of company.

Powers to Borrow:-

a) Legal Provision: Every Trading Company has an implied power to borrow money for the purpose of its business; and the Memorandum and Articles of Association specify the borrowing powers of a limited company. If the company borrows beyond its powers, the borrowing in Ultra Vires and void. Therefore, the banker must examine the provision on the borrowing power very carefully and should not allow advances beyond the powers within the specified limitations.

b) Separate Resolution: Every time the company borrows, the banker must take a separate resolution because such a resolution will often help getting over the difficulty which may arise where delegation by the Directors is permitted to committees or some of the members of the Board.

c) Personal Guarantee: The prudent banker must take personal guarantee from the Directors to cover the over – exercised power, because this guarantee makes the Directors personally liable for the debts.

Operation of the Account:-


a) Nominees: The account of the company is opened on the resolution of the Board of Directors which

nominates the persons authorized to operate upon the account. The banker must take the specimen signature of the authorized persons and allow the operations on the account under those signatures as long as the authority is not terminated.

b) Stoppage: When a banker receives a notice of death, retirement or dismissal of the authorized person, he should stop the operation on the account and wait for a fresh resolution authorizing another person for operation, and any cheques drawn before this should be honoured if no suspicion is in there.

c) Initiation of Company: The banker may open the account of a newly floated public limited company without the certificate of commencement of business in order to receive the amount of issued capital from the prospective shareholders, however withdrawals can’t be made on such account till the time when the certified copy of certificate of commencement of business is given.

Winding up of Company:-

The banker should stop operation on the account immediately on receipt of winding – up information through a reliable source. The banker must arranged to adjust all the outstanding loans and advances etc. by disposing of the securities lying with him and should lodge claim for the remaining balance against the liquidator.

(3) Accounts of Clubs, Societies And Associations:

Introduction:-

These are non – trading organizations and formed for the promotion of culture, science, education, recreational activities and charitable purposes etc. Some of these institutions are registered.

Registration:-


Clubs, Societies and Associations are registered under Societies Regulation Act, 1866 and are issued a certificate of registration after they have been found fit for registration.

Administration:-

These institutions are administered by a body known as ‘Governing Body’ or ‘Managing/Executive committee’ which draws its authority from the rules and regulations or bye – law of institution.

Opening of Account:-

When the account of such institutions is to be opened, the banker must take the following documents:

a) Resolution: The Resolution of the Governing Managing committee authorizing the opening of the account with the bank. The resolution should name the persons authorized to operate upon the account, clearly specifying the powers of the signed by the chairman of the meeting at which the resolution was passed and countersigned by the Secretary of the Governing Body/Executive Committee.

b) Bye – Laws: Certified copy of the bye – laws or rules and regulations, clearly showing the limitations of the managing committee of the Governing Body.

c) Signature: The account – opening form duly signed by the authorized persons who would operate on the account.

d) Account Opening Form: For opening of account company must obtain account opening form.

e) Undertaking: An undertaking signed by all the authorized persons on behalf of the institution, expressly mentioning that as and when any change takes place in the persons authorized to operate on the account, the banker will be informed immediately.

Operations of Account:-

Generally, these institutions are not registered under the registration laws and have no legal entity; as such they have no contracting powers. They can neither be sued nor are the


individual members of un-registered institutions liable for any overdraft as long as these members sign the cheques in their representative capacity and not in their individual capacity. Only registered institutions are legal entitles and are competent to enter into valid contract.

(4) Agent’s Account:

Definition:-

“An agent is a person who has powers to act for and on behalf of another person his ‘Principal’.”

Power of Attorney:-

An agent can open and operate a bank account, if authorized by his principal under power of attorney.

Stamped:-

The powers of attorney should be stamped in accordance with the provisions of Stamp Act which apply even to a power of attorney executed abroad for use in Pakistan. Such powers should be stamped within three months of arrival of the Agent in Pakistan.

Opening And Operation on Account:-

a) Power: The powers of an agent are strictly constructed in the power of Attorney executed in his favour, and the banker must carefully examine the clauses and borrowing powers. He should keep a certified copy of it on record.

b) Cancellation: The principal may cancel the power of attorney at any time he wishes and this power is automatically canceled when the principal becomes insane or is declared insolvent. Jon death of principal account termed as ‘Deceased’ Drawer.

c) Stoppage: The banker should stop operation on account after receiving the notice of cancellation of power of Attorney.

(5) Trust Account:


Definition:- According to Section 3 of Trust Act: “A ‘Trust’ is an obligation annexed to the ownership of property and arising out of a confidence proposed in and accepted by him for the benefit of another, or of another and the owner.”

A Trust may be created for any lawful purpose. Every Trust is lawful unless it is forbidden by law. Every Trust of which the purpose is unlawful is void.

Parties To Trust:-

According to Section 3(2) of the Trust Act 1882, it has following constituents:

a) The person who declares the confidence is called the “Author of the Trust”.b) The person who accepts the confidence is called “Trustee”.c) The person who benefits from the confidence is called “Beneficiary”. d) The subject matter of The Trust that is called “Trust Property” or “Trust money” or “Beneficial

interest”.e) The instrument, by which a Trust is declared, is called the “Instrument of Trust”.

Opening And Operation of Account:-

a) Account Title Trust: The account should be opened in the name of Trust and all trustees should sign the account – opening form. They should also sign a mandate governing transactions on the account including authority to the bank asking for securities deeds, boxes or parcels and their contents for safe custody.

b) Account Title Trustee: If the account is opened in the name of trustee, it should not be treated as Joint Account, and the ledger and specimen signature cards etc. should be boldly marked suitable to show that it is Trust Account.

c) Instrument of Trust: The banker should examine the instrument of Trust very carefully, and an attested copy of it should be kept on record. Particular attention should be paid to the borrowing powers and the provisions for the appointment of new Trustee. Section 47 of Trust Act, 1882 has forbidden the delegation of authority to co – Trustee or to a stranger by the Trustee.

d) Attorney or Proxy:


A Trustee may appoint an attorney or proxy for an act of routine nature involving no independent direction. Therefore, the banker should not allow delegation, for there is an agent great risk of breach of trust wherein banker may be asked to redress it.

Death of Trustee:-

*Trust Act 1882;

Section 44: “When an authority to deal with Trust property is given to several trustee, and one them disclaims or dies, the authority may be exercised by the continuing trustee, unless from the terms of the Instrument of Trust it is apparent that the authority is to be exercised by the number in excess of the number of the remaining trustees.”

Section 74: This further elaborates that “On the death or discharge of one of the several co – trustees, the Trust Survives, and the Trust property passes on to the others, unless the instrument of Trust expressly declares otherwise.”

Insolvency of Trustee:-

Bankruptcy or insolvency of a Trustee does not terminate his appointment as trustee; but it is a sound reason for court to remove such a Trustee, so that he may not appropriate The Trust fund. In the words of the Sir George Jessel. “A necessitous man is more likely to be tempted to misappropriate Trust funds then one who is wealthy; and besides, a man who has not shown prudence in managing his own affairs is not likely to be successful in managing those of others.

The banker must exercise increased vigilance to guard against the consequences of breach of trust.

(6) executor’s And Administrator Account:

Definition of Executor:-

“An Executor is a person to whom the executing of a will is entrusted by the testator.”


Definition of Administrator:-

“An Administrator is a person appointed by a court of law to look after the estate of a person who died without leaving a will or the persons he appointed are incapable of acting as executors.”

Will:-

Section 74 of The Law of Will: lays down that a will may be drawn in any such language or

expression that the wording expresses the intentions of the testator clearly. A will may be oral or in writing and may not be signed or witnessed. The Testator under Muslim Law is permitted to give only 1/3 of his estate to a stranger by will, while he may will the other 1/3 to only one of the legal heirs, provided the other legal heirs agree to it. Moreover, the will drawn under Muslim Law does not require to be attested.

Probate/Letter of Administration:-

It is a certified copy of a will under the seal of the court. An application for the letter of Administration should be field along with the following;

a) The date & time of testor’s death.b) Statement mentioning that the enclosed is his last will and testament.c) Statement mentioning that the enclosed will was duly executed. d) Details of the estate which are likely to come into the petitioner’s hand.e) Declaration that the petitioner is applying for probate and that he is the executor named in the

will.

Section 281: of the law of will makes it obligatory that the witness should declare that he was present and saw the said testator affix his signature thereto or that the testator made his will in the presence of the witness.

Opening and Operation of Account:-

After the death of the testator executor can open and operate Bank Account after granting of probate.

a) Examination of Documents: In such a situation, the banker must examine the will and testament very carefully to verify the names of the executor or administrator.


b) Letter of Administration: In case the account is being opened in the name of administrator, the valid letter of Administration should be seen before opening an account, and an attested copy of his letter should be kept on record with the account – opening form.

c) Joint Account: If there are more than one executors all of them should sign on the account opening form and they should all sign the instructions for the operation of account.

d) Transactions: The banker must exercise great care in the operation on the account, as the executors are the trustees of the deceased person. So the banker can be held liable as a party to any breach of trust.

e) Borrowing: The borrowing powers of the administrator or executor should be verified from the will or letter of Administration and the application for advance should be signed by all the executors or administrators.

Death of administrator:-

When one or more of the executors and administrators dies, the authority is vested in the survivors. If the dead was the sole executor, a fresh letter of Administration must be applied for. If the account is in credit, the operation on the account should not be stopped and the cheques signed by the executor or Administrator before his death should be paid.

(7) Account of Local Bodies:

Local Bodies:-

These are autonomous institutions formed under the Local Bodies Act, such as Municipal Corporations or Municipal Committees, District Councils, and Councils etc. They are governed by their own Managing Committees, comprising generally of elected members. They are administered through notifications issued under the Act from time to time. The Chairman of these Local Bodies may be elected by the members or nominated by the Government.

Opening and Operation of Account:-


a) Request for Account Opening:

When an account of a Local Body is to be opened, banker must see that the request come only from the person authorized to do so in the Controlling Act. Account-opening form should be signed by the authorized persons .b) Authority to Operate:

He should also mention clear instructions regarding the operation on the account; and specimen signature should be taken from the person authorized to operate the account. c) Advances:

As a general rule no advance should be considered for a Local Body unless some statutory provision expressly or impliedly authorizes the banker to do so .In case the related statutory provisions allow the borrowing, the banker must ensure that the purposes and the limitations are in accordance with the authority, and that prior approval of the Government has been obtained before applying.d) Borrowing:

If a Local Body borrows ultra vires, the payment of the loan is also ultra vires.“Therefore, the banker who lends to an authority acting ultra vires when borrowing, may be forced to fund any money repaid to him by the authority, and also any markup charged on the unauthorized loan”
