TYPE OF CUSTOMERS
In this Chapter, for the convenience of study, types of Borrowers have been classified as under:
1. Individual
2. Partnership firm.
3. Hindu Undivided Family
4. Companies
5. Statutory Corporations
6. Trusts and Co-op Societies
7. Limited liability Patnership
One of the essential elements of a contract is “capacity of the parties to Contract”.
The Bank while dealing with an individual should ensure that he is competent to enter into contract. An individual is not competent to contract and money lent to him cannot be recovered in the following circumstances:
a) If an individual is a minor:
A person is minor in the eyes of the law if has not attained the age of 18 years under Indian Majority Act and the age of 21 years, if he/she is a ward, under the Guardians and Wards Act. The money lent to a minor cannot be recovered, if the minor fails to repay. Exception to this is a contract with a minor for supply of necessaries to the minor. If a Bank lends money to a minor to meet expenses for purchasing necessaries of life, then bank can recover the money from the estate of the minor.
b) If an individual is not of sound mind:
According to the Contract Act, if a person is not of sound mind, then he is incompetent to enter into a contract. The Act says that a person at the time when he makes the contract, he is not capable of understanding it and of forming a rational judgment as to its effect upon his interests, will be considered that he is ‘not of sound mind’. Hence, a contract would be invalid if it is proved that the time of entering into contract, the person was not in sound state of mind and could not understand what he was doing and could not understand the implications of entering into the contract.
c) Disqualified persons:
If a person is disqualified by the law in respect of his capacity to contract, then the contract entered into by such a person cannot be enforced. For example, a person might have been declared as insolvent under the Insolvency law. As long as the person continues to be undischarged insolvent, he cannot enter into contract.
2. PARTNERSHIP FIRM
‘Partnership Firm’ is another entity with which a Banker deals with in the course of his business. Partnership firm is governed by Indian Partnership Act 1932. 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 partners is governed by partnership deed which can be written or unwritten.
Legal Position of a partnership:
A partnership is not distinct from its partners. The liability is joint and several. It means that they responsible for the act of the partnership firm in their capacity as partner as well as individual. The Indian Partnership Act 1932, provides for registration of the partnership and it is necessary that a Banker dealing with partnership firm, should verify as to whether the firm is registered or not. This would help him to know all the names of the 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 act to bind the firm. In view of the provisions of Section 19 and 22, it should be noted that the act of a partner shall be binding on the firm if done:
a) in the usual business of the partnership;
b) in the usual way of the business; and
c) as a partner, i.e. on behalf of the firm and not solely on his own behalf.
Business of partnership firm: Mode of Operation
Rights and duties of the partners are determined by Partnership Deed. It provides for opening of bank accounts, borrowing powers, signing of cheques etc. Generally there may be a managing partner, who conducts business on behalf of other partners. While dealing with partnership firms it should be ensured that business is conducted as per partnership deed. If the Managing Partner does not have power to conduct certain transaction, then it should be ensured that consent of all partners is obtained.
Partnership firm and transaction in immovable property:
Section 19 of the Indian Partnership Act 1932 states that a partner cannot effect transfer of immovable property of the firm unless expressly authorized. While taking mortgage security of firm’s immovable property, it should be ensured that the partner creating mortgage is expressly authorized to create mortgage. If the partner has no authority to create mortgage, then the banker should ensure that all the partners jointly create the mortgage.
Insolvency of the firm:
The banker on receiving notice of insolvency of the firm must immediately stop further transaction in the account irrespective of the fact that the account is in credit or debit. In case there is a credit balance, and the banker does not intend to set off the same against the dues in any other account, then the balance has to be handed over to the official receiver appointed by the Court or as directed by the Court. In case the account is in debit then the banker would be required to prove his debt before the Court and thereafter will be entitled to receive the same from the Official Receiver either in full or as per the dividend declared by the Court.
Insolvency of the Partner:
If at the time of insolvency of one of the partners the firms account is in credit then the same can be operated by the other partners, 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.
Death of a partner:
In case of death, the principles, as stated* in the case of Insolvency of a partner, applies.
3. JOINT HINDU FAMILY (JHF) or HINDU UNDIVIDED FAMILY (HUF)
Joint Hindu Family is an entity of customary law among Hindus. This is governed by personal laws. In Bengal and other parts of erstwhile Bangal province, a Hindu Undivided Family is governed by Dayabhaga Law. In other parts of India, it is governed by Mitakshara Law.
Constitution of a Joint Hindu Family:
A Joint Hindu Family consists of male members descended lineally from a common male ancestor, together with their mothers, wives or widows and unmarried daughters bound together by fundamental principle of family relationship. The Joint Hindu Family is purely a creature of Law and cannot be created by act of parties.
in so far as he manages the family property or business or looks after the family interests on behalf of the other members. The Managership of the JHF property comes to a person by birth and he does not owe his position as Manager on consent of the other co-parceners. The liability of the Karta is unlimited, whereas the liability of the co-parceners is limited to their shares in the Joint Family Estate.
Powers and Duties of the Manager
A Manager or Karta of a Joint Hindu Family has the following powers and duties:
Powers:
i. Right to possession and management of the joint family property.
ii. Right to income from the joint family property
iii. Right to represent the joint family
iv. Right to sell the joint family property for family purpose.
Duties:
v. Duty to run the family business and manage the property for the benefit of the family
vi. Duty to account the income from the joint family business and property.
Banker and his dealings with Joint Hindu Family
i. A banker dealing with JHF, should know the Karta of the family.
ii. Banker should ensure that Karta of the Joint Hindu Family deals with the Bank and borrows only for the benefit of Joint Family Business.
iii. The application to open the account must be signed by all the members and all adult members should be made jointly and severally liable for any borrowings or if the account gets overdrawn.
4. COMPANIES
A Company is another type of customer, which a banker deals with. A company is a juristic person created by law, having a perpetual succession and Common Seal distinct from its members. A Company depending upon its constitution is governed by various laws.
Basic Law Governing Company:
In India Companies are governed by Companies Act, 1956. All the companies are required to be registered under Companies Act, 1956.
The Business and objectives of a company are known by two important documents called Memorandum of Association and Article of Association. Therefore for the formation of company these documents are essential.
Memorandum of Association
The Memorandum of Association is charter of a company. Its purpose is to enable the shareholders, creditors and those dealing with the company to know its permitted range of business.
Memorandum of Association of a company contains the following details among others:
i. Name of the company
ii. Place of the business of the company
iii. Objects of the Company
iv. Name of the first Directors of the company
v. Share capital of the company
Articles of Association
Articles of Association are rules and regulations governing the internal management of the company. 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:
i. Number of Directors of the company
ii. Procedure for conducting meeting of shareholders, Board of Directors etc.
iii. Procedure for transfer and transmission of shares.
iv. Borrowing powers of the company
v. Officers of the company and other details
Types of Companies:
A. Private Company:
According to Section 3 (1) (iii), a Private Company is one which contains following provisions in its Articles of Association:
i. Restriction on the right to transfer its shares.
ii. ii. Limitation on number of members to fifty excluding the people, who are employees and ex-employees of the company.
iii. iii. Prohibition as to participation by General public in its capital requirements.
iv. B. Public Company:
v. A Public Company is one which is not a Private Company i.e. a Public Company does not have any restrictions of the Private Company and its main features are as follows:
vi. i. Shares are freely transferable.
vii. ii. No restriction on number of members
viii. iii. Public at large can participate in its share capital.
ix. The Public Company can be further classified as
x. (a) Limited Liability Company – Liability is limited to the share in capital.
xi. (b) Unlimited Liability Company – Liability of the members is unlimited
xii. (c) Limited by Guarantee - liability is limited to the amount guaranteed
xiii. C. Government Company:
xiv. A company in which Central Government or State Government or both has not less than 51 % of share capital.
xv. D. Statutory Companies:
xvi. There are some companies established by an act of Parliament. These are called Statutory Corporations. For example, State Bank of India is established under State Bank of India Act, 1955. Nationalised Banks are established under Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970.
xvii. E. Other Companies:
xviii. Besides the above, Companies Act, 1956 classifies companies on the basis of time, place of incorporation and nature of working into the following categories:
xix. i.Existing Company:A company existing already before the coming into force of Companies Act, 1956.
xx. ii.Foreign Company: A company registered in a Foreign Country.
xxi. iii.Holding Company: A company owning more than 50 % of share capital in another company or a company which can appoint majority of Directors in another company.
xxii. iv. Subsidiary Company: it can be seen that when there is a holding company the other company is called Subsidiary Company.
xxiii. 5. OTHER TYPE OF CUSTOMERS
xxiv. (i) Clubs, Societies, Schools:
xxv. These bodies are usually governed by Companies Act or co-operative Societies Act and function within the ambit of those laws. For example clubs can be registered either under the Companies Act, 1956 or under Societies Registration Act or Co- operative Societies Act. In the case of lending to these bodies a Banker should study the bye-laws, rules and regulations applicable to them and ascertain the legality of lending to them.
xxvi. (ii) Trusts:
These are governed by Indian Trusts Act, 1882, if they are Private Trusts and if they are public trust, they are governed by Public Trusts Act or Religious and Charitable Endowments Act, if they are Trusts of Hindus and in the case of Muslims they are governed by Wakf Act.
A Banker dealing with Trusts should acquaint himself with the respective laws applicable to them and shall ensure that his lending is within the ambit of those laws.
(iii) Trustee:
The Trusts are managed by Trustees. The powers and duties of the Trustees are either provided in Trust deed or regulated by the respective laws applicable to such Trusts. For example in the case of Public Trusts, Charity Commissioners, or Commissioner of Endowments appointed by Government has power to supervise the activities of the Trusts. The Trustee of Muslim Wakf is called Mutawali and his conduct and function is regulated by Wakf Board. Therefore a Banker dealing with a Trust should ensure that all the permissions required for taking a loan is obtained from the respective Government authorities.
7. Limited Liability Partnership :
Limited Liability Partnership (LLP) is a new corporate structure that combines the
flexibility of a partnership and the advantages of limited liability of a company at a low
compliance cost. In other words, it is an alternative corporate business vehicle that
provides the benefits of limited liability of a company, but allows its members the
flexibility of organizing their internal management on the basis of a mutually arrived
agreement, as is the case in a partnership firm.
Owing to flexibility in its structure and operation, it would be useful for small and
medium enterprises, in general, and for the enterprises in services sector, in particular.
Internationally, LLPs are the preferred vehicle of business, particularly for service
industry or for activities involving professionals.
