Chapter – 5 banking and commercial laws



• The Banking Regulation Act of 1949 came into operations with effect from March, 16. 1949. The purpose of this Act was to supplement the Companies Act and help consolidate the prevailing laws at that time relating to banking companies.

• Banking Regulation Act defines bank, banking and banking business as per section 5 of the ACT.

• Banking Regulation Act,1949 says “banking company” means any company which transacts the business of banking.

• “Banking”means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.

• In simple words, Banking can be defined as the business activity of accepting and safeguarding money owned by other individuals and entities, and then lending out this money in order to earn a profit.

• With the passage of time, the activities covered by banking business have widened and now various other services are also offered by banks.

• The banking services these days include issuance of debit and credit cards, providing safe custody of valuable items, lockers, ATM services and online transfer of funds across the country / world.

• Banking Regulation Act, 1949 is not applicable to Primary Agricultural Credit Societies. However, Banking Regulation Act does apply to cooperative banks as per section 65 (AACS).

• Mode of nomination to be taken in case of deposits have been described in section 45 ZA of the Banking Regulation Act.

• Banking Companies in India are supposed to transfer at least 20 per cent funds to reserve fund category every year. (Section 17, Banking Regulation Act, 1949).

• Reserve Bank of India is empowered through Section 21 of the Banking Regulation Act, 1949 to keep control over advances of banking companies.

• Any banking company in India cannot create floating charge on the undertaking or any property of the company. (section 14 A).

• Section 7 of the banking Regulation Act, 1949 provides that every company carrying the business of banking must use one word of the following: bank, banker, banking or banking company.

• Section 6 provides list of businesses that banking company can undertake which have been increased from time to time.

• Businesses that banking companies in India are prohibited to undertake are given in section 8 of the Act.

• Banking Companies can open its subsidiaries as section 19(1) of the Act. Main purposes for which banking company can open subsidiary are:

Undertaking administration estates as executors, trustees etc.
Undertaking and executing trusts.
Providing safe deposit vaults services Carrying banking business outside India.
Any other business that Government may permit from time to time.
• Section 30(1) requires banks to be audited every year.

• Banking Regulation Act as amended in 1968, inserted under Section 10, some new sub-sections like A, B, C and D regarding management of banking companies.

• Section 10A provides that of all the Board of Directors at least 51 per cent must possess special qualities/experiences etc. like:

Accountancy, economics, agriculture, law, banking, cooperation, etc.
Do not have substantial interest in companies which carry business with banking company in which he is Board of Director.
Appointment of a person as Director who is already a Director of other banking company is prohibited.


• Commercial banking in India is governed by the Negotiable Instruments Act, 1881.

• The enactment of this Act was not only to define and amend the then laws relating to promissory notes, bills of exchange and cheques but also to provide a legal framework for payment and collection of cheques and other negotiable instruments besides fixing duties and responsibilities of paying and collecting bankers and their protection thereof.

• Negotiable Instruments Act also defines and describes the crossing and endorsement of negotiable instruments and their implications.

• With the amendments made in the Negotiable Instruments Act, 1881, new chapter and sections added in it from sections 138 to 142, describes the forging and dishonouring of cheques and their implications. This section was added in the Negotiable Instruments Act, 1881 by way of amendment through Banking, Public Financial Institution and Negotiable Instrument Laws (Amendment) Act, 1988 (Act 66 of 1988).

• Initial three chapters define the terms used in trade and commerce the meaning of various negotiable instruments and other aspects of banking operations like drawer, drawee, holder, holder for value, holder in due course etc.

• Other chapter like chapters-4 onwards talk about different banking operations, legal framework and guidelines etc. on how to handle various including negotiation, presentment, payments, crossing, dishonouring and penalty etc.


• Negotiable Instruments by statute under Negotiable Instruments Act, 1881 means and include Cheque, Bills of Exchange and Promissory Note. These negotiable instruments being dealt along with other important aspects of negotiable instruments are given indifferent sections given below:

Section 4 of Negotiable Instruments Act, 1881 deals with promissory note.
Section 5 of NIA, 1881 deals with bills of exchange
Section 6 of the Act deals with cheques.
Section 123 describes the types of Crossing and its definition.
Section 8 describes the term “holder” of instrument.
Section 10 describes “holder in due course”.
Section 9 of NI Act, 1881 describes about “holder for value”.
• Under section 137 of the Transfer of Property Act,1882, certain instruments like Government Promissory Notes, Shah Jog Hundis, Delivery Orders and Railway Receipt(under certain conditions) have been recognized as negotiable instruments by customs, usages and law to be having negotiable characters.

• All negotiable instruments can be negotiated or transferred from one person to another, i.e. ownership is transferable. Negotiable Instrument is explained as negotiable means “transferable” or “change hands along with ownership” whereas “instrument” means a “document” or “property in document” used for banking purposes.

• Drawing, accepting, making or issuing any promissory note, hundi or bill of exchange expressed to be payable to bearer on demand by a person other than the RBI or the control govt is prohibited under sec. 31 (1) of RBI act 1934.

• Essential Features of Negotiable Instruments Acts are:

It is an unconditional written document.
Negotiable instruments are conveniently transferable from one hand to another along with the property in the instrument.
Holder of the negotiable instrument has the right to sue in his own name on the instrument.
Negotiable instrument provided complete and good transfer of title in the instrument to the transferee. It has complete negotiability as well as transferability property.

Difference between Transferability and Negotiability

Transferability means transfer of any product from one person to another with the condition that the transferor cannot transfer better title in the product to transferee than what he (transferor) himself has. If he has no title in the product which is, say, stolen one, then he (transferor) cannot give transferee any better right on property than he himself has. If transferor is caught, then the product has to be returned back to its original owner. However, in case of Negotiable instrument transferee if takes a cheque from the transferor without knowledge of latter’s (transferor’s) defective title (say stolen cheque), then the transferee will have complete title in the property (money) in the cheque and shall not be responsible to the true owner of the cheque from whom stolen. But in transferability this is not true.


Cheques : An instrument to be called a cheque, must possess the following important features as required in section 6 of Negotiable Instrument Act. These are:

Instrument should be drawn on a specified banker for specified amount with a date on it.
Instrument that is payable on demand is cheque and only in money terms.
There are three parties to cheque, namely, Drawer (i.e.account holder who signs the cheque); Drawee (bank on whom cheque is drawn and is to pay the money to payee); and Payee(whom to pay money)
In a cheque order to pay money is unconditional.
Promissory Note : It has following characteristics as contained in section 4 of NIA, 1881:

It is unconditional promise to pay.
It should be in writing and signed by the maker.
Promise to pay must be of a certain sum of money.
Promise to pay must be to or to the order of certain person or the bearer of the instrument
Bills of Exchange: Characteristics of bill of exchange as given in section 5 of NI Act, 1881 provides following important parameters to call an instrument as bill of exchange.

An instrument in writing;
It contains an unconditional order,
Bill of exchange is signed by maker,
There is direction to pay to a certain sum of money only to or to the order of certain person or the bearer of instrument.
• As per the banking practice some other instruments are also being used as negotiable instruments like dividend warrants, share warrants, bank draft, bank notes etc.

• Instruments like deposit receipts, share certificates, postal and money orders of post offices etc. are non-negotiable instruments.


All the three have unconditional order as common factor.
In case of cheque and bill of exchange there are three parties whereas in case of promissory note there are only two parties.
In case of cheques, the maker is the drawer, whereas in case of bills of exchange and promissory note, the maker is creditor and debtor respectively.
In case of cheques and promissory notes, acceptance of instrument is not required but in case of bill of exchange acceptance is necessary.
Cheque can be crossed to stop further negotiability but in case of promissory note and bill of exchange crossing is not required.
In case of bill of exchange the liability of the drawee or maker is secondary, i.e. upon non-fulfillment of apromise to pay by drawee but in case of promissory note the liability is primary.
In case of cheques the liability of the drawee is to pay on demand.


Cheques can be classified into various types. Normally cheques are of four types. These are:

Bearer Cheque: A cheque payable to a person mentioned in the instrument or any person who presents the cheque on the bank’s counter is called bearer cheque. In case of bearer cheque, it can be transferred to another person by mere delivery

Open Cheque: Holder of an open cheque can get cash across the counter of the bank or holder can transfer to another person by signing at the back of the cheque or even can deposit in his own account.

Order Cheque: Such cheques contain an order to pay money to a particular person mentioned in the instrument. Such cheques are transferable by endorsement.

Crossed Cheque: When two transverse parallel lines on the face of the cheque are put then the cheque is called crossed cheque. Crossing is a direction / instructions to the bank.


• A holder of negotiable instrument means a person who has possession of the instrument in his own name and has the right to recover money mentioned therein.

• Holder is not a person who is in possession of the instrument through theft, possesses lost cheque belonging to another person, if court passes an order not allowing possessor of the instrument to get amount. (section 8 of NIA, 1881)

• Holder has the right to endorse, obtain duplicate instrument in case of loss of original and can sue other in his own name as per the instrument.

Rights of Holder:

1. An endorsement in blank may be converted by him into an endorsement in full

2. He is entitled to cross cheque

3. Can negotiate a cheque with third person, if negotiation is not prohibited by any crossing etc.

4. Can claim payment of the instrument and sue in his own name on the instrument

5. Can get duplicate copy of the cheque otherwise lost.


• Holder in due course (section 10 of NIA, 1881) means a person who has obtained the instrument for lawful and valuable consideration; must have obtained instrument before maturity; is not aware of defect in the title of his immediate transferor and has nothing apparently wrong in the instrument.

• For instance, if a borrower of the bank, deposits a cheque with his bank in discharge of his debt, then the position of the bank is “holder in due course”.

Conditions to be Holder in Due Course

• Possession of instrument in the hands of holder in due course- if order, name must exist as payee or endorsee

• Negotiable Instruments must be regular in all aspects

• Instruments must have been obtained for valuable consideration

• Instrument must have been obtained before the amount mentioned therein becomes payable.

• Holder in due course must obtain instrument without having any doubt in its title. He receives the instrument free from any defective title


• When abanker obliges acustomer by crediting his account with the amount of the cheque of other bank, and allows him to draw money against it, the banker’s position is of “holder for value”. For instance, ‘X’ a debtor induces ‘Y’ , a third person to draw on him (X), which accepts in favour of his creditor ‘Z’, then the latter (Z) is holder for value with power to sue the drawer ‘Y’ even though he has not received any value.

Payment in Due Course

• Payment in due course means when cheques are passed in “accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned”. Section 10 of Negotiable Instrument Act, 1881)

• The above section makes it clear that payment is considered made in due course only when made as per:

Apparent tenor (see date, name of payee),
Whether cheque is stale or not,
Bearer or otherwise,
Amount in figures and words match, and
There is not apparent visibility to the naked eye about material alteration etc.
Amount is paid in good faith and without negligence, and
Payment is made to person in possession of the instrument.
• The legal position of holder in due course does not withstand test of law in case instruments are overdue instrument or a not negotiable instrument or inchoate instrument.


Collection of Cheques

Role of Collecting Banker

• One of the functions of the banker is to collect cheques of his customers only to realize payments from drawee bank (paying bank).

• Many a time it is difficult to ensure the legality of ownership of cheque deposited by customer for realization from another bank. In order to ensure safety of the collecting banker, section 131 of the Negotiable Instruments Act, 1881 provides certain parameters that if followed can give legal protection to the collecting bank. These parameters are:

Act in good faith and without negligence
Receive payment for his customer only. No third party cheques to be collected.
Collect cheques crossed generally of specially to himself.
What is Negligence?

• Negligence depends upon the circumstances of each case.

• Generally it indicates lack of care which is necessary to be taken in a case.

• “Test of negligence under section 131 is whether the payment considered in the light of circumstances, antecedents and present, was so much out of ordinary course that it ought to have aroused doubt in banker’s mind and caused him to make enquiries.”

• Some specific examples of negligence in practice could be:

• Opening of accounts without proper introduction.

• Irregularity of endorsements

• No enquiry being made in doubtful cases.

• Failure to take note of Not Negotiable Crossing.

• Collection of “Account Payee Cheque” for any other person.


As per Section 15 of Indian Contract Act:

• Coercion means threatening to commit or committing any act which is an offence under Indian Penal Code or unlawful detaining or threatening to detain unlawfully any property belonging to other party, with a view to obtaining his or her consent.

What is Conversion?

• “Conversion” means wrongful or unlawful interference (i.e. using, selling, occupying or holding) with another person’s property which is not consistent with the owner’s right of possession.

• Negotiable Instruments are included under law in the term “property” and hence banker is liable for conversion.

• The basic principle under conversion is that a rightful owner of the goods can recover the same from anyone who takes it without his authority.

However, right of true owner is restricted to the fact that when goods have reached in the hands of a person in good faith, for value and without knowledge that the other party had no authority on goods.

Except the above, true owner can file suit for conversion.


Crossing of Cheque

What is Crossing? – Two parallel transverse lines on the face of the cheque

Different types of Crossing

General Crossing (section 123 of NI Act, 1881)

• Parallel lines with or without any abbreviation like “& Company” or “ Not Negotiable”, or “Account Payee” are all general crossings.

Special Crossing (section 124 of NI Act, 1881)

• Parallel lines with the name of some Banker is written across the cheque.

• Cheque shall be deemed to be crossed specially to that Banker.

“Crossing of Cheque: some features

• Where a cheque is uncrossed, the holder may cross it generally or specially.

• It restricts the payment of the cheque by way of cash.

• In case of special crossing, the banker on whom it is drawn shall not pay otherwise than to the Banker mentioned therein and to none else.

Truncated Cheques

• Truncated cheque means a cheque whose image is scanned and the electronic image is sent for collection and payment, instead of physical cheque.

CTS-2010 ( Cheque Truncated System-2010)

• This facility started initially in NCR (National Capital Region) and Chennai. Later this scheme was extended to whole of the country in phases.

• New cheque books are now issued with mark “ CTS _2010 Standard” by Banks.

• Reserve Bank of India and Indian Banks Association have developed such cheques by standardizing paper quality, water marks, logo of bank in invisible ink etc.

• CTS has been legalized through the amendment of Negotiable Instruments Act 1881. The amendments came through the Negotiable Instrument Act, 1881 {NI (Amendment and Miscellaneous Provisions) Act, 2002 },

Advantages of CTS

• There is better reconciliation of funds.

• Since only cheque image is sent during collection, instead of physical movement of cheques, lot of time is saved.

• Collection of cheques is faster since time taken for collection is reduced.

• Earlier physical movements of cheques used to take place from branches to the nodal branch for collection/clearing. There was lot of risk in physical movement as any cheque lost might lead to risks. Now with CTS system the operation risk is largely finished.

• Movement of cheques can be anywhere in the country with no geographical constraints.

• It reduces the cost of handling and other operational costs.

As per the amendments in the Negotiable Instruments Act, 2002, presentation of a truncated cheque to paying banker is not compulsory.

Where an electronic image of a truncated cheque is presented for payment, drawee bank is entitled to:

1. Demand any further information regarding the truncated cheque in case of any suspicion about genuineness of the apparent tenor of the instrument.

2. Demand the presentment of the truncated cheque for verification if it has suspicion of any fraud, forgery, tampering or destruction of the instrument.

3. Retain the truncated cheque, if the payment is made accordingly

Collection of cheques: Time Limits

• Normally proceeds sent by the Paying Branch are credited in the Drawee’s A/c within 10 days of lodgment in case the instrument drawn on State Head Quarters except the State Capital of N.E. Region & Sikkim, and 14 days in all other cases. For delayed credit beyond 10/14 days, branch should pay penal interest at the rate of FD as applicable for the delayed period.

• For abnormal delay in credit i.e. beyond 90 days, branch should pay penal interest at the rate of 2% above. F.D. rate applicable for the delayed period.


Role of Paying Banker

• Duties of the paying banker are laid down insection 31 of the Negotiable Instrument Act, 1881. This section provides that “ the drawee of a cheque having sufficient funds of the drawer in his hands properly applicable to his payment of such cheque must pay the cheque when duly required so to do, and in default of such payment, must compensate the drawer for any loss or damage caused by such default”.

• Paying banker is required to ensure availability of sufficient funds, properly applicable funds (there is no restrictions by court etc.), make payment only when duly required to do so, and in case of default in payment compensate the party.

• Some examples of payments could be:

Cheque presented for payment is marked ‘pay to bearer’, is payable to bearer or possessor or order.
Cheque presented marked’ pay Ramesh or order’ is payable to Ramesh or to his order.

Bouncing of Cheques

• Bouncing of cheques or dishonouring of cheques was a civil liability till 1989.

• However to make bouncing of cheques a criminal liability that can lead to imprisionment and/or fine, amendments were made in the Negotiable Instruments Act throughbanking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 from April 1. 1989.

• Five new sections from sections 138 to 142 were inserted in the existing Act mainly toprotect genuine public.

• However, where bank returns the cheques with the remarks “payment stopped” always does not mean dishonouring of cheque and as such section 138 (b) is not attracted.

• Cheque dishonoured on the ground of “account closed” does not mean dishonoured due to insufficient funds or exceeding arrangement.

• In banking customs and practice and as per legal decisions “refer to drawer” is considered that cheque has been returned for want of funds in the drawer’s account.

• A valid cheque does not become invalid due to it being either post dated and ante dated.


• Negotiable Instruments Act, 1881, section 15 defines endorsement as one “where the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed thereto or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to have endorsed the same and is called “endorser”.

• In simple words, endorsement means when holder signs the negotiable instrument otherwise than as maker (drawer), on the:

Back of the instrument
On the face of the instrument
On a slip of paper annexed to the instrument as its part, or
Signs a stamped paper intended to be completed as negotiable instrument.
• Endorsement can be full endorsement or blank endorsement.

When in addition to the signatures the holder writes the name of the endorsee, it is called endorsement in full. Section 16 of NI Act)
Where merely signature of the holder is put without anybody’s name, then it is called Blank Endorsement.
A cheque endorsed blank becomes a bearer cheque may be originally it was issued asan order cheque. But the same cheque can become an order cheque if endorsed in full.
• Sometimes in practice, endorsement is done by fixing a rubber stamp, such endorsement is valid legally.

• In case any ‘order cheque’ is endorsed in blank, then it can be paid to the bearer and like a bearer cheque can be transferred by delivery. This is true in case any cheque endorsed in blank, it becomes payable to bearer.


• Section 5 of the Negotiable Instruments defines a bill of exchange as an instrument in writing containing an unconditional order, signed by the maker and directing certain person to pay a sum of money only to or to the order of a person or to the bearer of the instrument.

• Bill of Exchange has following characteristics that make it a bill of exchange:

Should be in writing
Should be signed by drawer
It is necessary that there is no ambiguity in naming drawer, drawee and amount payable. In other words all these should be certain.
Name of the payee must be certain.
• Drawee and acceptor are the same in case of bill of exchange.

• There are two types of bill of exchange, viz.

Demand bill of exchange
Usance bill of exchange
• It is necessary that all types of bills of exchange are presented for payment or acceptance to the drawee.

• When bill of exchange is drawn on partnership firm, then any partner can accept it.

• Demand bill of exchange is one which is payable on presentment, or at sight or on demand. In such bills no time limit arises.

• In case of demand bills presentment time and acceptance time are the same.

Dishonour of Bill

• Bill is considered dishonored when drawees who are not partners any one fails to accept bill or drawee given conditional acceptance, it is deemed dishonoured.

• Notice of dishonour is not necessary for maker.

Payment of Bill on Public Holiday

• When on the date of payment or maturity is a public holiday,then it is done on the immediate preceding working day..

• Days of grace on bill of exchange and promissory note are allowed after sight or after date. Normal grace period is 3 days after sight or after date. Days of grace are not permissible in case of cheques.

• Days of grace on bill of exchange and promissory note on the happening of some situation or event, or after that situation or specific day.


• It is defined as an unconditional undertaking to pay a certain sum of money only to orto the order of a certain person or to the bearer of the instrument.

• A document can be called a promissory note if it satisfies the legal requirements mentioned in negotiable instruments act and is an unconditional promise to pay.

• Law provides that a promissory note should possess following features:

A written, unconditional promise to pay.
Must have been signed by maker
Parties to promissory note are certain i.e. specified in particular.
Method of payment is specified along with money payable.
• Promissory note like bill of exchange can be drawn for any duration. Law does not specify any period.


Important Features

• Concept of partnership is contained in Indian Partnership Act, 1932.

• Section 4 of the Partnership Act defines partnership as relation between persons who have agreed to share profits of the business carried on by all or any of them acting for all. It also means abstract relations of agency between two or more persons.

• Partnership firm can be registered or unregistered. Partnership agreement can be written or oral.

• Typical characteristics of partnership is:

Joining together or association of minimum two persons or more than two persons.
Agreement for engaging themselves in gainful business
Persons coming together for a legal business must agree to share profits from the business in a proportion.
Between themselves partners act as an agency in their relationships.
• Section 8 of the Partnership Act, 1932 defines “Particular Partnership” which means a person becoming a partner with another person in a particular venture or undertaking

• As between the partners it may be agreed if so desired by them (a) that one or more of them shall not be liable for losses, (b) that any partner is not to share the losses but share only the profit, (c) that to share loss which is a negative profit.

• For instance, a sum due to one of the partners in a firm from a company can be set off against the debt to such a company due from the firm.

• Legal relationship between the partners is that of ‘Agency’.

• A partner as an agent of the firm has some implied powers under section 18 of the Partnership Act, 1932. Implied Powers means that any partner can make the firm liable by his acts done in the name of the firm in ordinary course of business.

• For instance, under implied powers some specific acts, for example, that a partner can do are:

He may sell or purchase any goods on account of the firm necessary to carry firm’s business.
He may receive payment of debts due to the firm and issue receipts thereof.
He may borrow money on credit of the firm against security of firm’s assets.
He may accept, make and issue bills and other negotiable instruments.
• However, under implied powers partner cannot acquire or transfer any immovable property.

• Implied powers do not apply to the following under section 19(2) of the Partnership Act:

Partner cannot take firm’s dispute to arbitration.
Cannot compromise or waive firm’s claims against outsiders (third party).
Cannot open a banking account on behalf of the firm in the name of the partner.
Cannot withdraw suit or admit any liability in a suit filed on behalf of firm or proceedings against the firm respectively.
• PARTNERSHIP at WILL : It means partnership not for a fixed period. Also partnership can be dissolved by any partner giving a notice to that effect to other person. (section 43 of the Partnership Act).

• Some other typical features of partnership are:

Partnership does not exist between members of charitable society or religious associations etc.
Persons who enter into partnership with one another are individually called ‘partners’.
All partners jointly or collectively are called ‘firm’.
Joint Hindu Family is not a partnership.
• Minor can be admitted as partner of the firm with the consent of all partners (Section 30 (1) of Partnership Act, 1932). Minor when admitted as partner derives certain rights as per section 30 of the said Act. These rights are:

Personally minor is not liable to any act of the firm.
Can elect to become a partner on attaining majority.
Entitled to all benefits of the firm but not liable for any losses or other liabilities.
If decides not to become partner then his share is not liable for any acts of the firm done after the date of notice of his intention of not becoming partner.
Right to all information and inspection of accounts etc
When partner dies
When any partner is adjudicated as an insolvent.
• Business of partnership is considered illegal and void, if (a) it is forbidden by law, (b) the nature of the business carried out by partnership is such that it is against any law of land, or against public interest at large, (c) business is fraudulent, and (d) business may cause harm to person or property.

Registered and Non-registered Partnership—its impact

• In the partnership is unregistered then the partner cannot do the following:

A partner cannot institute a suit against the firm or any partner of the firm to enforce his right. Only registered firms or persons of registered firm can sue
An unregistered firm cannot sue a third to enforce a right arising from a contract whereas registered firm can.
An unregistered firm or any partner of the unregistered firm cannot claim a set off in a proceeding instituted against the firm by third party to enforce right arising out of contract.
Right of set off is affected if claim is above Rupees 100. This value may vary by government after amendments in the Act.

THE INDIAN COMPANIES ACT, 1956 – Important Features

• Company is a legal person or a separate legal entity and company member is not an agent of the other member.

• Company is a perpetual existence and death or insolvency of any members of the company does not dissolve the company unlike partnership.

• Liability of members is limited unlike partnership where liability is unlimited.

• Company shareholder can transfer his share to another person making the transferee amember of the company.

• Company conducts its business on the basis of:

Memorandum and Article of Association
The Companies Act, 1956, and
Use of common seal of the company.
• The Company Act, 1956 applies to the whole of India.

• Incorporated Company means following:

A company is an artificial person with perpetual succession and common seal, formed and registered under the provisions of the Indian Companies Act, 1956.
A company that uses aword at the last of its name as name ‘limited’ or ‘private limited’.
A company of few individuals forming a group of workers.
• Memorandum of Association: It contains the following information:

Constitution of the company i.e. the charter of the company.
Name of the company, name of the State where company is registered and situated and objects of the company
Authorized capital, and
Liability of the members.
• When bank lends money to the company, it sees all the points mentioned in the memorandum of association. Normally bank sees (i) objective of company is incorporated, (ii) what is the constitution of the company i.e. how it has been formed and who are its promoters, (iii) what is present capital and how much is required, and (iv) liabilities of its members, any special clause etc.

• Article of Association provides information related to share capital, underwriting commissions, alterations of capital, powers of Directors, their qualifications, remunerations, rules and regulations, objects of company, power of company, etc.

• Joint Stock Companies are mainly statutory companies and they are established under the Indian Companies Act.

• Statutory companies are those which are established by a special Act of the Parliament. For example such companies are RBI, SBI, NABARD or other Government enterprises.

• There are three types of companies that are registered under the Companies Act, 1956. These are:

Public Limited Company
Private Limited Company
Company Limited by Guarantee.
• Public Limited Company is limited by share, liability is per shareholdings, require 7 or more persons to start a company and is incorporated under Companies Act, 1956.

• Private Limited Company is characterized by liability limited by shares, minimum 2 members to form a private limited company with maximum of 50 members excluding employees, such company restricts the right of the transfer of shares and lastly such company does issue prospectus.

• A company limited by guarantee is one where members contribute fixed amount in the event of its winding up, profit not being motive since these are charitable companies.

• Ultra-Vires means that company doing something beyond its scope, power of authority, contracts made are beyond members/company’s power as laid down in memorandum of association. Ultra-vires are ab initio void and not ratifiable.

• Doctrine of Relation back: It means when dealing of the insolvent from the date of act of insolvency will not be valid in law. All such properties sold or transferred shall rest in the Official Receiver.

• Doctrine of Indoor Management: It means while persons dealing with a company are presumed to have read the public document and understood their contents and ascertained that the transaction is not inconsistent with the memorandum and articles of the company. Moreover, outsider has no right and duty to see the inside working of the company’s internal proceedings.

• Doctrine of Constructive Notice means that every person dealing with the company is deemed to have notice of the contents of its memorandum and article and have understood them properly.

• Minor cannot become a member of a company and is wholly incompetent to contract. Minor taking shares is void

• Rights of Members include (a) right of getting dividend, (b) right of return of capital on winding up of company or reduction, (c) right to attend meetings and exercise vote, (d) right to inspect statutory books and registers free of charge as provided under Companies Act.

• Prospectus : Prospectus under section 2 (36) of the Companies Act defines prospectus as any document described or issued as a prospectus and includes notice, circular, advertisement or other document inviting deposits etc. It also means invitation issued to the public to take shares etc. of the company. It acts as an advertisement offering to public. In other words it is general notice to public.

• Issue is not public when directed to a specified person.

• Deemed Prospectus means where a company allots or agrees to allot any share or debentures with a view to their being offered for sale to public by any document by which it is deemed that offer of sale is to public is called deemed prospectus.

• Section 20 of the Banking Regulation Act, 1949 provides a restriction to banks to grant loans and advances to its Director who happen to be Director or partners or guarantor of any company or firm.


Meaning of Contract

• Meaning of contract has been defined in section 2 (b) of the Contract Act as “agreement enforceable by law is called a contract”.

• Section2(e) of the Act also provides that “every promise and every set of promises, forming the consideration for each other, is an Agreement”.

However, Agreements cannot be enforced by Court of Law, and as such they are not contracts.

Essential Elements of Contract

• Section 10 of the Contract Act, 1881 provides certain essential features that are required to be looked into before any valid contract is made. These essential features are:

Lawful offer accepted unconditionally.
Legal Relationship
Contract is for Lawful object.
Capacity to enter into a valid contract.
Free consent of the parties to the agreement.
Free consent of the parties to the agreement
Freedom from vagueness
Presence of consideration
Performance possibility
Compliance with legal formalities
Person of Unsound Mind

“A person is said to be of sound mind for the purpose of making a contract if, at the time when he makes it, he is capable of understanding it and of forming rational judgement as to its effect on his interest” Section 12 of The Indian Contract Act.

Two major test of Soundness of Mind are:

Capacity to understand the concerned business
Ability to form a rational judgement as to its effects on a person‘s interests.


• Lunatic means a person whose mental powers are deranged so that he cannot form a rational judgement on any matter.

• Normally an agreement entered by lunatic is void in law,with exception where it is necessary for his/her life.

• Banks do not normally open accounts of lunatic since they are unable to understand the do’s and don’ts of the banking operations.


• The term idiocy is related to the term idiot, which means a person whose mental powers are completely absent. Any or all contract with such person (s) is void in law.

• This defect is related to poor brain development.

• Lunacy can sometimes be cured but idiocy is incurable.


• Section 11 of Indian Contract Act divides competence into three distinct branches. These are:

Disqualification due to infancy, i.e. person being minor.
Disqualification due to Insanity, described earlier in foregoing paragraphs.
Other disqualifications by personal law (s)Section – 3 of Indian Majority Act, 1875 describes /defines minor.

Who is Minor?

• Every person domiciled in India and has attained the age of majority when he / she shall have completed the age of 18 years and not before. However in case of appointment of Guardian by the competent court, the age of majority is 21 years and not 18 years.

• In India, minor cannot enter into a contract, subject to certain exceptions. Banks do not enter into contract with contract except for deposits under guardianship or where no liability iscreated in the contract. An agreement by minor is absolutely void since minor has no capacity to contract.

Exception in case of Minor

• Minor’s property is liable for payment of a reasonable price for necessaries supplied to the minor or to anyone whom minor is bound to support.

• Section 68 of the Indian Contract Act provides that if a person incapable of entering into a contract, or anyone whom he is legally bound to support , is supplied by another person with the necessaries suited to his conditions of life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person”). This in simple words means that minor may enter into a contract to support a third person who provides services and goods for minor’s benefit

• Another important feature in the Contract regarding minor is that since any contract minor enters into is absolutely void in law, he/she cannot ratify his/her actions done during minority period after attaining majority. There can be no ratification of a contract which is void ab initio.

• A minor cannot be compelled to refund any benefit that he might have received under a Void Contract.

• A minor cannot be a promise under section 26 of Negotiable Instrument Act.

• Contract Act provides that minor can be an agent so as to bind his acts but not so as to bind himself.

• A minor cannot be declared insolvent because even for necessaries of life he is not personally liable.


Important Features of the Act

• Transfer of Property Act was enacted in 1882.

• Transfer of Property means an act by which a living person conveys property, in present or in future, to one or more of the living persons or to himself or to himself and one or more other living persons. (Section 5 of Transfer of Property Act, 1882)

• Word “Property” has also been explained in General Principles of Law. Property as per this law means physical or concrete thing like land and building and also owner’s rights or interest in it. It also means right on action claims like book debt, bills of exchange and other negotiable instrument act and documents of the title to goods.

• Transfer of Property Act does not fully applicable to the States of Punjab and Haryana.

• Possession of property can be any of the following : (i) actual possession, (ii) physical possession, (iii) constructive possession, and / or (iv) adverse possession.

• There are six types of mortgages that have been recognized in India. These are equitable mortgage, simple (registered) mortgage, anomalous mortgage, English mortgage, unsufructuary mortgage and conditional mortgage.

• “Mortgagor” means the person who gives his property as security or for sale. “Mortgagee” means a person to whom the property is given as security or buyer of property.

• Common forms of mortgages practiced in India are simple mortgage and equitable mortgage.

• Major benefits of equitable mortgage (mortgage by deposit of title deeds) are:

Registration is not required
Transaction remains cofidential between banker and mortgagor.
On completion of contract (repayment of debt), the title deeds are returned to the mortgagor.
Mortgagee (in case loans, it is bank) gets the same rights under equitable mortgage as in case of simple (registered) mortgage.
• Essential features of a simple mortgage are:

Property remains in the possession of the mortgagor.
Mortgagor binds himself personally to pay the mortgage money
Mortgagor expressly or impliedly agrees that in the event of default to pay, the mortgagee has the right to sell the property and apply the sale proceeds to cover the mortgaged money.
• Rights of the mortgagee as per Transfer of Property Act, 1882 are:

Right to foreclosure (section 67) or sale
Right to sue for mortgage money
Right to realize the security
Right to sale without court’s intervention, and
Right to the accession to mortgaged property, i.e. hold mortgaged property for the purpose of security, unless there is contract to the contrary.
• Under Transfer of Property Act, section 7, only owner of the property and/or duly authorized agent of the owner can transfer the property.

• Right of the Mortgagor to redeem the property mortgaged has been specified in section 60 of TOPA, 1882. These are:

Possession of property
Delivery of the mortgage deed, title deeds and other relevant documents.
Retransfer of mortgaged property to him or any third person as per his direction.
• Mortgage by deposit by title deeds does not require registration under the Indian Registration Act.


• Bankers’ Book Evidence Act, 1891 mainly relates to providing evidence in the court of law of the banking transactions in cases under suit since it (bank) keeps and maintains accounts of all its customers

• Bankers’ Books as per section 2(3) of the Bankers’ Book Evidence Act as amended from time to time include the following:

Ledgers, day books, cash books, account books etc. used in the business whether kept in the written form or as printouts of data or stored in a floppy, disc, tape or any other form of electromagnetic data storage device.
‘Certified Copy’ which means a copy of written form of details in such books together with a certificate written at foot of such copy that it is true copy of such entry. In simple words this means that such entry is contained in the books of the bank.
Certified statement that consists of printout of data stored in a floppy, disc, tape etc. subject to the provision of section 2 A of the Bankers’ Book Evidence Act, 1891 (This section provides conditions in making printouts as evidence).
• Certified copies produced by banks become prime facie evidence of the original entries. Certified copies are admitted as evidence of matters, transactions etc. subject to the extent of original entries. Though, certified copies of entries in the bankers’ books are admissible as evidence but not as conclusive evidence. To prove the case additional and corroborative evidence is required to be produced by the bank to prove its case. (Section 34 of Bankers’ Book Evidence Act. 1891).

• Printout copy of the transactions has to be certified by the Manager and in case of electronic data, the Officer-in-charge of the computer system has to give the certificate as to the fact that all needed precautions / safeguards of the data in the computer system etc. has been taken care of.