The pre-independence commercial banking sector was dominated by five foreign owned banks. These banks were very conservative in their lending policies, usually giving loans on strict commercial criteria. As a result they tended to lend to larger companies and to finance trade all of which were owned and 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.
The colonial
government reacted to the perceived inadequacies of foreign owned banks by
enacting, in early 1950s, the Uganda Credit and Savings Bank Act which created
the Uganda Credit and Savings Bank. This was the first public sector bank in
Dissatisfaction with foreign controlled banks continued after independence. The independent government regarded this as irrational and unjust and 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 the 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. Other commercial banks included local operations of Bank of Baroda, Barclays Bank, Bank of India, Grindlays Bank and Standard Chartered Bank.
The Bank of
Uganda was set up on 15th August 1966 the day the Uganda Currency
was first issued. Prior to 1966,
In early 1970s
the government acquired 49% shares in the foreign owned banks, except Standard
Chartered Bank. The foreign owned banks reacted by closing down in couple of
cases and closing their branches in the rest of the country except for those in
- Commercial
Banking Environment
The rapid expansion of U.C.B. and the Co-operative Bank in the 1970s and 1980s was carried out when there were shortage of professional and skilled personnel. This development coupled with weak regulatory framework undermined managerial efficiency and internal controls even further. Both banks were imprudently managed leading the U.C.B to accumulate Non-Performing Assets (NPAs) 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 U.C.B. from the Bank of Uganda, the bank did not have proper accounting procedures and there was political influence on lending policies of the U.C.B. 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, ICB, CERUDEB etc were operated. This situation persisted until 1993 when the Financial Intuitions Act, No. 4 of 1993 Cap 54 and the new Bank of Uganda Act No. 5 of 1993 were enacted. 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.
The licensing of Banks was taken away from the Minister and given to the Central Bank with clear guidelines regarding screening of directors, shareholders, competence and integrity of management and approval of auditors appointed by the Banks. The Central Bank used its powers under the statute to intervene in Nile Bank and Sembule Bank and to close down Teffe Bank (1994), International Credit Bank (1999), Co-operative Bank (1999) and Greenland Bank (1999) all of which were insolvent by intervention time. A judicial Commission of inquiry was set up to find out the immediate causes and failure of the last three banks but the report has not been made public as yet. 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.
Uganda Commercial Bank was initially privatized through a sale of its majority shares to a purported company from Malaysia. However it later came to light that the actual buyer was a partnership between Greenland Bank (which itself was insolvent) and some politically connected individuals. A second privatization sale was conducted, with the Standard Bank emerging as the winner.
The privatized Uganda Commercial Bank was merged with the former Grindlays Bank which Standard Bank already owned and renamed Stanbic Bank. The combined new bank is now known as Stanbic Bank (Uganda) Limited. As of now, Stanbic Bank (Uganda) Limited is the dominant commercial bank in Uganda. Nile Bank Limited, an indigenous institution, was acquired by the British conglomerate, Barclays Bank in January 2007 and merged with its existing Ugandan operations to form the current Barclays Bank (Uganda).
A moratorium on new commercial bank licenses was declared in 2004, with the passage of the Financial Institutions Act, 2004 in Parliament, which established new banking institution classification guidelines.
The financial sector is categorized in a tiered framework where institutions are classified. Currently there are four tier classes of financial institutions as outlined below;
Tier I –Commercial Banks
This class includes commercial
banks which are authorized to hold cheques, savings and time-deposit accounts
for individuals and institutions in local as well as International currencies. Commercial banks
are also authorized to buy and sell foreign exchange, issue letters of credit
and make loans to depositors and non-depositors.
Licensed commercial banks in Uganda include the following (as of August 2017);
1. ABC Bank
2. Barclays
Bank
3. Bank
of
4. Bank
of
5. Bank
of
6. Cairo
International Bank
7. Commercial
Bank of Africa (Uganda) Ltd
8. Centenary
Bank
9. Citibank
Uganda Limited
10. DFCU
Bank
11. Diamond
Trust Bank
12. Ecobank
13. Equity
Bank
14. Exim
Bank (Uganda) Ltd
15. Finance
Trust Bank
16. Guaranty
Trust Bank (Uganda) Ltd
17. Housing
Finance Bank
18. Kenya
Commercial Bank
19. NC Bank
Uganda
20. Orient
Bank
21. Stanbic
Bank
22. Standard Chartered Bank
23. Tropical Bank
24. United
Bank for
Tier II –Credit Institutions
This class includes Credit and Finance companies. They are not authorized to establish checking accounts or trade in foreign currency and therefore are not members of the Clearing house. They are authorized to take in customer deposits and to establish savings accounts. They are also authorized to make collateralized and non-collateralized loans to savings and non-savings customers. These include (as of August 2017);
- Mercantile Credit Bank
- Opportunity Uganda Limited
- Post Bank Uganda
- Top Finance Bank Uganda Ltd
Tier III –Microfinance Deposit Taking Institutions (MDIs)
This class includes microfinance institutions which are allowed to take in deposits from customers in the form of savings accounts. Members of this class of institutions are also known as Microfinance Deposit-taking Institutions or MDIs and regulated under the Micro finance deposit taking institutions Act, 2003. MDIs are not authorized to offer checking accounts or to trade in foreign currency. They include (as of August 2017);
- FINCA Uganda Limited
- Pride Microfinance Limited
- UGAFODE Microfinance Limited
- EFC Uganda Ltd
- Yako Microfinance Ltd
Tier IV –Non Deposit
taking institutions
These institutions are not regulated by the Bank of Uganda. They are regulated under the Tier 4 Microfinance Institutions and Money lenders Act, 2016. The Act establishes the Uganda Microfinance Regulatory Authority, provides for the licensing and management and control of money lending business, establishes the SACCO Stablization Fund, establishes the SACCO Savings Protection Scheme etc. They are not authorized to take in deposits from the public. In 2008, it was estimated that there were over 1,000 such institutions in the country.
- The Financial
Institutions Act, 2004
Enactment of the Financial Institutions Act, 2004 stemmed from the banks failures between 1994 and 1999 and the need to strengthen the regulation of banks.
A Judicial Commission of inquiry into closure of banks was constituted under Legal Notice No.4/1999 of 29th October, 1999 and Sworn on 7th February, 2000.
The terms of reference of the commission among others were to;
(a) Examine the primary causes of the failure and subsequent closure of International Credit Bank (ICB), the Greenland Bank Ltd (GBL), and the Cooperative Bank Ltd.
(b) Make recommendations to strengthen the prudential regulation and supervision of banks and strengthen the Bank of Uganda’s intervention policy towards failed banks in order to protect depositors and public funds.
The recommendation of the commission were incorporated in the Financial Institutions Act, 2004.
The process of drafting and gazetting the Act took almost 4/5 years and involved input and review from BOU, MOFPED, Banks, Accountants, Solicitor General’s office, World Bank, IMF, Parliament among others.
The Act commenced on the 26th day of March, 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, to repeal the Financial Institutions Act, Cap. 54 and to provide for other related matters.
In Jan 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 bancassurance, to provide for agent banking, to provide for special access to the Credit Reference Bureau by other accredited credit providers and service providers, to reform the Deposit protection Fund, and for related purposes.
Bearing the above in mind, the Act will be discussed under the following headings;-
i.
Licensing
The Act prohibits any person from transacting any deposit taking or financial institutions business in Uganda without a license and it is only a company that can apply for a license to transact banking business. The 2016 amendments allow a company licensed to transact financial institutions business to carry out the licensed business through an agent. An agent means a person contracted by a financial institution to provide financial business on behalf of the financial institution.
The Act introduced stringent measures to be considered by the Central bank to grant a license like vetting of all directors, substantial shareholders and officers of a financial institution under a fit and proper test. In order to determine whether a person is ‘a fit and proper’ the Central Bank will look at his general probity ( integrity), his competence and soundness of judgment for fulfillment of the responsibilities of the office in question, the diligence with which the person concerned is likely to fulfill those responsibilities etc The person must not have taken part in any business practices which in the opinion of the Central Bank were fraudulent, prejudicial or otherwise discredited his method of conducting business.
The Act provides for the Classes of license and the permitted main functional services particulars of which are in the second schedule to the Act. Classes include; Commercial bank, post office saving bank, merchant bank, mortgage bank, credit institution, acceptance house, discount house and a finance house. The 2016 amendments introduced the business of Islamic bank (Class 9), and business of an Islamic financial institution which is a non bank financial institution (Class 10).
The Act gives
the Central Bank wide powers to revoke a license at any time. It is sufficient
to mention the enumerated grounds in the Act for revoking a license. They
include where (a) a bank is significantly undercapitalized, (b) is conducting
business in a manner detrimental to the interests of depositors, (c) is
engaging in serious deception of the Central bank or the general public in
respect of its financial condition, ownership, management, operations or other
facts material to its business, (d) has without consent of the central bank
amalgamated with another financial institution or sold or otherwise transferred
its assets and liabilities to another financial institution, (e) has failed to
comply with the condition in its license.e.t.c. Refer to Part II of the Act, the Financial Institutions (Licensing)
Regulations, 2005 and the Financial Institutions (Agent Banking) Regulations,
2017.
On July 25, 2014 Bank of Uganda revoked the license of Global Trust Bank (U) Ltd in accordance with sections 17(f), 89(2)(f) and (7)(c) as well as section 99(1) FIA and concluded a purchase and assumption agreement with DFCU Bank.
ii.
Shareholding
The Act prohibits a person or a body corporate controlled by one person or a group of related person or a body corporate owned or controlled directly or indirectly by a group of related person from owning or acquiring more than 49% of the shares of the financial institution.
A financial institution is prohibited from allotting, issuing, or registering the transfer of 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 its permission to such a transfer if its satisfied that the proposed acquisition of shares (a) will not be contrary to the public interest; (b) will not be contrary to the interests of the financial institution concerned or its depositors; and (c) will not be detrimental to the financial services industry in general.
Moreover no person or group of related persons who do not satisfy the criteria of ‘fit and proper person test’ shall acquire more than 5% of the shareholding.
Refer to Part III of the Act and the Financial Institutions (Ownership and Control) Regulations, 2005.
iii.
Capital Requirement
The minimum paid up capital for banks unimpaired by loses was required to be Ushs. 4,000,000,000/- by 2004. In 2010 the Financial Institutions (Revision of Minimum Capital Requirements ) Instrument, 2010 raised the bank’s minimum paid up capital unimpaired by loses to Ushs. 25Billion.
The Central Bank allowed banks in existence up to the 1st day of March, 2011 to build up their minimum paid-up capital unimpaired by losses to 10billion and up to the 1st day of March 2013 to build up their minimum paid up capital unimpaired by losses to 25billion shillings.
Refer to Part IV of the Act, the Financial Institutions (Capital Adequacy Requirement) Regulations, 2005 and the Financial Institutions (Revision of Minimum Capital Requirements) Instrument, 2010.
iv.
Prohibition
and Restrictions
In order to further protect depositors, there are prohibitions which are intended to protect the capital of the bank. Thus banks are prohibited from granting advances or credit facility or accommodation against security of its shares or of those of a company affiliated to it or such instrument which may qualify as capital.
A financial institution is prohibited from granting a loan to any of its affiliates and associates, directors, persons with executive authority, substantial shareholders or to any of their related persons or their related interests (insiders) except on terms which are non- preferential in all respects including creditworthiness, term, interest rate and the value of the collateral.
Banks are not allowed to engage in trade, commerce, agriculture, invest in real estate or engage in underwriting of shares or securities brokerage. These restrictions are intended to protect depositors whose money may be invested in high risk investments. This prohibition however does not apply to a financial institution engaging in Islamic financial business.
Refer to Part V of the Act.
v.
Accounts and
Financial Statements.
The Act harmonizes the accounting standards, formats and periods of reporting with best international practices. A penalty was introduced for any person who with intent to deceive or mislead in any financial ledger or record makes a false entry or omits to make an entry.
The Act requires
banks to submit audited financial statements to the Central Bank and thereafter
their publication in a news paper of nation wide circulation. The published
financial statements are required to be exhibited in the banking hall. Refer to Part VI of the Act.
vi.
Corporate
Governance.
Sec. 51(1e) FIA define “corporate governance” to cover the overall environment in which the financial institution operates comprising a system of checks and balances which promotes a healthy balancing of risk and return, and in the case of a financial institution which conducts Islamic financial business, promotes compliance with the Sharia’ah.
A bank is required to 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 boards independence by preventing it being manipulated by an executive director. The 2016 Amendment prohibits a member of the Sharia’ah Advisory Board in any financial institution to be appointed a director while he or she holds that position.
Moreover a person to be appointed a director must pass a ‘fit and proper test’ requirement provided for in the Act. The Centerpiece of this test is the person’s probity, competence, soundness of judgment and diligence with which he is likely to fulfill his responsibilities. Such a person must be law abiding, and not have engaged in fraudulent or improper practices.
The Act spells out the responsibilities of the board being responsible for good corporate governance and business performance of the bank and ensures that business is carried out compliance with the law and regulations.
The Act further
requires the appointment of an internal auditor by the bank and reports to the
audit committee of the board. He must be suitably qualified in accounting and
experienced in banking. The external auditor on the other hand is appointed by
the bank from a pre-qualified list to be published by the central bank and has
duties to both the bank and the central bank. Refer to Part VII of the Act, the Financial Institutions (Corporate
Governance) Regulations, 2005 and the Financial Institutions (External
Auditors) Regulations, 2010.
vii.
Credit
Reference Bureau
The Act further requires establishment of a Credit Reference Bureau for the purposes of disseminating credit information among financial institutions for their business. All financial institutions should report to the Bureau 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. Refer to Sec. 78 and 78A of the Act and the Financial Institutions (Credit Reference Bureau) Regulations, 2005.
viii.
Supervision
The Act lays great emphasis on the on-site inspection and offsite surveillance and prompt provision of accurate information when required. In on-site 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. The purpose is to gather information to determine the current financial condition of the bank, compliance with or breach of the laws, any mismanagement etc.
The examination
evaluates the performance of a bank’s activities and books which will reveal
its condition and compliance with the laws and regulations. In
Off-site inspections require banks to furnish periodic information to the Central Bank. Periodic returns and the audited financial sheet and profit and loss account including those of subsidiary, affiliate, associated etc. Refer to Part VIII of the Act
ix.
Corrective
Actions
The Central bank is given wide powers to take corrective or punitive measures against the bank or individuals involved in the violation of laws, regulations and directives. If the violations are not severe, the Central bank may order the bank to take remedial action to comply with the regulations and directives. If the violations are more severe, the central bank can issue formal and legally enforceable actions such as cease and desist orders.
The most far reaching power of the central bank is to take over management of the bank if the continuation of its activities is detrimental to the interests of depositors. Refer to the case of Bank of Uganda taking over the management of Tropical Bank 2011. Refer to Part IX of the Act
On 27th Sept 2012, Bank of Uganda took over the management of the National Bank of Commerce under section 88(1) (a) & (b) FIA and directed depositors to operate their accounts with Crane Bank Ltd.
On 20th October 2016 Bank of Uganda took over the management of Crane Bank Limited under section 87(3), 88(1)(a) &(b) FIA and appointed a statutory manager of the affairs of Crane Bank and suspended the Board of Directors of Crane Bank.
x.
Receivership
The central bank
may close a bank and place it under receivership. Such action will be taken if
it is determined that there is a real likelihood that the bank will not be able
to meet the demands of its depositors or pay its obligations in the normal
course of business, or that the bank has incurred or is likely to incur losses
that will deplete all or substantially all its capital and or it is
significantly under capitalized. The Act restricts legal proceedings against a
bank under receivership. Refer to Part X
of the Act
Bank of Uganda on the 24th January 2017, progressed Crane Bank from Statutory management to Receivership, with Bank of Uganda as receiver. In exercise of its powers as Receiver, under Section 95(1)(b) FIA, Bank of Uganda transferred the liabilities (including the deposits) of Crane Bank to DFCU Bank Limited and in consideration of that transfer of liabilities conveyed to DFCU Bank, Crane Bank assets.
xi.
Liquidation
The Act provides
that the liquidation or winding up of a bank shall only be commenced by the
Central bank or the institution itself under provisions of voluntary
liquidation. The Act sets out in details the appointment of a liquidator,
powers of a liquidator and all attendant procedures on liquidation. Refer to Part XI of the Act.
On 28th Sept, 2012 the constitutional court issued an interim order Misc Appl. No. 38/2012 of Humphrey Nzeyi (petitioner / applicant) against Bank of Uganda and the Attorney General against the action 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.
xii.
The Deposit
Protection Fund.
The 2016 Amendment to the Financial Institutions Act establishes the Deposit protection fund as a body corporate and a separate legal entity from the Central Bank.
The purpose of
the fund is 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 would not suffer deposit loss
even if the bank failed. Therefore the tax payer’s will not be used to pay
depositors as was the case when
Every financial institution is required to contribute to the fund an 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. 3Mns. Refer to Part XII of the Act
xiii.
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 a Islamic
financial business inorder to ensure that the financial institution complies
with the Shariah. Refer to Part
XIIIA of the Act.
In order to operationalise the Financial
Institutions (Amendment) Act 2016 regarding Islamic Banking, Bank of Uganda is
in advanced stages of instituting Regulations and Supervisory framework for
Islamic Banking.
xiv.
Conduct of
Bancassurance by Financial Institutions.
Bancassurance means using a financial institution and its branches, sales network and customer relationship to sell insurance products. A financial institution wishing to engage in the business of bancassurance or Islamic insurance as a principal or agent should get prior written authorization of the Central Bank and the activities shall comply with the Insurance Act. Refer to Part XIIB of the Act.
xv.
Amalgamation,
Arrangements and Affected transactions.
Recognizing the
fact that safeguards of licensing may be swept away by change in ownership of a
financial institution, any form of amalgamation, arrangement etc of between
financial institutions can only be done or effected with prior consent of the
Central Bank. The Central bank will not grant its consent unless its satisfied
that (a) that the transaction will not be detrimental to the public interest,
(b) in case of amalgamation, that it is an amalgamation of banks only, or (c)
in case of acquisition or transfer of assets and liabilities which involve the
transfer by the transferor bank of the whole or any part of its business as a
bank, the transfer is effected to another bank approved by the Central bank for
purposes of that transfer. Refer to the
case of Barclays Bank & Nile Bank.
The Act further restricts a bank to alter its articles, memorandum of association or its name under the Companies Act without prior written approval of the Central Bank. Refer to Part XIV of the Act.
xvi.
Miscellaneous.
The Act imposes stringent fines and penalties. The fines and penalties expressed in monetary terms and recovered by the Central Bank shall be retained by the Central Bank and used to offset the cost of supervising financial institutions.
Unclaimed balance are transferred to a dormant account of the bank after 2 yrs and the bank shall cause it advertised in the print media after 3yrs. Unclaimed balances after 5yrs from the date of advertisement shall be transferred to the Central Bank to off set costs of supervising financial institutions
The Act requires
banks to report any suspected money laundering activity to the Financial
Intelligent Authority. Money laundering covers all procedures designed to
change the identity of illegally obtained money so that it appears to have
originated from a legitimate source. Refer
to Part XV of the Act
The Act also under section 124 FIA prohibits suits or legal proceedings against the Bank of Uganda or any office for acts done in good faith under the Act.
xvii.
Implementing
Regulations.
In order to give effect to the Financial Institutions Act, 2004 a number of regulations were drafted and passed which include;
- The Financial Institutions (Penalties) Instruments, 2001.
- The Financial Institutions (Corporate Governance) Regulations, 2005
- The Financial Institutions (Capital Adequacy Requirements) Regulations, 2005
- The Financial Institutions (Licensing ) Regulations, 2005
- The Financial Institutions (Limit on Credit Concentration and Large Exposures) Regulations, 2005
- The Financial Institutions (Credit Classification and Provisioning) Regulations, 2005
- The Financial Institutions (Insider Lending Limits) Regulations, 2005
- The Financial Institutions (Liquidity) Regulations, 2005
- The Financial Institutions (Ownership and Control) Regulations, 2005
- The Financial Institutions (Credit Reference Bureaus) Regulations, 2005.
- The Financial Institutions (External Auditors) Regulations, 2010.
- The Financial Institutions (Anti-Money laundering) Regulations, 2010.
- The Financial
Institutions (Consolidated Supervision) Regulations, 2010.
- The Financial
Institutions (Foreign Exchange Business) Regulations, 2010.
- The Financial
Institutions (Agent Banking) Regulations, 2017.
- The Financial
Institutions (Islamic Banking) Regulations, 2018
- The Central
Bank of
The Regulation and Control of banking business in
(a)
promote and maintain the stability of the value of the
currency of
(b)
regulate the currency system in the interest of the
economic progress of
(c)
encourage and promote economic development and the
efficient utilization of the resources of
(d) do all such other things not inconsistent with this article as may be prescribed by law.
In performing its functions, the Central Bank is not
subject to the direction or control of any person or authority. Parliament is
mandated to make laws prescribing and regulating the functions of the Central
Bank. The Bank of Uganda Act Cap 51 is an Act that establishes and regulates
the functions of Bank of Uganda.
TOPIC III
Definition of Bank, Banker and Customer.
Lord Denning M.R remarked in United Dominions Trust Ltd v.
It is thus very difficult to give a general definition of the word bank or banker because of the different functions performed by specialized banks. For example savings banks generally do not issue cheque books but give passbooks and normally the customer’s deposit is drawn on application. For merchant banks, their main function is to facilitate trade and accordingly, they are heavily engaged in discounting bills and opening letters of credit.
And because of this any definition of the word bank or banker should only be looked as a sort of guide rather than an exhaustive one.
- Statutory
Definition
Separate Acts define a ‘bank’ or ‘banker’ for their specific purposes. An institute that is a bank in one context may not be so regarded so for other purposes.
The Bill of Exchange Act, Cap 65 defines “banker” to include a body of persons whether incorporated or not who carry on the business of banking. This Act makes no attempt to define the business of banking.
The Evidence (Banker’s books) Act Cap 7 provides that
“bank”
or “banker” means any person carrying on the business of banking in
The Financial Institutions Act, 2004 defines “bank” to mean any company licensed to carry on financial institution business as its principal business, as specified in the Second Schedule to the Act and includes all branches and offices of that company in Uganda;
“Financial institution” is defined to mean a company licensed to carry on or conduct financial institutions business in Uganda and includes a commercial bank, merchant bank, mortgage bank, post office savings bank, credit institution, a building society, an acceptance house, a discount house, a finance house or any institution which by regulations is classified as a financial institution by the Central Bank.
“Financial institution business” is defined to mean the business of acceptance of deposits and issue of deposit substitutes. It also includes lending or extending credit, engaging in foreign exchange business, issuing and administering means of payment, including credit
cards, travelers’ cheques and banker’s drafts, providing money transmission services etc.
Section 4(2) of the FIA clearly states that only companies can be licensed under it to carry out banking business.
The statutory provisions lead to an observations as far as definition of ‘bank’, ‘banker’ and ‘banking business’ is concerned. In order to be a ‘bank’ or ‘banker’ to be licensed to carry out banking business the person must be a company incorporated under the Companies Act and uses the word ‘bank’ as provided in s.7 FIA.
Consequently the definition of banker as contained in the Bills of Exchange Act and the Evidence bank’s book Act in so far as it includes unincorporated persons should be taken to have been modified. It’s stated in s.133 FIA, 2004 that it takes precedence over other Acts for the purposes of any matter concerning banks and in case of any conflict it prevails.
The definition of financial institutions business emphasizes that a banker has to employ the deposits wholly or partly by lending. But a banker is not a money-lender. Money lending is governed by Tier 4 Micro finance Institutions and Money lenders Act, 2016 and is supervised and regulated by the Uganda Microfinance Regulatory Authority. In that Act, a money lender does not include a company carrying on the business of banking. Unlike banks, money lenders do not receive deposits from the public and they advance their own funds.
- Case Law
Definition of ‘Bank’
Like statutes, case law makes fragile attempt at this definition but has defined the characteristics of banking business in the leading case of United Dominions Trust Limited v. Kirkwood (1966) 2 QB. 431 where a finance company brought an action to recover a loan made to a 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.
Lord Denning said that there are two characteristics usually found in bankers today: (i) they accept money from, and collect cheques for, their customers and place them to their credit; (ii) they honour cheques or orders drawn on them by their customers when presented for payment and debit their customers accordingly. These two characteristics also carry with them the third, namely (iii) they keep current accounts or something of that nature, in their books in which the credits and debits are entered. That no one or nobody, corporate or otherwise can be a banker which does not (i) take current accounts; (ii) pay cheques drawn on himself (iii) collect cheques for his customers.
Lord Denning held that the company was exempt from the provisions of the Money Lenders Act. He was of the view that there were other characteristics which go to make a bank. He said that such characteristics include soundness, stability and probity. And in the case of doubt, one should look at the reputation of the company amongst intelligent commercial men. In other word the banking community should know a banker when they see one.
Diplock LJ’s concurring judgment was based on
a slightly different reasoning. In his opinion the finance company had 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.J in his dissenting judgment expressed the view that the company was
not carrying on the banking business. It was therefore, a money lender.
According to common law a definition of a bank is an institution that actually
carries on banking business, not an institution which has the reputation of
doing so or being a bank.
However these characteristics are of less importance because of the provisions of the Financial Institutions Act, 2004. It seems clear that the person must certify the requirement of the law and be registered as a banker in order to have the intelligent commercial men recognize him as a banker.
Lastly it was
held in Re Shield’s Estate, Governor and
Co. of Bank of
Under Common law according to the above authorities, the usual characteristics of a banker or bank are (a) conducting accounts on which they deposit money from customers and which shows debits and credits (b) lending out money deposited with it for its profits (c) collecting cheques, or orders for customers and (d) payment of cheques drawn on the bankers.
- Customer.
The main determination whether or not a person is a customer must depend on whether or not that person has or will have an account in the Bank. In Great Western Railway Vs. London and Country Banking Co. Ltd [1914] 19 Com. Cas 256 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 services to him does not make him a customer and the bank isn’t liable to him as it would be to its customer.
In the above case a rate collector habitually cashed crossed 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 collector’s request for a number of years, he didn’t maintain an account with the bank.
In the case of Iwa Kizito (Administrator of the Estate of the late Felix Charles Maku) vs. Equity Bank (U) Ltd & Mindra Josephine HCCS No. 36/2013 stated that a bank customer has been legally defined as someone who has an account with a bank or who is in such a relationship with the bank that the relationship of a banker and customer exists. That in Commissioner of Taxation vs. English, Scottish and Australian Bank Limited [1920] AC 683, the following definition was provided;
A
customer of the bank is a person who has a more permanent relationship with the
bank, for instance, having an existing account with the bank. Habit or
continued dealings will not make a party a customer unless there is an account
in his name. Thus a person who had opened an account on the day before paying
in a cheque was a customer of the bank…The contrast is not between an habitué
and a newcomer, but between a person for whom the bank performs a casual
service, such as, for instance, cashing a cheque for a person introduced by one
of their customers, and a person who has an account of his own at the bank.
That the key determinant therefore is having an existing account with the bank or an account in one’s name. That the legal position implies that opening an account in one’s name is the crucial element in establishing the bank-customer relationship. That when an account is opened, specific legal rights and obligations come into play but these are obligations owed to the account holder, who may or may not be the signatory to the account.
Note however that an arrangement to open an account is sufficient to constitute one as a customer as long as there is consensus ad idem between the two. In Ladbroke V. Todd [1914] 19 Com. Cas 256 Court held that a person becomes a customer of the bank when he goes to the bank with money or cheque and asks for an account to be opened in his names. If the bank accepts the money and is prepared to open an account for that person, then that person is a customer of the bank from that point.
The court stated that a person becomes a customer of a bank when he goes to the bank with money or cheque and asks to have an account opened in his name, and the bank accepts the money or cheque and is prepared to open an account in the name of that person; after that he or she is entitled to be called a customer. It is not necessary that he or she should have drawn any money or even that he or she should be in the position to draw money. Such a person becomes a customer the moment the bank receives the money or cheque and agrees to open an account.
In the above case, a rogue who stole a cheque opened with the defendant bank an account under the name of ostensible payee of the instrument. The cheque was cleared and the rogue withdrew the funds. The bank contended that the mere opening of the account did not constitute the rogue a customer. The court held that the rogue had become a customer when the bank agreed to open the account.
Similarly in Woods v. Martins Bank Ltd (1959) 1 QB 55 a bank accepted instructions from the plaintiff to collect money, pay part of it to a company he was going to finance and retain to his order the balance of the proceeds. He had no account with the bank. It was held that an agreement to open an account is sufficient to constitute the person a customer of the bank.
- Nature of
Relationship between Banker and Customer.
The relationship
of a banker and his customer is one of contract. In Esso Petroleum Co. v. Uganda Commercial Bank Civil Appeal No. 14 of
1992, the supreme court of
Similarly in Mobil (U) Ltd v. Uganda Commercial Bank 1982 H.C.B 64, court held that the banker and customer relationship was contractual. i.e. its an implied contract whose terms are in much dependant 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 lends it to him and to deposit it in his account until the customer demands for it.
This is a development from an obiter dicta of Lord Campbell in Foley v Hill (1848) 9 E.R 1002 that the relationship between a banker and a customer was one of contract. This view was endorsed by Lord Atkin in Joachimson v. Swiss Bank Corporation (1921) 3 KB 110 where a partnership that maintained an account with the defendant bank one of the partners brought an action claiming in the partnership name the repayment of the amount. Atkin LJ stated;
‘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 at the branch of the bank where 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 contract that the bank will not cease to do business with the customer except upon reasonable notice. The customer on 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. There principles that can be drawn from Foley v Hill and Joachimson’s case
i) Demand exists only in case of current or saving account which provided for payment at call. For fixed deposits, payment only on designated day.
ii) The amount standing on the customer’s credit becomes payable without a demand if the bank is being wound up or if the banker customer relationship is terminated
iii) Contract exist between banker and customer based on maintenance of an account
The relationship is contractual whose terms are not written but depend on the custom of bankers. The contract carries with it superadded obligations which however do not affect the main contract. The superadded obligations are those duties and obligations which arise in the ordinary course of business such as the relationship of debtor and creditor.
In the case of Chilala v Republic 1973(2) ALR Comm 240 the Court of Appeal of Malawi said that when a person pays his or her money into his or her bank account that money becomes the property of the bank and the relationship between banker and customer becomes that of debtor and creditor with the addition that the banker promises to honour, the customers cheques on demand.
In the case of Makua Nairuba Mabel vs. Crane Bank Ltd HCCS No. 380/2009 Justice Hellen Obura stated that it has been held that the relationship between the banker and customer is contractual. That much as this relationship was stated in Joachimson v Swiss Bank Corporation, [1921] 3 K.B. 110 in the context of a current account, the same principal is applicable where a customer operates a savings account. That with the advance of information technology the banking practice concerning savings accounts have changed to the extent that the specimen signature cards can now be scanned and kept in the automated system and just with a click of a button all the particulars of a customer are displayed on a computer screen.
Although the bank is usually the debtor it may also happen that the customer becomes the debtor. Therefore the relationship of debtor and creditor is not always fixed.
- Duties owed by
the Customer to his or her Banker
1. 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 Joachimson v. Swiss Bank Corporation (1921) 3 KB 110, Lord Atkin said that it is a term of the contract between the bank and its customer that the customer undertakes to exercise reasonable care in executing his or her written orders so as not to mislead the bank or to facilitate forgery.
This duty has already been recognized in the case of London Joint Stock Bank v. Macmillan and Arthur (1982) A.C. 77 where the H.O.L said that a cheque drawn by a customer is in point of law mandate to the banker to pay the amount according to the tenor of the cheque. It is beyond dispute that a customer is bound to exercise reasonable care in drawing a cheque and if he or she does so in a manner which facilitates fraud, he or she will be guilty of breach of duty as between him/herself and the banker and he will be responsible for any loss sustained by the banker as a natural and direct consequence of this breach of duty.
The above principle was applied in the case of Mobil (U) Ltd v. Uganda Commercial Bank (1982) H.C.B. 64. In this case a cheque drawn for Ushs. 10,301 was altered to read Shs. 40,301. The High Court of Uganda held that a customer and a banker being under a contractual relationship the customer in drawing a cheque is bound to take reasonable and usual precautions to prevent forgery. If a cheque is drawn in such a way as to facilitate or almost to invite an increase in the amount by forgery, if the cheque should get into the hands of the dishonest person, forgery is not remote but a very natural consequence of negligence of this description.
2. Duty to inform the bank of any forgeries that that the customer is aware of.
In Greenwood v. Martins Bank Ltd (1932) I KB 371, the plaintiff had an account with the defendant bank. The wife had over a period of time forged her husband’s signature. On the wife’s request the husband refrained from notifying the bank of the frauds. When the husband threatened to notify the bank the wife committed suicide. The husband afterwards brought an action against the bank for the amount paid by them on forged signatures.
The English Court of Appeal said that there is a continuing duty on either side to act with a reasonable care to ensure the proper working of the account. That the banker, if a cheque were presented to it which it rejected as forged, would be under a duty to report this to the customer to enable him or her to inquire into and protect himself or herself against the circumstances of forgery.
This involves a corresponding duty ion the customer, if he or she became aware that forged cheques were being presented to his or her banker, to inform him or her banker in order that the banker might avoid loss in future. There was in present case silence, a breach of duty to disclose. The H.O.L upheld he decision.
A customer however owes his or her bank no duty to take precautions in his or her business to prevent forged cheques from being presented for payment. In Nigeria Advertising Services Ltd v. United Bank for Africa Ltd (1968) 1 ALR Comm. 6 Court held that a bank customer who knows that his or her signature is being forged on cheque has a duty to his bank to inform it of the fact without waiting until the bank’s position is altered for the worse, and if he fails to carry on this duty, he will be estopped from contending against the bank that the payment should have been made on later forged cheques, but if the customer is merely silent for a period of after learning of the forgery of his signature during which the position of the bank is not altered, his or her conduct cannot be an admission or adoption of liability or an estoppel.
- Duties owed by
the Banker to a customer
The duties owed by the banker to a customer largely relate to carrying out the customer’s payment instructions, dealing with securities deposited with the bank and the way the bank handles information concerning the affairs of the customer.
i)
Duty
to honor a customer’s mandate
The customer gives the bank authority to operate the account in accordance with the instructions, that is, the customer’s mandate. A customer has a duty to give a clear and unambiguous instructions to the bank and this includes a duty to ensure that his or her signature upon orders to the bank is similar to the specimen signature held by the bank.
The bank therefore has an implied duty to honor its customer’s cheques provided that;-
a) They are drawn in 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 will 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 un available
d) They are presented during banking hours or within a reasonable time thereafter. See Baines v. National Provincial Bank (1927) 96 KB 801
In the Supreme Court case of Stanbic Bank Uganda Ltd vs. Uganda Crocs Limited SCCA No. 4 of 2004 the Supreme Court stated as follows;
‘Legal
principles which govern the relationship between a bank and a customer are well
settled. The duty of a bank is to act in accordance with the lawful requests of
its customer in normal operation of its customer’s account consequently, a
banker who has paid a cheque drawn without authority or in contravention of the
customer’s orders or negligently cannot debit the customers account with the
amount. A banker is under duty of care to its customer which may require him to
question payment. See: Banex Ltd vs. Cold Trust Bank civil Appeal No 29
of 1995 (SCU) (unreported), Harsbry’s Laws of England, 4th Edition,
volume 3 (1) paragraph 175. If the banker pays and debit its customers
in reliance on signature being his customer’s, which is not so, he cannot
charge its customer with the payment, in paying cheques, a banker must not be
negligent and cannot charge its customer with money lost through his
negligence. See: Pagets Law of Banking 11th Edition by Megrah,
Butterworths, 1966 at page 365 and 269; Consultant Surveyors & Planners vs.
Standard Bank (U) Ltd. (1984) HCB, where a red signal manifests itself
the banker’s duty may be even more stringent. See: Barclay’s Bank PLC Vs.
Quin-acre Ltd & Another (1992) 4 All.E.R 331.’’
In the Supreme Court case of Arim Felix Clive vs. Stanbic Bank (U) Ltd SCCA No. 3/2015 the issue was whether the respondent bank failed in its duty when it acted contrary to the customer’s countermand instructions. It was held that one of the general principles in the banker-customer relationship is that a bank is expected to comply strictly with their customer’s orders. That the duty is not absolute, there instances when the bank’s decision not to honour its customer’s instructions will not amount to breach of its duty to the customer. That in Stanbic Bank Uganda Ltd vs. Uganda Crocs Ltd (Civil Appeal No. 4 of 2004 SC) Court impliedly limited the fiduciary duty of a bank to a situation of ‘normalcy’ when it stated that; The legal principle which govern the relationship between the bank and its customer are well settled. That the duty of a bank is to act in accordance with lawful request of its customer in normal operations of its customer account. In that case it was held that the bank was served with an injunction freezing the appellant account and the appellant’s countermand was made while injunction still existed and follows that any injuction received during the existence of the injuction was of no effect. That the legal order (mareva injunction) was binding on the respondent bank and took precedence over the customer’s countermand instructions and order of re-transfer of money into his account and hence no breach of duty of care by the respondent to its customer.
In the case of Makua Nairuba Mabel vs. Crane Bank Ltd HCCS No. 380/2009 Justice Hellen Obura stated that as regards the duty of banker to customer, it is stated in a booked titled ‘The Law Relating to Domestic Banking’’ Vol 1 by G.A. Penn, A.M. Shea and A. Arora at page 65 that;-
‘It
is not the case that a banker has a duty to honour all his customer’s
instructions. Rather there is a duty to honour all instructions which the
banker has, at the time of the original contract, or subsequently, undertaken
to honour, and this depends on any specific undertakings in a particular case,
and on the general ‘holding out’ of those things which the baker will do, which
arises from the nature of the bakers business..’
That the nature of the banker’s duty is also stated at page 66 of the same book to the effect that;-
‘The
duty is to obey the mandate, and in obeying it to do so with reasonable care so
as not to cause loss to the customer. Negligence is not only a direct and
actionable breach of duty, but may also deprive the banker statutory protection
against his customer (in debt or damages) or a third party (in contravention)
where he pays the wrong person.’
In the case of John Kawanga & Anor Vs. Stanbic Bank (U) Ltd UCLR (2002-2004) 262, the Plaintiffs were Advocates practicing in a law firm which operated a joint account with the defendant bank. In March 2002 the Plaintiff drew 2 cheques payable to various payees payable to various payees which were dishonored by the defendant bank when presented for payment. The Plaintiff then presented a case for breach of contract for failing to pay the cheque on demand, their by injuring their reputation. It was held that the defendant bank breached the contract when it failed to pay the monies to the payees even after the plaintiffs had confirmed with the defendant that the cheques were properly drawn and authorized by them.
ii)
Duty
of skill and care
The bank should exercise reasonable care in carrying out the customer’s operations. This duty is implied into a contract and covers wide range of banking business.
In the Supreme court case of Arim Felix Clive vs. Stanbic Bank (U) Ltd SCCA No. 3/2015 the appellant intentionally filed the transfer form with a different name i.e Josephine Yanga Lagn Felix Arim Clive instead of that which was recorded as his account with the bank Arim Felix Clive. That he did this deliberately so that his bankers would easily detect the anomaly and thereby thwart the transfer of the said account.
The issue was whether the respondent bank violated its duty of care to its customer in the manner in which it handled the ‘defectively’ filled transfer form.
It was held that there can be no negligence without a duty of care. That the duty of care in this case arises from the existence of the fiduciary relationship between the banker and its customer. That it was a fact that the transfer form was signed by the account holder himself and that payment of money was not made to a fraudster but to the prescribed beneficiary-the Government of Southern Sudan (GOSS) therefore the Bank was not negligent.
That a suspense account is an account in the general ledger that temporarily stores any transactions for which there is uncertainty about the account in which they should be recorded. It is only when the accounting staff investigates and clarifies the purpose of this type of transaction that the transaction is shifted out of the suspense account and into the correct account. An entry into a suspense account may be a debit or credit.
That the respondent bank opened a suspense account on which funds were deposited before completing the transaction to the beneficiary and that much later, at the time when the bank transferred the funds to the beneficiary in obedience to the court order, there was no doubt that the transfer instrument had been signed by the bank’s customer /account holder and accordingly in the performance of the above duties the bank acted with due diligence.
The bank must
also recognize the person from whom or for whose account he or she has received
the money in an account as the proper person to draw it. In Barclays Bank PLC V. Quincecare [1992] 4
ALLER 363 it was held that it is an implied term of the contract that the
banker will exercise reasonable care in executing the customer’s orders to pay
or transfer money. Rd. Bank of
iii)
The
duty of skill and care may also arise where services are rendered outside the
contract. (The fiduciary relationship)
A bank therefore may be held liable in tort for 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 obligations to give advice to its customer but if it takes 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.
In Woods v. Martin Bank (1959) 1 QB 55, the manager of a bank advised the plaintiff to invest a substantial amount of money in shares of accompany whose excess 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 shares. The bank pleaded that the plaintiff was not 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 Bank Ltd v. Bundey (1975) QB 326, the bank obtained from one of its customers a guarantee covered by a charge overland to service an overdraft granted to that customer’s son. The father was of advanced age and naïve 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 seeks independent legal advice before the execution of the guarantee in question. The transaction was advantageous from the bank’s point of view. The Court held that the guarantee was 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 the exercise of undue influence.
iv)
Duty
of secrecy / Confidentiality, that is, a duty not to disclose any information
concerning the affairs of the customer without his consent.
It is an implied
term of the contract that the banker enters into a qualified obligation not to
disclose information concerning the customers affairs without his or her
consent. This is a legal duty arising out of the contract between the banker
and a customer. The law was clearly stated in Tournier v. National Provincial and Union Bank of
In the above case 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 orders by another custodian was collected for the account of a book maker. The branch manager thereupon rang the plaintiff’s employers, ostensibly to ascertain the plaintiff’s private address, but in the course of the conversation, he disclosed that the plaintiff’s 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 a breach of a duty of secrecy and awarded damages against it. Atkin LJ pointed out that the information which the bank was supposed to treat as confidential, was not restricted to the facts it learnt from the state of the customer’s account. The bank’s duty remained intact even after the account had been closed or ceased to be active.
The bankers duty of secrecy has received statutory recognition. Thus the Bank of Uganda Act Cap 51 under section 40 provides that every bank shall furnish to the Central Bank in a manner prescribed by statutory instrument all information that may be required by the bank for proper discharge of its functions. The Bank may publish in whole or in part information furnished to it as the Board may determine. But the bank shall not publish or disclose any information regarding the affairs of the bank or a customer of a bank unless the consent of the bank or the customer has been obtained.
This obligation prohibits banks from disclosing to third parties. It does not stop a banker from using such information for its benefit. Thus in G.A. Schmitt’sches Weight v. Leslie 1967 (2) ALR Comm 34, in dismissing the argument by counsel for the plaintiffs 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, the court held that a banker may look at the information it possesses to verify what it is told by the customer as to the customer’s financial capacity on his or her application for overdraft facilities, especially when the customer already has this information in his or her possession, but the bank cannot disclose this information to the third parties.
- Exceptions to
the Duty of secrecy / confidentiality.
There are situations where a duty of strict secrecy would clearly be inappropriate. Some of the exceptions were actually enumerated by Banks in Tournier’s case. These include;-
i)
Where disclosure is under the Compulsion of
the law
In Bucknell v Bucknell (1969) 1 WLR 1204 it was decided that a bank may be compelled by law to disclose the state of its customer account in legal proceedings.
a) Evidence (Banker’s Book) Act Cap 7
Section 6 of the Act provides that on application of any party to a legal proceeding a court may order that such a party be at liberty to inspect and take copies of any entries in a bankers book for any of the purposes of such proceedings.
In Bankers Trust Co. Vs. Shapira (1980) 1 WLR 1274, two rogues obtained 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.
b) The Income Tax Act Cap 340, Section 131 (1)
Inorder to enforce provisions of the Act, the Commissioner or any other office authorized in writing by the commissioner –
· Shall have at all times and without any prior notice full and free access to any premises, place, books, record or computer
· May make any extract or copy from any record or computer stored information to which access is obtained
· May seize any book or record that in the opinion of the communication or authorized officer afford evidence which may be material in determining the liability of any person tax, interest, penal tax or penalty under the Act.
This section obliges the banker to disclose any information in its possession including the dealings or affairs of its customer.
c) The Leadership Code Act, Cap 167, Section 28
The Inspector of Government is authorized by order under the hand of the Inspector General or Deputy Inspector General to authorize any person under its control to inspect any bank account or any safe or deposit in a bank. An order made under the section is sufficient authority for the disclosure or production of any person of any information, account, document or articles required by the person so authorized. These wide powers were thought appropriate in fighting corruption.
d) Anti Corruption Act, 2009 Section 41(1)
Notwithstanding anything in any law contained the DPP or IGG by written notice in the course of investigation or proceedings into or relating to the offence by any person employed by any public body under the Act require the manager of a bank to give copies of the accounts of that person or of the spouse or son or daughter of that person at the bank. These provisions compel the bank in very clear terms to disclose the affairs of its customer.
e) Inspection of Companies under ss. 173-184 of
the Companies Act, 2012.
Section 176 provides that 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) defines agent in relation to the company or other body corporate to include bankers. But s. 184 makes it clear that the company’s bankers are not required to disclose any information as to the affairs of their customer other than the company.
f)
The Financial
Institutions Act, 2004.
The Act itself contain provisions which require the bank to disclose the customers affairs. These include disclosing to the Credit Reference Bureau non performing loans which the customer has failed to pay and information of customers involved in financial malpractice including bouncing cheques due to lack of funds and frauds under s.78(2), revealing to the Central Bank accounts which contain funds from the proceeds of a crime under s.118(1), advertising in the print media unclaimed balances which have been on the register of dormant accounts for more that three years under s.119(4), and informing the national law enforcement agencies of any suspected money laundries activity related to any account under s. 130(1).
However to plead compulsion by law, the disclosure must derive its authority from the statute or court order. Casual inquiries by police officers because they suspect that a crime has been committed is not covered.
In Standard Bank of West Africa v. A.G of the Gambia 1972 (3) ALR Comm 449 , the supreme court of Gambia held that a search warrant should issue against the bank only if the bank is suspected of having committed the offence itself or of harboring evidence directly connected with the crime, and should not issue in any case where an inspection order might be made under the Bankers Books Evidence Act 1879 and the 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 up with evidence of the commission of the offence. The Court further held that an order under the Banker’s Books of Evidence Act to inspect and take copies of entries should only be given after the most mature and careful consideration because it is a grave interference with the liberty of the subject. The various statutes compelling the banks to disclose their customer’s affairs should not be used for a kind of searching inquiry or fishing expedition.
g) Garnishee proceedings.
A court order for disclosure can be in the form of garnishee proceedings under Order 20 CPR. In such proceedings money held by a banker to the credit of a customer judgment debtor may be attached to satisfy the judgment debt. The bank is called upon to show cause why its customer’s money should not be attached. In these proceedings banks have to disclose their customer’s affairs. Just because the amount of debt cannot be ascertained that alone does not defeat the claim of a garnish to attchment
ii)
Where there is a duty to the public to
Disclose.
This duty was described in the Tournier case as where a higher duty than the private duty is involved e.g. where danger to the state or public duty may supersede the duty of the agent to his principal. An example is in case where in times of war the customer’s dealings indicate trading with the enemy. In Libyan Arab Foreign Bank v. Bankers Trust Co. (1988) 1 Loyd’s Rep. 259 where the defendant bank invoked the exception in relation to the disclosure made by it to, and at the request of, the federal reserve bank of New York of the payment instruction which the defendant had received from the plaintiff. The court was of the view that the exception was applicable.
iii)
Where the Interest of the Bank require
Disclosure.
A typical case is where a customer brings a suit against the bank. In such case, the bank will be allowed to reveal the customers affairs in court proceedings as part of its defense.
In Sunderland v. Barclays Bank Ltd (1938) 5 LDAB 163 a bank dishonored cheques drawn on it by a married woman, principally because the account had 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. She sued for breach of duty of secrecy. It was held that the disclosure was in the interest of the bank.
iv)
Where the Disclosure is made by 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 or special in that the bank is entitled to supply only such information as is sanctioned by the customer. 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. In Parsons v. Barclays & Co. Ltd (1910) 2 LDAB 248, It was held that answering inquiries is 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 this knowledge of the first banker’s customer.
Other relations undertaken by bankers.
- Bailment.
A banker who accepts goods for safe custody is a bailee for reward. The customer is a bailor and the relationship that develops is outside the confines of banker-customer relationship. In Joachimson v Swiss Bank Corp. Atkin J emphasized that there is only one contract between the banker and its customer but the bank can enter into other specific relations on its own terms including bailor-bailee, principal agent and trustee-beneficiary as the situation requires.
- Agency.
The bank sometimes acts as an agent for the customer for payment of customers cheques. In the case of Indechemists Ltd v. National Bank of Nigeria Ltd 1976 (1) ALR Comm. 143 the court said that one of the principal function of a banker is to receive instruments including cheques from its customers inorder to collect the proceeds and collect its customer’s account. While acting in this capacity, it is called a collecting banker. In acting as its customer’s agent, a banker will be expected to bring reasonable care and diligence to bear in presenting the effects of payment, in obtaining the payments and crediting its customers account.
- Trusteeship
The trustee and beneficiary is not an appropriate relationship for a banker and customer. Because a trustee is usually restricted in the use of funds. However this does not exclude the possibility of a banker acting as a trustee for its customer in some other respects.
TOPIC IV
SPECIAL CUSTOMERS AND ACCOUNTS OF CUSTOMERS.
There are
special types of accounts of customers which present problems; on some cases it
is questionable who is entitled to issue the mandate. Before looking at the
accounts generally, there is need to look briefly at accounts of some of the
special customers that a banker may have to deal with.
- Special Customers.
i)
Unincorporated Associations
Unincorporated associations are mainly bodies such as clubs, societies and charitable institutions. The object of such bodies is primarily non commercial. The funds of unincorporated associations are usually obtained from subscriptions and donations.
It is clear that such bodies need a bank account to be utilized for payment and collection of cheques. However they do not have an independent legal personality. The capacity of the body is the same as the capacity of the members who compose it. The law on this subject was exhaustively stated in the case of African Continent Bank v. Balogun 1969 (1) ALR Comm. 386 that where a body contracting is unincorporated the matter ceases to be straight forward. In such a case the body as such cannot be a contracting body as it lacks the necessary legal personality. As the association cannot, therefore, contract as an entity, whether by itself or by means of an agent, some other legal principles must be found. In the absence of legal personality clothing the association itself, a principal can in law be constituted only by members themselves. It will thus be apparent that the contractual relations of voluntary society do not involve any questions of capacity (for the society has none), but rest purely on the basis of agency.
In the above case the plaintiff bank sued members of an incorporated trading company to recover an overdraft. The court held that they were personally liable and severally liable as having received the money.
A distinction however should be made between an unincorporated society and a club. The rule that members will not generally be held liable in respect of obligations incurred on the behalf of club seems never to have been expressly extended to other unincorporated societies. The feature which distinguishes them from other societies is that no member as such becomes liable to pay to the funds of the society or to anyone else any money beyond the subscription required by the rules of the club to be paid as so long as he or she remains a member. It is upon this fundamental condition not usually expressed but understood by everyone that clubs are formed and this distinguishing feature has often been judicially recognized.
In case of any society in the nature of partnership or association for gain the members cannot lawfully exempt themselves from personal liability by merely inserting a provision to that effect in the rules.
The powers of the clubs or association are those which members agree to exercise in concert or common or to delegate for convenience to those people deputed to act on their behalf and this is largely a question of agency. In Flemying v. Hector (1835-42) ALLER 465, the court stated that the case must stand upon the ground on which the defendant puts it, as a case between principal and agent. It is therefore a question how far committee who are to conduct the affairs of the club as agents are authorized to enter into such contracts as that upon which the plaintiffs sought to bind the members of the club at large, and that depended on the constitution of the club, which was to be found in its rules.
Where the association is a club the liability of members is generally limited to the amount of their subscription. The property of the club or association may be vested in a council or committee. Any bank wishing to lend against a charge on property must satisfy itself that there is power to borrow on behalf of the members, that signatories to the charge have the authority, and that the purpose of borrowing is within their authority. The bank must always bear in mind that it is the officers rather than the members of unincorporated associations who are normally liable for debts and contracts of the associations.
In the case of Cutts & Co. v. Irish Exhibition in London (1891) 7 TLR 313, a promoter of a company opened an account with an arranged overdraft. Later the company was incorporated. The promoters proposed to pass the responsibility of the account to the company contending that, throughout the transactions it was not the intention of the bank to look to them personally for the amount. It was held that the company could not be liable and the promoters were personally liable for the debts which they incurred in the name of the association.
Another issue that deserves mention is that the banker who has a charge on club property may find that the security has been diminished if there are changes in the club because the club can only contract on behalf of existing members only. Thus it was held in Abbat V. Treasury Solicitor (1969) 1 ALLER 52 that once the old club had ceased to function the rights of existing members crystallized, and that the club belonged to and was distributable amongst the members of the clubs as at the date and the personal representatives of those members who had died since that date. But the banker can protect itself by insisting that there should be a rule which requires new club members on joining the club to signify their consent to previous contracts.
Where the bank accepts an unincorporated body as a customer, the bank should ask for clear instructions as to who is entitled to operate the association’s account. The bank should obtain a copy of the constitution.
ii)
Executors and Administrators.
The Succession Act Cap 162 s. 1 defines an executor as a person mentioned in the last will of the deceased person to execute the terms of the will and an administrator is a person appointed by a court to administer the estate of the deceased person when there is no executor.
Section 180 Succession Act, the executor or administrator of the deceased person is a representative for all purposes and all the property of the deceased person vests in him/her as such.
Executor and administrators in law constitute only one person. In absence of express provisions any one as executor or administrator can operate an account with the bank. A bank account is a property and vests in the executor or administrator as legal representatives of the deceased. Borrowing by an executor is always his personal responsibility and if is unauthorized, the estate of the deceased cannot be made liable for it.
iii)
Limited Companies
A company has legal personality of its own. This means that companies can enter into contracts in their given name and can sue and be sued. Companies can open and operate an account and have capacity to borrow money on security of their property.
Before opening an account it is standard practice to take references of directors under s. 129 of the FIA and evidence of incorporation, Memorandum and Articles of Association, a resolution of the board showing how the account will be operated and the specimen signature. A bank dealing with a company has to satisfy itself that the transaction is not ultravires the object clause of its memorandum or powers conferred on its directors by the articles of association. The rule was laid down in the case of Asbury Railway Carriage Co. v. Riche (1875) LR7HL 653, that a company can lawfully do only acts as it was formed to do as set out in its memorandum of association objects clause.
A person dealing with a company which is registered must satisfy himself that the proposed transaction is not inconsistent with the memorandum and articles of association and that the company acting on behalf of the company is not one to whom power so to deal is unlikely to have been delegated but he or she need not inquire whether all the necessary steps have been taken to make the matter complete and regular. For example the model of Table A of the Companies Act provide that directors may exercise all powers of the company to borrow money, and to mortgage or charge its undertaking, property and uncalled capital, or any part thereof, and to issue debentures, debenture stock, and other securities.
If the acts of the company are otherwise ultravires but are entered into in furtherance of an improper purpose is largely determined by the law of agency. In Rolled Steel Products (Holdings) Ltd v. British Steel Corp (1986) CH 246, it was held that a company holds out of its directors as having authority to bind the company to any transaction which falls within the powers express or implied conferred on it by its memorandum of association.
If however a person dealing with the company is on notice that the directors are exercising the relevant powers for purposes other than the purposes of the company, he or she cannot rely on ostensible authority of the directors and on ordinary principles of agency and cannot hold the company to the transaction.
The Companies Act s. 56 details how a company can contract and particularly in regard to negotiable instruments. It provides that a bill of exchange or promissory note shall be deemed to have been made, accepted or endorsed on behalf of a company, if made accepted or endorsed in the name of or by or on behalf or account of, the company by any person acting under its authority express or implied.
The effect of this section is that a bill of exchange or promissory note may be made (i.e drawn) accepted or endorsed by a company’s name without more. The second way is to sign by or on behalf of or on account of a company. Where a person wishing to sign in a representative capacity omits to use such wording or equivalent he may be held personally liable on the instrument.
Similarly a banker must make sure that section 117 of the Companies Act is complied with or else it may fins that the company is not liable and recourse may be had to the person who signed the instrument. The section provides inter alia that every company shall have its name mentioned in legible roman letters in all business letters of the company and in bills of exchange, promissory notes, endorsements, cheques and orders for money or goods purporting to be signed by or on behalf of the company, and in all bills of parcels, invoices, receipts and letter of credit of the company.
Non compliance fixes personal liability on the director. In the case of S.J.Patel (Zambia) Ltd v. Cinamon 1970 (1) ALR Com 260 the Plaintiff supplied goods to a limited Co. named Longacres Stores Ltd. Cheques issued for and on behalf of the company for payment of the goods were signed by the defendant over a rubber stamp reading ‘Longacres Stores’. The court held that the company director’s personal liability to the holder of the cheque or other orders for money signed by the director on behalf of the company wherein the company’s name was not mentioned in the prescribed manner, arises when the name used varies in any way whatever from the registered name, whether by omission of the word limited or not.
In Durham Fancy Goods Ltd v. Michael Jackson (Fancy Goods) Ltd & Anor (1986) 2 QB 839, the plaintiff drew a bill of exchange on a company called Michael Jackson (Fancy Goods) Ltd but addressed to M. Jackson (Fancy Goods) Ltd and inscribed the words of acceptance ‘Accepted payable for and on behalf of M. Jackson (Fancy Goods) Ltd, Manchester’. On receiving the bill, the second defendant who was a director and secretary of the company merely signed his name and returned the bill. The bill was dishonored upon maturity and the company went into liquidation. The plaintiff claimed against the second defendant on the ground that he had become personally liable on the bill for signing it on behalf of the company contrary to the provisions of the Companies Act, as the bill did not mention the proper name of the company. It was held that ‘M’ was not an acceptable abbreviation of ‘Michael’ and that accordingly the second defendant had committed an offence and was liable to the plaintiffs who were holders of the bills of exchange. But the plaintiffs could not enforce that liability for they had inscribed the words of acceptance and had chosen the wrong words, thereby implying that acceptance of the bill in that form would be accepted by them as a regular acceptance of the bill, in seeking to rely on their own error coupled with the second defendants failure to remedy it as entitling them relief, they were bound by equitable principle of estoppel.
iv)
Children
A child, for purposes of contracting is any person under the age of
eighteen years as indicated in the Contract Act, Children’s Act, and Article
257 Constitution of the
Three problems arise regularly where a minor wishes to have dealings with a bank. The first problem concerns the opening of the account
i) Can it be in the names of a minor?
ii) Is the bank entitled to honor cheques drawn on the account by a minor?
iii) What is the bank’s position as regards the extension of credit to a minor?
There is no good legal reason why a child cannot open and operate a bank account. Under Section 21 of the Bills of Exchange Act, Cap 68, a person’s capacity to issue negotiable instruments is the same as his capacity to enter into a simple contract. Subsection 2 provides that where a bill is drawn or endorsed by an infant, minor or corporation having the drawing, or endorsement entitles the holder to receive payment of the bill and to enforce it against any other party thereto.
A child
shouldn’t be given an overdraft. According to Blackburn Building Society v. Cunliffe Brooks & Co. (1882) 22 ch. D
61, overdrafts are money lent and as such could not be recovered against a
child under the Infant Relief Act 1874. And in
However a minor is bound by a contract under which he is supplied with goods or services that constitute necessaries like food, clothing and presumably books required for study. In the same aspect loans granted to enable a minor to acquire necessaries are also binding. At common law, other than loans for necessaries other loans for necessaries other loans are absolutely void. It appears that the basic principle is that the law must protect the child against his or her inexperience, which may enable the adult to take unfair advantage of him or her or to induce him or her to enter into a contract which, though in itself fair, is simply wasteful. The second principle is that the law should not cause unnecessary hardship to adults who deal fairly with children. Under this principle some contracts with children are valid such as those for necessaries.
In the case of Iwa Kizito (Administrator of the Estate of the late Felix Charles Maku) vs. Equity Bank (U) Ltd & Mindra Josephine HCCS No. 0036 of 2013 held that Section 2 of the Children Act defines a child as a person below the age of 18yrs while Art. 257(1)(c) of the Constitution of the Republic of Uganda, 1995 too defines a child as a person under the age of 18yrs. That it is felt undesirable that minors should enter into contracts carrying the high financial risks will often be involved in business agreements. However, total unenforceability would act to the minor’s disadvantage because traders and service providers know that any contract with a minor would involve a risk of the minor deciding not to honour it, they would be reluctant to enter into such contract. As a consequence, minors might have difficulty acquiring the basic requirements of everyday life, such as food or clothing. It is for that reason that persons that have not attained the age of 18yrs, regarded in law as ‘minors, have limited capacity to enter into a contract. That the object of the rules is largely paternalistic, i.e it is intended to protect minors from the consequences of their own actions. That the scope of a minor’s capacity to contract is limited in law to goods and services considered to be necessaries. Therefore, contracts analogous to those of necessaries will be enforceable only if in some way they contribute to minor’s ability to earn a living.
v)
Joint Accounts
An account opened in the name of two or more customers is known as a joint account. In a joint account the owners, either jointly or severally, act on behalf of themselves.
In the ordinary joint accounts, there is a rebuttable presumption that all those whose names the account stands must combine in drawing the mandate or authorize one or more of their number to do so. The instructions give rise to a dispute where the bank honours a cheque bearing the required signature or a cheque on which the mandatory signature is missing. In Jackson v. White & Midland Bank Ltd (1967) 2 Lloyds Rep 68, the plaintiff entered in to negotiations for a contract which he was to become a partner in or joint owner, of the first defendant business. An amount of 2000 pounds was paid by the plaintiff into a joint account at a branch of the defendant and stipulating that the cheques be signed by both parties. The first defendant forged the plaintiff’s signature on the several cheques which were honored in the due course by the bank. The business negotiations between the plaintiff and defendant broke down and the plaintiff sued for reverse of the debit expenses arising from payment of forged cheques. Court held that the bank made an agreement with the plaintiff and the first defendant jointly that it should honor any cheque signed by them jointly and a separate agreement with the plaintiff and the first defendant severally that it would not honor any cheque unless he had signed them, that the plaintiff was entitled to sue for breach of that separate agreement.
On the death of a joint account holder the survivor or survivors is or are under normal circumstances entitled to the whole amount either under the law of devolution between joint owners or by custom of banker or by express or implied agreement. However the rule of survivorship as applied to joint accounts can be rebutted. In the case of Russel v. Scott (1936) 55 CLR 440 Court observed that the right at law to the balance standing at the credit of the account on each of the deceases party was thus vested in the survivor.
When the joint
account holders are husband and wife, on the death of the husband the rule on
survivorship depends on the intentions of the parties. That is whether the
method of keeping and working the account was for convenience or for purpose of
providing for the wife in case she was a survivor. Decisions in this area
depend on the facts of each case. In
If either the husband or the wife become mentally disabled it would not be safe for the banker to part with the money to the other party. This is also true in all other joint accounts. The mental disorder of any party revokes any mandate he or she may have given, if the disorder is such that he or she does not know or understand what he or she is doing.
vi)
Partners
Partnerships do
not have a legal personality separate from that of the partners, its account
constitute in effect a joint account of the partners. In partnership accounts,
one partner has a prima-facie right to draw cheques in the firm’s name. He also
has implied authority to bind the firm by the cheques so drawn but he has no
mandate to post date them. In
The Partnership Act provides that in absence of an agreement to the contrary, the death of one partner marks the dissolution of the partnership though the surviving partners have power to bind the firm and to continue business so far as it is necessary for winding up of its affairs. Therefore the banker in such case is safe dealing with the surviving partners only to such extent as is clearly for this purpose. The bankruptcy of one partner also dissolves the partnership unless the partnership deed provides otherwise.
In Re Bourne (1906) 2 Ch 427, the partnership was dissolved by the death of one of the partners. The remaining partners continued to carry on the firm business in order top wind up the affairs and for this reason, refrained from closing the bank account. As the account was overdrawn and an increase of the overdraft was required, the surviving partners deposited with the bank some title deeds as security. Court held that the surviving partner had power to give a good title, to purchase and mortgage. Persons dealing with them were therefore entitled to assume that they were acting in good faith with them to liquidate the partnership.
vii)
Local Governments
The local government Act Cap 243 s.6 provides that every Local Government Council shall be a body corporate with perpetual succession and a common seal and may sue and be sued in its corporate name. Article 180 (1) of the constitution provide that a local government is based on a council which is the highest political authority and the executive powers are vested in the executive committee. Article 195 grants the local government power to borrow.
Section 84 of the L.G.A provides that a local government may borrow money as is provided in the fifth schedule. Regulation 20 of the schedule gives local governments powers to raise loans by way of debenture, issue of bonds, or any other method in amount not exceeding 25% of locally generated revenue provided the local government demonstrates ability to meet its statutory requirements. The borrowing powers are exercised by the Local Government with approval of the minister responsible for local government if the amount to be borrowed exceed ten percent of the total amount the Local Government Council is eligible to borrow. It is also dependant whether the Auditor General has certified the books of accounts of the preceding financial year and his report is not qualified.
It is clear that a local Government as a body corporate can open and operate a bank account. Therefore, what the bank need to ascertain ids the council authority to borrow and to create security and also the authority of the persons purporting to act on behalf of the local government.
In
viii)
Trustees.
Trust accounts are mainly opened by trustee such as persons who administer charitable trusts. The principle is that a trustee has legal title in the trust property and the beneficiary of the trust acquires the equitable interest.
The purpose of appointing several trustees is to ensure that the trust property is under their combined control. Delegation of these powers to a single trustee is not allowed when such a delegation involves exclusive dealing with the property. It follows that signatures of all trustees should be required on all the cheques unless the modification of this rule is fully authorized by the terms of the trust. The trustees Act Cap 164 authorizes the appointment of agents for specific purposes but does not include signing of cheques. Therefore trustee cannot appoint one of their numbers to sign cheques.
A special trust account is exemplified by the Advocates Act Cap 267 which require all practicing advocates to keep an account known as ‘clients’ account’. In a sense this is a trust account although the advocate will be the sole trustee and has powers to operate the account as if it was his or her own. However the fact that the account is impressed with a trust certain consequences follow. The most important being that the bank cannot combine the clients account with the advocates personal account.
In case of trust account, a banker must recognize the person from whom or whose account, he has received the money in an account as the proper person to draw on it, and cannot set up the claim of a third person as against the client.
In Ademiluiji v. African Continental Bank Ltd (1969) ALR Comm 10, it was held that a person whose money has been accepted by a bank on the footing that the bank undertakes to honour cheques up to the amount standing to that person’s credit is a customer of the banker and the position is unaffected by the banker’s belief that the account is held in trust, nor does that make the supposed beneficiary a customer.
The other
important rule is that a beneficiary of a trust fund is entitled to an
authority of the trustee to enable him or her to verify from the bank whether
statements of the accounts have been filed by the trustee tally with the bank
book entries. This rule was formulated by Chitty J in Re Tillot (1892) 1
ix)
Solicitor’s Accounts.
Solicitors’ account describes an account opened by a solicitor in order to deposit clients’ money. The need to treat clients’ account as a separate fund arises because such accounts have been the subject of legislation which lays down accounting procedures that precludes the mixing of client’s money with the solicitor’s own funds. The provisions are under section 40 of the Advocates Act, CAP 267 which require Advocates to keep accounts in compliance with the rules entitled ‘the Advocates Accounts Rules’ and the and ‘the Advocates Trust Account rules’ under the first and second schedule of the Act respectively. The procedures seek to combat both fraud and carelessness in the handling of the solicitors’ trust fund.
The solicitor is entitled to notify the court that certain money attached by the garnishee order nisi was property of a third party. The court will then make the order required to protect the client interest.
- Types of
Accounts
There are two types of Accounts in Banking. These include;
- Demand deposits
- Time deposits
Demand Deposits
These are deposits repayable on demand and withdrawable by cheque, order or by other means-s.3FIA. This is generally referred to as a current account or mercantile account or running account.
i)
Current Accounts
These accounts are used by the banks’ customers for their regular financial transactions to discharge personal liabilities. This can be done either by the drawing of cheques or by direct debits issued by a customer to the bank.
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 month 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.
ii)
References
It is usual practice for bankers and now a requirement of s.129 of the FIA not to open an account for a customer without obtaining a reference and without inquiry as to the customers standing. It is also an offence under s. 129(2) of the Act which carries a fine for any offending director or officer who does not take a reference. Failure to do so at the opening of the account might prevent the banker from establishing its defence under s. 81 of the Bills of Exchange Act Cap 68 if a cheque was converted subsequently in the history of the account because in establishing whether the bank acted without negligence one has to look at all the circumstances antecedent and present. Such antecedents include the issue or not the banker took references before opening the account.
S. 81 provides that where a banker in good faith and without negligence receives payment for a customer of a cheque crossed generally or specially to himself or herself, and the customer has no title or a defective title to it, the banker shall not incur any liability to the true owner of the cheque by reason only of having received that payment.
It has been stated by Holden Miles, in the Law and practice of Banking 1996 at 392 that when an application is made to a bank to open an account in the names of a private individual, there are four principal matters for considerations regarding the prospective customer, namely (a) whether he or she has authorized the opening of the account (b) whether he or she is the person he or she claims to be and (c) whether he or she is employed by someone else and if so, the name of the employer.
If a third party claims to have authority to open an account in another person’s name the banker should be very cautious indeed. In Robinson vs. Midland Bank ltd (1924) 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 pounds to prevent the plaintiff from bringing divorce proceedings, and the conspirators, without the plaintiffs knowledge, opened an account with the defendants in the names of the plaintiff. They paid into this account the cheque in question and later drew out the proceeds. The plaintiff’s action for money had and received failed because inter alia, it was held that the bank was dealing with a fictitious customer notwithstanding the use of the plaintiff’s name.
A bank which fails to take references and cross check the identity of an intending customer will be negligent and loose the protection afforded to paying bankers under the Bills of Exchange Act. Thus in United Nigeria Insurance Co. v. Muslim Bank (West Africa) Ltd 1972 (2) ALR Comm. 8 the supreme court of Nigeria held that it is the usual practice of bankers not to open an account for a customer without obtaining a reference and without inquiry as to the customer’s standing; and a banker who without doing so opens an account for a new customer and shortly afterwards collects a cheque crossed ‘Not-negotiable-A/C payee only’’ which is paid in by the customer, and was drawn in favour of payee of the same name on the date before the account was opened will be unable to establish the statutory defence, 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 it is in negligence. Therefore the bank when opening a new account has a duty to ascertain the name of the customer and the customer’s employer in addition to obtaining suitable references.
iii) Overdraft.
A customer of the bank with a current account may be granted an overdraft. A customer may borrow from his or her banker by way of overdraft. Drawing a cheque or accepting a bill payable at the bankers where there are no sufficient funds to meet it amounts to a request for a overdraft. Rd. Odumosu v. African Continental Bank Ltd, 1976 (1) ALR Comm. 53 at p.56.
But in the absence of an agreement, express or implied from a customer of a business and supported by good consideration, a banker is not bound to allow its customer to overdraw his or her account. Overdrawing a banking account is borrowing money. The overdraft is payable only on demand.
Therefore it can be said that it is an implied term in the relationship between a banker and its customer that where (a) overdraft facilities are provided to the customer, or (b) money is standing to the credit of the customer on his or her current account and in the absence of special agreement, a demand by either party is a necessary prerequisite to an action by the other for money lent.
In
he or she has no reasonable ground, proof of which shall be on him or her, to believe that there are funds in the account to pay the amount specified on the cheque within the normal course of banking business; or (c) with intent to defraud stops the payment of or countermands any cheque previously issued by him or her, commits.
Under the law if one issues a cheque when there are no sufficient funds to meet it is not an application for an overdraft but a commission of an offence. This law however has been condemned by the judges. There is no need to criminalize contractual obligations.
iv)
Over-Crediting
In case a customer whose account has been over-credited, if the customer honestly believes that the money is his or hers and alters his or her position in reliance on the statement, then the banker is estopped from recovering the money from the customer. In Lloyds Bank Ltd vs. Brooks (1950) 72 JI.B 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 by representation, contained in the statements of account, 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 estopple only operates after the customer has acted upon the representation.
v)
Over-Debiting
Over-debiting generally occurs as a result of fraud or forgeries. In Kepitingalla Rubber Estates Ltd v. National Bank of India Ltd (1909) 2 K.B. 1010 the secretary of the company forged cheques drawn on a company’s account over a period of two months. Statements had been given to the company but the directors had not examined them. The court held that the bank could not charge the company with amount paid out on forged cheques and the plaintiffs were under no duty to organize their business in such a way that forgeries of cheques could not take place.
Similarly in Tai Hing Cotton Mill Ltd V. Liu Chong Hing Bank & Ors (1986) A.C. 80 a fraudulent account clerk forged signatures on over 300 cheques to the tune of HK$5.5 million drawn on the company’s account over a period of five years. The Privy Council held that the banks which had paid on forged cheques were not entitled to debit the company’s accounts. That the duty owed by the customer to the banker in the operation of the
vi) Interests.
In Youvill v. Hibernian Bank Ltd (1918) A.C. 372, Lord Atkinson said that the bank by taking the account with half-yearly rests, secured for itself the benefit of compound interest. That this is usual and perfect legitimate mode of dealing between the bank and customer.
The author of Pagets law of banking says that the law remains that a claim of interest is justified by the customer’s acquiescence in the charging of interests. And such interest will justify the charging of compound interest or interest with periodic rests so long as the relation of banker and customer exists. These remarks were supported by the case of National Bank of Greece S.A v. Pinos Shipping Co. (No. 1), The Maira (1988) 2 Lloyds Rep. 126 where Nicholls L.J. said that to facilitate the use of compound interest by the banks despite the usury laws, the courts resorted to the fiction that a fresh agreement for the payment of interest was made on the occasion of each rest in a customer’s account. An agreement to pay compound interest when a customer opened an account with the bank would have been unlawful. But if on each occasion when the bank charged or credited interest on an account, the parties were to enter into a new agreement that the balance then struck would bear interest, that agreement would be lawful, because it would provide for the payment f simple interests on an agreed sum.
In Harilal Shah v. Standard Bank 1967 (1) ALR Comm. 209 the court of Appeal for Eastern Africa said that it is however generally notorious that banks charge compound interest on overdrawn mercantile accounts and the notoriety of that general usage is such that judicial notice can be taken of it.
In fact the Bank of Uganda Act Cap 51 sec. 39 recognizes the banks right to charge interest by providing that the bank may in consultation with the minister, by statutory instrument, prescribe the maximum or minimum rates of interest and other charges which in transaction of their business financial institutions may pay on any type of deposit or other liability and impose credit extended in any form.
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. Thus in Harilal Shah v. Standard Bank Ltd, where the bank varied interest without the express or implied consent of the borrower, the court held that a trade usage allowing banks to vary charges imposed on customers without prior consent of, or notification to, those customer is contrary to the law of contract, unreasonable, oppressive, unjust and therefore of no legal effect.
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 or her overdraft and he or she doesn’t dispute the accuracy of those statements he or she is deemed to have accepted that interest should be charged at that rate. The position seem to be that simple interest can be charged by the bank as a matter of course. But compound interest is only chargeable when a customer expressly or impliedly agreed to it or when a trade usage of charging compound interest has been proved or so notorious that courts take judicial notice of it.
Rd. Rahul J Patel v. DFCU Bank (2002-2004) UCLR
390
Determination of PLR. (Interests)
-Cost of funds
-operational costs
-risk premium
-minimum nominal profits
Deposit Accounts
In law these accounts are also known as time deposits-s. 3 FIA. These are deposits repayable after a fixed period or after notice and includes saving deposits. Because the balances on the deposit account are payable after a stated notice, the customer has no right to cheques on the account and normally no cheque is given to such an account. The money placed on a deposit account is the banker’s money and makes what profit of it can, which profit it retains to itself, paying back only the principal, according to the customer of the bankers in some places or the principal and a small rate of interest according to the custom of bankers in other places. However it is generally recognized that banks pay interest on deposit accounts and do not charge commission.
- Appropriation of Payments
A feature of overdraft account is that the debit balance keeps changing from day to day. These fluctuations occurs because of the current nature of the account and mutual dealings transacted through it. 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;-
i. In transactions in which the bank seeks to enforce a security covering a revolving amount; and
ii. in respect of the account of a partnership following the firm’s dissolution.
The principle used by courts to solve problems of this type is known as ‘the rule of appropriation of payments’. 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’
In Devaynes v. Noble, Clayton’s case (1816) I Mer 572, decided that when a current account is kept between parties as in the case of accounts between bankers and their customers, if there is no express intention to the contrary and no circumstances from which such an intention can be implied, the account rendered is evidence that the payments in one side are appropriated to the payments out on the other side in the order in which they take place. That is to say the first item on the debit side is discharged or reduced by the first item on the credit side (FIFO: First In First Out).
The rule in Clayton’s case applies only where the payment into or out of the account continue to be made, and this is illustrated by the facts in Clayton’s case itself. Clayton had a current account with a banking firm, a partnership named Devaynes, Dawes, Noble and Co. One of the partners, William Devaynes, died. The amount then due to Clayton was 1,717 pounds. The surviving partners thereafter paid out to Mr Clayton more than that amount while Clayton himself, on his part, made further deposits with the firm. The banking firm subsequently went bankrupt. Between the death of the partner’s death and the date of the failure of the banking firm the customer withdrew sums in excess of the credit balance but he also paid in sums sufficient to put the account more in credit than it had been when the partner died. The customer claimed that the payments in should be appropriated against the withdrawals so as to leave intact the balance at the time of the partners death as a claim against his estate.
The court held that the estate of the deceased partner was not liable to Clayton, as the payments made by the surviving partners to Clayton must be regarded as completely discharging the liability of the firm to Clayton at the time of the particular partner’s death. That the credit balance being a liability for the continuing fund had been extinguished by the 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 lost his claim against the estate of the deceased partner.
As Smart puts it, in the case of a current account, payments in are, in absence of any express indication to the contrary by the customer are presumed to have been appropriated to the debit items in order of date. It is up to the customer to appropriate. This was made clear in the case of Deeley v. Lloyds Bank Ltd (1912) A.C. 756 where the court said that the person paying the money has a primary right to say to what account it shall be appropriated; the creditor, if the debtor makes no appropriation, has the right to appropriate, and if neither of them exercise the right, then one can look on the matter as a matter of account and see how the creditor has dealt with the payment, in order to ascertain how he or she did in fact appropriate.
The rule in Clayton’s case is not a rule of to be applied in every case but, rather a presumption of fact, and may be rebutted by circumstances or by agreement. For instance the letter of continuing security in overdraft facilities has the effect of holding the mortgaged security up to the end of the overdraft facility.
Exception to
Clayton’s rule
The rule does not apply to payments made by a fiduciary out of an account which contains a mixture of trust funds and the fiduciary’s personal money. In such a case if the trustee misappropriates any moneys belonging to the trust, the first amount so withdrawn by him will not be allocated to the discharge of the funds held on trust but towards the discharge of his own personal deposits, even if such deposits were in fact made later in order of time. In such cases, the fiduciary is presumed to spend their money first before misappropriating money from the trust; see Re Hallet’s Estate (1879) 13 Ch D 696.
BANK STATEMENTS / STATEMENT OF ACCOUNTS.
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 errors resulting from wrong entries. There are two situations in which a mistake may occur either in favour of a customer or in favour of a banker. The two are known respectively as over crediting and over debiting already discussed.
a)
The bank’s right to rectify errors.
A bank may by mistake credit the customer’s account with a 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 rights to do so, he has to institute proceedings. The customer has two pleas. The first is that, the bank is estopped from disputing the correctness of the balance as shown in the periodic statement, the other is based on a claim that the balance constitutes an ‘account settled’ or an account stated.
In
b)
The customer’s right to demand correction.
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 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 v. 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.
c)
Customer’s silence with knowledge of a wrong entry.
In Greenwood v. Martin Bank Ltd (1933) AC 51, it was held that if the customer knows that an entry made in his passbook or statement of account 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. In Brown v. Westminister Bank (1964) 2 Lloyd’s Rep 187 a servant of a customer, an old woman who was too frail to look after her affairs, forged her signature on the cheque drawn on her account. The branch manager called on the customer several occasions to ask whether the instruments were regular. Although the customer did not expressly verify the genuiness of the cheques, she refrained from questioning their payments. She was accordingly held to be estopped, from denying the bank’s right to debit her account.
TOPIC V
COMBINATION OF ACCOUNTS.
In many cases a customer maintains more than one account with the bank. Thus a customer may use one account for strictly personal purposes and another one for his business. There are two situations by which the bank may wish to treat all accounts maintained by a given customer as if they were one:-
- Where the customer is unable or unwilling to repay an overdraft incurred in one account although another account is in credit. This may arise out of the customer’s insolvency.
- The bank may wish to combine accounts where the customer draws a cheque for an amount exceeding the balance standing to the credit of the account involved but the deficiency can be met out of funds deposited in another account.
The issue is whether the bank has an automatic right to combine or consolidate its customer’s account or whether there is a duty imposed on the bank to keep its customer’s account separate.
Lord Denning has given an emphatic positive answer to the first question and therefore a negative one to the second issue, in Halesowen Presswork and Assemblies Ltd v. Westminster Bank Ltd (1910) 3 W.L.R 625, he said that suppose a customer has one account in credit and another in debit. Has the bank the right to combine the two accounts? So that he can set off the debit against the credit and be liable only for the balance? The answer to this question is Yes. The banker has a right to combine the two accounts whenever it pleases and set off one against the other unless it has some agreement, express or implied to keep them separate.
However, Swift J. in Greenhalgh v. Union Bank of Manchester (1924) 2 K.B. 154 took the opposite view stating that if a banker agrees with its customer to keep two or more accounts, it has not, without the assent of the customer, any right to move either assets or liabilities from one account to another, the very basis of its agreement with its customer is that the account shall be kept separate.
Since these views have been competing for supremacy, there is need to examine their validity. However it may be that part of the confusion in this area of the law is attributable to the use of the legal terms ‘lien’, ‘set off’ and ‘combination of account’ in the wrong text.
- Banker’s Lien.
According to Sheldon’s practice and Law of banking a lien is the right to retain property belonging to a debtor until he or she has discharged debt due to the retainer of the property. This being the case, the use of the word lien ought to be restricted to the bank’s right over securities deposited with bankers to secure a customer’s indebtedness. The reason is that a banker does not have nor can it have a lien over a customers credit balance. Money is not subject of a lien because it is not capable of being earmarked. Thus in Re Morris Coneys v. Morris (1922) I.I.R. 136, the court specifically held that a banker has no lien in respect of a customer’s account.
A lien attaches to instruments deposited with bankers as security and not the customers balances. In Halesowen Pressworks and Assemblies Ltd v. West minister Bank, there is a strong obiter by Buckley L.J to the effect that money or credit which the bank obtained as a result of clearing a cheque became the property of the bank, not the property of the company. No man or woman can have a lien on his or her own property and consequently no lien can arise affecting that money or that credit.
- Set-Off
A set- off is a legal right according to which a debtor will take into account a debt owing to him by a creditor when he is required to settle the debt or, as was put by Lord Cross of Chelsea in Halesowen Presswork and Assemblies Ltd v. West minister Bank, when there have been ‘mutual dealings’ between the debtor and someone who claims to prove as a creditor an account of mutual dealings shall be taken, there be set off of the sums mutually owing and it is only the balance that the creditor is to pay or prove for as the case may be.
It was a rule which was applied by commissioners in bankruptcy before it received statutory sanction. The right of set off was developed by bankruptcy courts as part of common law and it is now a statutory right. It is therefore a rule which is not peculiar to bankers. Every debtor has a right as far as mutual dealings between him or her and an insolvent creditor are concerned. It is submitted that it will reduce the confusion in the law if the right of set off is restricted to insolvent customers, whether natural or legal persons.
Upon a receiving order being made, the bank is entitled to terminate the banker and customer relationship and exercise its right to set off.
A good example
of set off is provided by the case of Mutton
v. Peat (1902) 2
Under these circumstances, it is submitted, the bank in the absence of a receiving order or at least an available act of bankruptcy has no right of set off. Therefore, those who have asserted that the banker’s right over a customer’s credit balance is right to set off are not strictly speaking legally correct. Such a right, if it exists at all, should be called combination or consolidation of accounts.
- Combination or
Consolidation of Accounts.
The words combination or consolidation of accounts in banking law have yet to receive a satisfactory judicial definition. But according to Buckley L.J, in Halesowen Presswork & Assemblies Ltd v. Westminster Bank Ltd, it is an accounting situation in which the existence and amount of one party’s liability to the other can be ascertained by discovering the ultimate balance of their mutual dealing.
Combination or Consolidation of accounts ought to be limited to an accounting situation whereby a banker might treat two or more accounts opened between its customer and itself as though they were one whole account, entirely under its control by reason of which it might remove assets from one account to meet deficiencies in other. Using this definition as a guide attempt will be made to answer the question posed earlier on whether a banker has an automatic right to combine or consolidate its customer’s accounts.
Whether the bank in any particular case will combine or keep the accounts separate will depend on the facts of each case to be proved by calling the necessary evidence. If there is no express or implied agreement then it has to be proved like any other trade usage or custom.
As to when accounts may be combined, the general principle is well explained in T & H. Greenwood Teate O. Williams vs. Williams Brown & Co. (1894-1895) 11 T.L.R. 56 where Wright J said that a bank had the right to combine a customer’s separate account subject to three exceptions;
a) the right to combine could be abrogated by a special agreement
b) It would be inapplicable where a special item of property was remitted to the bank and appropriated for a given purpose
c) A bank could not combine a customer’s private account with the one known to the bank to be a trust account or to be utilized for operations conducted by the customer as trustee.
In the case of Obed Tashobya vs. DFCU Bank Ltd HCCS No. 742/2004 the plaintiff operated a local current account with the defendant bank and deposited a cheque drawn on Citibank Philippines for US$. 150,000 on his local shilling account. Later he opened a dollar account in order to receive his funds upon advice from the defendant bank which was credited with the amount and made withdrawals. The defendant bank afterward informed the plaintiff that the cheque had been dishonored and the need to recover the money and the plaintiff volunteered to deposit money on the account and deposited partial amount. The local current account was debited leaving it overdrawn. The defendant bank set off the plaintiff’s account who was subsequently denied access to his account and his cheques were dishonored.
The issue was whether the defendant bank correctly exercised the right of set off of the plaintiff’s account.
Justice Kiryabwire stated that according to Haslsbury’s Laws of England, Vo. 3(1) (4th Ed,), Para 198: ‘unless precluded by agreement, express or implied, from the course of business, the banker is entitled to combine accounts kept by the customer in his own right, even though at different branches of the same bank, and to treat the balance, if any, as the only amount really standing to his credit, but the banker may not arbitrary combine a current account with a loan account. An agreement not to combine ceases to be effective as soon as the relationship of banker and customer comes to an end,’’
That according to Paget’s Law of Banking at P. 602, para 29.16, ‘the basic rule is that a bank may combine two current accounts at any time without notice to the customer, even though the account are maintained at different branches.’
That the rule was affirmed by the C.A in Halesowen Presswork & Assemblies Ltd V Westminister Bankl Ltd (1971) 1 Q.B 1, where Lord Denning posed a question as to whether a banker has a right to combine two accounts so that he can set off the debit against the credit and be liable only for the balance, and gave the following answer: ‘The answer to this question is: Yes, the banker has a right to combine the two accounts whenever he pleases, and to set one against the other, unless he has made some agreement, express or implied, to keep them separate…’’
That as to whether banker can exercise the right of set off where the accounts are maintained in different currencies, Paget (at P.608) states that, this is an aspect of right which, if disputed, would require to be proved by evidence of usage; that otherwise, the existence of accounts in different currencies may be evidence of an implied agreement not to combine. That this however doesn’t apply at the termination of banker-customer relationship.
It was held that the fact that the plaintiff had originally wanted to bank the suit cheque on his Uganda Shilling account but for the advice of the bank would suggest that the plaintiff did not mind which currency the money would be collected. That a set off in such circumstances would be justified.
TOPIC VI
Cheques and other Documents intended to enable a person obtain payment
The law relating
to cheques is contained in the Bills of Exchange Act Cap 68. This Act
reproduces the provisions of the Bills of Exchange Act 1882 45 & 46 Vict c.
61 of
- Definition of
a cheque.
A cheque is the customers mandate to his or her banker to pay. Section 72(1) of the Bills of Exchange Act defines a cheque as a bill of exchange drawn on a banker payable on demand. Section 2(1) of the Act defines a bill of exchange as an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to or to the order of a specified person or to bearer. Subsection 2 goes on to provide that an instrument which does not comply with these conditions or which orders any act to be done in addition to the payment of money is not a bill of exchange.
According to subsection 3 an order to pay out of a particular fund is not unconditional within the meaning of the section; but an unqualified order to pay, coupled with an indication of a particular fund out of which the drawee is to reimburse himself or herself or a particular account to be debited with the amount; or a statement of the transaction which gives rise to the bill, is unconditional.
There are certain characteristics of a bill as defined above which are not part of the cheque. Therefore a definition of a cheque is only possible if certain requirements of s. 2 are combined with those of s. 72(1). Thus a cheque can be defined as unconditional order in writing drawn by one person upon another who is a banker to pay on demand a sum certain in money to or to the order of a specified person or to bearer.
The person who draws a cheque is known as a drawer. The banker on whom the cheque is drawn is called the drawee banker or paying banker. The person who is supposed to receive payment is the payee. If the drawer is the person to be paid then the drawer and payee are the same. The order must be unconditional. In Bavins Jnr & Sims v. London and South Western Bank Ltd (1899) 81 L.T. 655, an instrument which was in the form of a cheque but with the order followed by the words ‘provided the receipt form at the foot hereof is duly signed’. The court held that the receipt requirement was a condition which made the instrument not a cheque.
A cheque must be addressed by one person as a drawer
to another, being a bank as drawee. The FIA, 2004 s.2 provides that a bank
means any company licensed to carry on financial institution business and
includes all branches and offices of that company in
A cheque must be payable on demand. But modern cheque forms do not include the word ‘on demand’. This omission is remedied by s. 9 of BEA which stipulates that a bill is payable on demand which is expressed to be payable on demand, or at sight, or on presentation; or in which no time for payment is expressed.
A cheque must have a drawer, a drawee or paying banker and a payee or if no payee then a bearer. Thus s.6 (1) provides that where a bill is not payable to the bearer, the payee must be named or otherwise indicated with reasonable certainty.
- Ante-dating
and Post dating
It was generally thought that a post dated cheque would not have qualified as a cheque because s. 72 defines a cheque inter alia as being payable on demand. In Brien v. Dwyer (1979) 22 ACR 485, Barwick CJ suggested that a postponed cheque constituted a bill of exchange payable at a future date, rather than a cheque which had to be payable on demand.
The law inclined to the view that a post dated cheque is valid in all regards. The reasoning is based on section 12(2) of the Act, under which a bill is not invalid by reason of its being postdated, ante-dated or undated.
It appears therefore that postdated cheques are within the meaning of s.72 and s.12 (2) was not necessary to make them cheques.
However post dated cheques should always be handled with care as they can both be ‘troublesome and dangerous for bankers’
First, under s. 74 the death of the customer which comes to the knowledge of the banker determines the customer’s mandate and consequently all outstanding cheques cannot be honored by the banker.
Secondly s.74 gives the customer the right to determine the bankers duty and authority by countermand of payment, that is to withdraw his or her mandate before the cheque has been honored. This means that a person holding the cheque cannot get payment from the bank. In he case of Thaker Singh (Electrician) and Sons v. Quarbanlite Ltd 9178 (2) ALT Comm. 324 where the Court of Appeal of Kenya held that when a negotiable instrument was taken in lieu of money payment, there was a presumption that the parties intended it to be a conditional discharge only, and that their original rights were to be restored if the cheque were dishonored or if the drawer acted in a manner inconsistent with giving of the cheque such as by countermanding payment.
Thirdly, the bankruptcy of the customer may create problems for the banker because of the doctrine of relation back. Under this doctrine bankruptcy is deemed to have started on commission of the first available act of bankruptcy.
Fourth, if the
bank mistakenly honours a post dated cheque and dishonours other cheques drawn
on it by the customer, it will be liable to the customer for wrongful
dishonour.
- Notice of
Dishonour.
Section 47 provides that when a bill, such as a cheque has been dishonoured, notice of dishonour unless excused under s. 49(2) (c), must be given to the drawer. If it is not given the drawer will be discharged from liability both on the cheque and on consideration for which it was given.
Notice of dishonour to be valid must be given under the rules specified under section 48 of the Act.
The Court of Appeal of Sudan in the case of Emile Habib Bateekha v. Rosen Alam Eddin 1970 (1) ALR 205 said that the holder of a dishonored bill, note or cheque may sue an immediate party liable thereon on the consideration as well as on the instrument, and where a negotiable instrument has not been protested for non payment and thus cannot be sued upon, the drawee can use the instrument as evidence in an action on the consideration, and if there have been presentment and notice of dishonour the instrument will prima-facie be evidence, though otherwise it may not be sufficient.
The notice of dishonour must be given by a person entitled to call for payment and must convey to the recipient that the cheque has been dishonored and that he or she will be held responsible.
In the case of Obed
Tashobya vs. DFCU Bank HCCS No. 742/2004 the issue was whether the suit
cheque was dishonoured and if so whether proper steps were taken on dishonor.
Court held that the telex message and the personal communication of the
dishonor to the Plaintiff by the Defendant are sufficient evidence that the
suit cheque was dishonoured. That all that is required of a collecting bank in
these circumstances is to give notice of dishonor to its client if the cheque
is dishonoured.
- Payment by a
Cheque.
Simply stated the law seems to be that when there is payment by cheque the presumption is that the parties intended it to be a conditional discharge only and that their original rights are to be restored if the cheque were to be dishonored or if the drawer acted in a manner inconsistent with giving of the cheque such as countermanding payment.
The rule was
stated by the Court of Appeal of
In that case a judgment debtor issued cheques to the judgment creditor. He waited for six months before presenting the cheques for payment and they were dishonored. Relying on s. 44 of the Sudan’s bills of Exchange Ordinance which is similar to s.44 Bills of Exchange Act of Uganda, the court held that if a creditor takes a bill or note as a conditional payment, and he or she is guilty of laches in respect of it, as where a creditor takes a cheque and takes an unreasonable time in presenting it, whereby his or her debtor’s position is altered, the bill or note is then treated as absolute payment., and between the debtor and creditor the debt is discharged, and six months is not a reasonable time for the payee of a cheque to wait before presenting the cheque for payment.
Be that as it
may, a bill of exchange or promissory note is to be treated as cash and must be
honoured unless there is some good reason to the contrary.
- Other
Documents to enable a person obtain payment.
These docucuments include promissory notes, treasury bills, dividend and interest warrants. Section 82(1) of the Bills of Exchange Act states that a promissory note is an unconditional promise in writing made by one person to another signed by the maker, engaging to pay, on demand or at a fixed or determinable future time, a sum certain in money, to, or to the order of, a specified person or to bearer.
In
‘At one hundred and twenty (120) days after date I pay to M/s Ghusal Revji & Sons Ltd K’la the sum of Shs. Five thousand for value received as per invoice No. 45.’
It was argued that because the usual words ‘I promise to pay’ were not used these documents were not promissory notes.
The court held that no particular form of words is essential to the validity of the note provided the requirements of the section are fulfilled.
TOPIC VII
GENERAL CONSIDERATION OF CHEQUES.
Holden in his law and practice of banking correctly points out that mere fact that the drawer fills in blank spaces on a cheque form will not itself make the instrument operate as acheque. First of all it must be issued. Issue under S.1 BEA means the first delivery of a cheque which is complete in form to a person who takes it as a holder. Delivery according to S.1 BEA is transfer of possession actual or constructive from one person to another. A holder under s. 1 BEA is the payee or endorsee of the cheque or note who is in possession or bearer of the cheque.
Parties to a Bill of Exchange
i. Drawer-Person responsible for creating the bill. Usually this person is the creditor of the drawer
ii. Drawee-Person to whom the order is addressed
iii. Payee-Person to whom the drawee is required to pay
iv. Endorser-If the payee desires to transfer the bill he can do so by endorsing it
v. Bearer-Person who is in possession of the bill
vi. Holder-Person in possession of the bill if the bill is payable to the bearer
vii. Holder in due course-Person in possession of the bill who can establish that they have taken a bill:-
a) Complete and regular on the face of it before it is overdue
b) Taken in good faith and for value
c) Without notice at the time of any defect in title of the transferor
d) Without notice of any previous dishonor
- Inchoate Cheques.
Section 19 of the Bills of Exchange Act deals with inchoate or incomplete cheques. This provides for a situation where the drawer signs the cheque and leaves another person to complete it. It also provides that when an instrument is wanting in any material particular, the person in possession of it has prima-facie authority to fill up the omission in anyway he or she thinks fit.
In order that any such instrument when completed may be enforceable against any person who became a party to it prior to its completion, it must be filled up within a reasonable time, and strictly in accordance with the authority given. Reasonable time for this purpose is a question of fact; but if any such instrument after completion is negotiated to a holder in due course, it shall be valid and effectual for all purposes in his or her hands, and he or she may enforce it as if it had been filled up within a reasonable time and strictly in accordance with the authority given.
- A holder.
Section 1 BEA defines a holder to mean the payee or endorsee of a bill or note who is in possession of it, or the bearer of a bill or note. The position of a holder is very important in the law of banking. S. 37 (a) the holder of a bill of exchange can sue on it in his or her own name. Under s. 33(4) when a bill has been endorsed in blank, any holder may convert the blank endorsement into a special endorsement by writing above the endorser’s signature a direction to pay the cheque to or to the order of himself or herself some other person.
S. 76(2) where a cheque is uncrossed, the holder may cross it generally or specially.
S. 76(3) where a cheque is crossed generally, the holder may cross it specially.
S. 76(4) where a cheque is crossed generally or specially, the holder may add the words “not negotiable”.
S. 68(1) where a bill has been lost before it is overdue, the person who was the holder of it may apply to the drawer to give him or her another bill of the same tenor, giving security to the drawer, if required, to indemnify him or her against all persons in case the bill alleged to have been lost shall be found again and under (2) If the drawer on request as aforesaid refuses to give such duplicate bill, he or she may be compelled to do so.
With certain exceptions the holder of a cheque may negotiate it to another person. A holder sometimes has powers to negotiate a cheque even though he or she has no title or defective title. As Lord Denning said in Arab Bank Ltd v. Ross (1952) 2 Q.B. 216, the Arab Bank Ltd claimed that they were holders in due course. They failed to make good that claim because the endorsement was not regular on the face of it. But nevertheless it was open to them to claim as holder.
The difference between the rights of a holder in due course and those of a holder is that a holder in due course may get a better title than the persons from whom he or she took, whereas the holder gets no better title.
A holder of a cheque can present it for payment at the drawee bank or present through his or her bank for collection if the cheque is crossed. Under s. 37(a) the holder may sue on the cheque in his or her own name. If the holder presents a cheque and it is dishonored he or she must give notice of dishonour in order to maintain liability of the drawer and endorsers.
- A Holder in due Course.
Section 28 (1) BEA defines a holder in due course as a holder who has taken a bill, complete and regular on the face of it, under the following conditions namely; that he or she became the holder of it before it was overdue, and without notice that it had been previously dishonored, if that was the fact; that he or she took the bill in good faith and for value, and that at the time the bill was negotiated to him or her he or she had no notice of any defect in the title of the person who negotiated it.
The first requirement for one to be a holder in due course is that he must be a holder. S. 1 defines a holder to mean a payee or endorsee of a bill or note who is in possession of it or the bearer thereof. Although a payee is a holder he or she cannot be a holder in due course. In Re Jones Ltd v. Waring and Gillow (1926) A.C. 670 it was contended on behalf of the respondents that they were ‘holders in due course’ of the cheque for pounds 5000, within the meaning of the Act, and entitled on that ground to retain the proceeds of the cheque. The Court said that the expression ‘holder in due course’ does not include the original payee of a cheque.
It is true that under the definition clause s.1 of the Act the word ‘holder’ includes the payee of the bill unless the context otherwise requires, but it appears form s. 28(1) that a ‘holder in due course’ is a person to whom a bill has been ‘negotiated’ and from s. 30 a bill is negotiated by being transferred from one person to another and if payable to order by endorsement and delivery. In view of these definitions it is difficult to see how the original payee of a cheque can be a holder in due course within the meaning of the Act.
Also s. 23 BEA provides that a forged or unauthorized signature is wholly inoperative, and no right to retain the bill or give discharge therefore or to enforce payment thereof to a party thereto can be acquired through or under that signature. It follows from this that if a prior essential signature was forged or unauthorized no one can thereafter become a holder.
The second requirement for a holder in due course is that he or she must take the bill complete and regular on the face of it. This means that if any essential element in form is lacking the transferee cannot be a holder in due course. Incomplete means that there is some material details missing e.g. name of the payee, amount payable and necessary endorsements. It appears that a cheque without a date is not invalid under s. 2 (4) (a) but it is not complete and regular for purposes of s. 28 because regularity is a different thing form validity. A cheque is regular on the face of it whenever it is such as not to give rise to any doubt that it is the endorsement of the payee.
The word ‘face’ as used in s.28 (1) means looking at the cheque, front and back without the aid of outside evidence it must be complete and regular. As to when an endorsement will give rise to doubt, Lord Denning in the case of Arab Bank Ltd V. Ross (1952) 2 Q.B . 216, says that is a practical question which is as a rule, better answered by a banker than a lawyer. Bankers have to consider regularity of endorsements every week, and everyday of the week and every hour of every day.
The third requirement is that to qualify as a holder in due course the transferee must have no previous notice of dishonour of a cheque. This can be illustrated by the facts of N.S. Rawal v. Rathan Singh & Anor (1956) 26 KLR. 98, In this case the appellant claimed shs. 350 from the respondent on a cheque drawn by the respondent to one Mohan Singh who gave it to one Hari Chand. Hari Chand presented the cheque to the Bank and it was dishonored and returned marked ‘Refer to drawer’ Hari Chand gave the cheque so marked back to Mohan Sign who referred it to the drawer, the respondent, Rattan Singh. The respondent said that he had no funds to meet the cheque. Some weeks later Mohan Singh (who had, at the time, notice of its dishonor) endorsed the cheque to the appellant allegedly for value. The appellants noticed at the time they took the cheque, that it had ‘Refer to drawer’ written upon it and that it was a dishonored cheque. One of the issues was whether or not the appellants were holders in due course. This was not decided as counsel for both sides agreed that the appellants were not holders in due course. The second issue was whether the appellants were holders. The court held that they were holders.
The Fourth requirement to qualify a holder in due course is that one must become the holder before the cheque was overdue. Under s. 35(3) BEA, a cheque is payable on demand and will be deemed overdue when it appears on the face of it to have been in circulation for unreasonable length of time. And what is unreasonable length of it is a question of fact. In Uganda and according to the Bank of Uganda clearing rules, a cheque is valid for a period of 6 months from the date of issue.
The fifth requirement to qualify a holder in due course is that the transferee must have taken the cheque in good faith and for value. Under s. 89 of the Bills of Exchange Act, a thing is deemed to be done in good faith where it is in fact done honestly whether it is done negligently or not.
Value is defined under s. 1 to mean valuable consideration. Under s. 26(1) (a) valuable consideration sufficient for a cheque may be constituted by any consideration sufficient to support a simple contract. According to s. 26(2) where value has at any time been given for a bill, the holder is deemed to be a holder for value as regards the acceptor and all parties to the bill who became parties prior to that time. It is also provided under s. 26(3) that where the holder of a bill has a lien on it, arising either from contract or by implication of law, he or she is deemed to be a holder for value to the extent of the sum for which he or she has a lien. Moreover under s. 29(1) every party whose signature appears on a bill is prima facie deemed to have become a party to it for value.
The Supreme court of Nigeria in the case of Metalimpex v. A.G. Leventis and Co. (Nigeria) Ltd 1976(1) ALR Comm. 20, stated that a bills of exchange and promissory notes are presumed to be supported by valuable consideration and a party who alleges want of consideration therefore has the burden of proving it.
Section 26(1) (b) provides that valuable consideration for a bill may be constituted by an antecedent debt or liability. And under s. 26(3) where the holder of a bill has a lien on it, arising either from contract or by implication of law, he or she is deemed to be a holder for value to the extent of the sum for which he or she has a lien. This means that a person holding by virtue of a lien may qualify as a holder in due course, even though the amount of the instrument is greater than the sum for which he has alien.
The sixth and final requirement to qualify as a holder in due course is a holder whom at the time when the bill was negotiated to him or her, he or she had no notice of defect in title of the person who negotiated it. The phrase defective title is not defined in the Act but section 29(2) provides that in particular the title of a person who negotiates a bill is defective within the meaning of the Act, when he or she obtained the bill or acceptance thereof by fraud, duress or force and fear or other unlawful means or for an illegal consideration or when he or she negotiates in breach of faith or under such circumstances as amount to fraud.
- Deriving Title through a Holder in Due Course.
The most favored position of a holder in due course is contained in s.28 (3) BEA. A holder (whether for value or not) who derives his or her title to a bill through a holder in due course, and who is not himself or herself a party to any fraud or illegality affecting it, has all the rights of that holder in due course as regards the acceptor and all parties to the bill prior to that holder.
Holden in the law and practice of banking comment on this provision is that the rule applies where a cheque affected by some fraud or illegality, is negotiated to a person who has no knowledge of such irregularity and who becomes a holder in due course. Under those circumstances, the rule is that, although this transferee has knowledge of the irregularity and even though he or she has not given value for the cheque, he or she has all rights of the original holder in due course as regards all parties prior to that holder.
By way of example A obtains B’s cheque by fraud. A endorses it to C who takes the cheque as a holder in due course. C endorses it to D who knows of the fraud. D can recover from B.
Also if B and D conspire to obtain A’s cheque by fraud, the cheque is drawn in favour of B. B endorses to C who takes as a holder in due course. C then endorses to D. D cannot recover from A even if he or she gives value, since he or she was a party to the fraud against A.
- Presumption as to Holding in Due
Course.
It is stated in section 29(1) that every party whose
signature appears on a bill is prima facie deemed to have become a party to it
for value. In Metalimpex v. A.G.
levintis &
Section 29(2) provides that every holder of a bill is prima facie deemed to be a holder in due course. But if in an action on a bill it is admitted or proved that the acceptance, issue or subsequent negotiation of the bill is affected with fraud, duress, or force and fear or illegality, the burden of proof shifts. Unless and until the holder proves that, subsequent to the alleged fraud or illegality, value has in good faith been given for the bill. In Hassanali Issa & Co. v. Jevaj Produce Shop 1967 (2) ALR Comm. 64, the court observed that ‘under s. 29(2) a holder of a bill is prima facie deemed to be a holder in due course, but that, of course, is a presumption of fact which may be rebutted. It may, for example, be shown that no consideration was given, in which event the plaintiff would not be able to succeed on the cheque.
- A Summary of provisions protecting a
holder in due course.
S. 37(b) holds the bill free from any defect
S.37(c) (i) good and complete title to the bill where holder has a defective title
S.20 (2) Unauthorized delivery will not affect a holder in due course
S. 28(3) holder in due course can pass good title with all rights to a holder
S.11(b) a holder in due course is protected from a wrong date on a bill
S.19(2) an inchoate instrument converted into a bill negotiated to a holder in due course is valid
S.35(5) a holder in due course is not affected with a dishonored overdue bill
S.47(a) a holder in due course’s rights are not prejudiced by omission of notice of dishonour
S.53(b) the acceptor is precluded from denying a holder in due course.
S.54(1) (b) drawer is precluded from denying a holder in due course
S.54(2)(b) endorser is precluded from denying a holder in due course
S. 55 a person who signs a bill incurs liabilities of an endorser to a holder in due course
S.63 a holder in due course is not affected by alteration of a bill etc
- Liabilities of Parties to a cheque.
(i)
Drawer
Under s. 54(1)(a) the drawer of a cheque by drawing it engages that on due presentment it shall be paid according to its character and that if it is dishonored he or she will compensate the holder or any endorser who is compelled to pay it so long as the requisite proceedings on dishonour are duly taken. Rules relating to notice of dishonour are contained in s.48 and s.49 of the BEA. Consequently the drawer is under no liability until the cheque has been presented for payment and dishonored. A cheque is to be treated as cash and it is to be honored unless there is some good reason to the contrary. The rule has always been that as between the drawer and holder of a cheque, the drawer is not discharged by any delay in presentation unless some loss or injury is occasioned to him or her by delay. Under s. 15(a) the drawer of a bill may insert therein an express stipulation negativating or limiting his or her own liability to the holder. The words usually used are ‘without recourse to me’ or ‘sans recours.’
(ii)
Endorser’s
liability
Under s. 54(2)(a) the endorser of a bill by endorsing it engages that on due presentment it shall be accepted and paid according to its tenor, and that if it is dishonored he or she will compensate the holder or a subsequent endorser who is compelled to pay it, provided that the requisite proceedings on dishonour are duly taken and under subsection 2 (c) is precluded from denying to his or her immediate or a subsequent endorsee that the bill was at the time of his or her endorsement a valid and subsisting bill and that he or she had then a good title to it. But under s.30(5) where any person is under obligation to endorse a bill in a representative capacity, he or she may endorse the bill in such terms as to negative personal liability and under s.15(a) an endorser may add an express stipulation negating or limiting his or her own liability to the holder.
(iii)
Transferor
by Delivery
Under S.57 (1) where the holder of a bill payable to bearer negotiates it by delivery without endorsing it he is called a ‘transferor by delivery’ and according to subsection 2 such transferor by delivery is not liable on the cheque. However according to subsection 3 a transferor by delivery who negotiates a bill thereby warrants to his or her immediate transferee, being a holder for value, (a) that the bill is what it purports to be, (b) that he or she has a right to transfer it and (c) that at the time of transfer he or she is not aware of any fact which renders it valueless.
(iv)
Accommodation
Cheque
Under s.27(1) an accommodation party to a bill is a person who has signed a bill as drawer, acceptor or endorser, without receiving value for it, and for the purpose of lending his or her name to some other person. That means that he or she draws or endorses the cheque without consideration. An accommodation party is liable on the cheque to a holder for value and under subsection 2 he or she is liable on the bill to a holder for value; and it is immaterial whether, when the holder took the bill, he or she knew that party to be an accommodation party or not. Under s. 58(4) where an accommodation bill is paid in due course by the party accommodated, the bill is discharged.
- Defenses
to a claim on a Cheque.
The main defenses to claim on a cheque are largely to a defense on a suit in contract. Thus S. 20(1) talks of every contract on a bill which means that the relationship of the parties is contractual
i)
failure or
absence of consideration
Section 26 BEA codifies the common law rules relating to valuable consideration. In a contract the plaintiff must prove that he or she gave consideration. However contrary to the general rule that in a contract the plaintiff must prove consideration, a party to a bill of exchange does not have to prove consideration. This is because it is provided under s. 29(1) that every party whose signature appears on a bill is prima facie deemed to have become a party thereto for value. This is a rebuttable presumption of fact and a party resisting payment of a bill has to rebut it by proving either that there was absence or failure of consideration or that the consideration was illegal. In Sterling Products (Nigeria) Ltd v. Dinkpa 1975(2) ALR Comm. 75, the plaintiff brought an action against the defendant to recover the amount of a cheque returned un paid drawn by the defendant for the price. The court said that as regards the claim on a cheque, this had to fail because the evidence showed that there was total failure of consideration. The goods for which the cheque was issued were returned to the plaintiff in the same condition as they were delivered to the defendant. There was therefore an entire failure of consideration and this is a valid defense to an action on a bill of exchange.
ii)
Failure to
present a Cheque in proper time.
S.44(3)(b) BEA provides that where the bill is
payable on demand, presentment must be made within a reasonable time after its
issue in order to render the drawer liable, and within a reasonable time after
its endorsement, in order to render the endorser liable. In determining what is
a reasonable time, regard shall be had to the nature of the bill, the usage of
trade with regard to similar bills and the facts of the particular case.
However under s. 73(a) where a cheque is not presented for payment within a
reasonable time of its issue the drawer will only be discharged to the extent
of any actual damage which he or she suffers as a result of such failure. The
rules as to presentment are of particular importance to the collecting bank
because a banker to whom a cheque is delivered for collection is under a duty
to his customer to use reasonable diligence in presenting it for payment.
Sections 44, 45 and 73 which govern presentment were exhaustively discussed by
the Supreme Court of Uganda in Esso
Petroleum (
iii)
Failure to
give notice of dishonor
The BEA contains detailed rules relating to notice of dishonor. Under s.47, when a bill has been dishonored by non acceptance or by nonpayment, notice of dishonor must be given to the drawer and each endorser, and any drawer or endorser to whom the notice is not given is discharged. S.48 (i) the notice may be given as soon as the bill is dishonored, and must be given within a reasonable time thereafter. In Nanji Khodabhai v. Sohan Singh (1957 EA 291, acheque was dishonored on the 25th April 1955 and notice of dishonour was not given until 29th April, 1995. The court held that the defendant was discharged because there were no special circumstances to justify any delay and notice should have been given on 26th April, 1955.
iv)
Material
Alteration of a Cheque.
It is provided under S.63(1) that where a bill or acceptance is materially altered without the assent of all parties liable on the bill, the bill is avoided, except as against a party who has himself or herself made, authorized or assented to the alteration, and subsequent endorsers; except that where a bill has been materially altered, but the alteration is not apparent, and the bill is in the hands of a holder in due course, the holder may avail himself or herself of the bill as if it had not been altered and may enforce payment of it according to its original tenor.
S.63(2) provides that in particular, the following
alterations are material, namely, any alteration of the date, the sum payable,
the time of payment, the place of payment and, where a bill has been accepted
generally, the addition of a place of payment without the acceptor’s consent.
But in Overman & Co. v. Rahemtulla
(1930) 12 K.L.R.131 the supreme court of
Thus it was held in Koch v. Dicks (1933) 1 K.B. 307, that an alteration in the place of
drawing of a bill which changed it from an inland bill to a foreign bill was
material alteration. And yet alteration of place of drawing is not enumerated
in the equivalent of s.63 (2).
v)
Forged Signatures
According to S.23 BEA it is provided that a person cannot be liable where his signature has been forged or placed on the cheque without his authority. A person in possession of a cheque on which the drawers or endorser’s signature has been forged or placed thereon without authority has no title and therefore no right to retain the cheque or discharge the cheque. In Kepitingalla Rubber Estates Ltd v. National Bank of India Ltd (1909) 2 K.B. 1010, the court held that the bank could not charge the company with the amounts paid out on forged cheques and the plaintiffs were under no duty to organize their business in such away that forgeries of cheques could not take place.
vi)
Other
Defenses
Non fulfillment of a condition is a defense. The case of Baxendale v. Bennett (1878) 3 QBD 52 is authority for the proposition that if a person signs a blank cheque in space provided for the drawer’s signature but never delivers it for the purpose of completion, he will not be liable on it even to a holder in due course.
Section 35(2) provides that where an overdue bill is negotiated, it can only be negotiated subject to any defect of title affecting it at its maturity, and then forward no person who takes it can acquire or give a better title than that which the person from whom he or she took it had.
Similarly under Section 35(5) where a bill which is not overdue has been dishonored, any person who takes it with notice of the dishonour takes it subject to any defect of title attaching thereto at the time of dishonour, but nothing in this subsection affects the rights of a holder in due course.
Other defenses such as lack of capacity, mental incapacity, fraud, duress and undue influence are defenses coextensive with the defenses in the law of contract.
I). Fictitious or Non Existing person
Section 6(3) of the Act provides that where the payee is a fictitious or nonexisting person, the bill may be treated as payable to bearer. The HOL considered this provision in the case of Bank of England v. Vagliano Brothers (1891) AC 107 and held by a majority of five to two that the effect of the section is that a bill may be treated as payable to the bearer where the person named as payee and to whose order the bill is made payable on the face of it is a real person but has not and was never intended by the drawer to have any right upon it or arising out of it, and this is so though the bill (so called) is not in reality a bill but is in fact a document in the form of a bill manufactured by a person who forges the signature of the named drawer, obtained by fraud the signature of the accepter, forges the signature of the named payee, and presents the document for payment, both the named drawer and named payee being entirely ignorant of the circumstances.
Lord Watson was of the view that ‘the language of the sub-section, taken in its ordinary significance, imports that the bill may be treated as payable in all cases where the person designated as payee on the account of it is either non existing or being in existence, has not and never was intended to have any right to its contents. Bearer is defined in s.1 of the Act to mean the person in possession of a bill or note which is payable to bearer.
In Boma Manufacturing Ltd v. Canadian Imperial Bank of Commerce (1997) 23 CLB 740, the Supreme Court of Canada stated the law in similar terms that the concept of a nonexistent person within the meaning of the equivalent s.6 (3) was that if the payee on a cheque was a matter of pure invention and not a real person then such payee was non existent.
The rationale of the rule was stated by the court to be that the fictitious payee rule set out in the equivalent of s. 6(3) of the BEA by which a cheque made out to a fictious or non existing person was to be treated as a payable to bearer and could be negotiated by simple delivery, was an exception to the normal rule of nemo dat quad non habet (no one gives who possesses not) and threw the loss to the drawer. The policy behind the fictious payee rule is that if a drawer drew a cheque payable to order, not intending that the payee receive payment, the drawer lost, by his or her conduct, the right of protection afforded to a bill payable to order and there was no reason why the defence of fictitious payee was not available to the collecting banker.
In Clutton v.
Attenborough & Sons (1897) A.C. 90 an employer was fraudulently induced
by the clerk to draw cheque in favour of nonexistent payees whose endorsement
was forged by the clerk in favour of a bonafide transferee for value. The third
party, the transferee, who acted in good faith obtained payment of the cheques.
Clutton, after discovering the fraud sued the third party for money they had
received. The HOL held that the equivalent of 6.6(3) applied and the money
could not be recovered.
J)
Impersonal
Payees
Impersonal payee is a payee of a bill or note designated as cash, bills payable or order. Impersonal payee may be designated otherwise than in the name of a person, association, partnership, or corporation. Effect of drawing bill or note in the name of an impersonal payee is that the instrument will be payable to bearer. Instruments payable to any impersonal payee are negotiable and payable to bearer, and need not have other words of negotiability. Under s. 6(3) a cheque is treated as being payable to the bearer only when the payee is a fictitious or non existing person. The word person is defined in s. 3 as including a body of persons whether incorporated or not. Obviously this definition does not cover impersonal payees such as instruments drawn in a cheque form to order or bearer in favour of ‘cash’.
This issue came up for decision in Khan Stores v. Delawer [1959] E.A. 714, the document in question was a cheque drawn on the National Bank of India signed by the applicant, directing the bank to pay ‘cash or bearer’ the sum of Shs. 2,000/-. The word ‘cash’ was in manuscript, the word ‘bearer’ was printed. Law J. as he was, held that a person who uses cheque forms made out to blank ‘or bearer’ and who fills in the blank either the word ‘cash’ or with the name of specified person without deleting the word ‘bearer’ must be presumed to intend that the words ‘or bearer’ should remain. Such a document is a bill of exchange, being payable to bearer and complying with other requirements of the Act and the Plaintiff / respondent, as the person in possession of the Cheque, was the holder thereof within the meaning of the terms bearer and holder.
TOPIC VIII
CROSSED CHEQUES AND ENDORSEMENTS
- Crossed
Cheques
Crossing of cheques is provided for in s.75 of the Bills of Exchange Act. It provides for both general and special crossings of cheques.
A general crossing is provided for under s. 75(1) BEA
as a cheque which bears across its face an addition of (a) the words “and
company” or any abbreviation of it (i.e. &
A crossing is an instruction by the customer or the drawer to his bank to pay the proceeds of the cheque into a bank account (chosen by the payee) and not to cash it over the counter.
A special crossing is provided under s.75 (2) BEA as where a cheque bears across its face an addition of the name of a banker, either with or without the words “not negotiable”.
Section 80 on the other hand provides that where a person takes a crossed cheque which bears on it the words “not negotiable”, he or she shall not have, and shall not be capable of giving, a better title to the cheque than that which the person from whom he or she took it had. Under s.77 BEA a crossing is a material part of the cheque. Therefore it is not lawful for any person to obliterate, or add or alter the crossing except as provided by the Act.
A special crossing requires the paying bank to pay the money due on the cheque to the bank specified by the crossing rather than merely to a bank. Special crossing are rare. The crossing ‘not negotiable’ is used more widely than ‘and company’ which now days serves no useful purposes.
In addition to crossings authorized by s.75 there is another interpolating the words ‘Account payee’ which has received recognition by the courts. This is an instruction to the collecting bank to collect only for the payee’s account.
- The effect of
Crossing
A crossing is an instruction from the drawer to his or her banker that it is supposed to pay the instrument if certain conditions are fulfilled which conditions depend on the type of crossing. The general effect of any crossing is that if the banker wants protection under s.79 it must pay only to another banker.
The general crossing instructs the paying banker to pay the amount of the instrument only to a banker. A special crossing instructs a paying banker to pay a cheque to the banker whose name appears on its face and to nobody else. A cheque crossed generally may be collected by any banker whereas a cheque crossed specially should be collected only by any banker named in the crossing.
Section 78(1) provides for a situation where a cheque is crossed to two bankers. The drawee banker is supposed to refuse payment except where one bank is acting as an agent for collection. If a bank pays to a person with a defective title it will be liable to the true owner of the cheque for any loss he may sustain owing to the cheque crossed paid. The prohibition does not extend to cheques crossed generally. In Abimbola v. Bank of Ameraica and Anor. 1977(2) ALR Comm. 139, the court held that the bank had been negligent in collecting the cheque and crediting the proceeds to another account after it had been cleared by the partners own bank. Both ‘Account payee only’ and ‘not negotiable’ are directions warning the collecting banker to be on inquiry, and although failure to obey either one of them is not in itself enough to prove negligence, in this case where the sum of money involved was a large one and there were multiple directions so that the bank must be held jointly liable with the second defendant.
When the words
‘not negotiable’ are used the crossing takes the cheque out of the category of
negotiable instruments. The addition of the words ‘Account payee’ will increase
protection although they have no statutory effect. In Abimbola v. Bank of Ameraica and Anor. 1977(2) ALR Comm. 139, the
court was considering a cheque crossed ‘&
However such words do not make the cheque non transferable. If the cheque is transferred those words cease to have effect. Thus it was said in Philsam Investments (Private) Ltd v. Beverley Building Society 1977 (2) ALR Comm.338, that by established practices and customs, although not by statutory sanction a holder may also add the words ‘a/c payee’ or ‘a/c payee only’ between the parallel crossing lines. They may operate as some safeguard if the cheque should fall into wrong hands. They are, in effect, a direction to the collecting banker that the specified payee should receive the money. These words cease to have any operation if the payee specified in the cheque transfers it (e.g. by special endorsement) because thereupon the specified payee parts with his or her rights to receive the money.
- Advantages of
Crossing and Authority to Cross.
Professor Holden suggests that the crossing makes it more difficult for a fraudulent person to obtain payment than it would be if the cheque was not crossed at all. He or she cannot present the cheque at the counter of the drawee bank and obtain payment. He or she will accordingly have to bank it on his or her account or open an account under an assumed name with the risk that he or she may be traced
Section 76 provides that a cheque may be crossed generally or specially by the drawer. According to s.76 (2) where a cheque is not crossed the holder may cross it specially or generally. A holder may cross especially a cheque which is crossed generally. When a cheque is crossed specially or generally the holder may add the words ‘not negotiable’. And it is submitted that by practice and custom, the holder may add also the words ‘account payee’ or ‘account payee only’ Where a cheque is crossed specially, the banker to whom it is crossed may again cross it specially to another bank for collection. And where an uncrossed cheque or a cheque crossed generally is sent to a banker for collection, it may cross it specially to itself. According to section 77 the crossing is a material part of the Cheque and should not be tempered with except as authorized by the Act.
- Negotiability and Transferability
Cheques are bills of exchange. Therefore they are negotiable instruments. But a crossed cheque with the words ‘not negotiable’ ceases to be a negotiable instrument. There are other situations where a cheque is made non transferable by the drawer. In Thilsam Investment (Private) Ltd v. Beverley Building Society & Anor 1977(2) ALR Comm. 338, talking of a cheque with the words ‘A/c Payee’ the court observed that it would only have been fully non transferable if for example the words ‘or order’ had been crossed out and ‘non negotiable’ or ‘non transferable’ were written clearly across it.
Section 7(1) BEA provides that when a bill contains words prohibiting transfer or indicating an intention that it should not be transferable is valid as between the parties to it but it is not negotiable. In other words such a cheque will be both not negotiable and non transferable. And S.35 (1) stipulates that a bill which is negotiable in its origin continues to be negotiable until it has been either respectively endorsed or discharged by payment or otherwise. Such a bill is negotiable and transferable.
- Endorsement
The Bills of Exchange Act s.1 defines endorsement as ‘an endorsement completed by delivery. Holden in his law and practice of Banking defines endorsement as signature on a cheque, usually on the back, by the holder or his or her authorized agent, followed by delivery of the instrument, whereby the holder of a cheque payable to his or her order negotiates it to another person who takes it as a new holder.
An endorsement may be special or in blank. An endorsement in blank is provided under S.33 (1) as one which specifies no endorsee with the effect that it is treated as payable to a bearer. It follows that such a cheque can be negotiated by delivery.
A special endorsement is provided under s. 33(2) as one which specifies the person to whom or to whose order, the instrument is to be payable. A cheque which is endorsed ‘Pay to M’ is specially endorsed. ‘M’, who is the endorsee, may negotiate it by endorsement and delivery.
S. 33(4) when a bill has been endorsed in blank, any holder may convert the blank endorsement into a special endorsement by writing above the endorser’s signature a direction to pay the bill to or to the order of himself or herself or some other person.
According to s. 31(a) an endorsement in order to operate as a negotiation must be written on the bill itself and be signed by the endorser. The simple signature of the endorser on the bill, without additional words, is sufficient. Section 90(1) provides that where in the Act any instrument or writing is required to be signed by any person, it is sufficient if his or her signature is written thereon by some other person by or under his or her authority.
Section 24 provides that a signature by procuration (agency) operates as notice that the agent has but a limited authority to sign, and the principal is only bound by such signature if the agent in so signing was acting within the actual limits of his or her authority.
Section 25 provides that where a person signs a bill as drawer, endorser or acceptor, and adds words to his or her signature, indicating that he or she signs for or on behalf of a principal, or in a representative character, he or she is not personally liable thereon; but the mere addition to his or her signature of words describing him or her as an agent, or as filling a representative character, does not exempt him or her from personal liability. In determining whether a signature on a bill is that of the principal or that of the agent by whose hand it is written, the construction most favourable to the validity of the instrument shall be adopted. In the words of Lord Ellenborough in the case of Leadbither v. Farrow (1816) 5 M & S 345, it is not a universal rule that a man or woman who puts his or her name to a bill of exchange makes himself or herself personally liable, unless he or she states upon the face of the bill that he or she subscribes to it for another, or by proculation of another which are words of exclusion. Unless he or she says plainly ‘I am the mere scribe’ he or she becomes liable. Thus in Rolfe Lubell & Co. v. Keith and Anor (1979) 1 ALL E.R. 860 the plaintiffs agreed to supply goods to a company in exchange for bills of exchange. The bills were accepted and stamped and signed at the back ‘For and on behalf’ of the company. They were signed by a director and the secretary. The court held that the endorsement as worded was meaningless and of no value. There was patent ambiguity which allowed evidence to be accepted to give effect to the intentions of the parties. In effect the judge used s. 25(2) to fix personal liability under s.25 (1) of the BEA.
- Other Forms of
Endorsement.
Other forms of endorsement are composed of regular and irregular endorsements, conditional endorsements and restrictive endorsements. The case of Arab Bank v. Ross (1952) 2 QB 216 has made a distinction between regularity and validity of endorsement. As discussed by Lord Denning L.J. regularity is a different thing from validity. The Act makes a careful distinction between them. On one hand an endorsement which is quite invalid may be regular on the face of it. Thus the endorsement may be forged or unauthorized and, therefore, invalid under section 23 of the Act, but nevertheless there may be nothing about it to give rise to any suspicion. The bill is then regular on the face of it. Conversely, an endorsement which is quite irregular may be nevertheless valid. Thus by a misnomer, a payee may be described on the face of the bill by wrong name, but if it is quite plain that the drawer intended him or her as payee, then an endorsement on the back by the payee in his or her own true name is valid and sufficient to pass the property in the bill.
Once regularity is seen to differ both from validity and from liability, the question is when is an endorsement irregular? The answer is that it is irregular whenever it is such as to give doubt whether it is the endorsement of the named payee.
In case of conditional endorsement section 32 provides that where a bill purports to be endorsed conditionally, the condition may be disregarded by the payer, and payment to the endorsee is valid whether the condition has been fulfilled or not. The effect is that a conditional endorsement is valid and operative as between the endorser and endorsee.
Section 34
provides for restrictive endorsements. It is provided that an endorsement is
restrictive which prohibits the further negotiation of the bill or which
expresses that it is a mere authority to deal with the bill as thereby directed
and not a transfer of the ownership of the bill, as, for example, if a bill be
endorsed “Pay D only”, or “Pay D for the account of X”, or “pay D or order for
collection”. In a restrictive endorsement, the document transfers ownership of
the instrument to the endorsee but prevents further negotiations.
TOPIC IX
WRONGFUL DISHONOUR OF CHEQUES AND LIMITATION OF ACTIONS.
- General
Principles.
It was stated in Indechemist Ltd v. National Bank of Nigeria Ltd, 1976(1) ALR Comm. 143 that a banker is bound to pay cheques drawn on it by a customer in legal form provided there are in the bank at the time sufficient and available funds standing to the credit of the customer and available for the purpose or provided the cheques are within the limits of an agreed overdraft.
A bank that without justification dishonors its customer’s cheques is liable to the customer in damages for injury to his or her commercial credit. Generally when a contract has been breached and the plaintiff cannot prove actual damages, the general rule is that he or she is entitled to nominal damages. But where a cheque has been wrongfully dishonored the damages are supposed to depend on whether the person is a trader or non trader. Most of the authorities concerning a trader are to the effect that a drawer is entitled to recover substantial damages for the wrongful dishonor of his or her cheque, without pleading and proving actual damages. Therefore in case of a trader damage is presumed. In Rolin v. Steward 139 E.R. 245, three cheques were presented and dishonored. They were presented again the following day and they were honoured. The plaintiff was a trader. In an action for damages no evidence was given to show that he suffered any injury or damages. He was awarded 200 pound as substantial damages.
Though damages are presumed when a person is a trader, it is not so when a person is not a trader. In Evans v. London & Provincial Bank Ltd (1917) 3 L.D.A.B. 152, the plaintiff drew a cheque which owing to the mistake of the bank was dishonored. He was not in business and there was no suggestion of actual damages. Nominal damages of two pounds were awarded.
These decisions were followed by the High Court of Uganda in the case of Patel v. Grindlays Bank Ltd 1968(3) A.L.R. Comm. 249 that where the court said that a trader whose cheque is wrongfully dishonored need not plead and prove special damage in order to recover substantial damages for the banker’s breach of contract; the refusal of payment is injurious to his or her trade, credit and commercial reputation, and the damages should be reasonable compensation for the injury having regard to all the circumstances and commercial probabilities of the case; not excessive but temperate and neither punitive or exemplary.
The circumstances and commercial probabilities can be seen in the case of Soorasra v. Standard Bank of South Africa Ltd (1953) 7 ULR 41 where court said that some evidence had been given to indicate how far news that a trader’s cheque has been dishonored can travel. Moreover, the majority of traders of the plaintiff’s class do much business on credit, and the obvious result of an occurrence such as dishonor of his or her cheque the credit will tend to be withdrawn.
The law in
In
The word ‘trader’ was enlarged in the case of Balogun v. National Bank of Nigeria LTD 109 E.R.842, by the Supreme court of Nigeria. After reviewing earlier decisions, the court drew attention to the expression person in trade (and not trader). The court said that while it is true that a trader is in business, all persons in business are necessarily traders; for instance, the ordinary citizen who daily exhibits his or her various articles or stock in trade in the market for the purpose of selling for gain is engaged in business and is a trader but the citizen who runs a private school, although engaged in business, can hardly be referred to as a trader. Although ‘a person in trade’ is ‘a person engaged in business’ he or she is not necessarily a trader but a trader is necessarily engaged in business. Therefore the court preferred the expression ‘persons in trade for it refers to persons engaged in some occupation, usually skilled but not necessarily learned, as a way of livelihood’’. It was held that a legal practitioner was a person in business and therefore was entitled to substantial damages without proof of damages.
In the case of John Kawanga & Anor Vs. Stanbic Bank
(U) Ltd UCLR (2002-2004) 262, the
- Damages for
Libel.
The most commonly used words when dishonoring a cheque is ‘refer to drawer’ or ‘R/D’. This phrase came up for interpretation in Govind Ukeda Patel v. Dhanji Nanji (1906) E.A. 410, in which Court of Appeal for Eastern Africa held that the words ‘refer to drawer’ may be used in variety of circumstances; they may and frequently do mean that the drawer has no funds available and has made no arrangements to meet the cheque, but that is not their only meaning and therefore not their necessary meaning.
The same words came up for consideration by the High Court of Kenya in Dogra v. Barclays Bank (1955) E.A. 541, the court in holding that those words were not defamatory said a banker by dishonoring a cheque and marking on it ‘refer to drawer’ is indicating that the bank will not honor the cheque on the instant presentment and that the person who presented it and other person concerned should get in contact with the person who made the cheque for any explanation required or in order to decide his or her further course of action. The words are not published in any sort of connection or relation to the plaintiff’s profession, trade or calling if they are to be held to be libelous, it must be shown that in the circumstances of the publication they subjected the plaintiff to hatred, ridicule or contempt. That these words do not subject the plaintiff necessarily to hatred ridicule or contempt.
It seems however that in order to determine whether the words used are libelous one should use the standard set by Lord Atkin in Sim v. Stretch (1936) 2 ALL E,.R 1237 which is would the words tend to lower the plaintiff in the estimation of right thinking members of the society generally? The use of such words as ‘not sufficient’ refer to drawer ‘not arranged for’ and ‘no account’ would definitely have such effect on the plaintiff. Thus in Davidson V. Barclays Bank (1940) 1 ALL E.R. 316 the plaintiff Cheque was dishonored with the words ‘not sufficient’ and court held that this amounted to a libel.
The case of Baker v. Australia and New Zealand Bank (1958) NZLR 907, seems to have influenced the English Court of Appeal’s decision in Jayson v. Midland Bank (1968) 1 Loyds Rep. 409 in which the court decided that the words refer to drawer are libelous.
Baker’s case also sets out the criteria for assessing damages. What must be taken into account are (a) the position and standing of the plaintiff; (b) the nature of the libel; (c) the mode and extent of publication; (d) the absence of retraction or apology; and (d) the whole conduct of the defendant from the time when the libel was published down to the very moment of verdict.
Therefore when deciding whether or not to pay cheques drawn on it by customer, a banker must have regard to a number of issues or questions. These include whether or not (a) there are sufficient funds in the customer’s account; (b) the cheque is properly presented; (c) the cheque is in proper from; (d) the cheque requires endorsement; (e) the customer has countermanded payment; (f) the relationship of banker and customer still exist; (g) a third party has laid a legal claim to the money; (h) there is knowledge of breach of trust and (i) the person presenting the cheque has title.
- Limitation
of Actions
The Limitation Act Cap 80. S. 3(2) provides that an action for an account shall not be brought in respect of any matter which arose more than six years before the commencement of the action. Therefore an action cannot be brought after the expiration of six years from the date on which it accrued.
But at least in the case of a current account time does not begin to run until the customer has made a demand and such demand has not been complied with. It means that the banker can face legal claims on balances that have laid dormant for more than six years. However the court may in very rare circumstances assume that the balances have been paid if the account has been dormant for a very long time. Thus in Douglas v. Lloyds Bank Ltd (1929) 24 Comm. Cas 263 the plaintiff’s claim for 3500 pound on an account which had remained dormant for over twenty years was dismissed on the assumption that it had been paid.
In case of overdraft and loans the law, was stated in the case of National Bank of Nigeria v. Peters 1971 (1) ALR Comm. 262, that a banker cannot recover a dormant overdraft more than six years after the last advance if the statute of limitation is pleaded, nor can it recover interest which, even within six years, has in accordance with the ordinary practice of bankers been added to the principal from time to time and become part of the principal sum due.
A bank loan which is repayable on a certain date, the time begins to run as from that date because that is the time when the cause of action will accrue. In the absence of an agreement, if the loan is to be paid by installments a cause of action will accrue to the bank upon each of the installment dates. However in most cases the agreement will provide that if the borrower defaults on any agreement then all the installments become due and payable. In such a case the cause of action accrues upon any default in payment. If the loan is granted without agreement about the date of repayment, then the loan is repayable on demand. The cause of action accrues from date of granting the loan
In order to bring an action after expiry of six years the plaintiff must bring himself within the exceptions provided for in the Limitation Act. Thus section 22(4) provides that where any right of action has accrued to recover any debt or other liquidated pecuniary claim, and the person liable or accountable therefore acknowledges the claim or makes any payment in respect of the claim, the right shall be deemed to have accrued on and not before the date of the acknowledgment or the last payment.
S.23 (1) every such acknowledgment as is mentioned in section 22 shall be in writing and signed by the person making the acknowledgment.
S. 21 provides that if a person was under a disability, the action may be brought at any time before the expiration of six years from the date when the person ceased to be under a disability or died, whichever event first occurred.
TOPIC X
Duties, Liabilities and Protection of Bankers.
The duties,
liabilities and protection of the banker depend on whether it is a paying or
collecting bank. In most cases the same bank will perform both roles. However
each role must be looked at separately in order to determine the banker’s
duties or liabilities and the statutory protection which is accorded to the
banker.
- The paying Banker: The Banker’s
Obligation
A paying Banker is bound to pay cheques drawn on it by its customer in legal form provided there is in the bank at the time sufficient funds standing to the credit of the customer and available for the purpose or provided the cheques are within the limits of an agreed overdraft. Cf. Indechemist Ltd v. National Bank of Nigeria Ltd (1976) 1 ALR Comm. 143
When a customer draws a cheque, there must be sufficient funds available to cover the amount of the cheque because the banker is only indebted to the customer for the amount standing to his or her credit at the time of demand.
A bank acts as an agent of its customer when it honours cheques drawn on his or her account and therefore has a duty to exercise care and skill when dealing with his or her affairs. Cf. Babalola v. Union Bank of Nigeria Ltd 1980 (1) ALR Comm. 210.
The exact extent of this duty has not been clearly decided by the courts. The banker is obliged to pay its customers cheques if there are sufficient and available funds on the customer’s account. At the same time it is to exercise care and skill which means that the bank may in certain circumstances, justifiably refuse to honour its customer’s mandate. According to Lipkin Gorman v. Karpnle & Anor (1989) F.L.R. 137 a reasonable banker would be justified in refusing to honour his or her customer’s mandate if there was a serious or real possibility that its customer is being defrauded.
Otherwise a reasonable banker would be in breach of duty if it continued to pay without inquiry. In Babalola v. Union Bank of Nigeria Ltd 1980(1) ALR Comm. 201 the court held that the defendant bank was justified in refusing to honour the cheques, pending further investigations, where there was an obvious disparity between the signature on the cheques and the specimen signature.
Another obligation of a paying banker is that it must recognize the person from whom or for whose account he or she received money in an account as the proper person to draw on it. Therefore it cannot set up a claim of a third party against that of its customer. Whether the customer holds the account in his or her own right or as a trustee, the banker is bound to honour the customer’s order with respect to the money belonging to the customer in its hand.
- Statutory Protection of a Paying
Banker.
The Bills of Exchange Act provides in s. 58 that a bill is discharged by payment in the due course by or on behalf of the drawee. And it says that payment in due course mean payment made at or after maturity of the bill to the holder thereof in good faith and without notice that his or her title to the bill is defective. Payment to any other person other than the holder is not payment in due course. Moreover payment must be made without notice that the payee’s title is defective. This means for example, apart from s. 23, if payment is made to a person upon a forged endorsement, that will not amount to payment in due course because such a person does not have only a defective title but in fact has not title at all.
A strict application of s. 58 would make the banker to lose money. Thus s. 59 came in to protect the paying bank. The effect of this section is that when a paying bank pays a cheque ‘in good faith and in the ordinary course of business’ the banker is deemed to have paid the bill in due course, although such endorsement has been forged or made without authority.
The requirement of good faith is a simple one because s. 89 provides that a thing is deemed to be done in good faith where it is in fact done honestly whether it is done negligently or not. Where the payment was made in the ordinary course of business will be decided on the basis of the custom of bankers. But it appears that payment of a crossed cheque over the counter to a person other than the drawer cannot be regarded as payment in the ordinary course of business. It should however be noted that s. 59 does not protect the banker who pays on an irregular endorsement.
Under s. 78(2) of the Bills of Exchange Act when a drawee bank pays a crossed cheque contrary to the crossing it is liable to the true owner of the cheque for any loss he or she may sustain owing to the cheque having been so paid, however under the proviso to the section the bank will not be liable if it pays the cheque in good faith and without negligence. The defense applies if the cheque presented for payment appears to be uncrossed cheque but later it is discovered that it has been crossed at some point in time. The bank under this proviso will not be liable to the true owner and payment cannot be questioned by the drawer.
Section 79 is similar to s. 59 except that the former only applies to crossed cheques while the latter appears to cover all cheques whether crossed or not. Section 79 provides that where the banker on whom a crossed cheque is drawn, in good faith and without negligence, pays it, if crossed specially, to the banker to whom it is crossed, or its agent for collection being a banker, the banker paying the cheque, is to be entitled to the same rights and be placed in the same position as if payment of the cheque had been made to the true owner of the cheque. It provides further that if a crossed cheque which is properly paid in accordance with the crossing has come into the hands of the payee, the drawer shall be entitled to the same rights and be placed in the same position as if payment of the cheque had been made to the true owner. The practical effect of this provision is that if a crossed cheque is delivered to the payee and it is lost or stolen, the loss must fall on the payee. Under s. 79 once the crossed cheque is paid in accordance with its crossing in good faith and without negligence, the paying banker cannot be liable to the true owner if the payment was made to another person.
- The Collecting Banker
A collecting banker, as an agent for collection, must exercise reasonable care and diligence in presenting cheques for payment, in obtaining payment and crediting its customer’s account, and if the customer suffers any loss through its negligence in these matters such as by its failure to credit its customers account promptly with the amount of the cheques cleared by the paying banker, it will be liable to the customer to the extent of the loss. And since the relevant facts are peculiarly within the knowledge of the banker he or she has the burden of proving that it was not negligent.
According to the supreme court of Uganda in the case of Esso Petroleum (Uganda) Ltd v. UCB Civil Appeal No. 14 of 1992 the banker fulfills its duty when the cheque is drawn on a bank in the same place, it either presents or forwards it on the following day. The forwarding may be to another branch or to an agent of the bank, who has the same time after receipt in which to present. Presentation through a recognized clearing house is equivalent to presentment to the bank on which the cheque is drawn. Presentation by post to the bank on which the latter receives an agent for presentation to itself and in that capacity can hold it till the day after receipt.
If the banker fails to present the cheque within a reasonable time after it reaches it, it is liable to its customer for loss arising from the delay and the drawer or the endorser, if any, is discharged if presentation is not made within reasonable time of its issue or endorsement. The drawer is discharged to the extent of any damage he or she may have suffered by failure to pay the bank on which the cheque was drawn.
The collecting banker is under a duty to give notice of dishonor with regard to cheques which have been dishonoured on presentation by it. If the cheques is dishonored the customer becomes liable to reimburse the bank the amount advanced by it to him or her when it placed the amount to his or her credit and the cheque was subsequently dishonored.
If a cheque is
dishonored, when actually the customer has already drawn on it, the bank by
virtue of s. 26 (3), can become a holder for value of the cheque. The section
also provides that a holder of a bill has a lien on it and is deemed to be a
holder for value to the extent of its lien. This is a possessory lien which
gives the bank the right to retain the cheque until monetary claims against the
bank are satisfied.
- Statutory
Protection of A Collecting Banker
The protection of a collecting banker is contained in s. 81 of the Bills of Exchange Act. It provides that where a banker in good faith and without negligence receives payment for a customer of a cheque crossed generally or specially to itself and the customer has no title or defective title thereto the banker shall not incur any liability to the true owner of the cheque by reason only having received such payment. A banker receives payment for a customer notwithstanding that it credits its customer’s account with the amount of the cheque before receiving payment.
When a banker opens or operate an account or collects a cheque for a customer, the test of negligence on its part is whether the circumstances of the transaction or actual or proposed conduct of the account are so out of the ordinary course that they ought to have aroused reasonable suspicion in its mind and caused it to make inquiries or to take references to satisfy itself as to the customers identity and circumstances.
It is clear from a number of cases that the onus is on the banker to prove that there has been no negligence on its part. In Lloyds Bank Ltd v. Savoy & Co. (1933) A.C. 201 the court said, that the only question is whether the bank as the appellant established that they handled the cheques without negligence. Unless the appellants can establish that they handled the cheques without negligence they like other bankers in similar position, are responsible in damages for conversion if their customers had no title or a defective title.
In House Property Co. of London Ltd v. London County Westminster Bank Ltd (1920) A.C. 683, a cheque drawn in favour of ‘F.S. Hanson and others or bearer’ crossed with the words ‘A/C Payee’ was collected by the bank and credited to a customer, the bearer of the cheque. It was held that the bearer was not the payee and that the bank was negligent in not making inquiries as to the circumstances in which the customer was the bearer of the cheque. In Lardbrok & Co. v. Todd (1914) 111 L.T 43 it was again held that a banker is guilty of negligence towards the drawer of a cheque crossed ‘Account payee only’ if it opens an account for the person presenting the cheque and collects the money for him or her without making inquiries.
The test to be applied was laid down in the case of TAXATION COMMISSIONER ENGLISH, SCOTTISH AND AUSTRALIAN BANK LTD (1920) AC 683 where it was held that the bank has a duty not to disregard the interest of the true owner. Therefore it has a duty to make inquiries if there is anything to arouse suspicion that the cheque is being wrongfully dealt with. Establishing the customer’s identity and the circumstances under which the cheque was obtained can assist in doing so."
In the case of Bank of Baroda (U) Ltd vs. Wilson Kamugunda Civil Appeal No. 10/2004 (S.C) two brothers who died before receiving compensation for their land and some strange persons impersonated the two dead brothers, got the cheque and with the help of a bank customer were allowed by the Bank to open an account in the names of the two deceased in the Bank and the impersonators withdrew the money and disappeared. The issue was whether the bank was negligent in opening a bank account in the names of the deceased without verifying the identity. The Bank relied on s.82 of the Bills of Exchange Act in defense that it had received payment thereof in good faith and without negligence. Court held that by ordinary values, the amount of money involved was reasonably big and it is a notorious practice in Banks in this country for a new customer to be introduced by customers already known in the bank. The tendency is to require at least two referees should be reliable and respectable customers. That from the bank’s averment in its written defense, the two men were introduced by David Mukasa before the account was opened. That implies that the men were strangers in the bank. They did not operate or have an existing account with the bank. A government Bank of Uganda cheque was involved. That surely the defendant bank should have inquired how the depositors were entitled to the money, who they were and from where they came. The defendant bore the responsibility of establishing whether the berarers of the cheque were genuine payees or not before allowing them to deposit the cheque and to draw its proceeds. That the respondent proved negligence against the bank and in circumstances the bank is not protected by s. 82 of the Bills of Exchange Act.
- Conversion and
Money Had and Received
A cheque, like any other bill of exchange, is a chattel which can be negotiated from one party to another. A bank converts the cheque if it deals with it under the direction of an unauthorized person, by making the proceeds available to someone other than the person rightfully entitled to the possession.
The drawer, the payee or the endorsee can bring an action for conversion of a cheque by proving that he or she was either in actual possession or entitled to immediate possession of the cheque. For example where a collecting banker pays out on a forged endorsement, it is prima facie liable in conversion for the face value of the converted cheques since it is the intention of the drawer, on whose account the cheques were drawn not the signatory, which determines whether there is liability. The forged endorsement by virtues of s. 23 is wholly inoperative. Therefore by presenting the fraudulent cheque for payment to the bank and collecting proceeds for the fraudulent person the bank will prima facie be liable in conversion Cf.Boma Manufacturing Ltd v. Canadian Imperial Bank of Commerce (1977) LRC 581 (SC) (1977) 23 C.L.B. 736.
Where a cheque has been converted and money has been received for it, a claim for money had and received is an alternative to a claim for conversion. Action for money had and received is an independent form of action and lies in many cases where conversion would not, so where a bank accepts from a customer an unsigned credit transfer and a cheque drawn on itself for the amount and pays the amount of the cheque to the account named in the credit transfer, the customer’s proper form of action against the bank for making payments without authority is for money had and received and not conversion.-Thomas Wyatt & Sons (W.A) Ltd v. United Bank for Africa Ltd, 1970 (1) ALR Comm. 234
- Money Paid by
Mistake
Money is
generally paid by mistake when the banker thinks that the signature on a cheque
is genuinely that of its customer when in fact it has been forged and where
payment is made against a cheque that has been countermanded. The Court of Appeal of E. Africa in the case
of Dukiya v. Standard Bank of South
Africa Ltd (1959) E.A. 958 and in the Supreme Court case of
In Barclays Bank Ltd v. W.J. Simms Sons and Cooke (Southern) Ltd and Anor. 1980 Q.B. 677 the court said that while money paid under mistake of fact is prima facie recoverable, the payee has a defence (a) if the payer in making the payment was not influenced by the mistake, or (b) if there was good consideration for payment or (c) if the payee has changed his or her position in good faith on the strength of the payment. As to (b) the absence of consideration resulted from the fact that the payment having been made without the customer’s mandate (they having stopped payment) it could not satisfy the liability to the payee. It would be otherwise if a cheque were paid in a mistaken belief that there were funds to meet it, for then it would be within the customer’s mandate and would satisfy the liability.
However the customer may be estopped from recovering. The case of National Westminister Bank Ltd v. Barclays Bank International & Anor (1975) Q.B. 654 brought the doctrine of estoppel into focus. There it was argued that by paying the cheque, the plaintiffs had represented that it was genuine, it had acted to the detriment on this representation and the plaintiffs were therefore estopped from recovering. The court said that the customer can only succeed in raising estoppel against the plaintiff if the mere fact of the bank honoring a cheque on which its customer’s signature has been undetectably forged carries with it an implied representation that the signature is genuine. Further more the law should be slow to impose an innocent party who has not acted negligently an estoppel merely by reason of having dealt with a forged document on the assumption that it was genuine. In the context of forged share transfers this contention has been rejected as against companies which register a transfer in the belief of its authenticity.
TOPIC XI
Determination of Contract between Banker and Customer
The Bank and its
customer may mutually agree to extinguish their rights and obligations under
the banking contract. Eodem modo quo
oritur, eodem modo dissolvitur -(what has been created by agreement may be
extinguished by agreement). However, in usual banking practice, such mutual
termination is rare. Banking contracts are usually terminated unilaterally. The
unilateral termination may either take the voluntary action of either party
closing the account or may result from involuntary occurrences like death, bankruptcy,
mental incapacity or winding up of the customer or winding up of the bank,
court orders or frustration by an intervening event.
- Closure of the Account.
i)
Closure of account by the customer on demand
In such a case, a customer can close his or her account by simply demanding payment of the outstanding balance on the account. However, it is advisable for a bank to obtain from the customer some evidence of his or her intention to close the account. Reliance on the mere fact that the customer has withdrawn all the money on the account may not always absolve the bank from its duty to honor the clients’ cheques. In Wilson v. Midland Bank Ltd, Quoted in Holden Miles J, the bank manager relied on a telephone conversation with the customer, which conversation the customer could not recollect, to close the customers account. The customer subsequently paid money into his account which the bank credited to the wrong account. When the customer issued a cheque on his account it was dishonored in the words ‘No account’’. The bank was condemned in damages for breach of contract and libel.
Several banks in
ii)
Closure
of Account by the Bank.
The bank can close its customers account but can only do so upon giving reasonable notice to its customer. The requirement for giving reasonable notice before closure of the account is part of the contract between the bank and its customer. The principle was aptly stated by Atkin LJ. In Joachimson v. Swiss Bank Corporation [1921] 3 K.B. 110 that it is a term of the contract that the bank will not cease to do business with the customer except upon reasonable notice.
The question of reasonableness depends on the special facts and circumstances of the case like the size of the account, the nature of the business of the account holder, the geographical distance to which the customer sends his or her cheques, the number of cheques still in circulation and the number of transactions handled on the account. Reasonable notice enables a customer to organize alternative banking arrangements.
Where the customer is using the account for illegal transactions the bank is under no obligation to give reasonable notice to such customer before closure of his or her account. The bank’s public duty not to aid an illegality is superior.
In Banex Limited v. Gold Trust Bank Limited Civil Appeal No. 29/1993, S.C, the bank suspended operations on its customers account owing to the reorganization of the company whereby one of the directors was dropped and a new director appointed. Although the company presented a registered resolution containing these changes, the bank insisted that the director who had been dropped should agree to the changes before the new directors could be allowed to operate the account. The bank insisted that the re-organization was irregular. Platt J.S.C. held, with Odoki J.S.C. and Order. J.S.C. concurring that the bank should have accepted the company resolution on the basis of Turqand’s case. Platt J.S,C stated the bank’s duty in the following terms. The duty of a banker is to act in accordance with the lawful request of his customer in the normal operation of the customers account. The bank refused to carry out the lawful request and wrongly suspended the account from October, 1987 till High court gave Judgment. It was in breach of its contract with the company for all this time.
- Bankruptcy
of the Customer.
When a debtor
commits an act of bankruptcy provided under the insolvency law, a creditor may
petition court to make a receiving order for the protection of the debtor’s
interest. On making a receiving order by the court, the official receiver is constituted
receiver of the property of the debtor. In case the debtor has a bank account
the account becomes subject of the receiver’s protection. After the receiver or
interim receiver is appointed the bank can no longer honor cheques drawn by its
indebted customer since the money on the account has to be preserved by the
receiver for the benefit of all the creditors. The bankruptcy will have the
effect of closing the account.
- Death of a
Customer.
The general common law rule is that upon the death of a party to a contract there is automatic assignment of the rights and liabilities of the deceased upon his or her personal representative. The rule has been confirmed by s. 11(1) of the on the law reform (miscellaneous provision) Act, Cap 74 that death of any person, all causes of action subsisting against or vested in him or her shall survive against, or, as the case may be, for the benefit of his or her estate subject to exceptions.
Under section 74(b) BEA when a bank receives notice of its customer’s death its duty and authority to pay cheques drawn on the bank by the customer is determined. A customer’s death terminates the contract between the bank and such customer. Any balance on the account is treated like any other property of the deceased person and is vested in the legal representative of the deceased customer who is either executor or administrator under s. 180 Succession Act, CAP. 162.
- Mental Incapacity of the Customer
Where a banker receives reliable information that its customer has developed a mental disorder, it is prudent practice for the banker to treat its mandate to honour such customer cheques as determined. The rationale for such practice is that a customer under mental disorder is incapable of consenting to an order to the banker to pay. Whatever cheque he or she signs in such a mental condition is in reality non est factum. In Re Beavan, Davies, Banks & Co. V. Beavan [1912] 1 ch. 196. a customer of a bank became of unsound mind. The family arranged with the bank to continue the account and to draw upon it on behalf of the customer for the maintenance of him and family. At the customer’s death the account was overdrawn. In a creditors action to administer the real and personal estate of the deceased customer the bank claimed to prove as creditors of their late customer for the amount of the overdraft which included bank charges, interest and commission. It was held that although the bank were not creditors they were entitled under the doctrine of subrogation to stand in the shoes of the creditors paid by the son by the means of the banking account for necessaries supplied for the maintenance of the lunatic’s household and for the necessary out goings of his estate. However, it was held that the bank could not claim commission or interest on the overdraft.
- Winding up of the Customer
Upon winding up of a company it ceases to have any legal existence and all its contractual relationships come to an end. The company is in that case as an individual.
As soon as the bank learns of the passing or a resolution for winding up f the company or the presentation of a winding up petition in court, it should not honour cheques drawn on the company’s account. It should treat its mandate to operate the account as terminated.
In Re Grays Inn Construction Co. Ltd [1980] 1 WLR 711 the court of Appeal of England held that payments into and out of a company’s bank account during the period between the date of the presentation of a winding up petition and the date when the winding up order was made constituted disposition of the company’s property.
After hearing the winding up petition, the court makes a winding up order and then appoints a liquidator under the Companies Act. The liquidator is specifically empowered to draw, accept, make and endorse any bill of exchange or promissory note in the name and on behalf of the company, with the same effect with respect to he liability of the company as if the bill or note had been drawn, accepted, made or endorsed by or on behalf of the company in the course of its transactions.
Read Mental Treatment Act Cap. 279.
- Winding up of the Bank.
Where a bank is wound up, it ceases to have legal personality and hence its contractual relationship with its customer is terminated. The bank’s right to transact banking business will be terminated once the Central Bank revokes its license under the Financial Institutions Act, 2004. The license may be revoked where the central bank is justified that the bank ceased to carry on business, has been declared insolvent, has gone into liquidation, has been wound up, is carrying on business in a manner detrimental to the interest of depositors or has failed to comply with any condition stipulated in the license. In such a case the bank ceases to exist and its relationship with the customer is terminated. The customer who has credit balance is entitled to prove as creditor before the liquidator and get paid.
- Legislation Stopping the Bank-Customer
Relationship
For a variety of reasons legislation may be enacted whose effect is to suspend or even sometimes terminate the contractual relationship between a banker and its customer. An example would be legislation during time of war against trading with the enemy.
The Financial Institution Act, 2004 s. 188 provides that the Central Bank shall if it has reason to believe that any account held in any financial institution has funds on the account which are the proceeds of crime, direct in writing the financial institution at which the account is maintained to freeze the account in accordance with the direction.
The Anti Corruption Act, 2009 targeting the offences of Corruption, embezzlement, causing financial loss and theft by agents, the courts are now empowered upon application by the DPP or IGG to place restrictive orders, as appear to court to be reasonable, on the operation of bank account of the accused person or any person associated with any such offence.
The DPP is obliged under s. 121B(5) of the Penal Code Act Cap 120 to ensure that any order issued by the court is served on the bank, the accused or suspect person and any other person to whom it relates.
Also consider provisions of the Anti-Money laundering Act 2013
- Garnishee
Orders.
Under Order 20 rule 1 of the Civil procedure Rules SI 65-3 the court may on an exparte application of a decree holder supported by an affidavit sating that the decree has been issued and is still unsatisfied to a stated amount and that another person within the jurisdiction is indebted to the judgment debtor, order that all debts accruing or owing from such third party person known as the garnishee, be attached to answer the decree and the cost of the garnishee proceedings. Service of decree nisi on a banker has the effect of binding the debts in the banker’s hands. The bank should hence for the refuse to pay the cheques drawn by the customer even though it is known that the amount of the judgment debt s less than the balance standing to the customer’s credit.
TOPIC XII
SECURITIES FOR BANKER’S ADVANCES.
Object of Securities.
A security is an interest which the debtor confers on the creditor in an item of property owned by him or by arrangement, such as surety. To be effective, the interest acquired by the creditor must confer on him a right to satisfy the debts out of the proceeds of the property in question. The object of the security is, thus, satisfaction of the debt covered by it.
No doubt, the advancing of credit involves a great risk for the bank. Therefore, to cover this risk, the bank keeps different tangible and non tangible securities, before sanctioning the credit facility to a customer. The Common securities against banker advances are as under;
- Mortgages.
(i)
Introduction
One of the most forms of security is a mortgage. Section 2 of the Mortgage Act 2009 defines a mortgage to include any charge or lien over land or any estate or interest in land in Uganda for securing the payment of an existing or a contingent debt or other money or money’s worth or the performance of an obligation and includes a second or subsequent mortgage, a third party mortgage and a sub mortgage.
The definition of a mortgage under the new Mortgage Act, 2009 has been expanded to include security for already existing debts and sub-mortgages. The law relating to mortgages of land in Uganda is both statutory and non statutory. The basic statutory laws are the Registration of Titles Act, Cap 230, and the Mortgage Act No. 8 of 2009. Both of these statutes codify aspects of the common law and doctrines of equity but not in their entirety. Very often direct reference has to be made to the common law and doctrines of equity.
(ii)
Registered
and Unregistered land.
- Registered
land
The Mortgage Act 2009 regulates mortgages of registered land. Section 3 provides that a person holding land under any form of land tenure, may, by an instrument in the prescribed form, mortgage his or her interest in the land or part of it to secure the payment of an existing or a future or contingent debt or other money or money’s worth or the fulfillment of a condition.
The creation, registration of and rights and duties of the parties to mortgages of registered land are regulated by both the Mortgage Act, 2009 and the RTA. But because these two statutes are not exhaustive, the common law and doctrines of equity are sometimes called in aid with regard to these mortgages.
Registered land is more preferred security for intending mortgagees.
- Un
registered land
There are other estates and interests in land which are not registrable under the RTA but which are recognized under the law and which can form the subject matter of a mortgage. These are customary tenure recognized by the Constitution and defined by the land Act.
Persons holding land under customary tenure can mortgage their land under section 8(2) (C) of the Land Act where the certificate of customary ownership does not restrict such mortgages. Under section 7 (6) of the Mortgage Act, 2009 in case customary land which is owned by a family, the land may be mortgaged with the consent of the spouse or spouses and children of the mortgagor.
Section 7(4) of the Mortgage Act allows the court to be guided by relevant provisions of the Act, the common law and doctrines of equity in any case concerning a mortgage on customary land. In Mutambulire v. Yosefu Kimera [1975] H.C.B 150 the court held that the law relating to mortgages is two fold. If the land mortgaged is regulated by the RTA, then that Act applied. In case of unregistered interest in land the applicable law was the common law and the doctrines of equity.
It should
however be noted that no mortgage on tenancy by occupancy on registered land.
S.34 of the land Act was amended by removing power to pledge.
iii.
Consideration
for the mortgage.
A mortgage is a contract between the proprietor of the land known as the mortgagor on the one hand and another person known as the mortgagee to whom the land is conveyed as security on the other hand. Similar to all contracts a mortgage must be supported by consideration. The consideration may be a monetary loan or some other debt. Most of the standard form of mortgage deeds prepared by bankers contain a provision under which the mortgagor acknowledges receipt of a stated sum of money.
iv.
Creation of
Mortgages
- Searches and
Enquiries before Creation.
A mortgage over land can only be created by the proprietor thereof. It is, therefore, imperative that before land is accepted as security for any debt or other obligation, the prospective mortgagee should establish the ownership of the land and any adverse claims that may exist on the land.
If the land is registered, then the first step that the prospective mortgagee should do is to search the Land Register. Sec 201 RTA provides for searches of the Register by any member of the public upon payment of fees. The search should be able to show the registered proprietor of the land and any registered encumbrances like caveats, leases, prior mortgages etc. If there are unregistered claims to the land, the mortgagee who creates a mortgage unaware of there claims will get a good mortgage. Once the search reveals no registered encumbrances the mortgagee’s interest will be unimpeachable except in the case of fraud.
In the wake of the Land Act, Cap 227, which recognized the rights of lawful or bonafide occupants to security of occupancy, the prospective mortgagee now has an additional burden to visit the land offered as security to ascertain if it is free of such occupants. This is important since in case of default it will be impossible for the mortgagee to take possession of the land.
Where land offered as security is a lease or sub lease, the respective mortgagee should also scrutinize the lease or sub lease to ensure that the lease or sub lease does not contain restriction to mortgage. Where there is such restriction, the necessary consent should be obtained.
In case of customary land, the prospective mortgagee should make necessary inquiries in the locality where the land is situated. He or She should also require to see the certificate of customary ownership issued in respect of a customary holding by the recorder under s. 4 of the Land Act.
The prospective mortgagee should try, if need be by using a professional valuer and surveyor, to open up boundaries and establish the market value of the land offered as security. This will ensure that consideration is sufficient.
Lastly where a matrimonial home is the subject of an application for a mortgage a prospective mortgagee shall satisfy himself or herself that the consent of a spouse is obtained under section 5 and 6 of the Mortgage Act 2009 and sections 38A and s. 39 of the land Act.
v.
Creation of
Legal & Equitable Mortgages.
- Legal Mortgage
Section 3 of the mortgage Act provides that a person holding land under any form of land tenure, may, by an instrument in the prescribed form, mortgage his or her interest in the land or a part of it to secure the payment of an existing or future or contingent debt or other money or money’s worth or fulfillment of a condition.
A mortgage created under the section takes effect only when registered, however un registered mortgage is enforceable between the parties.
A mortgage must be signed by the registered proprietor of the land or his or her duly appointed agent. Where the proprietor is a corporation, the execution of the instrument must strictly conform to the constitution of such corporation. The constitution normally prescribes the persons to execute deeds and contracts and sometimes makes provision for use of a common seal.
After due execution of the mortgage deed, the same should be stamped in accordance with the provisions of the Stamps Act Cap 342. Under the schedule of the Stamps Act, item 42(1) the duty is 0.5% of the total value. The next step is registration of the mortgage at the office of title. The mortgage is registered as an encumbrance on the certificate of title. The registration attracts a payment of the registration fees prescribed in s. 33 of the RTA and specified in the Twenty Second schedules to the Act.
- Equitable Mortgage
Sec. 3(8) of the Mortgage Act provides that nothing in the section prevents a borrower from offering and a lender from accepting an informal mortgage; or a deposit of any of a certificate of customary ownership, a certificate of title issued under the Registration of Titles Act, a lease agreement, any other document which may be agreed upon evidencing a right to an interest in land; or any other documents which may be agreed upon, to secure any payments which are referred to in subsection.
An ‘‘Informal mortgage” is defined under the Act to mean a written and witnessed undertaking, the clear intention of which is to charge the mortgagor’s land with the repayment of money or money’s worth obtained from the mortgagee and includes an equitable mortgage and a mortgage on unregistered customary land.
The basic mode of registration of an equitable
mortgage whether it is constituted by a deposit of title deed is by the
equitable mortgagee registering a caveat on the mortgagor’s title at the office
of Titles as provided under s. 139 RTA. The Caveat attracts both the stamp duty
and registration fees under the as Stamps Act. It is always advisable to
accompany the caveat with an affidavit that set out the grounds in proof of the
mortgage.
vi.
Important
Clause in Mortgages.
Because a mortgage is a contract between the mortgagor and mortgagee, the parties have the liberty, subject only to a few legal restrictions, for example on the equity of redemption to insert in their mortgage clauses of their choice. Over the decades mortgagees especially bankers have developed several clauses to safeguard their interests. Some of the most common and important clauses are discussed below;-
- Continuing
Security
Where a banker lends money on a current account by a fluctuating overdraft the banker runs a risk of having the latter advances unsecured by the operation of the Clayton case. To avoid the adverse effects of this rule, the security is a continuing one and extend to over any sums of money which shall for the time being constitute the balance due from the mortgagor to the mortgagee.
- Covenant to
repair and Insure
To ensure that
the mortgaged property does not diminish in value due to neglect and disrepair
and it is not lost or destroyed by insurable risks, most mortgagees now require
the mortgagor to keep the land, buildings, fixtures or machinery which form
part of the security in a good state of repair and in good working order and
also insure the same against loss or damage by fire or other listed causes for
their full value with an insurer of repute.
- Covenant to pay
rent and Observe terms of a lease
Where the
property mortgaged is a leasehold or sub mortgagees normally insert a covenant
in the mortgage requiring the mortgagor to pay rent and perform all other terms
and conditions on his part contained in the lease or sub lease.
- Personal
Covenant to repay
In the absence of such a specific covenant of personal liability, the mortgagee cannot sue the mortgagor for any balance of mortgage money not realized by the sale of security. The covenant for personal liability is even more necessary where the person depositing the title deeds and executing the memorandum of deposit is not the principal debtor himself.
- Covenant to
The mortgagee can exercise a power of sale in case of default by first applying to court to foreclose the mortgagor’s equity of redemption. This process is fairly costly and cumbersome. It is therefore advisable for the mortgagee to provide for sale outside of court process in case of default by the mortgagor.
vii.
The Position
and Rights of Mortgagor.
- The Equity of
Redemption
A mortgage is not an absolute conveyance of land but rather a conveyance for a specific and restricted purpose, namely that of securing the payment of a debt or performance of some other contractual obligation. In terms of s. 8 of the Mortgage Act, a mortgage shall have effect as a security only and shall not operate as a transfer of any interest or right in the land from the mortgagor to the mortgagee.
The above statutory provision is to the effect that the mortgagor has a legal or contractual right to redeem his or her land on the appointed day, and an equitable right to redeem thereafter.
- No Clog on the
Equity of redemption.
Equity will hold
any stipulation in the mortgage whose effect is to fetter redemption on payment
of the debt or performance of the obligation for which the security was given.
The principle was stated by Romer J. in the case of Biggs v. Hoddinitt [1898] 2 ch 307 that on a mortgage you cannot
clog the equity of redemption so as to prevent the mortgagor from redeeming on
payment of principal, interest and costs.
- The right to
redeem must not be excluded
The courts will not allow a provision in the mortgage whose effect is to exclude the equity of redemption. The courts have had occasion to consider provisions in the mortgage which give mortgagees options to purchase the mortgaged property.
In he case of Samuel v. Jerah Timber and Wood Paving Corporation Limited [1904] A.C. 323 the mortgagee was given an option at the time of creating the mortgage to purchase the mortgaged property. Court stated that it is an established rule that a mortgage can never provide at the time of making the loan for any event or condition on which equity of redemption shall be discharged and the conveyance absolute.
- The right to redeem may be postponed.
The redemption of the mortgage can be postponed to an agreed date. Such postponement will not be declared void.
- Collateral advantage
By collateral advantage is meant some other advantages other than principal and interest which a mortgagee may enjoy from the mortgagor under the provisions of the mortgage. One of such may be a right to exclusively supply trade goods to the mortgagor during the term of the mortgage. In G&C Kreglinger v. New Patagonian meat and Cold Storage Company Ltd (1914) AC 29 held that there is no law in equity which precludes a mortgagee whether the mortgage be made upon occasion of a loan or otherwise, from stipulating for any collateral advantage, provided such collateral advantage is not either unfair and unconscionable, in a nature of a penalty clogging the equity of redemption, inconsistent with or repugnant to the contractual and equitable right to redeem.
viii.
Enforcement
of Equity of Redemption.
The equity of redemption is enforceable by the mortgagor when he or she pays off the principal loan, interest, and bank charges and discharges any other obligation at the time and in the manner stipulated in the mortgage.
- Discharge of
Mortgage
S. 14 and 15 of the Mortgage Act enables the mortgagor on payment of all monies and performing all the conditions and payment of all prescribed fees to have the mortgage released. Upon the entry being made the land affected by the release shall cease to be subject to the mortgage to the extent stated in the release.
Equitable mortgages that are registered as caveats are discharged when the mortgagee executes a withdraw of caveat under the section 145 RTA. The withdraw of caveat also attracts stamp duty under the Stamps Act and registration fees. The duplicate certificate of title should be handled back to the proprietor of the land after release of mortgage or withdraw of the caveat.
2. Discharge of Mortgages of unregistered land
In case the
mortgage relates to unregistered land the discharge of such mortgage will have
to be in accordance with items as set out in the document creating the mortgage
and where there no such document, the exercise of the equity redemption will
have to be in accordance with the common law and doctrines of equity.
ix.
Discharge of
Mortgage by limitation.
S. 37 of the Mortgage Act enable extinction of
certain rights of the mortgagee by the operation of the Limitation Act.
x.
Obligations of a mortgagor
A mortgagor is under obligation to perform all those covenants on his part contained in the mortgage. In particular he or she is obliged to pay the mortgage debt with interest at the rate and stipulated time in the mortgage. If there is default in payment, the mortgagor faces the risk of losing the equity of redemption. The breach by the mortgagor of any of the covenants in the mortgage entitles the mortgagee to invoke the remedies set out in the Mortgage Act, 2009.
xi.
Powers of
the Mortgagee
A notice of default of 45 and 21 working days by the mortgagee to the mortgagor under section 19 creates a default in payment in case the mortgagor has defaulted for 30 days.
Sec 20 of Mortgage Act provides for powers of the mortgagee where the mortgagor is in default and does not comply with the notice issued to include—
(a) require the mortgagor to pay all monies owing on the mortgage, this may be through court action for recovery of the mortgage sum.
(b) appoint a receiver of the income of the mortgaged land. It involves serving 15 working days notice to the mortgagor
(c) lease the mortgaged land or where the mortgage is of a lease, sublease the land. It involves serving 15 working days notice to the mortgagor and the lease shouldn’t exceed 15 yrs.
(d) enter into possession of the mortgaged land. It involves serving 15 working days notice to the mortgagor
(e) sell the mortgaged land, if power expressly given in mortgage
xii.
OTHER
SECURITIES
Lending of money is one of the principal businesses of bankers. However it is risky and speculative and depends to a large extent on the relative chances of a banker being repaid beyond the mere undertaking by a borrower to do so. So from the earliest times bankers have had to seek for security other than the land itself. Securities take many forms such as lien, pledges, hypothecation and charges, they also include stock exchange securities, debentures, insurance policies, assignments, fixed deposit accounts and the guarantee.
- Lien
A lien is the right to retain property belonging to a debtor until he has discharged a debt due to the person retaining the property. A lien attaches to instruments deposited with the banker as security and not customer balances. Section 2 of the Mortgage Act defines lien by deposit of documents to mean the deposit of a certificate of customary ownership, a certificate issued under the RTA, a lease agreement, any other document which may be agreed upon evidencing a right to an interest in land, or any other document which may be agreed upon to secure any payments.
- Pledge
A pledge is the act of delivering of goods, chattels or negotiable securities by one person to another as security for the repayment of a loan or debt. In a pledge, the possession of movable assets is with the bank but ownership remains with the client.
In
- Guarantees
A guarantee is defined by Oxford Dictionary of law at page 246, as a secondary agreement in which a person, (the guarantor) is liable for the debt on default of another, (the principal debtor) who is the party primarily liable for the debt.
A contract of guarantee is defined under section 68 of the Contract Act 2010 to mean a contract to perform a promise or to discharge the liability of a third party in case of default of that third party, which may be oral or written. Under Section 71 of the Contract Act the liability of guarantor is to the extent to which a principal debtor is liable, unless otherwise provided by a contract and liability takes effect upon default by the principal borrower.
A guarantee is, therefore a special contract whereby a third person becomes liable for the default by a debtor to meet his obligation to a creditor. It can either be a personal guarantee or corporate guarantee. In the case of Barclays Bank of Uganda v. Livingstone Katende Luutu C.A NO. 22/1993 (S.C) the supreme court of Uganda upheld an express clause in a contract of guarantee that empowered the bank to realize its security without recourse to court.
Liability of a guarantor depends on the liability of the principal borrower as held in bank of Uganda Vs Banco ArabE Espanol Civil Appeal No. 23 of 2000. According to LAW OF GUARANTEES by Geraldine Mary Andrews and Richard Millet; at Pg 193, the fact that the obligations of the guarantor arise only when the principal has defaulted in his obligations to the creditor does not mean that the creditor has to demand payment from the principal or from the surety, or give notice to the surety, before the creditor can proceed against the surety. The learned authors noted that the question of whether demand is necessary is a matter of construction of the relevant contracts. In other words it is a matter on the merits. Simply put the question of the right to sue is determined by the nature or type of the guarantee contract and its construction.
The House of Lords case of Moschi v. Lep Air Services Ltd [1973] AC 331, per Lord Simon: “On the default of the principal promisor causing damage to the promisee the surety is, apart from special stipulation, immediately liable to the full extent of his obligation, without being entitled to require either notice of the default, or previous recourse against the principal, or simultaneous recourse against co-sureties.”
- Debenture Charge.
A debenture is a certificate of a loan or a loan bond evidencing the fact that the company is liable to pay a specificied amount with interest. A debenture is thus a medium to long term debt instrument used by large companies to borrow money, at a fixed rate of interest.
- Assignment
A conditional assignment of claims or rights against a third party can be made as banking security. Assignment of property lease rights and accounts receivable are the most common. It is required that an assignment must be in writing. A notice of the assignment must be given to the debtor of the assigned claims. An assignment is made effective from day one but its enforcement is conditional upon the default of the debtor. Once the debtor is in default, the assignment will become enforceable.
G.
Hypothecation.
It is a legal transaction whereby goods may be made available as a security for a debt but property will remain in possession of the borrower. In this case a loan is given to the borrower against goods without taking possession. The creditor possessed the right of a pledge under hypothecation deed.
TOPIC XIII
ANTI-MONEY
LAUNDERING
“Money Laundering” is the process of turning illegitimately obtained property into seemingly legitimate property and it includes concealing or disguising the nature, source, location, disposition or movement of proceeds of crime and any activity which constitutes a crime under the Act (Sec. 1 AML ACT 2013 as amended)
“Property” means assets of every kind whether corporeal or incorporeal, movable or immovable, tangible and legal documents or instruments evidencing title to or interest in such assets (Sec. 1 AML ACT 2013)
|
Why
the Anti-Money Laundering Act 1.
Prevention of Fraud and Corruption |
|
2.
Safeguarding the financial system from money
laundering activities |
|
3.
Safeguarding the financial system from being used
to Finance terrorism |
|
4.
To align with regional and international Protocols
(East Africa Community and UN) |
1. Placement
• Placement requires the physical
movement and placing of funds into the financial institutions or retail
economy.
• Depositing structured amounts
of cash into the banking sector and smuggling currency across international
borders for further deposit, are common methods of placement.
• Some of the more typical
activities found in the Placement phase include:
Cash deposits of less than
$10,000 that begin immediately after the accounts are established and are made
frequently often daily
Cash deposits of less than $10,000 begin suddenly after limited or no account activity could also be placement
2. Layering
Once the illicit funds have entered the financial system, multiple and sometimes complex financial transactions are conducted to further conceal their illegal nature, and to make it difficult to identify the source of the funds and/or eliminate an audit trail.
Purchasing monetary instruments (traveler’s checks, banks drafts, money orders, letters of credit, securities, bonds, etc.) with other monetary instruments.
Frequent inter-account transfers with no apparent economic purpose using non face to face means like internet and mobile banking
3. Integration
• Integration is the
final step in money laundering and involves the re-introduction of the laundered
funds to the economy.
• The illicit funds
re-enter the economy disguised as legitimate business earnings (deposited funds
used to purchase securities, businesses, real estate).
• Unnecessary loans
may be obtained to disguise illicit funds as the proceeds of business loans.
Loans with payoff dates in the far future for what appears to be legitimate
business purposes, followed by the cash payoff of the principal within the
first six-months of the loan period
• Creating offshore, anonymous companies, which lend laundered money back to the criminal, resulting in large deposits into bank accounts.
Accountable
persons-Sec 1 and Second Schedule of the AML Act, 2013 as amended
The Act
identifies the following as accountable persons;
• Advocates, Accountants and other
legal professionals and accountants
• Casinos
• Real estate agents
• Dealers in precious metals
• Trust and company service
providers
• Financial institutions
• A broker, dealer or investment
advisor
• Insurance companies
• Registrar of Lands
• Uganda Investment authority
• All licensing authorities in
Uganda
• NGOs, Churches and other Charitable organisations
Suspicious Transaction
“Suspicious Transaction” refers to a transaction which is inconsistent with a customer’s known legitimate business or personal activities or with the normal business for that type of account or business relationship or a complex and unusual transaction or complex or unusual pattern of transactions (Sec. 1 AML ACT 2013 as amended)
EXAMPLES
OF SUSPICIOUS TRANSACTIONS-3rd Schedule of the Financial
institutions (Anti money laundering) Regulations 2010
1. Money laundering using cash transactions
(a) Unusually large cash deposits made by an individual or company whose ostensible business activities would normally be generated by cheques and other instruments.
(b) Substantial increases in cash deposits of any individual or business without apparent cause, especially if such deposits are subsequently transferred within a short period out of the account or to a destination not normally associated with the customer.
(c) Customers who deposit cash by means of numerous credit slips so that the total of each deposit is not remarkable, but the total of all the credits is significant.
(d) Company accounts whose transaction, both deposits and withdrawals, are denominated in cash rather than the forms of debit and credit normally associated with commercial operations (such as cheques, Letters of Credit, Bills of Exchange, etc.).
(e) Customers who constantly pay-in or deposit cash to cover requests for banker's drafts, money transfers or other negotiable and readily marketable money instruments.
(f) Customers who frequently seek to exchange large quantities of low denomination notes for those of higher denomination.
(g) Branches that have a great deal more cash transactions than usual. (Head Office statistics should detect aberrations in cash transactions.)
(h) Customers whose deposits contain counterfeit notes or forged instruments.
(i) Customers transferring large sums of money to or from overseas locations with instructions for payment in cash.
(j) Large cash deposits using night safe facilities, thereby avoiding direct contact with the financial institution.
2. Money laundering using deposit accounts
(a) Customers who wish to maintain a number of trustee or clients' accounts which do not appear consistent with their type of business, including transactions which involve nominee names.
(b) Customers who have numerous accounts and pay in amounts of cash to each of them in circumstances in which the total of credits would be a large amount.
(c) Any individual or company whose account shows virtually no normal personal deposit or business related activities, but is used to receive or disburse large sums which have no obvious purpose or relationship to the account holder and/or his business (e.g. a substantial increase in turnover on an account).
(d) Matching of payments out with credits paid in by cash on the same or previous day.
e) Large cash withdrawals from a previously dormant/inactive account, or from an account which has just received an unexpected large credit from abroad.
(f) Customers who together, and simultaneously, use separate tellers to conduct large cash transactions or foreign exchange transactions.
(g) Large number of individuals making payments into the same account without an adequate explanation.
(h) Customers who maintain an unusually large number of accounts for the type of business they are purportedly conducting and/or use inordinately large number of fund transfers among these accounts.
3. Money laundering using investment related
transactions
(a) Purchasing of securities to be held by the institution in safe custody, where this does not appear appropriate given the customer's apparent standing.
(b) Back to back deposit/loan transactions with subsidiaries of, or affiliates of, overseas financial institutions in known drug trafficking areas.
(c) Larger or unusual settlements of securities transactions in cash form.
(d) Buying and selling of a security with no discernible purpose or in circumstances that appear unusual.
4. Money laundering involving off-shore
international activity
(a) Customers introduced by an overseas branch, affiliate or other bank based in countries where production of drugs or drug trafficking may be prevalent.
(b) Use of Letters of Credit and other methods of trade finance to move money between countries where such trade is not consistent with the customer's usual business.
(c) Customers who make regular and large payments, including wire transactions, that cannot be clearly identified as bona fide transactions to, or receive regular and large payments from countries which are commonly associated with the production, processing or marketing of drugs.
(d) Numerous wire transfers received in an account where each transfer is below the large cash reporting requirement in the remitting country.
(i) Customers sending and receiving wire transfer to/from financial haven countries, particularly if there are no apparent business reasons for such transfers or such transfers are not consistent with the customers' business or history.
5. Money laundering involving employees and agents
of a financial
institution
(a) Changes in employee characteristics, such as lavish life styles.
(b) Any dealing with an agent where the identity of the ultimate beneficiary or counterpart is undisclosed, contrary to normal procedure for the type of business concerned.
6. Money laundering by secured and unsecured
lending
(a) Request to borrow against assets held by the financial institution or a third party, where the origin of the assets is not known or the assets are inconsistent with the customer's standing.
(b) Request by a customer for a financial institution to provide or arrange finance where the source of the customer's financial contribution is unclear, particularly where property is involved.
(c) A customer, who is reluctant, fails, refuses to state a purpose of a loan or the source of repayment, or provides a questionable purpose and/or source.
Anti-Fraud
Measures in the AML Act 2013
Responsibilities of an Accountable Person
• To verify the identity of
clients using independent source documents such as passports, birth
certificates, driver’s license, identity cards, voters’ cards, utility bills,
bank statement and partnership/incorporation documents prior to initiating a
business relationship or carrying out an occasional transaction
• To report as soon as practical but in any case no later than 2 working days after forming a suspicion or receiving information a suspicious transaction to the Financial Intelligence Authority.
• To maintain accounts in the name of the account holder. If the client is acting on behalf of another person, the accountable person shall obtain the authority and details of the other person. (Lawyers that have client accounts will be required to give details of the clients and purpose of the transactions)
• Accountable persons to carry out enhanced due diligence on Politically Exposed Persons prior to establishing business relationship with them. “Politically Exposed Persons” means individuals who are or have been entrusted with prominent functions in a country for example senior politicians senior government, judicial or military officials, senior executives of state owned corporations, important party officials as well as their family members or close associates of those individuals. (AML ACT 2013)
• When unable to comply with the identification and verification provisions of the Act, the accountable person shall not open an account, conduct a transaction for the proposed /existing client
• Failure to comply with the provisions of the Act creates liability for both the firm and its partners.
Restriction on account opening, performance of transaction above 1000 currency points (Ugx 20m) – Verification of identity of persons carrying out one off over the Counter deposits and foreign currency purchase/sale
•
Accountable persons to report all cash and monetary transactions above 1000
currency points to the Financial Intelligence Authority. Part IV establishes
the Authority (see sections 18-43 on the functions and powers of the
Authority).
• The accountable person to
conduct ongoing review on the business relationship and scrutiny of
transactions undertaken throughout the course of the relationship to identify
suspicious activity and Politically Exposed Persons.
The obligations under the Act
shall not be impeded by the accountable person’s duty of confidentiality or
professional secrecy
• Where a report is done in good
faith by an accountable person or their staff, they shall not be held criminal
or civilly or administrative liable for complying with this Act’s provisions
• After filing a suspicious transaction report with the FIA, the Act authorizes the accountable person to continue with the transaction.
Read
Uganda vs. Sserwamba & 6 Ors HCT-00-AC-SC-0011-2015
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