BANKING AND NEGOTIABLE INSTRUMENTS

LECTURE 1

INTRODUCTION

A stable and efficient financial system has a powerful influence on a country's

economic development A central issue, therefore, is the fact that the institutional
structure of financial regulation and supervision has a huge bearing on the
efficiency of. Financial regulation and supervision itself and an irrefutable
impact on the wider economy.

However, while it is universally agreed that the central bank has a major
responsibility for maintaining systemic stability and the integrity of the
payments system, it not universally bridged that the central bank should be the
supervisory agency for individual banks or other financial institutions, and
markets. In some countries, this debate is also linked to issues related to the
independence of the central bank with respect to the conduct of monetary policy.
'

See David T Llewellyn, Institutional Structure of Financial Regulation- Aligning

Supervisory Structures with Country Needs. Paper presented at World Bank
Seminar Washington DC, 4-5th December, 2003.

The underlying theme in the debate is the extent to which financial regulation
as between different types of businesses should be integrated, and also whether
responsibility for financial regulation and supervision should be vested in a
single agency. Over the year’s financial regulation and supervision has, in most
countries, been organized around specialist agencies tint have distinct and
separate responsibilities for banking, securities insurance sector.

See Article by Kenneth Kaoma Mwendo, Journal of International Banking Law

2002. Uganda, financial institutions have just one regulatory agency; the Bank
of Uganda.
HISTORY OF THE BANKING SECTOR IN UGANDA

Historical Background

a) Pre-Independence era

The pre-independence commercial banking sector was dominated by office

foreign owned banks. These banks were very conservative in their lending
policies usually giving loans on strict commercial criteria because they were
foreign owned they were somehow shielded from political interference in their
lending decisions. As a result, others banks tended to lend to larger companies
and to finance trade all of which were owned or controlled by foreigners. They
discriminated against Africans because the majority could not meet strict
commercial criteria as they did not have acceptable securities such as land
titles, life insurance policies, bills of exchange and so on and they were largely
engaged high risk and relatively non-commercial ventures such as agriculture
and animal husbandry. The colonial government reacted to the perceived
inadequacies of foreign owned banks 1 by enacting in early 1 950s The Uganda
Credit and Savings Bank Act which created the Uganda Credit and Savings
Bank.
This was the first Public Sector bank in Uganda. The major purpose of the bank
was to facilitate loans to Africans in furtherance of agricultural, commercial,
building and co-operative society purpose in Uganda. This bank was expected
to increase access to credit by African business and farmers.

b) The Independence Era 1962-1993

Dissatisfaction with foreign controlled banks continued after independence.

They were widely criticized because of their discrimination in lending money.
The independent government regarded this as irrational and unjust and as a
constraint on its development objectives.

The primary objective of the reforms of the banking sector in 1960s and 1970s
was therefore to fill the financing gaps, and influence allocation of credit directly
through administrative controls. In 1965 the Uganda Credit and Savings Bank
was transformed into Uganda Commercial Bank (UCB) which is now Stanbic
Bank. The Bank of Uganda was set up in 1966, Co-operative Bank was set up
in 1972 and it was owned by the Cooperative Societies. These banks were
expected to fulfill development objectives based on government development
plans. In early 1970s the government acquired 49% of the shares in the foreign
owned banks, except Standard Chartered Bank. The foreign owned banks
reacted by closing down most of their branches in the rest of the country except
for those in Kampala. The vacuum left was filled by Uganda Commercial Bank
and the Co-operatives bank which embarked on expansion programmes.

By 1991 the Cooperative bank had 24 branches and Uganda Commercial Bank
had 90 branches and the latter held about 50% of all the bank deposits. This
expansion was based on a very inadequate legal framework. The Banking Act
which was enacted in 1955 required banks to have a paid up capital of one
million shillings and to be licensed by the Registrar of Companies Prudential
Regulation and Supervision were neglected. This was in part a legacy of the
British colonial rule and the dominance of foreign banks. Because these banks
were subsidiaries of reputable foreign banks which had their own prudential
management rules, it appeared unlikely that they would be allowed to fail by
their parent banks. Prudential Regulation seemed irrelevant and the banks'
regulation system prevailing in Britain at the time was of a highly informal
nature which entailed no independent on-site examination of banks by
supervisors.

The 1955 Act was repealed and replaced by the Banking Act as amended by the
Banking (Amendment) Act. This Act was a great improvement on the previous
one. Only companies incorporated in Uganda were allowed to do banking
business and the minimum paid up capital was raised to twenty million. They
were required to make mandatory periodic returns. The Act provided for capital
reserves and prohibited unsecured credit facilities and loans.

However, these measures did not address Prudential Regulation concerns. They
did not address the issue of insider lending which has been one of the leading
causes of bank distress and collapse. They did not address the quality and
experience of directors and managers. The licensing and revocation of licenses
was left at the absolute discretion of the Minister without sufficient guidelines
on how to exercise the discretion. The inspection of banks therefore was not
clearly assigned to any single authority, the law only provided that the Minister
or Bank of Uganda could carry out non mandatory periodic inspections. Yet if a
single authority had the mandate to inspect and to force improvement in
management and internal working of banks it could, possibly, prevent bank
failures. The Bank of Uganda Act was equally inadequate.

The Minister had powers to give directions to the Central Bank relating to the
financial and economic policy of the bank and the bank was bound to comply
with any such direction. The law was definitely not intended to give Central Bank
prudential regulatory powers. The law did not set out or impose standard
uniform accounting procedures and record keeping standards. The Central
Bank was not given powers to vary minimum paid up capital or to adjust it as
circumstances arose. An illustration of this was the currency reform of 1987. By
removing two zeroes from the currency, the minimum capital requirement of
shillings 20,000,000 was reduced to shs. 200.000. The two zeroes were 'brought
back' by inflation and exchange rate depreciation. But still a bank could be
licensed with a minimum paid up capital of shs. 200,000. The low minimum
capital requirement and political licensing of banks largely contributed to attract
locally owned undercapitalized' banks to enter the market. The banks were
largely owned by manufacturing, commercial or trading interest and real
property owners. Commercial Banking Environment and the rapid expansion of
Uganda Commercial Bank and the Co-operative bank in the 1970s and 1980s
was carried out when there was shortage of professional and skilled personnel.
This development coupled with a weak regulatory framework undermined the
banks managerial efficiency and internal controls further; both banks were
imprudently managed leading the Uganda Commercial Bank to accumulate
nonperforming loans of around 75% of its total loans portfolio by 1990s.
This situation was brought about by a number of factors; There was automatic
liquidity support for Uganda Commercial Bank from the Bank of Uganda. The
bank did not have proper accounting procedures. There was political influence
on lending policies of the Uganda Commercial Bank and corruption. Because
the loans were politically influenced, the borrower's repayment discipline was
very low. Political instability, protracted economic crisis, loan disruptions and a
weak legal regime made the lending environment very difficult. All these factors
influenced the way new private sector banks such as Greenland Bank, Teffe
Bank, International Credit Bank, Centenary Rural Development Bank and
others 6 were operated. This situation persisted until 1993 when the Financial
Institutions Act 7 and the new Bank of Uganda Act were enacted the weak points
of the Banking Act 1969 were addressed. Insider lending, large credit exposures,
investment in non-bank business and purchase of real estate were all addressed
accordingly. The Central Bank was given wide powers to carry out both on-site
and off-site supervision with a range of options to take against violations. It also
set up a Deposit Insurance Fund to be funded by the assessments from the
banks. The licensing of banks was taken away from the Minister. The Central
Bank used its powers under the statute to intervene in Nile Bank and Sembule
Bank (now Allied Bank) and to close down Teffe Bank, International Credit Bank,
Co-operative Bank and Greenland Bank all of which were insolvent by
intervention time. What is noteworthy, however, is that when these banks were
closed, the government directed that all depositors should be paid whether they
were protected or not at the expense of the tax payers.

LECTURE 2

LEGAL AND INSTITUTIONAL FRAMEWORK

REGULATION OF THE BANKING SECTOR

The term regulation refers to a set of binding rules issued by a private or public
body. Generally, regulatory rules are rules that are -applied by regulators in the
fulfilment of their functions. Such rules include prudential rules, corporate
governance and internal control systems, conduct of business rules, and
methods of supervision. The body issuing these rules must have the necessary
authority to issue the rules.

A supervisor, by contrast, undertakes mainly on-site and/or off-site supervision

of financial services businesses. In Uganda, the regulatory framework, reposes,
in the same body both powers to regulate and supervise the activities of financial
services businesses and this role is the reserve of the Central Bank (Bank of
Uganda) by virtue of the 1995 constitution.

a) The Bank of Uganda

The Regulation and control of banking business in Uganda, is principally done

by the central bank with the mandate directly derived from Article 161 of the
Constitution
Article 162(1) lays down the duties of the central bank. It states; the Bank of
Uganda shall:

a) promote and maintain the stability of tile value of the currency of Uganda
b) regulate the currency system in the interest of the economic progress of
Uganda encourage and promote economic, development, and efficient
utilization the resources of Uganda through effective and efficient
operation of a banking and credit system.

The control of the banking business by the central bank is in six categories;

a) Licensing

b) Supervision

c) Approval of minimum capital requirements of banks

d) Restrictions on the range of loans, advances, trade, investments and

business that a bank can undertake

e) Mergers and restrictions on transfer of shares

 f) Seizure, reorganization and liquidation; of banks in extreme cases

b) The Financial Institutions Act 2004

The enactment of the Financial Institutions Act 2004 (FIA) stemmed from the
banks failures between 1994-1999 and the need to strengthen the regulation of
the banks.

A judicial commission of inquiry into the closure of banks instituted under Legal
Notice and the terms of reference of the commission among others were to:

• Examine the primary cause of the failure and subsequent closure of

international Credit bank (ICB) the Greenland bank ltd (GLB), and the co-
operative bank Ltd.

• To make recommendations to strengthen the prudential regulation and

supervision of the banks and strengthen the bank of Uganda's
intervention policy towards failed banks in order to protect depositors and
the public funds.

The recommendations of the commission were incorporated in the Financial

Institutions Act 2004. With the aim of revising and consolidating the law relating
to financial institutions, to provide for the regulation, control and discipline of
financial institutions by the Central bank and to provide for other related
matters. In January 2016 parliament passed the Financial Institutions
(Amendment) Act, 2016 with the objective of amending the Financial Institutions
Act 2004 to provide for Islamic banking, to provide for bank assurance, to
provide for agent banking, to provide for special access to the credit reference
bureau by other accredited providers and service providers, to form the deposit
protection fund and for related purposes.

c) Licensing

According to section 4(1), (2) of the FIA, the Act prohibits any person from
transacting any deposit taking Financial Institutions business in Uganda
without a license and it is only a company that can apply for a license to transact
financial business In Uganda.

The Financial Institutions (Licensing) Regulations is to the effect that an

applicant proposing to transact financial institution business as a bank, shall
have a minimum paid up capital of not less than 120billion for commercial
banks and 20 billion for Micro Deposit Taking Institutions up to 30 th June
2024 after which it will be150billion for commercial banks and 25 billion for
Micro Deposit Taking Institutions.
Section 4 (2a) allows a company licensed to transact financial institutions
business to carry out the licensed business through an agent.

The Act introduced stringent measures to be considered by the central bank to

grant a license for example vetting of directors, substantial shareholders and
officers of a financial institution under a proper and fit test. This was illustrated
in the case of Kizito v Bank of Uganda. The Act provides for the classes of
license and the permitted functional services particulars of which are in the
second schedule and these are:

• Commercial banks
• Merchant bank
• Post Office Saving bank
• Mortgage bank

The 2016 amendment Act introduced the business of Islamic bank class 9
among others

Section 17 provides that the Central bank is given wide powers to revoke a
license at any time. The grounds to revoking the license among others are:

• When a bank is under-capitalized

• Conducting business in a manner detrimental to the interests of the

depositors.
 • Engaging in deception to the Central bank or the general public of the
bank's financial position, ownership, management, operations or other
acts material to its business.

• When the bank has without the consent of the Central bank amalgamated
with another financial institution or sold or otherwise transferred its
assets and liabilities to another financial institution.

d) Shareholding

Section 18(1)(a),(b) and the Financial Institution (ownership and control)

Regulations prohibits a person or body corporate controlled by one person or
group of related persons or body corporate owned or controlled directly or
indirectly by a group of related persons from owning or acquiring more than 49%
of the shares of a financial institution.

Section 19 in consonance with the Financial Institution (ownership and

control) Regulations prohibits a financial institution from allotting, issuing, or
registering the transfer of more than 5% or more of its shares to any person or
group of related persons without permission from the Central bank, the central
bank will grant such a transfer if

• It will not be contrary to public interest

• ii. It will not be contrary to the interests of the financial institution
concerned or its depositor
• iii. It will not be detrimental to the finance services industry in general.

e) Capital Requirement

According to the Financial Institutions (Revision of minimum capital

requirements) 2022 provide that a bank shall have a minimum paid up
capital of not less than 120billion for commercial banks and 20 billion for
Micro Deposit Taking Institutions up to 30th June 2024 after which it will
be150billion for commercial banks and 25 billion for Micro Deposit Taking
Institutions.

f) Prohibitions and Restrictions

In order to further protect depositors, there are prohibitions which are intended
to protect the capital of the bank thus banks under section 29 and 30 , are
prohibited from granting advance or credit facility or accommodation against
any security of its shares or of those of a company affiliated to it or such
instrument which may qualify as capital, the Act further emphases that a
financial institution is prohibited from granting a loan to any of its affiliates and
associates, directors, persons with executive authority, substantial shareholders
to any of their related persons or their related interest (insiders) except on terms
which are non-preferential in all aspects including credit worthiness, term,
interest rate and the value of the collateral.

According to Section 37 (a), banks are not allowed to engage in trade, commerce,
agriculture, invest in real estate or engage in underwriting of shares or securities
brokerage, this is intended to protect depositors whose money may be invested
in high risk investments; this prohibition does not apply to financial institutions
engaging in Islamic financial business.

g) Accounts and Financial Statements

The Act under sections 48(8), 50(1), (3) requires the banks to submit audited
financial statements to the Central bank and thereafter their publication in the
newspaper of a nation-wide circulation and these are to be exhibited in their
respective banking halls.

h) Corporate Governance

Section 52(1), (2) is to the effect that a bank must have a Board of Directors of
not less than five directors whose chairman must be a non-executive director,
the prohibition of an executive director being the chairman is an attempt to
secure the board independence by preventing it from being manipulated by an
executive director.

i) Credit Reference Bureau

The Act further under section 78,78A and the financial institutions (Credit
Reference Bureau) Regulations 2005 requires the establishment of a credit
reference bureau for the purposes of disseminating credit information among
financial institutions or their business all financial institutions should report to
the bureau the details of nonperforming loans and other accredited credit
facilities classified as doubtful or loss in their loan portfolio also customers
involved in financial malpractices including bouncing of cheques due to lack of
funds and fraud, banks are required to perform a credit check on a customer
who applies for credit from the financial institution.

j) Supervision

The Act under section 79(1), lays great emphasis on the onsite inspection and
off site surveillance and prompt provision of accurate information when required
in onsite inspection, the Central bank or another person appointed by it can
inspect any bank and its financial records and books of accounts on its
premises. Offsite inspection requires banks to furnish periodic information to
the Central bank, periodic returns and the audited financial balance sheet and
profit and loss account including those of subsidiary, affiliate, and associates.

k) Corrective actions

The Central bank is given wide powers under Part IX to take punitive measures
against the bank or individual in the violation of laws, regulations and directive
if the violations are not severe, the Central bank may order the bank to take
remedial action to comply with the regulation and directives if the violations are
severe the central bank can issue formal and legally enforceable actions such as
cease and desist orders. The most far reaching powers of the Central bank is to
take over management of the bank if the continuation of its activities is
detrimental to the interests of the depositors or example the central bank on 2O
October 2016 took over the management of Crane bank ltd under section 87(3)
88(1) (a) and (b) and appointed a statutory manager of the affairs of Crane bank
and suspended the board of Crane bank.

l) Liquidation

The Act provides that liquidation or winding up of a bank shall only he

commenced by the central bank or the institution itself under provisions of
voluntary liquidation, reference seen under Part XI On 28th September 2012
the constitutional court issued an interim order of Humphrey Nzeyi
petitioner/applicant) against bank of Uganda and the Attorney General:
against the actions of bank of Uganda to wind up the affairs of National bank of
commerce until the hearing of the main application and the entire case.

m) Deposit Protection Fund

Under section 108 (1) (2) (3), establishes the deposit protection as a body
corporate and a separate legal entity from the Central bank. The purpose of
the fund is to be a deposit insurance scheme for customers of contributing
institutions may act as a receiver or liquidator of a financial institution if
appointed by the Central bank. The idea behind the fund is that it reduces
bank panic and loss of public confidence in the banking system, with the fund
all but the largest depositors are assured that they will not suffer deposit loss
even if the bank failed therefore the tax payer’s money will not be used to pay
depositors as was the case when Greenland, Teffe, International Credit Bank
and the cooperative banks failed. Every financial institution is required to
contribute to the fund and amount specified in the notice even micro finance
deposit taking institutions contribute to the fund. The Act provides that
protection shall extend to the customer’s aggregate credit balance at the bank
less any liability of the customer to the bank to the extent determined by the
central bank. According to Mukubwa in his ‘Essays in African Banking Law
and Practice’ Second Edition, the fund currently (2009) protects a maximum of
Ushs. 10 Million. Refer to Part XII of the Act.
n) Special Provisions on Islamic Banking

Islamic bank means an Islamic financial institution which is a bank and an

Islamic financial institution means a company licensed to carry on financial
institution business in Uganda whose entire business comprises Islamic
financial business and which has declared to the Central Bank that its entire
operations are and will be conducted in accordance with the Shari’ah. On the
other hand, Islamic financial business means financial institution business
which conforms to the Shari’ah.

The 2016 Financial Institutions Amendment allows existing Banks to apply to

the Central Bank to carry on Islamic financial business in addition to the
existing licensed business through an Islamic window. Islamic window means
part of the financial institution which conducts Islamic financial business.

Every financial institution which conducts Islamic financial business is required

to appoint and maintain a Shari’ah Advisory Board. The Central Bank of Uganda
is also required to have a Central Shari’ah Advisory Council. A shariah Advisory
Board means a Board appointed by a financial institution to advise, approve and
review activities of an Islamic financial business in order to ensure that the
financial institution complies with the Shariah. Refer to Part XIIIA of the Act.

0) Conduct of Bank Assurance

Bank assurance means using a financial institution and its branches, sale
network and customer relationship to sell insurance products a financial
institution wishing to engage in the business of bank assurance or Islamic
insurance as a principle agent should get prior written authorization of the
Central bank and the activities shall comply with the insurance Act as per
section ll5D (1) (2) (3)

p) Amalgamation, arrangements and affected transactions

Recognizing the fact that the safeguards of licensing may be swept away by
change in ownership of a financial institution therefore section 112 is to the
effect that, any form of amalgamation, arrangement between financial
institutions can only be done or effected with prior consent of the Central bank,
the Central bank may under some circumstances refuse to grant such
transactions.

q) Miscellaneous

The act under section ll6 (4) imposes stringent fines and penalties the fines and
penalties expressed in monetary terms and recovered by the central bank shall
be used to offset the costs of supervising financial institutions the same is
pointed out under section 43 and 43 of the Act

Basing on section 119 (4), (6) provides that unclaimed balances are transferred
to a dormant account of the bank after 2 years and the bank shall cause it
advertised in the print media after 3 years, then after 5 years from the date of
advertisement the money shall be transferred to the Central bank to off-set the
costs of supervising financial institutions.

The Act as per section 47 a1so requires banks to report any suspected money
laundering 45 activities to the Financial Intelligence Authority. The Act under
section 124 prohibits suits or legal proceedings against the Bank of Uganda or
any office for acts done in good faith.

LECTURE 3

BANKS AND BANKING BUSINESS

a) Definition of a Bank

A bank is a financial institution licensed by a government agency. Its primary

activities include borrowing and lending money. Many other financial activities
have over time been incorporated into the banking business. For example, banks
are important players in financial markets and offer financial services such as
investment funds. Banks act as payment agents by conducting current accounts
for customers, paying cheques drawn by customers on the bank, and collecting
cheques deposited to customers' accounts. Banks also enable customer
payments via other payment methods such as telegraphic transfer and ATM.

The definition of a bank varies from country; to country. Under English common
law, a banker is defined as a person who carries on the business of banking,
which is specified as

• conducting current accounts for his customers

• paying cheques drawn on him, and

• collecting cheques for his customers

There is different legislation that have attempted to define a “bank” for their
specific purpose.

i. Under S.l of the Bill of Exchange Act, Cap 65,

The term “banker”. includes a body of persons whether incorporated or not who
otherwise carry on the business of banking. The Act does not-define what the
“business of banking” means. Thus, according to this definition, to determine
whether or not an institution is a bank, court has to review its business and
must compare it with that transacted by banks generally.

ii. The Bank of Uganda Act

Defines a bank to mean the Bank of Uganda established under that Act and it’s
mandated to act as a bank for other financial institutions. S. 1 of the BOU Act
defines a financial institution to mean a bank, credit, institution, building
society and any other institution classified as such.

iii. The Financial Institutions Act(FIA)

S.3 of the FIA provides that unless the context otherwise requires, a bank means
any company licensed to carry banking business as its principal biz and
includes all branches of that company in Uganda.

Banking business is defined to mean;

 • Accepting deposits of money from the public repayable on demand or
at the expiry of a fixed period or after notice.

• Employing such deposits wholly or partially by lending to make profit.

• Presenting to another bank for payment cheques, drafts or orders
received from its customers.

Case Law definition of a Bank

It has been stated severally that the word bank/banker cannot be defined with
exactness. Like statute, case law makes a fragile attempt at this definition.
Nonetheless; three cardinal principals have been laid down by the courts in
construing the common law definition.

In United Dominions Trust v Kirkwood, Lord Denning stated that “. there are
three characteristics usually found in banks today;

• to accept money and collect cheques on behalf of their customers and

place them to their credit.

• To honor cheques or orders drawn by their customers and debit their

accounts accordingly.
• they keep current accounts or something of that nature in their books in
which the debits and credits are entered'” Therefore no one can be a
banker who doesn't do the above.

In the first place, the meaning of “banking business” can change from time' to
time. In
Woods Vs Martin Bank Limited (1959) IQ B 55, the issue was whether the-
giving of advice on financial matters constituted banking business. Holding that
it did, Salmon j observed at Page 70;

‘...the limits of a banker’s licenses can not be laid down as a matter of law. ...’
The second principle laid down by the courts is that a bank regarded as engaged
in “banking business in one place is not necessarily so considered elsewhere.
The distinction is explainable on the basis of the differences in the structure of
banking in the countries concerned.

Thirdly, a number of cases stress the importance of an institutions reputation.

If it is widely considered to be a bank, the courts will be inclined to adopt this
view, and to treat the firm as engaged in banking business as considered in
(United Dominion. Trust Ltd Vs Kirk. Wood (1966) 2QB 431

The acceptance of money on deposit from customers for the purpose of making
a profit by re-investing it is regarded as banking business. In Re - Shields’ Estate
(1901), It was- held that the business of banking from the banker’s point of view
is to trade with the money of others for the purpose, of making profit. In UK, the
second essential type of banking business is the opening of current accounts,
operating cheques and the collection of effects paid in by customers-.

In United Dominions Trust Vs Kirkwood (1966) 2QB 431, a finance company

brought an action to recover a loan made to dealer. The dealer pleaded that the
company was an unregistered money- lender and that the contract was
accordingly illegal as it contravened

the Money - Lenders Act. It was proved that the finance’ company was regarded
as a bank in the city and that it enjoyed some privileges given to banks, and it
had a clearing number. The finance company received deposits from the public,
but they were invariably on agreed, maturity dates and not on demand. There
was evidence to suggest that the company collected cheques payable to its
customers.

Doubting that the company carried on the business of banking, Lord Denning
stated;

There are, therefore, two characteristics usually found hi banks today. (1) They
accept money from, and collect cheques for their customers and place them to their
credit; (11) They honour cheques or orders drawn on them by their customers
when presented for payment and debit their customers accordingly ....... (Ill) they
keep current accounts, or something- of that nature, in their books in which the
credit and debits are entered.

Lord Denning thus held that the company was exempt from the provisions of
the Money Lenders Act. Diplock LJ’s concurring judgment is based on a slightly
different reasoning. In his opinion the finance company has a marginal banking
business. The fact that the city considered the firm to be a bank established that
it enjoyed the reputation of carrying on banking business. The reputation
coupled with the firm’s marginal banking business, sufficed to bring it within
the definition. Harman L] in his dissenting judgment expressed the view that the
company was not carrying on the business of banking. It was therefore, a mere
money lender. According to the common law definition, a bank is an institution
that actually carries on banking business; not an institution which has the
reputation of doing so or of being a bank.

Also see S.3 and 4 of the FIA, 2004. '

b) A CUSTOMER

Definition of a Customer

A customer of a bank is any entity for which-the bank agrees to conduct an

account. The main determinant of whether one is a customer of the bank or not
is whether they have an account that particular bank. In Great Western
Railway Vs London and County Banking Ltd, it was held that a person was
not a customer of the bank who had no account of any sort with the bank and
nothing to his credit in any book or paper held by the bank. The fact that the
bank does render some casual service to him does not make him a customer
and the bank isn’t liable to him as it would be to its customer.

Note however that an agreement to open an account is sufficient to constitute

one a customer as long as there is a consensus ad idem between the two. In
Ladbroke Vs Todd, Court held that a person becomes a customer of the bank
when he goes to the bank with money or cheques and asks for an account to be
opened in his name. If the bank accepts the money or cheques and is prepared
to open an account for that person, then that person becomes a customer of the
bank from that point.

Similarly, in Woods Vs Martins Bank, a bank accepted instructions from the

plaintiff to collect money on his behalf, remit some to his company and hold the
balance to his order. He had no account with the bank at the time of the
instructions. Court held that when the bank accepted to hold the money to his
order,’ it was presumable that they would do so by opening an account for him
and therefore he was a customer of the bank.

Time is not of the essence; see Commissioner of Taxation Vs English

Scottish and Australian Bank.

The fact that a person has an account with-a bank leads fundamentally, to-three
legal consequences: Where a bank collects in good faith and without negligence
cheques remitted to it by a ’customer’ it is entitled to a statutory defense against
the true owner.

a) The banker owes a duty to obey its customers. An instruction as regards

the collection of cheques and other effects payable to him and further as
regard the making of payments ordered by the customer.

b) The bank owes certain incidental duties to its customer like duty of
confidentiality

In Ladbroke Vs Todd (1914) 30 TLB 433, a rogue who stoic a cheque opened
with the defendant bank an account under the name of the ostensible payee of
the instrument. The cheque was cleared and the rogue withdrew/ the funds. As
a defense to the drawer’s action fox tire conversion of the instrument, the bank
contended that the mere opening of the account did not constitute the regular
customer. Court held that the rogue had become a customer when that bank
agreed to open the account. The fact that the rogue had been advised that the
proceeds could not be withdrawn before clearance was irrelevant, in this regard.
Where a bank performs a casual service for a given person, that person does net
become a customer even if the service is performed on a regular basis. In the
Great Western Railways Company Vs London and Country Banking Co Ltd
(1901) AC 414, a rate collector habitually cashed cheques at the counter of the
defendant, with whom the rural authority maintained its account. In all these,
cases he retained part of the amount and asked that the balance be credited to
the authority’s account. The bank was sued for conversion. One of the questions
was whether the cheque had been collected by the bank for a customer. It was
held that although the bank had regularly cashed cheques at the rate collectors
request for a number of years, he could not be a customer because he
maintained no account with the bank.

It is clear that a person becomes a customer of a bank when he opens an account

with it and the type of account is immaterial. In some instances, it is important
to determine the very moment at which the relationship of banker and a
customer comes into existence. Ladbrokes’s case suggests that this occurs when
the bank agrees to open the account.

The same view was expressed in Woods Vs. Martins Bank, Ltd (1959) IQB ’55,
a batik accepted instructions from the plaintiff to collect money, pay part to a
company and retain to “order the balance of the proceeds.” In an action brought
by him against the bank to recover the amount lost in. the investment involved,
the question arose, as so whether foe defendant was the bank’s customer at the
time at which the advice was given.

Salmon J held that the relationship of banker and customer had come into
existence when the branch manager agreed to accept the plaintiff s instruction
to open an account in his name. The defendant had failed to observe a duty of
care which it owed to the plaintiff under the contract of banker and customer
established between the parties.

There are however, exceptional cases, in which an account may be opened in

M’s name by

A, M’s consent being given tacitly thereto either before or after the event.
In Rowlandson Vs National Westminster Bank Ltd (1978) 1WLR 798, a
woman drew a cheque payable to a bank at which she was known, but with
which she did not maintain an account, and explained that the proceeds were a
gift meant for her grandchildren. The bank credited the proceeds to an account
in the grand children’s joint names and conferred the right to draw on their
guardians. The guardians did not approve the arrangement and were not
notified of the opening of the account.
One of them drew a cheque on it. It was held that the bank owed a
fiduciary duty to the children and the bank had committed a breach of duty.

Banking law is based on a contractual analysis of the relationship between the

bank (defined above) and the customer defined as any entity' for which the bank
agrees to conduct an account.

The law implies rights and obligations into this relationship as follows:

a. The bank account balance is the financial position between the bank and
the customer: when the account is in credit, the bank owes the balance
to the customer; when the account is overdrawn, the customer owes the
balance to the bank.

b. The bank agrees to pay the customer's cheques up to the amount standing
to the credit of the customer's account, plus any agreed overdraft limit.

c. The bank may not pay from the customer's account without a mandate
from the customer, e.g. a cheque drawn by the Customer.

d. The bank agrees to promptly collect the cheques deposited to the

customer's Account as

e. The customer's agent, and to credit the proceeds to the customer's

account.

f. The bank has a right to combine the customer’s accounts, since each
account is just an aspect of the same credit relationship.
 g. The bank has a lien on cheques deposited to the customer's account, to
the extent that the customer is indebted to the bank.

h. The bank must not disclose details of transactions through the customer's
account unless the customer consents, there is a public duty to disclose,
the bank's interests require it, or the law demands it.

i. The bank must not close a customer's account without reasonable notice,
since cheques are outstanding in the ordinary course of business for
several days.

These implied contractual terms may be modified by express agreement between

the customer and the bank. The statutes and regulations in force within a
particular jurisdiction may also modify the above terms and/or create new
rights, obligations or limitations relevant to the bank customer relationship.

NATURE OF THE RELATIONSHIP BETWEEN BANKER AND CUSTOMER:

The nature of the banker customer relationship is primarily contractual as was

held by the SC in Esso Petroleum Vs UCB arid’ Mobil (u) Ltd Vs UCB. It was
noted that the relationship between a banker and customer is contractual i.e.
it’s an implied -contract whose terms are dependent on the custom of bankers.
The most fundamental term is that the banker undertakes to borrow-money
from the customer as and. when the customer tends it to him and to deposit it
in his account until the customer demands for it.

This relationship cannot be explained away on the basis of the principles of-.the
law of trusts. If the banker were a trustee of his customer’s money, he would
again be accountable for profits and, in addition, the customer would be entitled
to a tracing order if the bank failed. It is most clearly understood when one
appreciates the nature of the-agreement between them. The amount, equal to
that deposited, has to be repaid by the bank. The essence of the contract of
banker and customer is therefore, the banks right to use the money for its own
purpose and its undertaking to repay an amount equal to that paid with or
without interest, either at call or at a fixed time.

In Chilala Vs Republic, it was held that when a person pays his money into a
bank account, the money becomes the property of the banker and the
relationship becomes that of debtor-creditor with the addition that the banker
promises to pay the customer's orders on demand.

In Foley Vs Hill (1848)2 HLC 28, a customer paid an amount of money to the
credit of an account opened with his bank on the understanding that it would
earn interest at the rate of 3% P.a As no interest was credited to the account for
approximately 6 years, the customer instituted an action alleging that he was
entitled to the remedy sought either as the beneficiary of a trust or as the banks
principle. He argued that the relationship was fiduciary in nature. It was held
that the customer was not entitled to an account, and that his correct course
was to institute a common law action in debt for the amount due and that the
relationship was merely that of a debtor and creditor. It was further recognized
that the limitation period would start to run from the date of an unmet demand
and not from the date of deposit.

In Joachim son Vs Swiss Bank Corporation (1921) 3KB 110, A partnership

maintained, an account with the defendant bank. One partner brought an action
claiming in the partnership’s name the repayment of the amount involved. Atkin
L] stated at 127:

The bank undertakes to receive money and to collect bills for its customers
account. The proceeds so received are not to be in trust for the customer, but
the bank borrows the proceeds and Undertakes to repay them. The promise to
repay is to repay at the branch of the bank there the account is kept, and during
banking hours. It includes a promise to repay any part of the amount due
against the written order of the customer addressed to the bank at the branch,
and as such written orders may Be outstanding in the ordinary course of
business for 2/3 days, it is a term of the contract that the bank will not cease
to do business with the customer except upon reasonable notice. The customer
an "his part undertakes to’ exercise reasonable care in executing his written
orders so as not to facilitate forgery.

His Lordship concluded that the bank is not liable to pay the customer until the
customer demands payment. Four principles can be drawn from Foley Vs Hill-
above as well as Joachimson3s case;

a. Demand exists only in case of current or savings account which provided

for payment at call. For fixed deposits, payment only on the designated
day.
b. The amount standing to the customer's credit becomes payable without a
demand, it this bank is being wound up or if the banker customer
relationship is terminated;
c. The period of limitation begins to run from the day on which the amount
is payable.
d. Contract exists between banker and customer based on maintenance of
an account.

Also see;

• Bank of Baroda(U) Ltd Vs Kamuganda (2006) 1 EA 11

• Rcndaii - Day Vs Republic (1967) 3 ACR Comm 17

• Rwebangira Vs Republic (1974) 3 ACR Comm. 386

• A.G of Ghana Vs Bank of West Africa Ltd (1965) ACR Comm. 214.

It may also be an agent-. Principal relationship when the bank is executing/

carrying out the customer’s instructions.
LECTURE 4:

DUTIES OWED BY CUSTOMER TO BANK

a. Duty of reasonable care in drawing cheques.

A customer must execute his order in a way that neither misleads the bank nor
facilitates forgery. The customer therefore has a duty to inform the bank if he
knows that a cheque on his account has been forged.

In Mobil (U) v UCB (1982) HCB 64 a cheque for 10,301/= was altered to read
40,301/=. The HC ruled that the customer and the bank being in contractual
relationship, the customer is under duty in drawing a cheque to take usual and
reasonable precautions to prevent forgeries. If a cheque is drawn in such a way
as to facilitate or almost invite an increase in the amount by forgery should the
cheque fall in the wrong hands.' forgery is not a remote but a natural
consequence of the customer's negligence.

b. Duty to inform the bank of any forgeries that the customer is aware of.

In Nigeria Advertising Services Ltd v UBA, it was held that a customer who
knows that his signature is being forged has a duty to inform the bank otherwise
he will be stopped from claiming against the bank.

See Greenwood Vs Martins Bank Ltd.

NB; The duty on the customer not to facilitate fraud or forgery and to disclose it
does not include a duty on the customer's part to cheque his statement or even
to organize his business in a manner ensuring that fraud is curbed.

See Tai Hing Cotton Mills v Liu Chong Hing Bank Ltd [1986] AC 80
DUTIES OWED BY BANKER TO THE CUSTOMER

i. Duty to honor the customer's mandate;

The customer gives the bank authority to operate the account in accordance
with his instructions i.e. the "customer's mandate". It’s the bank's duty to
ensure that no unauthorized changes are made to customer’s documents kept
by the bank. The banker therefore has an implied duty to honor its customer’s
cheques, provided

a) They are drawn in the proper form.

b) The account on which they are drawn- for credit to an amount sufficient
to pay them, or arrangements have been made for an overdraft facility and
the agreed overdraft limit wall not be exceeded.

c) There is no legal cause (service of a garnishee order nisi which makes the
credit balance or the agreed overdraft limit unavailable.

d) They are presented during banking hours (or within a reasonable time
thereafter Baines v Nation Provincial Bank (1927) 96 KB 801

The banker generally has until the dose of business of the day of presentation
to decide whether or not to meet a cheque, and if it decides not to meet it, it
must immediately after the close of business return it with some remarks,
indicating that it has not been honored. If it wrongfully dishonors its customer’s
cheques, the customer may be able to sue for damages in breach of contract.

In Holden’s Law and Practice of Banking, it is suggested that before the bank
dishonors a customer’s cheque, a bank should take the following precautions: -

a) Should make sure that the customer’s account has not been debited by
mistake with any cheque drawn on other accounts. >

b) Should make sure that no post-dated cheques drawn by the customer

have been prematurely
c) debited.
 d) Should make sure that no regular credits such as salary are from the
customer’s account.

e) Should make sure that the cheque which it proposes to dishonor is not
backed by the customer’s cheques guarantee card.

See:

• Patel Vs SCB [2001] Lloyds Rep. 229,

• Stanbic Vs Crocs Ltd [2005]2 ULSR 314
• Barclays Bank Vs Godfrey Mubiru SCCA No. 1/98.
• Barclays Bank of Kenya Vs] Andy (2004) 1 EA 8
• Bank of Baroda (U) Ltd Vs Kamuganda (2006) 1 EA 11

ii. Duty of skill and care;

The bank should exercise reasonable care in carrying out the customer’s
operations. This duty is implied into the contract and coders a wide range of
banking business.

The standard of reasonableness is on a case by case basis. In Barclays Bank

Pic Vs Quincecare [1992]4 ALLER 363 it was held that it is an implied term of
the contract that the banker will exercised reasonable care in executing the
customer's orders to pay or transfer money. Sometimes this duty may interfere
with the duty to honour the customer’s mandate' but its-agreeable that a banker
who executes an order knowing or suspecting it to be dishonestly given but
ignoring that, obvious fact or acting recklessly in failing to make inquiries as
would a reasonable man is liable for breach of the duty of care

See

• Lipkin Gorman Vs Karpnale,

• Selangor ’United Rubber Estates Vs Craddock.
The duty of skill and care may also arise where services are rendered
outside the contract. (The Fiduciary Relationship)

A bank may therefore be held liable in tort fort negligent advice or statements
made to both customers and non-customers alike because then the bank is
taken to act as a fiduciary. The bank is not under obligation to give’ advice to its
customers but if it takes it upon itself to give it then it will be held liable for any
negligence in the process giving rise to loss after the Customer or another has
relied on it.

Read: Box Vs Midland Bank [1972] 2 Lloyds Rep 391, Hedley Byrne &. Cd
Ltd Vs Heller &. Partners [1964] AC 465;

As the customer’s agent, the bank has to strictly, adhere to its mandate.
Additional duties; of care are imposed on tire bank where it gives advice on
financial matters to its customer. The customer, in turn owes his bank the
general duty of a principal to an agent, which is to issue clear and unambiguous
institutions and a duty to issue orders in a manner that does not facilitate their
falsification.

Apart from the duties of care, special circumstances may constitute the bank a.
fiduciary. There is a requirement to take cares in the execution of customer’s
mandate. -As fiduciary, the bank may have to question the validity of an
instruction given to it by a person who is the representative of a customer. Three
cases illustrate the circumstances that give rise to a fiduciary relationship
between the bank and its customer.

In Woods Vs Martin Bank (1959) 1 QB55, the manager of a bank advised the
plaintiff to invest a substantial amount of money in shares of a company whose
excessive overdraft was a matter of concern: The branch manager failed to
disclose these facts to the plaintiff. The plaintiff, who was a young man without
any business experience, lost the full amount invested in the shares. The bank
pleaded that the plaintiff had not been a customer and that it did not owe him
a duty of care. Salmon J. held that even though the banker- customer
relationship had not been established at the time the advice was given, the bank;
through its branch manager had assumed a fiduciary obligation towards the
plaintiff when it agreed to act as his financial adviser. ' '

In Lloyds Banks Ltd Vs Bundey (1975) QB 326, the bank obtained from one
of its customers a guarantee covered by a charge over land to service an overdraft
granted to that customer’s son. The father was of advanced in age and naive in
business matters, the property charged by him was his home and only valuable
asset. The branch manager did not disclose to him the extent of the financial
problems faced- by the son, and failed to suggest that the father seek
independent legal advice before the execution of the guarantee m question. The
transaction was advantageous; from the bank’s point of view. The C/A held the
guarantee void, as the bank had not discharged the duty of fiduciary care owed
to the customer. The guarantor who was a customer of longstanding had placed
his reliance on the bank’s advice. The bank’s failure to disclose the full facts was
assent to she exercise of undue influence. ‘

In National West Minister Bank PLC Vs Morgan (1985) AC 686, the bank was
asked to approach a refinancing arrangement for a customer. A family home
owned jointly by the customer and his wife was granted as security. The branch
manager called on the couple and asked the wife to execute the necessary
document. The wife expressed her unwillingness to execute a charge covering
the husband’s business venture; the branch manager did not explain the wide
ranging nature of the security, reassuring her erroneously though in good faith,
that the charge only secured the amount advanced to refinance the original
mortgage. The branch manager failed to advise the wife to seek independent
legal advice. Upon default, the bank sought to sell the properly. ...

The H/L held that the bank had not committed a breach of duty of care Lord
Scar man reached this conclusion on three grounds:

• The bank had not derived any hidden benefit.

• The bank had no intention of utilizing the security.
• The wife understood the general nature of the charge.
Lord Scarman added that the relationship of banker and customer becomes
confidential, or of a fiduciary nature, when the bank crosses the narrow line that
gives rise to a special duty of care. In the circumstances, the bank was not
obliged to suggest that the wife seek independent legal advice.

Prescribed, cases;

• Cornish Vs Midland Bank Plc (1985) 3. ALLER 513

• Bank of Credit and Commerce International SA Vs Aboody (1989) 2 WLR
759 Barclays Bank Plc Vs O’Brien and Anor (1994) AC 340.

iii. Duty of Secrecy/Confidentiality i.e., a duty not to disclose any

information concerning the affairs of the customer without his consent.

To appreciate the confidential nature of the contract of a banker and customer,

it is important to recall that it comprises elements of agency. As a general rule
an agent owes a duty of loyalty and confidentiality of his principle.

The connection between the bank’s duty of secrecy and the general duty imposed
on an agent was emphasized by Diplopktin Parry Jones Vs Law Society (1965)
I CH 1 at 9. Such a duty (of secrecy) exists not only between solicitor and client,
but, for example, between banker and customer, doctor and patient and
accountant and client. Such a duty of confidence is subject to and overridden by,
the duty to the partly to that contract to comply with the law of the land...

In Tournier Vs National Provincial and Union Bank of England (1924) 1KB

46

The Plaintiff, whose account with the defendant bank was heavily overdrawn,
failed to meet the repayment demands made by the branch manager. On one
occasion, the branch manager noticed that a cheque, drawn to the plaintiff s
order by another custodian was collected for the account of a book maker. The
branch manager thereupon rang up the plaintiff’s employees, ostensibly to
ascertain the plaintiff s private address, but in the course of the conversation,
he disclosed that the plaintiffs account was overdrawn and that he had dealings
with book makers. As a result of this conversation, the plaintiff s contract was
not renewed by the employers upon its expiration;

The Court of Appeal held that the bank was guilty of breach of a duty of secrecy
and awarded damages against it. Atkin LJ pointed out that the information
which the bank was bound to treat as confidential, was not restricted to facts
that it learnt from the state of the customer’s account. Furthermore, the bank’s
duty remained intact even after the account had been closed or ceased to be
active. The bank’s duty to maintain secrecy encompassed information obtained
from other sources than the customer’s actual account, if the occasion upon
which the information was obtained arose out of the banking relations of the
bank and its customers.

In Tournier above, Bankes LJ at 473, in holding that the duty of non- disclosure
is a legal one arising out of contract, highlighted the fact that the duty is not
absolute but qualified in effect providing exceptions thereto.

The exceptions can be classified into 4 heads:

a) Where disclosure is under compulsion of law.

b) Where then is a duty to the public to 'disclose.

c) Where the interest of the bank requires disclosure.

d) Where the disclosure is made by the express or implied consent of the

customer.

Also see Intercom. Services Ltd & Others v Standard Chartered bank ltd (2002)
2 EA 39

EXCEPTIONS;
a) Compulsion by Law

Unlike a solicitor, a bank cannot refuse to answer questions concerning its

relationship with a customer on the ground of privilege.

Evidence (Banker’s Book) Act Cap 7

Sec 6 of the Evidence (Banker’s Book) Act Cap 7 provides that on the application
of any party to a legal proceeding, a court may order that such party be at liberty
to inspect and take conies of any entries in a banker’s book for any of the
purpose of such proceedings.

The bank will be served with 3days notice in order to comply with the court
directive.

An application for an order-under 6 is similar to an application for a search-

warrant. The order object of this proviso is to ensure that the bank is given the
opportunity of objecting to the order. The courts are guided by the decisions
governing the -inspection and discovery of documents.

In Bankers Trust Co. Vs Sapira (1980) IWLR 1274, two rogues obtained a
substantial amount of money by presenting to the plaintiff bank in New York
cheques purportedly, drawn on it by a bank in Saudi Arabia. The court held that
an order would be granted in interlocutory proceedings where the plaintiff
sought to trace funds of which evidence showed that they had been fraudulently
deprived.

In Foley Vs Hill (1848) 9 E. R 1002 it was held that a customer’s bank account
has been described as a chose in action or an incorporeal right as contrasted
with corporeal or tangible things.

The Tax Procedures Code Act 2014

Part X—Investigations
41. Access to premises, records and data storage devices.
(1) For the purposes of administering any provision of a tax law, the
Commissioner—
(a) shall have at all times and without prior notice, full and free access to—
(i) any premises or place;(ii) any record, including a record in electronic format;
Or (iii) any data storage device;
(b) may make an extract or copy from any record, including a record in
electronic format, of any information relevant to a tax obligation;
(c) may seize any record that, in the opinion of the Commissioner, affords
evidence which may be material in determining the correct tax liability of any
person;
(d) may seize a data storage device that may contain data relevant to a tax
obligation; and
(e) may retain any record or data storage device seized under this section for as
long as it is required for determining a taxpayer’s tax obligation and liability,
including any proceedings under this Act.
(2) The Commissioner may require a police officer to be present for the purposes
of exercising powers under this section.
(3) The occupier of the premises or place in which an exercise of power under
subsection (1) relates shall provide all reasonable assistance and facilities
necessary for the effective exercise of the power including—
(a) answering questions relating to the investigation to which the exercise of
power relates orally or in writing; or
(b) providing access to decryption information necessary to decrypt data to
which access is sought under this section.
(4) A person whose records or data storage device have been
seized and retained under this section may access and examine them,
including making copies or extracts from them under supervision as the
Commissioner may determine.
(5) The Commissioner shall sign for all records or data storage devices seized
and retained under this section.
(6) Where any record or data storage device seized and retained under this
section is lost or destroyed while in the possession of the Commissioner, the
Commissioner shall appropriately compensate the owner for the loss or
destruction.
(7) This section has effect despite—
(a) any law relating to privilege or the public interest with respect to access to
premises or places, or the production of any property or record, including in
electronic format; or
(b) any contractual duty of confidentiality.
42. Notice to obtain information or evidence.
(1) The Commissioner may, for the purpose of administering any provision of a
tax law, require any person, by notice in writing,
whether or not liable for tax—
(a) to furnish, within the time specified in the notice, any information that may
be stated in the notice; or
(b) to attend at the time and place designated in the notice for the purpose of
being examined by the Commissioner concerning the tax affairs of that person
or any other person, and for that purpose the Commissioner may require the
person to produce any record, including an electronic format, in the control of
the person.
(2) If a notice under subsection (1) is unable to be served on a person in
accordance with section 48, the notice may be published in any widely circulated
newspaper in Uganda and publication in such newspaper is treated as service
for the purposes of this section.
(3) The Commissioner may require the information referred
to in subsection (1) to be—
(a) given on oath and, for that purpose, the Commissioner may administer the
oath; or
(b) verified by statutory declaration or otherwise.
(4) This section has effect despite—
(a) any law relating to privilege or the public interest with respect to the giving
of information or the production of any record, including in electronic format; or
(b) any contractual duty of confidentiality.

The Leadership Code Act, Cap 167

Under Section 28, the Inspector of Government is authorized by the order under
the hand of the Inspector General or Deputy Inspector General to:
1) Authorize any person under its control to inspect the bank account... or
any safe deposit book in a bank account.

2) An order made under sub section (1) of this section shall be sufficient
authority for the disclosure or prediction of any person of any informed account
document-or article required by the person so authorized.

Anti- Corruption Act, 2009 (sec 36-45)

Section 41, gives the DPP and IGG powers to obtain information during the
course of an investigation or proceedings into or relating to an offence by any
person employed by any public body under this Act.

Section 41(f) specifically provides for a manager of a bank to give copies of

accounts of that person or of the spouse, or son or daughter of that person at
the bank.

Companies Act 2012 - Inspection of companies (section 172 – 176)

Section 176(1) - it shall be the duty of all officers and agents of the company and
agents of any other body, corporate whose affairs are being investigated to
produce to the inspector all books and documents.

Section 176(7) - makes it clear that the company’s agents include bankers and
advocates who are required to disclose the affairs of the Company to the
registrar.

To plead compulsion by law the disclosure must derive its authority from,
statute or court order. Casual inquiries by a police officer because they suspect
that a crime has been committed are not covered.

In Standard Bank of West Africa Vs Attorney General of Namibia (1972)

3ALR Comm 449. a police officer wished to inspect books of the banker and the
account of certain of its customer in the hope of coming upon an indication of
an offence having been committed. He laid all information before a magistrate
stating that he had reasonable ground for believing that in the bank’s premises
there were documents relating to the affairs of named customers of the bank
which would afford evidence as to the commission of an offence. The magistrate
issued a warrant for the documents.

The bank instituted proceedings for a declaration that they should not be
subject to a search warrant for the documents of their customers just because
there is reasonable ground for believing that they will afford evidence as to the
commission of any offence.

The Supreme court held that a search warrant should issue against a bank only
if the bank is suspected of having committed the offence itself or of harboring
evidence directly connected with a crime and should not issue in any case where
an inspection order might be made under the Bankers Books Evidence Act Court
must be satisfied that the applicant has very good reason to apply for the
warrant, and it is not enough that the applicant hopes that in the course of the
search he may come upon evidence of the commission of an offence.

It was further observed that various Acts compelling a banker to disclose their
customer’s affairs should not be used for a kind of searching inquiry or fishing
expedition.

Garnishee proceedings

A court order for disclosure of information can be in the form of garnishee

proceedings.

See Civil Procedure Rules O. 20. It is a court proceeding against a debtor leading
to a garnishee order. It is made so that a person who is owed money (creditor)
can obtain full or part payment from a third party whom in fact owes or holds
money for the debtor.

Examples include orders made so that a bank) account that contains money
belonging to the debtor must be paid to the creditor. In this situation the bank
is ordered to pay all or part of the money in the account direct to the creditor.

Under garnishee proceedings therefore, money held by a banker to the credit of

a customer who is a judgment debtor may be attached to satisfy a judgment
debt. The bank is called upon to show cause why its customer’s money should
not be attached. In these proceedings the banker may have to disclose its
customer’s affairs.

b) Duty to Public

A bank’s duty’ of confidentiality is overridden by potential danger to the state or

public duty. In times of war, for example, a bank would have a public duty to
disclose information relating to a particular customer to the authorities if it has
knowledge of that customer trading with the enemy. This duty was described in
die Tournier case as where a higher duty than a private duty is involved e.g.
where danger to the state supersedes the duty of the agent to his principal.

The application of the exception may be subject to variation in different periods.

Thus in time of war, a bank may be bound to disclose to the authorities’
information which it receives about a customer’s dealings with an enemy/ alien.
Bankes L] doubted that a bank was entitled to disclose to the police information
which gives rise to suspicions that the customer was involved in a crime.

In Libyan Arab Foreign Bank Vs Bankers Trust Co (1988) Lloyd’s Rep-259

where the defendant bank invoked the exception in relation to disclosure made
by it to, and at the request of the Federal Reserve Bank of New-York of payment
instruction, which the defendant had received from the plaintiff, court was of
the view that the exception was applicable. In Weld Blundeel Vs Stephens
(T920) AC 956 at 965, it was held that danger to the state may supersede the
duty of secrecy owed by an agent to his principal.

c) Where Bank’s own interest requires disclosure

A practical case is where a customer brings a suit against the bank in such
cases, the bank will be allowed to reveal the customer’s affairs in court
proceedings as part of its defence. E.g., where the bank sues to recover an
amount which it lent to its customer. The bank has to disclose in the pleadings
the state of the customer’s account and the amount owed by him to the bank.
This would occur, for example, in bank proceedings against a. customer
claiming overdraft repayment where the bank must state details of the overdraft
amount on the face of a summons, which is a public document.

In Sunderland Vs Barclays Bank Ltd (1938.) L DAB 163, the bank dishonored
cheques drawn, on it by a married woman, principally because the account had
an insufficient credit balance, but the cheques were drawn in respect of
gambling debts. When her husband interceded at her request, he was told by
the branch manager that most of the cheques were drawn in favour, of
bookmakers. The court dismissed the wife’s action for damages for the bank’s
breach of its duty of secrecy as in the opinion of court; the disclosure was
required in the bank’s own interest; The Wife had given implied consent as to
the disclosure of the facts to her husband.

d) Where Disclosure is by the Implied or Express consent of the customer

The consent may be express or implied and may be general in the sense that the
bank is permitted to disclose the general state of the customer’s account, which
means the bank is entitled to supply only such information as is sanctioned by
banking custom. Express consent should be in writing, stating specifically the
purpose for which the consent to make disclosure has been given. An example
of implied consent is a reference a bank might be requested to provide to a third
party on the customer’s behalf.

The common type is the giving of bank references. There is a well - established
practice which authorizes banks to provide such information. The practice has
probably become an established trade usage. Customers will therefore be
regarded as having consented to the giving of such information except if they
have specifically indicated that they refuse to allow their banks to-reply such
inquiries.

Answering inquiries from another bank acting on behalf of the customer is

within the scope of banking business and the practice may be regarded as
implicitly authorized by most customers of the banks.
See Credit Reference Bureau.

In Parsona Vs Barclays Co Ltd (1910) 2 LDAB 248, it was held that answering
inquires is a very wholesome and useful habit by which one banker arrives in
confidence, and answers honestly, to another banker, the answer being given at
the request and with his knowledge of the first banking customer.

Statutory protection of secrecy

• Section 40 - Bank of Uganda Act, Cap 51'

• Section 40(3) - The Bank shall not publish or disclose any information
regarding the affairs of a financial institution or of a customer of a
financial institution, without, the consent or the institution or the
customer obtained. This obligation prohibits the banks from disclosure to
third parties. It does not stop the banker from using such information for
its benefit. Thus in G.A Schmittsches Weight Vs Leslie (1967) 2 AIR
Comm 34, In dismissing the argument by the Plaintiffs’ counsel that the
bank was not entitled to use for its own benefit the information it received
as an agent of the plaintiff s bank for handling shipping documents, Court
held that a banker may look at the information he possesses to verify what
he is told by a customer as to the customers financial capacity on his
application for overdraft facilities especially .when the customer already,
has this information in his possession, but the bank can not disclose this
information to a 3rd party.
LECTURE 5

TYPES OF ACCOUNTS AND CUSTOMER RELATED ISSUES

TYPES OF ACCOUNTS

These are basically two with varying characteristics;

a) Demand deposits: These are deposits that are payable on demand and
withdrawable by cheque, draft or order or by other means. This is
generally referred to as a current, mercantile or running account.

b) Time deposits: These are deposits that are payable after a fixed period of
time or after notice and includes a savings account. This is also popularly
known as a deposit account.

A. CURRENT ACCOUNTS

These are used by a bank’s customers for their regular financial transaction to
discharge personal liabilities. This is done by drawing cheques or by direct debit
by him to his bank, it is more loosely described as a reservoir of the customer’s
money used for paying funds both into and out of the account. Current accounts
operate on the understanding that a banker is bound to pay cheques drawn on
him by the customer and the fact that current account holders may be granted
overdrafts.
In Foley v. Hill (1848) 2 HLC 28, it was held that when an amount is paid to
the customer’s current account, be it by means of cash, or a cheque payable,
the sum in question is forthwith regarded as paid rent by the customer to the
bank.

The amount standing to the credit of the customer’s current account is

recoverable on demand. Traditionally this demand is made by the drawing of a
cheque or by ATM. The bank’s duty to carry out the instructions given to it is
subject to basic limitations;

a) the bank is not obliged to honour a cheque or meet some other

demand, if the customer’s balance is inadequate. Rd. Bank of New South
Wales v. Laing (1954) AC 135. An exception is when a bank has agreed to
grant the customer an overdraft and amount of the cheque doesn’t exceed
the prescribed ceiling

b) Cheques should be paid only if presented during ordinary business

hours.

c) As a matter of practice banks dishonor cheques that have been

outstanding for a long period of time. Usually a cheque is dishonored if
presented after lapse of more than 6 months from the date of issue.

Subject to certain exceptions, the balance standing to the credit of a current

account does not earn interest. But some banks pay interest in order to compete
with other saving institutions. Bank charge a commission on the current
account for services rendered.

i) Bank is bound to pay cheques drawn on him by the customer.

The customer must have sufficient funds in the account. The bank must take
references and crosscheck the identity of the customer otherwise it loses the
protection afforded to bankers under the Bills of Exchange Act.
Banker has a duty to ascertain the names of the customer & his employer in
addition to obtaining suitable references when opening a' new account, failure
of which % considered negligence.

In Ladbrooke v Todd (1914) Comm 2d, the bank was considered negligent
because they did not inquire about a proposed customer which is an ordinary
precaution that ail-banks must take. The authorities show that the banker has
to show that he acted with reasonable care in all material respects in opening
the account or clearing a cheque.

ii) Overdrafts

Customers with current accounts may be granted overdrafts. An overdraft is an

extension of a credit to a customer for a defined period of time. Most often, this
period is short. The customer is given a ceiling which defines the maximum
amount he is allowed to overdraw on his account at any given time. Interest is
calculated on the daily balance but is debited to the account periodically. The
customer's best course is to have a reasonable margin available for drawing.

The practice with regard to overdrafts is that the bank will normally advise the
customer to draw cheques on his account up to a given ceiling, which may not
be exceeded at any one time. As amounts are paid to the Credit of the account,
the available balance of the overdraft increases.

An overdraft may be either secured over assets of the customer or unsecured.

The letter by the bank advising the grant of an overdraft to the customer
indicates both the ceiling and the period for which the overdraft is available. To
protect its interests, the bank will normally include a specific provision to the
effect that the overdraft is repayable at call. Thus, while the customer can expect
to utilize the overdraft for the agreed period, the bank can under the standard
formulation, demand immediate repayment incase unfavorable developments
unfold.

An overdraft facility thus arises where the bank expressly allows the customer
to draw more than the monies in their account such that he becomes indebted
to the bank. Barclays Bank Vs LJ Ciss & Sons [1980]1 QBD 639, it was held
that when the bank accepts to give money in excess of that on the account, it
has impliedly accepted to give an overdraft.

The advance of an overdraft facility confers some benefit to the banker. Banks
are entitled to an interest on every overdraft advanced. S.39 (d) of the BOU Act
provides that the Bank may in consultation with the Minister and by Statutory
Instrument prescribe the maximum and minimum rates, of interest or other
charges within the transactions. The bank cannot unilaterally vary the rate of
interest without the express or implied agreement of the borrower, although it
may call for repayment for the amount outstanding and then continue the
overdraft at a higher rate of interest if the borrower agrees.

A bank is only entitled to fair and reasonable interest on an overdraft, where the
parties have not expressly or impliedly agreed to the rate of interest payable.
However, where a person receives periodic statements on which it is shown that
compound interest was charged on the amount of his overdraft and he does not
dispute the accuracy of those statements, he is deemed to have accepted that
such interest should be charged. See African Continental Bank ltd.VsYesufu
1977)1 ALB. Comm. 212.

The rate of interest charged on overdrafts however varies from customer to

customer and from transaction to transaction, the lowest rate being that
commonly known as the prime rate. Generally speaking, an overdraft a kind of
a loan facility.

Difference between a loan facility and an overdraft

An overdraft facility is however clearly distinguishable from a loan.

a) In case, of a loan facility, a customer is granted a given amount which is

credited to his current account and stands at his disposal at any time.
The amount lent is debited to a loan account opened in the customer’s
name. Interest is charged on the debit balance entered in the loan account
regardless of whether the customer makes use of the proceeds or not.
 b) Repayments have to be made on a regular basis; a right to make early
repayment is usually available to the customer.

c) The rate of interest charged on a loan is higher than that of an overdraft.

In terms of cost, an overdraft is more attractive than a loan.

d) As already indicated, an overdraft facility is payable on demand/call.

What is the exactness of the phrase on demand/call? In Bank of Baroda.
Vs Panessar [1986J3 ALLER 75, it was held that demand means that
the customer should only be given adequate time to make arrangements
for payment and that adequate time does not include time for the
customer to look for money he does not have. See: Cripps
Pharmaceutical Ltd Vs Wickenden [197311 WLR 944

Limitations to the obligation imposed upon a bank to honour the

customers’ mandate instructions

a) that the bank is not obliged to honour a cheque or meet some other
demand, if the customer's balance is inadequate (See Bank of New South
Wales Vs Laing (1954) Ac 135 This principle is excepted whereas
discussed above, the bank has agreed to grant the customer an overdraft
and the amount of the cheque does not exceed the prescribed ceiling.

b) The demand must be made at the branch with which the account is
maintained. The customer is not entitled to demand payment at another
branch (See: Arab Bank Ltd Vs Barclays Bank (DCO) (1954) A C 495

c) Cheques should be paid only if presented during ordinary business hours.

d) Cheques that have been outstanding for a long period of time may be
dishonored. In practice, a cheque presented more than 6 months from the
date of its issue may be dishonored See rationale.
LECTURE 6

BANK STATEMENT'S / STATEMENT OE ACCOUNT

It is within the custom of bankers to dispatch to customers periodic statements

indicating the status of the customer’s account at the end of each month. These
statements are not entirely free from error resulting from wrong entries.

Although the banker-customer relationship does not give rise to a duty either in
contract (by way of implied terms) or in tort to a duty to the customer to check
his bank statement so as to be able to notify the bank of any items which may
not have been authorised by him or her, a customer should nevertheless check
statements and if any errors are detected, bring them to the attention of the
bank.

There are two situations in which a mistake may occur either in favour of the
customer or in favour of the banker. These two are known respectively as over
crediting and over debiting.

a) OVER CREDITING

If a customer has his account over credited and honestly believes that the money
is his and alters his position in reliance on the statement, the banker is estopped
from recovering the money from the customer.

In Lloyds Bank v Brook Bond Tea (1950)72JIB 114, it was held that there was
a duty on the banker not to over credit the customer’s account and there is a
duty on the banker not to induce the customer with representations contained
in the statement of account to draw money from the account which the customer
is not entitled to.
The amount credited to the customer's will be treated as being due to him or
her. However, the estoppel only acts after the customer has acted on the
representation.

b) OVER DEBITING

This normally occurs as a result of fraud or forgeries. In Keptiigala Rubber

Estates Lid Vs National Bank 'of India Ltd (1909)2 KB 1010, the secretary of
a company forged cheques drawn on the company’s account over a period of two
months. Statements given to the company had not been examined by the
directors. It was held that the bank could not charge, the company because the
directors were under no duty to organize their business in such a way that
forgeries of cheques couldn't take place. The duty owed by the customer to the
banker is limited to the duty to refrain from drawing cheques in such a manner
as to facilitate forgery, and inform the bank as soon as he becomes aware of it.

Similarly, in Tai Hing Cotton Mills Vs Liu Chong Hing Bank (1986) AC 80 an
accounts clerk forged signatures of over 300 cheques drawn on the company’s
account over a period of 5 years. The Privy Council held that the bank which
had paid on the forged cheques was not entitled to debit the company’s account.
The submission that the customer owes a duty of care to his bankers to take
such precautions as a reasonable customer would take to prevent forged
cheques from being taken to the banker for payment and to examine his
statement for unauthorized items was not upheld.

As to whether periodic statements can be used as evidence against a customer

who disputes an entry or against the bank that wishes to rectify errors made to
its disadvantage is a question resolved by appreciating the bank's right to rectify
errors as well as the customer's right to demand corrections

The bank's right to rectify errors.

A bank may by mistake credit the customer’s account with the wrong amount
or with a sum not due to the customer. When the bank discovers the mistake,
it reverses the entry. If the customer disputes the bank's-right to do so, he or
she has to institute proceedings.

The customer has two pleas.

i. The first is that, the bank is estopped from disputing the correctness of
the balance as shown in the periodic statement, the other is

ii. Based-on a claim that the balance constitutes an “account settled" or an

account stated, basing on the early decision of Clayton’s Case (1818) I
Mer 529 which suggests that a customer can be expected to examine the
entries in his statement and to return it for correction where an error is
discovered.

The case of Skyring Vs Greenwood & Gox (1825) 4 B &. C 281, suggests that
a customer may plead estoppel where the error led the customer into a false
belief about his financial position. In this case, Military Corps credited an
officer's account with money to which he was not entitled. The erroneous credits
stretched over a period of 5 years and the officer, who was unaware of the
mistake, drew out the money regularly. When the pay master discovered his
error, he continued to pay the officers wages, failing to inform him of the need
to rectify his position. When the officer died, the paymaster purported to set off
against credit entries of some payments received for the officer’s account. The
estate’s action, disputing the right of the paymaster to effect a set-off, was
successful. It was held that the erroneous entries constituted representations to
the effect that the amounts involved had been received for the officer's credit. As
the officer had changed his position in reliance of the statements by spending
more money than he would have otherwise done, the paymaster lost his right to
reclaim the amount credited.

In Holland Vs Manchester and Liverpool District Banking Co (1909) 14

Comm. Case 241, the customer Passbook showed a credit balance of £70
instead of £60. In reliance of this entry, the customer drew a cheque for £167,
which was dishonored when presented. The customer's action for breach of
contract succeeded. The court held that the bank was entitled to debit the
customer's account with the amount erroneously credited but the bank did not
have the right to dishonor cheques drawn for sums within the balance conveyed
to the customer, until, at any rate, they gave him some notice.

The bank is always entitled to rectify the error within a reasonable time. In
United Overseas Bank Vs Juwani (1976) IWL R 964, a bank erroneously
credited it's customer's account twice with the amount of a single remittance.
Despite this, he withdrew on the balance accrued as a result of this oversight,
and thereafter disputed the bank's right to reverse the undue credit entry. It was
held that the customer ought to have known that the unduly high balance
shown in his account was incorrect. He was not expecting any additional
payment of a substantial amount to the credit of his account, and he was not
entitled to shut his eyes to facts staring him in the face.

The Customer’s right to demand corrections

In certain cases, the customer rather than the bank is interested in having the
wrong entry corrected. Thus, the customer’s account may have been credited
with an amount smaller than that of an item payable to him or debited with an
amount larger than that for which he drew a cheque. In the majority of cases,
this occurs where the amount on the customer's cheque has been fraudulently
raised. In most cases in which the customer demands the correction of a wrong
entry, the bank is prepared to accede to the customer's wishes because the
customer’s reputation may be at stake.

One of the questions commonly raised is whether the customer is entitled to

demand rectification of entries in his account after the lapse of a reasonable
time from the dates of his receipt of the bank statement or the date of the entry.
The basic answer in English law is that, in the absence of fraud, the customer
is not precluded by the bank statement from disputing an error or a wrong debit
made by the bank.

In Keptingala Rubber Estate Ltd Vs National Bank of India Ltd (1909) 2 KB

1010, it was held that the principle involved is based on the construction of the
contract of banker and customer. It is thought that the contract does not place
the customer under a duty to peruse his statement.

Some banks include a warning on a customer's statements

"A customer must exercise reasonable care and promptness to examine the
statement and items attached to it to discover his unauthorized signatures or
any alteration on an item and must notify the bank promptly after discovering”.

If the customer fails to comply with this duty and does not, notify the bank of
an error within 14 -21 days, the customer is precluded from disputing the
regularity of the payment made.

See Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd (1986) ACS0

The plea that a bank statement consists an account stated may be raised either
by the bank or by the customer. Naturally, the urgency is pressed by the party
that seeks to deny the other a right to have an error or a wrong entry rectified.
From a practical point of view, when an account is stated, it becomes similar to
a confirmation by the debtor that the creditor is claiming the correct amount.

Customer’s Silence with Knowledge of wrong entry

In Greenwood Vs Martins Bank Ltd’ (1933) AC 51, it was held that if the
customer knows that an entry made in his passbook or statement of accounts
is wrong but keeps silent, the customer will be precluded from asserting the
error once the bank has changed its position.

A question of difficulty is whether such an estoppel would, likewise, be

operative where the customer did not have actual knowledge of the irregularity
involved, but on the basis of any reasonable practice, a customer ought to have
known about it or to have suspected it.

In Brown Vs Westminster Bank Ltd (1964)2 Lloyd’s Rep 187 is illustrative

on this point.

Here the servants of the customer, an old woman who was too frail to look after
her affairs, forged her signature on cheques drawn on her account. The branch
manager called on the customer on several occasions to ask whether the
instruments were regular. Although the customer did not expressly verify the
genuineness of the cheques, she refrained from questioning their payment. She
was accordingly held to be estopped from denying the bank's right to debit her
account.

In London - Joint Stock Bank Vs McMillan (1918) AC 777, it was held that
where the extent of the customer's disregard of ordinary standards of business
practice and ordinary care is such as to invoke an estoppel, the customer cannot
be heard to say that the customer had delegated the duty of examination to
another person. After the lapse of a reasonable time, the customer is regarded
as having the means of knowing what is being done by the person entrusted
with the conduct of customer's affairs.

In Lloyds Bank Ltd V Brooks (1950) 72 JIB 114, it was held that there was a
duty on the banker not to over credit the customer's account and a duty on the
bank not to induce the customer by representations contained in the statements
of account not to draw money from the account to which the customer is not
entitled. The amount credited to the customer’s account will be treated as being
due to him but the estoppels only operates after the customer has acted upon
the representation.

B. DEPOSIT ACCOUNTS

These are also known as time deposits. They are repayable after a fixed period
or notice and they include savings accounts. Because the balances are payable
after stated notice, the customer has no right to draw cheques on ‘the account
and normally no cheque book is given for these.

The money placed on a deposit account is the bankers’ money and he makes
whatever profit he can out of it which profit he retains and only repays the
principle. According to the custom of bankers, a small interest rate may be paid.
However, it is generally recognised that a banker does not charge commission.
In B. Vs Ezekiel (1967) 3 ALR Comm, 10, It was recognized that the banker
pays interest on deposit accounts. The banker does not charge a commission.
A variation of a deposit account is a savings account which was intended to
encourage small savings from small savers.

C. OTHER ACCOUNTS

I. Loan accounts:

These are usually used by business people who need access to credit from the
bank on a running basis and they are solely opened for that purpose. An
example of loan account operators are travel agencies

II. Suspense accounts:

This account is used for items which for one reason or another can’t be passed
on to the account into which they ought to go. They are in the meantime debited
or credited to the suspense account as the case may be. A cheque which is sent
directly from one bank to another for payment is debited to such an account
until advice of the payment is received. Also the usual practice of bankers in
garnishee proceedings is to transfer the amount of the judgement debt plus any
foreseeable costs of the order from the current account to the suspense account
to await a decision.

LECTURE 7
APPROPRIATION OF PAYMENTS

By the very nature of current accounts; the debit balance keeps changing from
time to time. For most purposes it is adequate to determine the net credit or
debit balance as standing at the end of each trading day. In certain cases,
though, it is important to consider which of the debit items in the account are
to be regarded as discharged by the incoming credit entries.

The problem is relevant in two cases;

a) In transactions in which a bank seeks to enforce a security covering a

revolving amount; and

b) In respect of the account of a partnership following the firm's dissolution.

Courts resolve this problem on the basis of a rule termed “the rule of
appropriation of payment". The nearest word to appropriation is allocation. It
treats each item paid to the credit of the account as discharging the earliest
debit item entered in it. The principle is better described as "first incurred first,
discharged" or first in, first out (FIFO).

This however does not capture the true meaning of appropriation. The customer
has a right to appropriate payment as he sees fit. If there are several cheques
due to him, the customer has a right to determine which debt should be paid
first. Once an appropriation is made, it’s final.

In Davaynes v Noble, (Clayton's case) (1816) l, Mer 527, it was decided that
when a current account is kept between parties as in the case between a banker
and a customer, if there is no express intention to the contrary and no
circumstances from which such intention can be implied, the account rendered
is evidence that the payments on one side are appropriated to the payments out
on the other side in the order in which they take place. That is the first item on
the debit side is discharged by the first item on the credit side. This is also
referred to as the 'First in First out (FIFO)' rule and otherwise as the Rule in
Clayton's case'. Therefore, in the case of a current account, unless there is a
contrary indication, payments in are presumed to have been appropriated to the
debit side in order of date.

In contemporary banking practice, banks include clauses in their contracts with

customers which have the object of excluding the rule in Clayton’s Case.

Exceptions to the Claytons rule

The rule in Clayton's case is not a rule of law to be applied in every case, but
rather a presumption of fact that will be applied depending on the circumstances
of each case and it can be rebutted by showing that it wasn't the intention of the
parties that the rule be applied.

a) In Be Hallets Estate (1880)13 ChD (596, it is stated that the rule in

Clayton's case doesn't apply to trust money because equity' gives priority
to the beneficiary where trust money is mixed with personal money.
Whatever balance is on the account will represent trust money and the
beneficiary would be able to claim a charge in the hands of the banker.

b) The rule in Clayton's case must be applied separately to each account.

Therefore, it does not apply to settling items in the current account
against another account kept in the same bank for the same customer
e.g. where a customer has a loan account and a current account, money
on the current account can hot be appropriated for the reduction, of the
current account. The case of Bradford Old Bank v Sutchiff (1918)2 KB
833, is authoritative on this view. In this case, the customers had a loan
account and current account at the bank. Court decided that payment to
the credit of the current account must be appropriated to that account
and therefore a guarantor for the loan account cannot claim that such
payment should be taken in reduction of the loan.

c) Further, the rule applies only where payments into or out of the account
continue to be made. This is illustrated by the facts in Clayton case itself.
Two partners had a current account with a banking firm. One of the
partners died and at the time of his death, there was a balance- standing
 to the credit of their account. Later the bank failed. Between the date of
the partner’s death and the failure of the bank, the surviving partner
withdrew sums in excess of the credit balance on the account but also
put in sums sufficient to put the account more in credit than it had been
when the partner died. The partner claimed that the payments should be
appropriated against, the withdrawals so as to leave intact the balance at
the partner's death and this he was; claiming against the partner's estate.
Held: That the credit balance had been extinguished by withdrawals since
items in the current account were presumed to be set against each other
chronologically. Thus the Customer had no claim against the estate of the
deceased partner. By continuing to make payments into the account and
withdrawing from the account, he had lost his claim against the estate of
the deceased.

d) In some instances, this rule may work against bankers and it may be
necessary for them to stop the account which is being overdrawn
especially in cases of death, bankruptcy, winding up or insanity of joint
holders. Failure to do so, may result into heavy losses. Thus in Royal
Bank
of Scotland v Christie 8 ER 84, a partnership was borrowing money from a
bank and one of the partners had executed a mortgage of his land as security.
That partner died and further advances were made to the partnership. Later,
sums were paid into the account sufficient to cover the indebtedness at the time
of his death Held: The HOL held that the sums paid in had repaid the debts
outstanding at the time of the partner's death and consequently the further
advances which were unsecured.

e) Finally, if a banker gets notice of the creation of a second mortgage, then

it should immediately stop the account and further transactions should
be conducted through a new account. Failure to do this will lead the
banker into heavy losses. Read: Deelay v Lloyds Bank (1912) AC 756,
COMBINATION OF ACCOUNTS AND SET-OFF

Combination of accounts represents an accounting situation whereby a banker

might treat two or more accounts opened between himself and the customer as
though they were one account entirely under his control by reason of which he
might remove assets from one account to meet deficiencies in the other. Majority
of decisions suggest that a bank has a right to combine a customer’s accounts.

A banker may wish to combine a customer’s accounts by setting off the credit
balance on one account against the debit balance in another in order to
determine the customer's total indebtedness to the bank. The bank may want to
do this where it is doubtful of the customer's solvency.

The Right to combination of Accounts

The contents of the contract between a banker and a customer cannot be stated
with certainty and may contain elements which may not be in the contemplation
of the customer. Can it therefore be said that one of the terms of that unwritten
contract is that a banker has an automatic right to combine or consolidate the
customer’s accounts or is there an obligation imposed on the banker to keep the
customer's accounts separate?

The right of combination is a particular form of contractual set-off and may be

excluded by express or implied agreement between the bank and customer. The
bank may exercise its right of combination without notice to the customer unless
the bank has previously agreed to keep the accounts separate.

This was the approach taken in Garnet v Mckewan (1883) ALLER 686, the
plaintiff opened an account at the branch of the bank. The account was
overdrawn in June and was closed in August of the same year when there was
a debit balance of about $42. Years later, the plaintiff opened another account
at a different branch of the same bank, some transactions followed and the
account came to a balance of about $42. Three cheques presented were
dishonoured. A month later, the plaintiff received a letter saying that on that
day, the bank had charged his account the debit balance due on the closed
account. Held: That the bank was entitled to do so. The banker has a right to
combine two accounts belonging, to the same customer even at different
branches of the same bank.

This case was approved in Hales Owen Presswork Ltd v Westminster Bank
(1970)3 WLR 625, where Lord Denning MR stated that the bank has an
automatic right to combine the customers’ accounts. A contrary view however
appears in. the earlier Greenlagh Vs Union Bank of Manchester (1924)2 KB
153, where court, held that by opening two accounts for the customer, the
banker undertakes to keep the accounts separate. This case was followed by the
British and French Bank v Opelaya where the SC of Nigeria held to the same
effect.

Exceptions to combination of accounts

a) The bank's right of combination is lost where money is deposited with the
bank for a special purpose of which the bank has knowledge. See Barclays
Bank Vs Quist close Investments Ltd [1970] AC567.

b) Also an account opened by the customer in a different capacity e.g.

nominee or agent of another party may not be combined with the
customer’s private account. See Union Bank of Australia Vs Murray
[1898] AC 693. However, the bank may exercise its right of set off on a
nominee account if there is clear undisputed evidence that the customer
entitled to the funds in both account is one and. The same. See Bhogul v
Punjab National Bank [198S]2 ALLER 296.

c) A bank is not obliged to combine a customer's accounts held with it where

there are insufficient funds in one account to meet a cheque which has
been drawn on it. See: Prof G.P Tumwine Mukubwa’s Essay in African
Banking Law and Practice 2 nd Edition, 2009. Chapter 5.
BANKER’S LIEN

A lien is a right to retain property belonging to a debtor until he has discharged

a debt due to the retainer of the property. It is a right to retain possession of
specific goods or securities or other movables of which the ownership vests in
some other person and the possession can be retained until the owner
discharges the debt or obligation to the possessor.

It is a legal claim by one person on the property of another as security for

payment of a debt. In Halsbury’s Laws of England, it is stated:

"A lien is in its primary sense is a right in one man to retain that which is in his
possession belonging to another" until certain demands of the person in
possession are satisfied. In its primary sense, it is given by law and not by
contract.

According to Chalmers on Bills of Exchange "A bankers’ lien on negotiable

securities has been judicially defined as ‘an implied pledge. A banker has in the
absence of agreement to the contrary, a lien on all bills received from a customer
in the ordinary course of banking business in respect of any balance that may
be due from such customer."

A banker’s lien does not require express agreement but is implied from the
business relation of the parties. A lien is not restricted to securities deposited
with the banker to secure advances given to the customer although it does not
cover a customer's credit because money is not capable of being earmarked. In
Re Morris: Coneys Vs Morris (f22) l J.R 136, Court held that a banker has no
lien in respect of a customer's account.

In Boliand v Bygraves (1846)3 CB 519, Sir Charles Abbot held that a banker
has a lien upon any securities of a customer which for any purposes are in his
keep and has a right to retain them, countervail any liabilities incurred; on his
behalf until those liabilities have ceased.
A lien attaches only to the instrument deposited with the banker and not to the
customer’s balances. In Halesowen Press work & assemblies’ Ltd v
Westminster Bank Ltd (supra), it was stated that, it has been recognized that
a banker has a general lien on securities deposited with him by the customer
unless there is an express contract or circumstances that show an implied
contract inconsistent with a lien.

INCIDENTAL MATTERS

a) References

It is the usual practice of banks not to open an account for a customer without
obtaining a reference and without inquiring into the customer’s financial
standing. Failure to do so at the opening the account might prevent the banker
from establishing the Defense under Section 81 of the Bill of Exchange Act, Cap
68.

Holden Miles, Law and practice of Banking 1996 at 392 has stated that when
an application is made to a bank to open an account in the names of a private
individual, there are 4 principle matters for consideration regarding the
prospective customer;

• Whether he has authorized the opening of an account in his name.

• Whether he is the person he claims to be.
• Whether he is employed by someone else and if so, the name of the
employer.
If a 3rd party ever claims to have the authority to open an account in another
person’s name, the banker should be very cautious indeed.

In Robinson Vs Midland Bank Ltd (1Q24) 41 TLR 170, there was a

blackmailing conspiracy against a foreign dignitary who had been discovered in
compromising circumstances with the wife of the plaintiff. The plaintiff was not
a party to the conspiracy. The dignitary issued a cheque for £ 150,000 to prevent
the plaintiff from bringing divorce proceedings and the conspirators, without the
plaintiff’s knowledge, opened an account with the defendants, in the names of
the plaintiff. They paid into its account the cheque in question and later drew
out the proceeds. The plaintiff’s action for money had and received failed
because it was held interalia that the bank was dealing with a fictitious customer
notwithstanding the use of the plaintiff’s name.

A banker who fails to take references and cross check the identity of an intending
customer will be negligent and lose the protection afforded to paying bankers
under the Bill of Exchange Act. In United Nigeria Insurance Co V Muslim
Bank (West Africa) Ltd (1972) (2) ALB. Comm 8, the Supreme Court of Nigeria
upheld the usual practice of bankers not to open an account for a customer
without obtaining a reference and without inquiry as to the customer standing.
It was stated that a banker who without doing much opens an account for a new
customer and shortly afterwards collects a cheque Crossed " not negotiable”
B/C Payee only” which is paid in by the customer, and was drawn in favour of
a payee of the same name on the date before the account was opened, will be
unable to establish the statutory defense that he acted in good faith and without
negligence, in answer to a claim by the true owner of the cheque and will be
liable on the claim if its negligence.

In Lloyds Bank v E. Savoy &_Co (1933) ' AC 201, it was held that there may
be negligence in connection with the opening of the customer’s account by the
banker. This however was recognized to be the usual practice of bankers not to
open an account for customer without obtaining references and without inquiry
as to the customer’s standing.

In Ladbroke & Co v Todd (1924) III LT 430, where the bank was held negligent
because they did not make inquiries about a proposed customer which was the
ordinary precaution that other banks took.

When a banker is opening an account for a customer or collecting a cheque for

him, the test of negligence is whether the transaction of paying a cheque coupled
with the circumstances antecedent and present, is so out of the ordinary course
that it ought to have aroused reasonable doubts and suspicion in the banker's
mind and caused him to make inquiries. If he fails to make inquiries, he should
have made there is at the very least a heavy burden on him to prove that such
inquiries could not have led to any action which could have protected the true
owner's interests.

BANKERS OPINION/RESPONSE TO INQUIRIES

A bank manager may sometimes receive inquiries from another bank with regard
to the financial position or business integrity of one of its customer. This usually
happens, where its customer wishes to enter into some contractual relationship
with a 3rd partly and the 3rd party asks the customer to supply a banker’s
reference. The customer gives the name of his bank to the 3rd party who passes
this information on to his own bank which then approaches the customer’s bank
“in confidence”. The fact that the reply is given in confidence does not mean that
the 3rd party’s bank is not authorized to disclose the information to its 3 rd party.

The request for an opinion ought to give some indication of the amount of the
liability concerned. The reply gives a general indication of the credit worthiness
of the customer. It should not give any details of the account itself. The usual
form of favorable reply is “Respectable and trustworthy and considered good for
your figure and purpose but if the bank wishes to be of more caution it may say:
“Respectable and trustworthy, but your figure is larger than we are accustomed
to see”.

The bank manager should be careful when answering such inquiries to avoid
any claims in negligence. It is not necessary for the opinion to be in writing or
signed by the Jailer