LLM Group 2 Business Law Banking Laws 2023 Question Paper with Solutions

The objectives are four and each has a legal consequence worth naming.

Economies of scope. The same branch network, the same customer records and the same credit assessment can be used to sell several products, so the marginal cost of the second product is low. The legal consequence is that the group's value lies in shared information, which is precisely what the duty of secrecy in Tournier v. National Provincial and Union Bank of England, [1924] 1 KB 461, restricts, and what the Digital Personal Data Protection Act, 2023, now regulates.

Diversification of income. Fee income from insurance, mutual funds and advisory work does not move with the credit cycle, so a conglomerate's earnings are steadier than a pure lender's. The legal consequence is a prudential one: a bank earning fees carries operational and conduct risk rather than credit risk, and the capital framework had to be extended to cover it.

Convenience to the customer, which is the argument usually made publicly, and which is real: a single relationship for deposits, credit, payments, insurance and investment lowers the customer's own cost of dealing.

Section 8 prohibits trading, that is buying, selling or bartering goods, except in connection with the realisation of a security. Section 19 restricts the nature of subsidiary companies and limits the holding of shares in any company, whether as pledgee, mortgagee or absolute owner, to a stated proportion of that company's capital and of the bank's own funds.

The consequence is that the conglomerate structure is a legal necessity and not a commercial preference. A bank cannot itself carry on insurance business, so insurance is done by a subsidiary or a joint venture; it cannot trade, so commodity businesses are excluded; and section 19 caps what it may hold in the vehicles that do these things. Every genuinely new activity an Indian bank has taken up has needed either a notification under section 6(1)(o) or a separate company under section 19.

Secondly, conflict of interest, and this is where the law is most exposed. A bank that lends to a company whose share issue its own subsidiary is underwriting has an interest in the issue succeeding. A bank that sells its group's insurance policy at the counter is advising a depositor who trusts it. Section 20 addresses the sharpest form of the problem by prohibiting advances to directors and to concerns in which they are interested, and section 19 limits shareholdings, but neither reaches mis selling. That has had to be regulated instead, through the Reserve Bank's directions on the marketing of third party products and, since the Consumer Protection Act, 2019, through the concept of an unfair contract and the Central Consumer Protection Authority's power over misleading practices.

Fourthly, too big to fail. A conglomerate whose failure would be systemic enjoys an implicit public guarantee and therefore has an incentive to take more risk than it otherwise would. The Reserve Bank's answer is the framework for domestic systemically important banks, under which such banks carry an additional capital surcharge. The deeper legal problem is that India has no special resolution regime for a financial group at all: banks are excluded from the Insolvency and Bankruptcy Code, 2016, section 227 has been used for non banking financial companies and never for banks, and the Financial Resolution and Deposit Insurance Bill, 2017, was withdrawn in August 2018. A failing conglomerate would have to be dealt with entity by entity, the bank under section 45 of the Act of 1949 and the rest under the Code.

The limit on that power was drawn in Internet and Mobile Association of India v. Reserve Bank of India, decided on 4 March 2020. The Bank had directed the entities it regulates to stop providing services to virtual currency businesses, which cut a whole trade off from the banking system. The Court accepted the power but set the circular aside on proportionality, no damage to any regulated entity having been shown. For a conglomerate the lesson is practical: the Bank may reach the group's activities, but a direction that destroys a line of business must be justified by evidence.

And where a bank's multifunctional business goes wrong for a customer, the relationship is not treated as a bare licence or a bare contract. In Amitabha Dasgupta v. United Bank of India, decided on 19 February 2021, the Supreme Court refused to accept that a safe deposit locker hirer was a mere licensee, holding that the customer is entirely at the mercy of the bank because the locker cannot be operated without the bank's key, and directed the Reserve Bank to frame rules; the revised locker directions of August 2021 followed, with a duty of care and liability of one hundred times the annual rent for loss caused by the bank's negligence, fire, theft or employee fraud. A bank that sells many services is answerable for each of them.

The unresolved tension is between a market that expects one relationship to supply everything and a statute of 1949 that lists what a bank may do. Peerless shows the Reserve Bank's reach is wide enough to follow the business wherever it goes; Internet and Mobile Association of India shows that reach must be exercised proportionately; and the withdrawal of the Bill of 2017 means that if a large Indian conglomerate ever fails, the law that deals with it will be a chapter written before any of these businesses existed.

Its mandate is in the preamble: to regulate the issue of bank notes and the keeping of reserves with a view to securing monetary stability, and generally to operate the currency and credit system of the country to its advantage. The Finance Act, 2016, added that the primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth, the first time the Act stated an objective in operational terms.

Group one: traditional central banking functions

Issue of currency. Section 22 confers the sole right to issue bank notes in India. Section 23 requires the issue to be conducted through a separate Issue Department whose assets are segregated from the Banking Department. Section 24 fixes the denominations, up to a ceiling of ten thousand rupees, and section 25 requires the design, form and material to be approved by the Central Government on the Central Board's recommendation.

Section 33 fixes the cover under the minimum reserve system introduced in 1957: gold coin, gold bullion and foreign securities of not less than two hundred crore rupees in aggregate, of which gold not less than one hundred and fifteen crore rupees. One rupee notes and all coins are outside the monopoly, being issued by the Central Government under the Coinage Act, 2011, and put into circulation only through the Bank under section 38.

Bankers' bank and lender of last resort. Section 42 requires every scheduled bank, that is a bank in the Second Schedule under section 42(6), to maintain a cash reserve with the Bank; the Reserve Bank of India (Amendment) Act, 2006, removed the earlier floor of three and ceiling of twenty per cent with effect from 22 June 2006 and omitted section 42(1B), so no interest is paid on those balances. Section 17(4) permits advances to scheduled banks against eligible security and section 18 confers an emergency power to lend to any bank or person against security the Bank would not ordinarily accept, which is the true last resort power. The Bank is also the settlement agent for the banking system under the Payment and Settlement Systems Act, 2007.

Custodian of foreign exchange reserves, exercised with its powers under the Foreign Exchange Management Act, 1999, under which section 10 authorises the persons through whom every lawful foreign exchange transaction must pass.

The instruments are the repo rate as the policy rate, the standing deposit facility introduced in April 2022 as the floor of the corridor, the marginal standing facility as the ceiling, open market operations, and the two reserve ratios. The bank rate under section 49 is defined as the standard rate at which the Bank buys or rediscounts eligible paper, but since the realignment of February 2012 it has simply tracked the marginal standing facility rate and survives as a legal benchmark, notably for the penalty on a cash reserve shortfall, rather than as an instrument. At the policy of 5 August 2026 the repo rate stood at 5.25 per cent, the cash reserve ratio at three per cent and the statutory liquidity ratio at eighteen per cent.

Group four: promotional and developmental functions

These rest on section 21 of the Act of 1949 and on the general words of the preamble. Priority sector lending; the basic savings bank deposit account and simplified know your customer requirements; the accounts opened under the Pradhan Mantri Jan Dhan Yojana from 2014; the licensing of payments banks and small finance banks from 2015 as differentiated institutions under section 22; and the operation of the payment infrastructure. Consumer protection belongs here too, through the customer liability directions of 6 July 2017, which place the burden of proving an unauthorised electronic transaction on the bank, and the Reserve Bank Integrated Ombudsman Scheme, 2021, in force from 12 November 2021, which merged three earlier schemes into one jurisdiction neutral scheme with a Centralised Receipt and Processing Centre at Chandigarh.

Its outer edge was fixed twice. In Internet and Mobile Association of India v. Reserve Bank of India, decided on 4 March 2020, a circular denying banking services to virtual currency businesses was set aside for want of proportionality although the power existed. And in State Bank of India v. Rajesh Agarwal, decided on 27 March 2023, audi alteram partem was read into the Bank's Master Directions on frauds, so a borrower must have notice, the material relied on, an opportunity to represent and a reasoned order before his account is classified as fraudulent.

And over the currency itself the limit was tested in Vivek Narayan Sharma v. Union of India, decided by a Constitution Bench on 2 January 2023. The demonetisation of 8 November 2016 was upheld by four to one under section 26(2), the majority holding that "any series" extends to all series of a denomination and that the consultation satisfied the section. Nagarathna J. dissented, holding that an entire denomination could be withdrawn only by legislation and that a Government proposal is not a recommendation of the Central Board, though she granted no relief.

What holds across all four is that the statute increasingly supplies the power and the Bank supplies the rule. Vellukunnel gave that arrangement a constitutional licence in 1962, Peerless extended it beyond banks, and Internet and Mobile Association of India and Rajesh Agarwal fixed its modern conditions, which are proportionality in substance and a hearing in procedure.

The Explanation to the section defines both new forms. A cheque in the electronic form means a cheque drawn in electronic form by using any computer resource and signed in a secure system with a digital signature, with or without biometric signature, and an asymmetric crypto system, or with an electronic signature. A truncated cheque means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank, whether paying or receiving payment, immediately on generation of an electronic image for transmission, the further physical movement of the instrument being dispensed with.

Two consequences follow from the definition itself. Because a cheque is a species of bill of exchange, every provision of the Act about bills applies to it unless displaced, which is why the rules on holders, indorsement, negotiation and dishonour need no separate statement. And because it must be drawn on a banker and payable on demand, it is never accepted, so the acceptance provisions in sections 61 to 63 have no application to it and the drawee bank owes its duty to the drawer alone.

The characteristics

The characteristics are, first, the elements of the definition of every negotiable instrument, and they must be given as such. It must be in writing. It must contain an unconditional order, so an instruction to pay if something happens is not a cheque. The order must be signed by the drawer. The sum must be certain and in money only. The drawee must be a specified banker, which is what distinguishes a cheque from every other bill. The payee must be certain or it must be payable to bearer. And it must be payable on demand.

Three further characteristics belong to a cheque alone and are what a question on "characteristics" is really testing.

It is never accepted. The drawee bank incurs no liability to the holder by the mere drawing of the cheque; its duty is owed to the drawer under section 31, which requires the drawee having sufficient funds properly applicable to pay when duly required and to compensate the drawer for any loss caused by default. The payee therefore has no action against the paying bank, there being no privity, which is why wrongful dishonour is a claim by the customer and not by the person who was not paid.

It may be crossed, which no other instrument may be.

Section 124, special crossing. Where a cheque bears across its face an addition of the name of a banker, with or without the words "not negotiable", it is crossed specially to that banker. Here the lines are not essential; the name of the banker is. Its effect under section 126 is that the cheque is payable only to that banker or his agent for collection, so it narrows the channel from any bank to one bank.

Section 125, who may cross. A cheque may be crossed by the drawer; where it is uncrossed, the holder may cross it generally or specially; where it is crossed generally, the holder may cross it specially; where it is crossed generally or specially, the holder may add the words "not negotiable"; and where it is crossed specially, the banker to whom it is crossed may again cross it specially to another banker as his agent for collection, which is a crossing by a banker rather than by a party.

Section 126 and section 127, payment of a crossed cheque. A generally crossed cheque may be paid only to a banker; a specially crossed cheque only to the banker named or his agent; and where a cheque is crossed specially to more than one banker, except when crossed to an agent for collection, the paying banker must refuse payment, because the direction is then impossible to obey.

Section 130, "not negotiable" crossing, and it is the most misunderstood provision in this part. A person taking a cheque crossed generally or specially bearing the words "not negotiable" shall not have and shall not be capable of giving a better title to the cheque than that which the person from whom he took it had. The words do not make the cheque non transferable; the cheque still passes from hand to hand. What they destroy is negotiability in the technical sense, that is the capacity of a transferee to take free of defects in his transferor's title. A "not negotiable" cheque is therefore transferable but carries the risk of every prior defect with it, which is exactly the protection a drawer wants.

The "account payee" crossing is not in the Act at all, and saying so earns marks. It is a creature of banking practice, treated as a direction to the collecting banker to credit the proceeds only to the account of the named payee. Its legal force comes not from any section but from the law of negligence: a collecting banker who ignores it and collects for someone else will almost certainly fail the "without negligence" condition in section 131 and lose its protection.

Where the case law bites

A forged cheque is not a cheque at all for the purpose of the mandate, and Canara Bank v. Canara Sales Corporation, (1987) 2 SCC 666, is the case. A company's accountant forged the managing director's signature on a large number of cheques over several years and the bank debited the account throughout. The Supreme Court held the bank bound to recredit the whole amount: a forged signature is wholly inoperative, so the payment was made without any mandate and with the bank's own money, and the customer's failure to detect the forgeries from the pass book was no defence, because he owes the bank no duty to examine his statements. No crossing and no protection assists a banker who pays on a signature that is not the customer's.

Crossing is the mechanism by which the drawer controls the route the money takes. A general crossing under section 123 keeps it inside the banking system; a special crossing under section 124 narrows it to one bank; the words "not negotiable" under section 130 strip a transferee of the one advantage negotiability gives, so that the cheque still travels but carries every prior defect with it; and the account payee crossing, which appears nowhere in the Act, works only through the collecting banker's duty of care under section 131. Section 129 is what makes the whole scheme real, because a banker who ignores a crossing answers to the true owner.

The two modern developments to end on are that the cheque has become an electronic instrument without ceasing to be a cheque, section 6 having been widened in 2002 and Explanation II to section 131 adapting the collecting banker's duty to an image that can only be checked visually; and that its most important sanction is now criminal, section 138 read with the presumptions in sections 118(a) and 139 having made a dishonoured cheque the principal small debt recovery instrument in India.

Liquidity comes second. The maturity pattern of the advances must let the bank meet demand deposits, since a bank borrows short and lends long, and a bank that is perfectly safe but wholly illiquid still fails.

Profitability comes third. The spread must cover the cost of funds, the operating cost and the expected loss, because a bank that lends safely and liquidly at a loss consumes its capital.

Purpose, diversification and security are the means by which the first three are secured, not independent virtues. Purpose must be identified and verified, since diversion of an advance to an unstated use is the commonest route to default. Diversification spreads exposure across borrowers, sectors and regions. Security is the last of them, a second way out and never a substitute for appraisal: a bank that lends on collateral without appraising capacity discovers on default that the security realises a fraction of the debt.

In India a seventh canon must be added, the national interest, because lending is not left entirely to the banker's judgment. That is the subject of the statutory overrides below.

Classification three: documentation and security

This is the half of good lending practice that is pure law, and it decides whether the bank has anything to enforce.

Stamping. Section 35 of the Indian Stamp Act, 1899, makes an insufficiently stamped instrument inadmissible in evidence, so an unstamped mortgage or promissory note is a recovery suit lost before it is filed.

Limitation. Under the Limitation Act, 1963, Article 19 gives three years for money lent from the date of the loan and Article 62 twelve years to enforce money charged on immovable property, while section 18 extends the period on a written acknowledgement made before expiry and section 19 on part payment of principal or payment of interest as such. A bank's revival letters are therefore not paperwork but the mechanism that keeps the asset actionable.

Title and valuation. A search report and legal opinion on title, a valuation by an approved valuer, and confirmation that the security is not agricultural land, which section 31 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, excludes from enforcement under that Act.

What a bank may not do. Section 20 of the Act of 1949 prohibits a banking company from granting any loan or advance on the security of its own shares, and from granting loans or advances to or on behalf of any of its directors, or any firm or company in which a director is a partner, manager, employee, guarantor or holder of a substantial interest. Connected lending has been the proximate cause of most Indian bank failures, and the Banking Laws (Amendment) Act, 2025, raised the "substantial interest" threshold in section 5 from five lakh rupees to two crore rupees, its first revision since 1968. Section 19 separately limits shareholdings and subsidiaries, and section 8 forbids trading except in the realisation of security.

The Court held that a contract for interest with rests capitalises the interest, so principal and accrued interest together become the principal sum adjudged at the date of the suit; but that interest on interest cannot be capitalised, being contrary to public policy, and that penal interest may be charged only once for one period of default and cannot be capitalised at all. The case is the reason bank interest is a question of law and not merely of contract.

The tension, which is the critical paragraph

Directed credit is compelled lending, and compelled lending is in tension with the canon of safety and with the directors' duty to the bank. The law resolves the conflict formally: a direction under section 21 is binding, so compliance cannot be a breach of duty. But the credit risk remains with the bank, and a target expressed as a proportion of credit takes no account of whether good proposals exist in the targeted sector.

Documentation and registration are where the law decides whether any of it was worth doing: stamping under section 35 of the Act of 1899 decides admissibility, acknowledgements under sections 18 and 19 of the Limitation Act decide whether the claim is alive, section 77 of the Companies Act and sections 26D and 26E of the Act of 2002 decide priority, and section 133 of the Contract Act decides whether the guarantee survives.

And the statutory overrides are what make Indian lending different from lending anywhere else. Section 20 forbids the lending that has actually destroyed Indian banks; section 21 compels lending the canons would not choose; and section 21A protects the bank's pricing from judicial review while Central Bank of India v. Ravindra limits it by holding that interest on interest cannot be capitalised and penal interest may be charged only once. Good lending in India therefore means prudence within a corridor that Parliament and the Reserve Bank have drawn on both sides.

Who is a customer

A person becomes a customer when an account is opened, and no course of dealing is required. In Ladbroke v. Todd, (1914) 30 TLR 433, a thief opened an account with a stolen cheque and was held a customer from the moment the account was opened, so the bank could claim the statutory protection. In Commissioner of Taxation v. English, Scottish and Australian Bank Ltd., [1920] AC 683, the Privy Council held that duration of dealing is not of the essence of the relationship.

The negative case is the more instructive. In Great Western Railway Co. v. London and County Banking Co., [1901] AC 414, a man had for many years presented cheques at a bank and taken cash over the counter but never had an account. The House of Lords held he was not a customer, and the consequence for the bank was fatal: having collected for a non customer it lost the statutory protection and was liable to the true owner in conversion. Opening an account is therefore not a formality; it is the event that creates the whole body of law below.

Joachimson v. Swiss Bank Corporation, [1921] 3 KB 110, supplies the qualification that makes it a banking debt. The Court of Appeal held that the banker's promise is to repay on demand made at the branch where the account is kept, in writing and during banking hours, and Atkin LJ set out the terms of the implied contract, including the bank's undertakings to receive money, to collect bills, to repay on demand at the branch, and to give reasonable notice before closing an account in credit, and the customer's undertaking to exercise reasonable care in drawing so as not to facilitate forgery.

Two consequences are regularly examined. Limitation runs from the demand and not from the deposit, so a dormant account does not become time barred by inaction. And a customer who sues without demanding first has no cause of action.

The locker relationship, which the banks long contended was a bare licence carrying no duty. In Amitabha Dasgupta v. United Bank of India, decided on 19 February 2021, the Supreme Court rejected that. A customer's locker had been broken open by the bank for alleged non payment of rent and its contents lost. The Court held that a bank cannot wash its hands of responsibility, that the customer is entirely at the mercy of the bank because a locker cannot be operated without the bank's own key, and that the absence of any rules on the subject was itself unacceptable.

It directed the Reserve Bank to frame comprehensive directions, and the revised locker directions of August 2021 followed, with a model agreement, a duty of care, and liability of one hundred times the annual locker rent where loss is caused by the bank's negligence, by fire or theft, or by fraud of its employees.

Trustee and beneficiary, where money is paid in for a specific purpose which then fails, in which case the fund does not form part of the bank's general assets and the claim is proprietary rather than personal.

Pledgee, mortgagee or hypothecatee, where security has been taken, bringing in the Transfer of Property Act, 1882, for mortgages and the Contract Act for pledge, indemnity and guarantee.

Secrecy. Tournier v. National Provincial and Union Bank of England, [1924] 1 KB 461, holds it a legal duty implied in the contract which survives the closing of the account. A manager telephoned a customer's employer to ask for his address and disclosed that the customer had been paying money to a bookmaker; the employers did not renew his contract. Bankes LJ stated four exceptions: disclosure under compulsion of law; where there is a duty to the public to disclose; where the interests of the bank require it; and where the customer expressly or impliedly consents.

In India the first exception has grown until it is larger than the rule, covering the income tax authorities, the Prevention of Money Laundering Act, 2002, the know your customer reporting obligations, the compulsory furnishing of credit data under the Credit Information Companies (Regulation) Act, 2005, and production under the Bankers' Books Evidence Act, 1891.

Statutory duties include nomination under sections 45ZA, 45ZC and 45ZE of the Banking Regulation Act, 1949, which since the Banking Laws (Amendment) Act, 2025, permit up to four nominees from 1 November 2025, either simultaneously with stated percentage shares or successively; and the annual return of accounts unoperated for ten years under section 26, with transfer of the balance to the Depositor Education and Awareness Fund under section 26A, the depositor's right to claim from the bank being expressly preserved.

The rights, worked

A general lien under section 171 of the Contract Act, which names bankers among those entitled, in the absence of a contract to the contrary, to retain as security for a general balance of account any goods bailed to them. In Syndicate Bank v. Vijay Kumar, (1992) 2 SCC 330, two fixed deposit receipts had been deposited as security for a guarantee with a letter authorising the bank to appropriate the proceeds, and the Supreme Court held the bank entitled to realise them, describing the general lien as an implied pledge. The characterisation is the value of the case, because a pledgee may sell after reasonable notice under section 176 while a bare lien confers only a right to retain.

The right to charge interest and commission, protected from being reopened as excessive by section 21A of the Act of 1949, but limited by Central Bank of India v. Ravindra, (2002) 1 SCC 367, decided on 18 October 2001 by a Constitution Bench, which held that a contract for interest with quarterly rests capitalises the interest, that interest on interest cannot be capitalised as contrary to public policy, and that penal interest may be charged only once for one period of default.

Termination

By act of the parties. The customer may close the account at will; the bank may close an account in credit only on reasonable notice, and what is reasonable depends on the use to which the account is put.

By operation of law. Death determines the mandate, an agency being ended by the death of the principal under section 201 of the Contract Act, and the balance passes to the legal representatives subject to any nomination. Insanity on notice and insolvency have the same effect, as does the winding up of a corporate customer. A change in the constitution of a firm closes the account as constituted, and Clayton's case then runs from that date.

Where the bank pays, it acts under a mandate, so a payment the customer did not authorise is the bank's own loss, which is what Canara Bank v. Canara Sales Corporation decided by refusing to impose on the customer any duty to police his pass book. Where the bank collects, it acts as agent, which is why it would be liable in conversion to a true owner it has never met and why section 131 protects it on conditions. Where it holds something, it is a bailee, or in the case of a locker something the Supreme Court in Amitabha Dasgupta refused to call a mere licence.

The modern development worth ending on is that the most important terms of this relationship are no longer written by the parties. Nomination and unclaimed balances come from sections 45ZA and 26A; the locker duty comes from directions the Supreme Court ordered the Reserve Bank to make; the loss on an unauthorised electronic debit is allocated by directions of 6 July 2017 that place the burden of proof on the bank; and the price of credit is limited not by the contract, which section 21A protects, but by Ravindra.

The State Bank of India, 1955. The Imperial Bank of India, itself created by the Imperial Bank of India Act, 1920, out of the amalgamation of the Bank of Bengal, the Bank of Bombay and the Bank of Madras, was converted into the State Bank of India by the State Bank of India Act, 1955, with effect from 1 July 1955. Its associate banks were brought in by the State Bank of India (Subsidiary Banks) Act, 1959, and were finally merged into it with effect from 1 April 2017.

Fourteen banks, 1969. On 19 July 1969 the undertakings of fourteen major commercial banks were acquired, first by ordinance and then by the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969. The stated objects were the removal of control by a few, the provision of adequate credit for agriculture, small industry and exports, the professionalisation of management and the encouragement of new entrepreneurial classes.

Six more, 1980, by an Act of that year, taking the total of nationalised banks to twenty.

The Act of 1969 was struck down in Rustom Cavasjee Cooper v. Union of India, (1970) 1 SCC 248, and both grounds must be given because the question asks for an explanation and not a date. A shareholder and director of one of the banks challenged the Act. The Supreme Court struck it down.

The response was legislative and immediate. The nationalisation was re-enacted by ordinance and then by the Act of 1970 in a form that cured both defects. The Twenty Fifth Amendment of 1971 later substituted "amount" for "compensation" in Article 31(2), removing adequacy from judicial scrutiny; Article 31 was itself omitted by the Forty Fourth Amendment in 1978, and the right to property became a constitutional right under Article 300A.

An honest assessment should close the note. On its own stated terms the policy succeeded: branch networks expanded very greatly, particularly in unbanked areas, and agricultural and small industry lending grew from a small base. The costs were equally real, in capital adequacy, asset quality and governance, and it was those costs that produced the Narasimham Committee reports of 1991 and 1998 and the shift from ownership to prudential regulation as the instrument of control.

(b) Rights of holder and holder in due course

Section 8 defines the "holder" of a promissory note, bill of exchange or cheque as any person entitled in his own name to the possession of it and to receive or recover the amount due on it from the parties to it. The two elements are entitlement to possession in his own name and the right to recover, so an agent, a servant or a finder is not a holder however firmly he holds the instrument.

Section 9 defines the "holder in due course" as any person who for consideration became the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the payee or indorsee thereof if payable to order, before the amount mentioned in it became payable, and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title. Four conditions therefore apply: consideration; possession or the character of payee or indorsee; acquisition before maturity; and absence of sufficient cause to believe in a defect, which is not mere honesty, since a person who shuts his eyes to an obvious defect has sufficient cause.

The rights of a holder in due course are all of the above and, in addition, the following, which must be given by section. Under section 20, on a stamped instrument delivered blank or incomplete, he may recover the whole amount the stamp covers, while any other holder recovers only the amount intended. Under section 36, every prior party remains liable to him until the instrument is duly satisfied. Under section 42, the acceptor of a bill drawn in a fictitious name cannot set the fiction up against him. Under section 43, absence of consideration is no defence against him. Under section 53, a holder deriving title from him has his rights, so the character cleanses the instrument for everyone downstream. Under section 58, although no possessor may claim on an instrument obtained by an offence, fraud or unlawful consideration, he is expressly excepted.

Sections 120 to 122 add estoppels for his benefit: the maker or drawer may not deny the original validity of the instrument; the maker of a note or the acceptor of a bill payable to order may not deny the payee's capacity to indorse; and an indorser may not deny the signature or capacity of any prior party.

The rationale, and the banking application, close the note. Negotiability exists so that a commercial instrument can circulate as money does, without each taker investigating his transferor's title, and the law achieves that by giving the innocent purchaser for value a better title than his transferor had, a deliberate exception to nemo dat quod non habet. The everyday application is a bank: a bank that discounts a bill or purchases a cheque for value before maturity becomes a holder in due course and takes free of disputes between drawer and payee; a bank that merely collects as agent takes nothing and must rely on the protection of section 131.

Conclusion. The two notes are about the two ways law creates confidence. Nationalisation was an attempt to create confidence by changing who owns the bank, and Rustom Cavasjee Cooper fixed its constitutional limits by holding that the State may take banking into public ownership but may not single out named competitors and may not call illusory compensation compensation. Its costs produced the reforms of 1991, after which confidence has been sought through prudential rule rather than ownership; and the fact that nationalisation was done by statute in a fortnight while disinvestment has not been completed in thirty years shows how much easier it is to take a bank than to sell one.

For full marks, cover: three of five are required, so each note is worth a little over eight marks and about a page. All five are given. On (a) the liability rules, which are the law, and not a description of the machine; on (b) keep suspension and winding up apart, since the question names both; on (c) the elements of section 4 and the consequence of misclassification; on (d) section 20, which is short and is entirely about who may recover how much; on (e) the demotion of the bank rate from instrument to benchmark.

Three disputes arise and all three are governed by regulation rather than statute or case law. Unauthorised withdrawal is governed by the Reserve Bank's directions of 6 July 2017, which give the customer zero liability where the loss arises from the bank's own contributory fraud, negligence or deficiency, and where a third party breach occurs with fault on neither side and he notifies within three working days; limited liability on a sliding scale for later notification; and, decisively, they place the burden of proving customer liability on the bank.

Failed transactions, where the account is debited and no cash is dispensed, are governed by the harmonisation directions of September 2019, which fix a turnaround time for automatic reversal and require compensation for each day of delay without the customer having to complain. Deficiency of service may be taken to a consumer commission under the Consumer Protection Act, 2019, or to the ombudsman under the Reserve Bank Integrated Ombudsman Scheme, 2021, in force from 12 November 2021, which merged three earlier schemes into one jurisdiction neutral scheme with a Centralised Receipt and Processing Centre at Chandigarh.

(b) Suspension and winding up of a banking company

Suspension is a moratorium and there are two routes. Under section 37 of the Banking Regulation Act, 1949, the High Court may, on the application of a banking company temporarily unable to meet its obligations, stay all actions and proceedings against it for a period not exceeding six months in all; section 37(2) makes the application unmaintainable without a report of the Reserve Bank that the company will be able to pay its debts if relief is granted, so the regulator effectively decides whether the case is illiquidity or insolvency.

Under section 45(1) and (2) the Reserve Bank may instead apply to the Central Government for an order of moratorium, again for not more than six months, and section 45(3) then forbids the bank to pay depositors or discharge liabilities during it and, since the amendment of 2020, to grant loans or make investments in credit instruments.

Section 43A gives depositors a statutory preference and its figure is the most revealing detail in this Part. After the general preferential payments the liquidator must pay, within three months, first to every savings bank depositor and then to every other depositor, two hundred and fifty rupees or the balance at his credit, whichever is less, in priority to all other debts. It was fixed by the Banking Companies (Second Amendment) Act, 1960, and has never been revised, which is why depositor protection now lives in insurance: cover of five lakh rupees since 4 February 2020, with interim payment within ninety days under section 18A of the Deposit Insurance and Credit Guarantee Corporation Act, 1961, inserted in 2021.

The constitutional foundation is Joseph Kuruvilla Vellukunnel v. Reserve Bank of India, AIR 1962 SC 1371, decided on 7 March 1962. The Palai Central Bank Ltd., the largest bank in Kerala with twenty five branches, was wound up on the Reserve Bank's opinion that it could not pay its depositors in full. A director's Article 14 challenge to sections 38 and 39 failed, the Court holding banks a class apart because they trade on deposits taken from the public.

Not a bank note or a currency note, which are excluded because they are governed by the Reserve Bank of India Act, 1934.

An undertaking to pay, and this is the element most often failed. A mere acknowledgement of debt is not a promissory note, and whether a document contains an undertaking is a question of construction of the whole instrument and not of the words it is labelled with.

The undertaking must be unconditional. An instrument payable on the happening of an uncertain event is not negotiable; an event certain to happen, though its time is uncertain, does not offend the rule.

Signed by the maker. A note without a signature, or signed by an agent without authority, creates no liability on the maker.

A certain sum of money only. The sum must be ascertainable from the instrument itself, and it must be money, so an instrument payable in goods or in a mixture of money and goods is not a promissory note.

Certain parties. The maker must be certain and the payee must be certain or the instrument must be payable to bearer. The maker and payee cannot be the same person, because a promise to pay oneself creates no obligation.

The person so signing is liable upon such instrument, in the capacity in which he signed, to any holder in due course for such amount; provided that no person other than a holder in due course shall recover from the person delivering the instrument anything in excess of the amount intended by him to be paid thereunder.

Three propositions follow and each is worth stating separately.

The signature plus delivery is an authority to complete. The person signing has not merely left a document lying about; by delivering it he has held out the holder as authorised to fill it in, which is why the liability is founded on estoppel rather than on contract.

The stamp is the outer limit. The authority extends only to an amount covered by the stamp, so the stamp does the work of a ceiling. That is why the section requires the paper to be stamped in the first place: an unstamped blank paper is outside the section altogether.

The holder in due course recovers the amount written; anyone else recovers only the amount intended. This is the whole practical effect. Against a holder in due course the signer is bound by the figure the holder took the instrument for, however far it exceeds what he meant; against any other holder he may prove what he actually intended and limit his liability to that.

In the classical model it was the pivot of policy. Raising it made refinance from the central bank dearer, which was passed on in banks' lending rates and contracted credit; lowering it did the reverse. It worked through the discount window, which is why the definition is tied to the rediscounting of commercial paper.

It is no longer the operative rate. The working rate is the repo rate under the liquidity adjustment facility, which is what the Monetary Policy Committee votes on. Since the realignment of February 2012 the bank rate has been kept equal to the marginal standing facility rate, itself fixed at a margin above the repo rate, so it moves automatically and carries no independent signal.

Its survival is legal rather than economic and that is the point of the note. Because a large number of statutes and contracts fix rates by reference to the bank rate, it continues to serve as a benchmark, notably for the penalty on a shortfall in the cash reserve ratio under section 42. It has moved from being an instrument of policy to being a legal reference rate, and it remains in the Act for that reason.

Conclusion. The five notes divide into the old law and the new, and the division is instructive. Sections 4 and 20, on the promissory note and the inchoate instrument, are nineteenth century provisions that still decide cases exactly as drafted, and both work by the same technique: they fix who bears a loss between an innocent purchaser and the person who created the document, and they prefer the purchaser.

Suspension and winding up are a complete statutory code that the regulator systematically avoids using, preferring a scheme under section 45, whose only reported test, Ganesh Bank of Kurundwad, upheld a scheme settled in weeks; and whose depositor preference in section 43A is still expressed in the two hundred and fifty rupees of 1960, which is why the real protection is insurance of five lakh rupees payable in ninety days.

And the automated teller machine and the bank rate show the two directions in which modern banking law has moved. The machine's law is made almost entirely by directions of the Reserve Bank, of 2017 and 2019, which did what the bank's own contract never would by putting the burden of proving authority on the bank. The bank rate is the opposite case: a statutory definition still on the books whose function has quietly passed to a committee constituted in 2016 against a target the Government sets.