LLM Group 2 Business Law Banking Laws 2018 Question Paper with Solutions

For full marks, cover: organise the history round the four things a banking system has to be able to do, take deposits, remit value, issue a circulating medium and stand behind other banks in a crisis, and ask in each era who did each of them; that plan shows what the indigenous system had and what it lacked, and it makes the arrival of the Reserve Bank an answer to a specific gap rather than a date to be memorised; then the modern classification of banks tied to the statute that creates each; then the legal issues, argued.

(The same question is set on the 2015 paper in Q.P. Code 27229, where it is answered through the indigenous instruments and the crises that produced each statute. Here the plan is the four functions.)

Remittance was supplied by the hundi. The principal kinds were the darshani hundi payable at sight and the muddati or usance hundi payable after a stated period, with specialised forms such as the shah jog, payable only to a respectable person, and the jokhmi, payable only if the goods arrived, which combined a bill with marine insurance. Hundis circulated by indorsement and were discounted, and the networks of shroffs, chettiars, multanis and marwaris honoured them across the subcontinent.

The crucial legal point is that this law survives. Section 1 of the Negotiable Instruments Act, 1881, provides that nothing in the Act affects any local usage relating to any instrument in an oriental language, with a proviso that the usage may be excluded by words in the body of the instrument indicating an intention that the parties' legal relations shall be governed by the Act. A hundi is therefore governed by custom unless the parties contract into the statute, which reverses the ordinary relation between code and usage. The saving is not ornamental: disputes on hundis are still decided by proof of mercantile usage.

What the indigenous system did not supply was a note issue or a lender of last resort. There was no institution whose paper everyone would take, and no one to lend to a shroff whose debtors had failed. Both gaps were filled from outside, and both were filled late.

The colonial and modern layering in India

The circulating medium came first and it came in stages. The three presidency banks, the Bank of Calcutta of 1806 renamed the Bank of Bengal in 1809, the Bank of Bombay of 1840 and the Bank of Madras of 1843, were chartered with government capital and the right of note issue within their presidencies. That right was withdrawn by the Paper Currency Act of 1861, which transferred the issue to the Government, so India had a government note issue before it had a central bank. The presidency banks were amalgamated into the Imperial Bank of India by the Act of 1920, which performed some central banking functions as banker to the Government but was itself a commercial bank and could not be a lender of last resort to its own competitors.

Ownership and structure changed after independence. The Reserve Bank was nationalised with effect from 1 January 1949; the Imperial Bank became the State Bank of India in 1955; fourteen banks were nationalised in 1969 and six more in 1980; and the nationalisation of 1969 was struck down in Rustom Cavasjee Cooper v. Union of India, (1970) 1 SCC 248, for discriminating against the named banks and for illusory compensation, before being re-enacted in 1970 in a form that met those objections. The Narasimham Committee reports of 1991 and 1998 then reversed the direction, producing prudential norms on Basel lines, reduced statutory pre-emption and new private bank licences from 1993.

The kinds of banks, each with its statute

Commercial banks are banking companies licensed under section 22 of the Banking Regulation Act: public sector banks constituted under the State Bank of India Act, 1955, and the Banking Companies (Acquisition and Transfer of Undertakings) Acts of 1970 and 1980; private sector banks incorporated under the Companies Act and licensed by the Reserve Bank; and foreign banks operating through branches or wholly owned subsidiaries.

The legal issues

The definition is the first. Section 5(b) anchors banking on deposits withdrawable by cheque, and payment now happens overwhelmingly through the unified payments interface, cards and wallets. A prepaid payment instrument issuer authorised under the Payment and Settlement Systems Act, 2007, performs a bank's payment function without being a bank. The statutory boundary and the economic boundary have come apart.

Dual control of co-operative banks is the second, and it caused a failure. A co-operative bank answered to the Registrar of Co-operative Societies for its constitution and management and to the Reserve Bank for its banking business, so neither could act decisively. The collapse of the Punjab and Maharashtra Co-operative Bank in September 2019, where lending to a single connected group had been concealed behind thousands of fictitious accounts, produced the Banking Regulation (Amendment) Act, 2020, extending the Act to co-operative banks and allowing a scheme under section 45 without a prior moratorium. The bank was amalgamated into Unity Small Finance Bank in January 2022.

Two decisions that belong to this history

The regulatory stage of this history was tested in court almost as soon as it began, and Joseph Kuruvilla Vellukunnel v. Reserve Bank of India, AIR 1962 SC 1371, decided on 7 March 1962, is the case. It arose from the failure of the Palai Central Bank Ltd., incorporated in 1927, which had grown into the largest bank in Kerala with twenty five branches and stood about fifteenth in India. Its collapse is itself an event in the history this question asks about.

The Reserve Bank formed the opinion that the bank could not pay its depositors in full and that its continuance was prejudicial to them, and applied for winding up. A director challenged sections 38 and 39 of the Banking Companies Act, 1949, under Article 14, saying that banking companies were denied the protections other companies enjoy and that the Bank had been given an unchecked power. The Supreme Court upheld the sections, holding banks to be a class apart because they trade on deposits taken from the public.

Conclusion. Judged by the four functions, the indigenous system was not primitive. It took deposits under a developed law and it remitted value across a subcontinent through the hundi, an instrument so well established that the Negotiable Instruments Act of 1881 saved its customary law in section 1 rather than replacing it. What it could not supply was a note that everyone would take and a lender who would stand behind a bank in a crisis, and neither of those is something a private network can create for itself.

Both were supplied from outside and both were supplied late: the note issue passed to the Government in 1861 and to the Reserve Bank in 1935, and the lender of last resort arrived only in 1935, nearly twenty years after the failures of 1913 to 1917 had shown what its absence cost. Every statute since has been an answer to a particular failure, down to the Amendment Act of 2020, which was the answer to a co-operative bank. The open legal issues are of exactly the same kind: a definition of banking anchored on the cheque, a boundary with non banking financial companies drawn by section 49A, and a resolution regime that still rests on Part III of an Act of 1949 because the Bill that would have replaced it was withdrawn.

Stage one: the bank owns a debt

Every advance is a contract, and on default the bank owns a chose in action. It may sue in the ordinary way, and where the claim rests on a written contract or a negotiable instrument it may sue summarily under Order XXXVII of the Code of Civil Procedure, 1908, in which the defendant must obtain leave to defend. Where the debt is secured by a mortgage it sues for a decree for sale under Order XXXIV.

A debt is a wasting asset, and limitation is what wastes it. Under the Limitation Act, 1963, Article 19 gives three years for money lent, from the date of the loan; Article 22 three years for money deposited under an agreement that it be payable on demand, from the demand; Article 62 twelve years to enforce payment of money charged upon immovable property; and Article 136 twelve years to execute a decree. 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.

That is why a bank's revival letters are not paperwork but the mechanism by which the asset is kept alive, and why a running account operated without acknowledgements can become unenforceable while the ledger still shows a balance.

Its jurisdiction is over applications by banks and financial institutions for debts above the prescribed amount, ten lakh rupees originally and twenty lakh rupees since the notification of September 2018, and the civil courts' jurisdiction is excluded. The application is made under section 19; the Tribunal is not bound by the Code of Civil Procedure and follows the principles of natural justice; it may attach or injunct pending adjudication; and the defendant may set up a counter claim. On adjudication it issues a recovery certificate, executed by a Recovery Officer with powers modelled on tax recovery, including attachment and sale, arrest and detention and the appointment of a receiver. An appeal lies to the Appellate Tribunal, a borrower's appeal being conditional on a deposit of fifty per cent, reducible for recorded reasons to not less than twenty five per cent.

Its constitutionality was upheld in Union of India v. Delhi High Court Bar Association, (2002) 4 SCC 275, the Supreme Court holding Parliament competent, the classification of bank claims rational, and the availability of a counter claim a sufficient answer to the objection that the borrower had no forum, while directing that the qualifications and service conditions of presiding officers be brought into line with judicial standards.

The Act was upheld with one provision struck down in Mardia Chemicals Ltd. v. Union of India, (2004) 4 SCC 311. The Supreme Court accepted that the burden of non performing assets justified a special enforcement mechanism, but struck down section 17(2) as it then stood, which required the borrower to deposit seventy five per cent of the claim before his appeal could be entertained, as onerous, oppressive and illusory as a remedy. It also held that the borrower must be allowed to make a representation and that the creditor must give reasons, and Parliament then enacted that direction as section 13(3A), which is a rare instance of a judicial gloss being converted into statutory text.

Three further decisions define the working of the Act. Transcore v. Union of India, (2008) 1 SCC 125, holds that a bank need not withdraw pending proceedings before the Tribunal in order to invoke the Act of 2002, the remedies being complementary. United Bank of India v. Satyawati Tondon, (2010) 8 SCC 110, deprecates writ petitions against measures under section 13(4) where the statutory remedy under section 17 exists, a direction repeated in Authorized Officer, State Bank of Travancore v. Mathew K.C., (2018) 3 SCC 85. And Pandurang Ganpati Chaugule v. Vishwasrao Patil Murgud Sahakari Bank Ltd., (2020) 9 SCC 215, holds that co-operative banks carrying on banking business are banks for the purposes of the Act.

Stage four: the bank owns a vote

In insolvency the bank stops being a claimant and becomes a member of a decision making body, and that is the conceptual shift the Insolvency and Bankruptcy Code, 2016, made. A financial creditor applies under section 7 on proof of default, and in Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407, the Supreme Court held that the adjudicating authority is concerned only with whether a default has occurred and whether the application is complete, the Code overriding inconsistent State law under section 238. Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17, upheld the Code in its entirety, including the distinction between financial and operational creditors and the disqualification of defaulting promoters under section 29A.

In Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta, (2020) 8 SCC 531, the Court held that the commercial wisdom of the committee of creditors is not justiciable on merits and that there is no principle of equal treatment as between classes of creditors beyond the statutory minimum. For a bank the practical consequence is that its recovery is decided by its voting share and by the plan the committee approves, not by a court.

To be able to sue the right person for the right amount, the bank needs appraisal and identification. The canons of lending, safety before security; know your customer verification under directions made under section 35A of the Banking Regulation Act and under the Prevention of Money Laundering Act, 2002, noting that after Justice K.S. Puttaswamy (Retd.) v. Union of India, (2019) 1 SCC 1, struck down section 57 of the Aadhaar Act, a private bank cannot compel Aadhaar authentication; and a credit information report obtained under the Credit Information Companies (Regulation) Act, 2005.

To own a security that can actually be realised, the bank needs title, valuation and registration. A search report and legal opinion on title; a valuation by an approved valuer; confirmation that the property is not agricultural land, which section 31 of the Act of 2002 excludes from enforcement; registration of a company's charge under section 77 of the Companies Act, 2013, within thirty days, failing which the charge is void against the liquidator and other creditors; and registration with the Central Registry, since sections 26D and 26E of the Act of 2002, inserted in 2016, make registration a condition of enforcement under the Act and the source of priority over all other debts including Government dues. Registration has ceased to be a formality and has become the source of priority.

What the courts have added to the recovery statutes

On the debt itself, what a bank may charge on it was settled in Central Bank of India v. Ravindra, (2002) 1 SCC 367, decided on 18 October 2001 by a Constitution Bench. A loan carried eleven per cent interest with quarterly rests on 31 March, 30 June, 30 September and 31 December, and the question was whether the compounded interest formed part of the principal for section 34 of the Code of Civil Procedure, 1908.

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. Section 21A of the Banking Regulation Act, 1949, separately bars a court from reopening the transaction as excessive. What the bank owns at stage one is therefore a debt whose size the law, not the contract alone, determines.

Conclusion. Asking what the bank owns at each stage makes the pattern visible. It begins with a debt, which limitation erodes and acknowledgement preserves. It may convert that into a decree or a recovery certificate, and the Act of 1993 was an attempt to make the conversion faster by creating a specialist forum, which Delhi High Court Bar Association upheld and which practice overwhelmed. It may hold a security that, since 2002, it can realise without any conversion at all, subject to the procedural fairness that Mardia Chemicals insisted on and that Parliament then wrote into section 13(3A). And in insolvency it holds a vote rather than a claim, its recovery decided by a committee whose commercial judgment Essar Steel placed beyond judicial review.

The precautions map onto that sequence exactly. Stamping and acknowledgement decide whether the debt is worth suing on; appraisal and know your customer decide whether the right person can be sued; title, valuation and above all registration under section 77 of the Companies Act and sections 26D and 26E of the Act of 2002 decide whether the security can be realised and whether it will rank ahead of the tax authorities; and correct classification under the norms made under section 35A decides whether the section 13(2) notice can be issued at all. Recovery is not a separate stage that begins on default; it is the cashing in of decisions taken at sanction.

What made the electronic instruction lawful at all is the Information Technology Act, 2000. Section 4 provides that a requirement of writing is satisfied by an electronic record accessible for subsequent reference, and section 5 gives legal recognition to electronic signatures. Without those two sections an electronic instruction could not satisfy a statutory requirement of writing, and the Bankers' Books Evidence Act, 1891, would not permit a printout to be proved, which it now does subject to the certificate required by section 2A.

Three heads of dispute arise, and all three are governed by regulation rather than by statute or case law.

Unauthorised withdrawal. The Reserve Bank's directions of 6 July 2017 on customer liability in unauthorised electronic banking transactions give the customer zero liability where the loss arises from the bank's own contributory fraud, negligence or deficiency, whether or not he notified, and where a third party breach occurs without fault on either side and he notifies within three working days; limited liability on a sliding scale where he notifies later; and they place the burden of proving customer liability on the bank. That reversed the earlier contractual position, under which the use of the correct number was treated as conclusive evidence of authority.

(b) Presumptions as to negotiable instruments

Section 118 provides that until the contrary is proved the following presumptions shall be made. Clause (a), of consideration, that every negotiable instrument was made or drawn for consideration and that every such instrument, when accepted, indorsed, negotiated or transferred, was so for consideration. Clause (b), as to date, that an instrument bearing a date was made or drawn on that date.

Clause (c), as to time of acceptance, that an accepted bill was accepted within a reasonable time after its date and before maturity. Clause (d), as to time of transfer, that every transfer was made before maturity. Clause (e), as to order of indorsements, that they were made in the order in which they appear. Clause (f), as to stamp, that a lost promissory note, bill or cheque was duly stamped. Clause (g), that the holder is a holder in due course.

The combined effect is that section 138, criminal in form, operates through a reverse burden that makes it in substance a summary recovery procedure, which is why the Supreme Court observed in Sanjabij Tari v. Kishore S. Borcar, decided on 25 September 2025, that these complaints account for a very large share of the criminal pendency of metropolitan trial courts and must be handled in a manner that reflects their quasi criminal, victim centred character.

Two limits are worth stating. The presumptions are rebuttable, not conclusive. And they attach to the instrument, so they do not assist a holder who cannot prove that the instrument was drawn by the accused at all; where the very execution is denied, section 118 has nothing to operate on.

(c) Smart card and debit card

Neither is a negotiable instrument, for the reasons given above. A card is a token that authenticates an instruction operating on an underlying contract.

A credit card is different in kind because it operates on a line of credit and creates a tripartite arrangement. The issuer contracts with the cardholder to pay merchants on his instruction and to be reimbursed, and separately with the merchant establishment to accept the card against payment less a discount. The cardholder becomes the issuer's debtor when the issuer pays, so the relationship is loan and not payment out of the customer's funds. The consequences are that interest and default charges are the issuer's and are regulated by the Fair Practices Code, that recovery is debt recovery subject to the Reserve Bank's directions on recovery agents, and that a dispute with the merchant does not by itself discharge the cardholder unless the scheme rules give a chargeback.

A smart card is defined by its technology, not by its legal effect. It carries an embedded integrated circuit, which may hold credentials securely or store value. Where it stores value it is a prepaid payment instrument, regulated by the Reserve Bank under the Payment and Settlement Systems Act, 2007, which requires authorisation of every payment system and empowers the Bank to lay down standards and issue directions. Where the chip merely authenticates, the card is a debit or credit card in a more secure form, and the chip and personal identification number combination is what satisfies additional factor authentication.

The cards and the automated teller machine are the modern end, and there the operative rules are of a completely different kind. No statute allocates the loss on a cloned card; that is done by directions of 6 July 2017 issued under section 35A of the Banking Regulation Act and the Payment and Settlement Systems Act, 2007. No statute compels compensation for a failed transaction; that comes from directions of September 2019. The old law works by presumption in a court; the new law works by direction from a regulator, and it is the second that decides almost every real dispute a bank customer now has.

The Reserve Bank: the actor that decides almost everything

The Reserve Bank's role begins long before any winding up. It inspects under section 35 and may, under section 35(4), prohibit the acceptance of fresh deposits or direct that the bank be wound up. It gives directions under section 35A in the public interest, in the interests of banking policy, or to prevent the affairs of a bank being conducted in a manner detrimental to depositors, which is the source of the all inclusive directions that freeze a bank's operations.

It controls the entrance to a moratorium under section 37, because section 37(2) makes an application by a bank to the High Court unmaintainable without a report of the Reserve Bank that the bank will be able to pay its debts if relief is granted. The Bank therefore decides whether the case is one of illiquidity or of insolvency, and the High Court acts on its opinion.

The Central Government: moratorium, sanction and acquisition

Its powers are three. It makes the order of moratorium under section 45(2), on the Reserve Bank's application, for a period not exceeding six months in all, and section 45(3) then forbids the bank to pay depositors or discharge liabilities and, since the amendment of 2020, to grant loans or make investments in credit instruments. It sanctions the scheme under section 45(7), which is what gives it binding effect. And under sections 36AE to 36AJ it may acquire the undertaking of a banking company on a report from the Reserve Bank, after giving the company an opportunity to show cause, paying compensation on the principles in the Fifth Schedule with a Tribunal to determine disputes.

That last power is now largely theoretical, and the constitutional reason is worth stating. In Rustom Cavasjee Cooper v. Union of India, (1970) 1 SCC 248, the Supreme Court struck down the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969, because it barred the named banks from carrying on banking business while leaving others free, and because the compensation was illusory. Acquisition is therefore expensive and constitutionally exposed, whereas a scheme under section 45 costs the State nothing.

The official liquidator: the regulator in a second capacity

Section 39 provides that the Reserve Bank, the State Bank of India or any other notified bank, or an individual, shall be the official liquidator. Putting the regulator in charge of the realisation is unusual and is justified by the specialised nature of banking assets and by the information the regulator already holds.

Sections 41 and 41A require a preliminary report within two months and a notice calling on preferential, secured and unsecured claimants to send statements of claim. Section 43A then imposes the statutory priority: 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, before distributing the rest pro rata among general creditors and depositors.

The same four actors in the alternative

Section 45 rearranges the actors and that is why it works. The Reserve Bank applies and prepares; the Central Government orders the moratorium and sanctions the scheme; the High Court is not involved at all; and there is no liquidator because the business is transferred as a going concern. Since the Banking Regulation (Amendment) Act, 2020, the Reserve Bank may prepare a scheme "at any other time" as well as during a moratorium, so even the Central Government's first step can now be skipped.

The record shows the consequence. Global Trust Bank was amalgamated with Oriental Bank of Commerce in 2004; Yes Bank was placed under moratorium on 5 March 2020 and reconstructed under a scheme notified on 13 March 2020, with State Bank of India taking a controlling stake and the moratorium lifted in thirteen days; Lakshmi Vilas Bank was amalgamated with DBS Bank India Limited in November 2020; and the Punjab and Maharashtra Co-operative Bank, under all inclusive directions from September 2019, was amalgamated into Unity Small Finance Bank in January 2022. None of the four was wound up, and in none of them did a court decide anything.

Loss surfaced early rather than hidden. Accounts, audit and publication under sections 29 to 31; inspection under section 35; and the income recognition, asset classification and provisioning norms made under section 35A. A bank that can defer recognition can hide a loss until it is fatal, which is why the asset quality review of 2015 and 2016 mattered more than any statutory amendment of that period.

Loss stopped from growing. The Prompt Corrective Action framework, revised with effect from 1 January 2022, restricts dividend, expansion, remuneration and lending as thresholds on capital adequacy, net non performing assets and leverage are breached; section 36AA allows removal of managerial persons, section 36AB the appointment of additional directors, and section 36ACA supersession of the board.

Loss transferred out of the bank. The Recovery of Debts and Bankruptcy Act, 1993, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, and the Insolvency and Bankruptcy Code, 2016, let a bank realise a bad asset before it consumes capital, and the asset reconstruction company under the Act of 2002 lets it move a distressed portfolio off its balance sheet altogether.

The Central Government's role and the alternative it sanctions were tested in Ganesh Bank of Kurundwad Ltd. v. Union of India, (2006) 10 SCC 645, decided on 28 August 2006. The moratorium on Ganesh Bank was advertised on 7 January 2006, the Federal Bank submitted its proposal on 8 January, and the Reserve Bank prepared a scheme of amalgamation under section 45(4). The bank and its shareholders challenged the speed, the consultation and the extinction of their interest.

The challenge was dismissed. Once a moratorium is imposed the Reserve Bank is under a duty to prepare a scheme of reconstruction or amalgamation, and such a scheme may merge a weak bank into a strong one in the interests of the weak bank's depositors. It is the only reported decision testing a section 45 scheme, and it explains why the High Court appears nowhere in the sequence: the scheme route is an administrative one from beginning to end.

The systematic measures for prevention are best understood as a sequence of loss allocations made in advance: capital puts the loss on the shareholder, section 20 keeps the insider from causing it, sections 29 to 35A make it visible, the Prompt Corrective Action framework stops it growing, the recovery statutes move it out of the bank, and deposit insurance and section 45 spread whatever is left across the system. The two hundred and fifty rupees in section 43A is what the depositor gets when every one of those has failed, and its survival unamended since 1960 is the clearest evidence that the winding up code is not where his protection now lies.

(a) Features of a promissory note and a bill of exchange

Four essentials are common to both and should be taken first, because they are what make an instrument negotiable at all. It must be in writing, so an oral promise is outside the Act. The engagement must be unconditional, so an instrument payable on the happening of an uncertain event is not negotiable, though an event certain to happen does not offend the rule. The sum must be certain and in money only, so an instrument payable in goods, or in a sum to be ascertained later, is not negotiable. And the parties must be certain, either named or made ascertainable, though an instrument may be made payable to bearer.

Section 4 defines a promissory note as an instrument in writing, not being a bank note or a currency note, containing an unconditional undertaking signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer. The essential is that it contains an undertaking to pay. A mere acknowledgement of debt is not a promissory note, and whether a document is one is a question of construction of the whole instrument and not of its label.

A cheque is a species of bill, defined by section 6 as a bill drawn on a specified banker and not expressed to be payable otherwise than on demand, and since the amendment of 2002 it includes the electronic image of a truncated cheque and a cheque in the electronic form. So every cheque is a bill; no bill is a cheque unless drawn on a banker and payable on demand; and a promissory note is neither.

The practical consequence of misclassification closes the note. Stamp duty differs, and section 35 of the Indian Stamp Act, 1899, makes an insufficiently stamped instrument inadmissible in evidence, so a document treated as the wrong kind of instrument can destroy the claim built on it.

(b) The banker's right to claim over securities and set off

Ask what the bank may do without a court, and the three rights fall into place with their limits.

It may combine accounts. Set off allows two or more accounts of the same customer, held in the same right, to be combined and a single balance struck. Where it stops: the debts must be mutual, due and certain, so it does not operate between a personal account and one held as trustee or executor, does not reach a contingent liability, and does not ordinarily reach a fixed deposit before maturity unless taken as security; and notice is generally required before combining accounts and returning cheques.

It may decide which debt a payment discharges. Sections 59 to 61 of the Contract Act give the choice to the debtor first, then to the creditor, and in default apply payments in order of time; in a running account Clayton's case, Devaynes v. Noble, (1816) 35 ER 781, applies. Where it stops: it cannot defeat an appropriation the debtor has actually made, and in a guarantee case a bank that fails to rule off an account on a surety's retirement or death may find the guaranteed debt discharged by later credits.

The quantity of money. The sole right of note issue under section 22 of the Reserve Bank of India Act, 1934, conducted through a separate Issue Department under section 23 and backed under section 33; the cash reserve ratio under section 42, freed of its statutory floor and ceiling by the amending Act of 2006; the statutory liquidity ratio under section 24 of the Banking Regulation Act, 1949; and open market operations. The withdrawal power in section 26(2) belongs here too, and was upheld in Vivek Narayan Sharma v. Union of India, decided on 2 January 2023, by four to one, Nagarathna J. holding that the entire denomination could be withdrawn only by legislation.

The price of money. Section 49 defines the bank rate, but the operative rate is the repo rate, and since February 2012 the bank rate has simply tracked the marginal standing facility rate. The real framework is Chapter III F, inserted by the Finance Act, 2016: section 45ZA requires the Central Government, in consultation with the Bank, to fix the inflation target every five years, now four per cent with a band of two per cent; section 45ZB constitutes the six member Monetary Policy Committee with the Governor as chairperson and a casting vote; section 45ZN requires a report if the target is missed for three consecutive quarters.

Under the Recovery of Debts and Bankruptcy Act, 1993, it is the bank's forum. It decides applications by banks and financial institutions for the recovery of debts above the prescribed amount, ten lakh rupees originally and twenty lakh since the notification of September 2018, the civil courts' jurisdiction being excluded. The application is under section 19; the Tribunal is not bound by the Code of Civil Procedure, 1908, and follows natural justice; it may attach or injunct pending adjudication; the defendant may set up a counter claim. It issues a recovery certificate enforced by a Recovery Officer with powers modelled on tax recovery, including attachment and sale, arrest and detention and the appointment of a receiver.

Under section 17 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, it is the borrower's forum. A person aggrieved by a measure taken under section 13(4) may apply within forty five days, and the Tribunal may restore possession or management if it finds the measure not in accordance with the Act. This is the borrower's only remedy, because United Bank of India v. Satyawati Tondon, (2010) 8 SCC 110, holds that a High Court should not entertain a writ petition where that statutory remedy exists, a direction repeated in Authorized Officer, State Bank of Travancore v. Mathew K.C., (2018) 3 SCC 85.

(e) Reconstruction and reorganisation of banking companies

Take it by stakeholder, because a scheme under section 45 is essentially a redistribution and each class fares differently.

The provisions first. Section 44A governs a voluntary amalgamation: a scheme approved by a majority in number representing two thirds in value of the shareholders of each bank, dissentients entitled to the value of their shares, and sanction by the Reserve Bank. Section 45 governs compulsory reconstruction or amalgamation: the Reserve Bank may apply to the Central Government for a moratorium of up to six months and may, during it or, since the Banking Regulation (Amendment) Act, 2020, at any other time, prepare a scheme where satisfied that it is necessary in the public interest, in the interests of depositors, to secure proper management, or in the interests of the banking system as a whole. Section 45(5) lists what the scheme may contain and section 45(7) requires sanction by the Central Government.

Depositors are the class the section exists to protect, and in every Indian scheme so far they have been transferred to the transferee bank and paid in full, notwithstanding that section 45(5) permits their rights to be reduced so far as necessary.

The difference between the two words in the question should be stated precisely. In a reconstruction the bank survives as a legal entity and its capital is rebuilt, as with Yes Bank. In an amalgamation the bank ceases to exist and its business vests in a transferee, as with Global Trust Bank in 2004, Lakshmi Vilas Bank in 2020 and the Punjab and Maharashtra Co-operative Bank in January 2022.

The authorities behind these five notes

On the promissory note and the bill, the practical consequence of getting the classification wrong is the presumption machinery you gain or lose, and Rangappa v. Sri Mohan, (2010) 11 SCC 441, decided on 7 May 2010, shows what is at stake. The accused admitted his signature on a dishonoured cheque but denied any legally enforceable debt. Three judges held that the presumption in section 139 includes the existence of a legally enforceable debt or liability, that it is a reverse onus clause enacted to make negotiable instruments credible, and that it is rebutted on the preponderance of probabilities.

On the Tribunal, Union of India v. Delhi High Court Bar Association, (2002) 4 SCC 275, upheld the Act of 1993, the Supreme Court reversing the High Court and holding Parliament competent, the classification rational and the counter claim a sufficient answer to the complaint that the borrower had no forum. On reconstruction, Ganesh Bank of Kurundwad Ltd. v. Union of India, (2006) 10 SCC 645, upheld a scheme prepared within weeks of a moratorium, holding that merging a weak bank into a strong one in the interests of its depositors is the purpose of section 45.

Conclusion. The five notes run from the oldest law in the syllabus to the newest. Sections 4, 5 and 6 of the Negotiable Instruments Act define three instruments by four common essentials and distinguish them by whether the engagement is a promise or an order, and misclassification still destroys claims through the Stamp Act.

For full marks, cover: three parts of roughly equal weight; on (i) section 14 and then the distinction between negotiation and assignment, which is what the definition is really for; on (ii) classify by statute and by custom, then by the divisions the Act itself makes, and give the presentment rules by section with the consequence of failure; on (iii) do not repeat a full essay, since the paper has given this limb a third of a question, but state the characterisations, the duties they generate and the authorities, and stop.

Sections 49 to 52 supply the detail. An indorsement may be in blank, where the indorser signs only his name and the instrument becomes payable to bearer, or in full, where he adds a direction to pay a specified person. Section 49 allows a holder of an instrument indorsed in blank to convert it into an indorsement in full. Section 50 provides that an indorsement transfers the property in the instrument with the right of further negotiation, and permits a restrictive indorsement which prohibits further negotiation or constitutes the indorsee an agent. Section 51 identifies who may negotiate. Section 52 allows an indorser to exclude or limit his own liability by express words.

(ii) Kinds of instruments, and the rules of presentment and payment

By source there are two classes. Those recognised by the Act, that is the promissory note under section 4, the bill of exchange under section 5 and the cheque under section 6. And those recognised by usage or custom, which the Act does not name but does not exclude, including the hundi, whose local usage is expressly saved by section 1, and, at common law, share warrants to bearer, bearer debentures, dividend warrants and circular notes. Documents of title to goods such as a railway receipt or a bill of lading are transferable but not negotiable, since the transferee gets no better title than the transferor had, and the distinction is regularly examined.

Presentment for payment is the demand at maturity. Section 64 requires presentment to the maker, acceptor or drawee by or on behalf of the holder, in default of which the other parties are not liable. Section 65 requires it during the usual hours of business and, for a banker, within banking hours. Section 66 fixes maturity as the time of presentment for instruments payable after date or after sight. Section 68 requires presentment at the proper place where one is specified. Section 74 requires an instrument payable on demand to be presented within a reasonable time of its receipt.

Sections 72 and 73 divide the cheque rules. Under section 72 a cheque must be presented at the bank on which it is drawn before the relation between drawer and banker has been altered to the drawer's prejudice, if the drawer is to be charged. Under section 73 it must be presented within a reasonable time of delivery if any other person is to be charged. Section 76 lists when presentment is unnecessary, including where the party to be charged has waived it, where he has intentionally prevented it, and where the instrument was made or accepted for his accommodation.

The base relationship is debtor and creditor. Foley v. Hill, (1848) 2 HLC 28, holds that money paid into a bank becomes the banker's own money, usable as it pleases, with an obligation to repay an equivalent, and that the banker is neither trustee nor agent. The depositor is therefore an unsecured creditor, which is why the licensing, capital and deposit insurance apparatus exists. Joachimson v. Swiss Bank Corporation, [1921] 3 KB 110, adds that the debt is payable on demand at the branch where the account is kept, so limitation runs from the demand and a customer who has not demanded has no cause of action.

Other characterisations overlay it and each carries a different body of law. Agency, when the bank collects a cheque or executes a standing instruction, bringing in Chapter X of the Indian Contract Act, 1872, and creating the exposure to the true owner that section 131 of the Negotiable Instruments Act exists to remove. Bailment, for articles in safe custody, under sections 148 and 151 of the Contract Act. The locker relationship, which in Amitabha Dasgupta v. United Bank of India, decided on 19 February 2021, the Supreme Court refused to treat as a bare licence, holding that the customer is at the bank's mercy because the locker cannot be operated without the bank's key, and directing the Reserve Bank to frame rules, which it did in August 2021. And trust, where money is paid in for a specific purpose that fails.

The relationship ends by notice on either side, reasonable notice being required of the bank; by operation of law on death, insanity, insolvency or winding up; or by the act of a third party through a garnishee order or an attachment. The debt survives even dormancy: section 26 of the Banking Regulation Act, 1949, requires a return of accounts unoperated for ten years and section 26A the transfer of the balance to the Depositor Education and Awareness Fund, the depositor's right to claim from the bank being expressly preserved.

Conclusion. The three parts of this question are one idea taken at three levels. Negotiation under section 14 is the mechanism that lets a debt circulate: it works only because the transferee becomes a holder in his own name, and it is worth more than assignment only because a holder in due course takes free of the defects that would defeat an assignee. That is the whole commercial point of the Negotiable Instruments Act.

The four capacities, acquired in layers

The Reserve Bank was not designed; it accumulated. It was constituted by the Reserve Bank of India Act, 1934, on the recommendation of the Hilton Young Commission of 1926, and began work on 1 April 1935 as an issuer of notes and banker to the Government and to the banks. It became a regulator of the banking industry only with the Banking Companies Act, 1949. And it became a monetary authority in the modern sense, accountable against a numerical target, only with the Finance Act, 2016.

Each layer sits in a different statute and that is the fact most answers miss. The issuing and banking capacities are in the Act of 1934; the regulatory capacity is almost entirely in the Act of 1949; the monetary authority is in Chapter III F of the Act of 1934 but was inserted eighty two years later.

Section 26(1) makes every note legal tender guaranteed by the Central Government, and section 26(2) permits the Central Government, on the recommendation of the Central Board, to declare that any series of notes of any denomination shall cease to be legal tender. That power was upheld in Vivek Narayan Sharma v. Union of India, decided by a Constitution Bench on 2 January 2023 by four to one. The majority held that "any series" extends to all series of a denomination, that the six month consultation satisfied the requirement of a recommendation of the Central Board, and that hardship does not invalidate a policy measure. Nagarathna J. dissented, holding that the whole of a denomination could be withdrawn only by legislation and that a proposal originating with the Government is not a recommendation of the Board, but granted no relief.

The tension between the capacities appears here. The section requires the recommendation of the Central Board, which is the Bank acting as issuer, but the decision is the Central Government's, and the dissent turns precisely on whether the Bank's institutional judgment was genuinely engaged. That is the constitutional question about a central bank in one sentence.

The consequences are the management of the public debt, including the conduct of auctions and the maintenance of ownership records; Ways and Means Advances repayable within three months; and, since the Fiscal Responsibility and Budget Management Act, 2003, a prohibition on subscribing to primary issues of Central Government securities. That prohibition is the most important reform in this relationship, because it ended the automatic monetisation of the deficit and separated the banker capacity from the monetary authority capacity, which had previously been in direct conflict.

As bankers' bank the hook is section 42, which requires every scheduled bank to maintain with the Reserve Bank a cash reserve of such percentage of its net demand and time liabilities as the Bank notifies. The Reserve Bank of India (Amendment) Act, 2006, removed the floor of three and the ceiling of twenty per cent with effect from 22 June 2006 and omitted section 42(1B), so no interest is paid on those balances. The companion requirement is the statutory liquidity ratio in section 24 of the Banking Regulation Act, 1949, subject to a ceiling of forty per cent. At the policy of August 2026 the cash reserve ratio is three per cent and the statutory liquidity ratio eighteen per cent.

It is no longer the operative rate. The working rate is the repo rate under the liquidity adjustment facility, and since the realignment of February 2012 the bank rate has been kept equal to the marginal standing facility rate, which sits at a margin above the repo rate. It therefore moves automatically and signals nothing.

Its survival is legal: a large number of statutes and contracts fix rates by reference to it, including the penalty for a shortfall in the cash reserve ratio, so it persists as a benchmark. Instrument to reference is the transition to describe.

The monetary authority capacity now sits in Chapter III F, inserted by the Finance Act, 2016. Section 45ZA requires the Central Government, in consultation with the Bank, to determine the inflation target in terms of the consumer price index once every five years, now four per cent with a band of two per cent either way.

What the courts have said about each capacity

As issuer, the Bank's outer limit was tested in Vivek Narayan Sharma v. Union of India, decided by a Constitution Bench on 2 January 2023. The withdrawal of the five hundred and one thousand rupee notes was challenged on the ground that "any series" in section 26(2) cannot mean an entire denomination, that the earlier demonetisations of 1946 and 1978 had been done by legislation, and that the proposal had originated with the Government rather than the Central Board. The majority upheld it; Nagarathna J. dissented, holding that a whole denomination could be withdrawn only by legislation and that a Government proposal is not a Board recommendation, though she granted no relief.

As regulator, the Bank's position was settled very early, in 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 Bank's opinion that it could not pay its depositors in full. A director's Article 14 challenge to sections 38 and 39 of the Banking Companies Act, 1949, failed, the Court holding banks to be a class apart because they trade on deposits taken from the public.

And as monetary authority it has, since 2016, been the executor of a target it does not set, decided by a committee of which its own officers are three of six, with a statutory duty to explain failure. The four capacities conflict with one another, and every important reform of the last quarter century has been an attempt to separate them: the Act of 2003 separated banker from monetary authority, Chapter III F separated the setting of the target from its pursuit, and section 45 of the Act of 1949 lets the regulator resolve a bank without the banker having to keep it alive. The bank rate is the casualty of that separation, an instrument of the banker capacity left standing in the statute after the monetary authority took its work away.

(a) The definition, and the four regulatory needs it generates

Section 5(b) of the Banking Regulation Act, 1949, defines banking as the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise. Section 5(c) defines a banking company as any company which transacts the business of banking in India.

Element one: the deposits come from the public. The risk is therefore dispersed among a very large number of people, individually small, who cannot investigate the institution or price the risk. The regulatory answer is entry control: section 22 requires a licence, section 11 a minimum paid up capital and reserves, and section 12 regulates the capital structure. Section 7 stops any other company calling itself a bank and section 49A stops anyone else taking deposits withdrawable by cheque.

Element four: the deposits are withdrawable by cheque or order. The institution is part of the payment system, so its failure stops payments generally and is contagious. The regulatory answer is supervision and resolution: inspection under section 35, directions under section 35A, removal of managers under section 36AA, and a resolution power in section 45 that keeps the payment function alive by transferring it to another bank.

Reading the definition this way shows why non banking financial companies are regulated differently. They satisfy the second and third elements but not the fourth, so they are supervised under Chapter III B of the Reserve Bank of India Act for their own solvency, but they are not licensed under section 22, not part of the payment system in the same way, and not resolved under section 45.

Deposits: the legal character

Foley v. Hill, (1848) 2 HLC 28, decides it. Money paid into a bank ceases to be the customer's and becomes the banker's own, usable as it pleases, with an obligation to repay an equivalent when called for; the banker is neither trustee nor agent but a debtor. The depositor is an unsecured creditor, which is the premise of everything above.

Lending: the legal character

On the lending side the relationship reverses. The forms are the cash credit or overdraft against hypothecated stock and book debts, the term loan repayable by instalments, the discounting of bills, which is a purchase rather than a loan and makes the bank a holder in due course taking free of prior defects, and non fund based facilities such as guarantees and letters of credit. Hypothecation, a charge on movables without possession, is a creature of practice given statutory recognition by section 2(1)(n) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

Section 21A provides that a transaction between a banking company and its debtor shall not be reopened by any court on the ground that the rate of interest is excessive, which takes bank lending outside the State usury legislation.

(b) Licensing: the entry valve

Section 22(1) forbids any company to carry on banking business in India without a licence from the Reserve Bank. The licence is a condition precedent, not an incident of incorporation.

Section 22(4) provides for cancellation on grounds mirroring the grant, with an obligation to give the company an opportunity of taking the necessary steps unless delay would be prejudicial, and section 22(5) an appeal to the Central Government. The requirement of an opportunity is a statutory instance of a general principle that the courts will supply where the rule maker has not, as State Bank of India v. Rajesh Agarwal, decided on 27 March 2023, shows: the Supreme Court read audi alteram partem into the Reserve Bank's Master Direction on frauds, requiring notice, the material relied on, an opportunity to represent and a reasoned order before an account is classified as fraudulent.

The power to acquire undertakings: the exit valve

Sections 36AE to 36AJ empower the Central Government to acquire the undertaking of a banking company, and it is a different thing from amalgamation or reconstruction under sections 44A and 45. Acquisition transfers the undertaking to the Government or to a company owned by it against compensation; a scheme transfers it to another bank.

And the compensation was illusory, the Act having specified the components to be valued in a manner that excluded significant assets and adopted principles irrelevant to true value. The case also gave Indian constitutional law the effect test, that State action is judged by its direct operation on fundamental rights and not by the object the legislature declared, displacing the compartmentalised reading of the freedoms in A.K. Gopalan v. State of Madras, AIR 1950 SC 27.

The nationalisation was re-enacted in 1970 in a form that met those objections and six more banks were taken over in 1980, and both statutes were amended by the Banking Laws (Amendment) Act, 2025, which allows the boards of public sector banks to fix the remuneration of their statutory auditors and requires unclaimed shares, interest and bond redemption money to go to the Investor Education and Protection Fund.

In practice the exit valve used is section 45, not section 36AE, and the reason is economic: acquisition requires the State to pay compensation and then own a bank, while a scheme moves the burden to the banking system and to an incoming investor. Global Trust Bank in 2004, Yes Bank in March 2020, Lakshmi Vilas Bank in November 2020 and the Punjab and Maharashtra Co-operative Bank in January 2022 were all dealt with by schemes.

On acquisition, Rustom Cavasjee Cooper v. Union of India, (1970) 1 SCC 248, fixed the constitutional limits and both grounds must be given. The Act of 1969 was discriminatory because it prohibited the fourteen named banks from carrying on banking business while leaving every other bank, including foreign banks, free to do so. And the compensation was illusory, because the Act specified the components to be valued in a way that excluded goodwill and unexpired long term leases and adopted principles that could not produce true value.

The case also gave Indian law the effect test, that State action is judged by its direct operation on fundamental rights rather than by the object the legislature declared, displacing the compartmentalised reading of the freedoms in A.K. Gopalan v. State of Madras, AIR 1950 SC 27. The nationalisation was re-enacted in 1970 in a form that cured both defects. The practical consequence for this question is that acquisition is lawful but costly, which is why section 45 has displaced it in every failure since Global Trust Bank.

For full marks, cover: organise round the three questions this relationship actually generates in litigation, because a plan that follows the disputes is more useful than one that follows the textbook: who bears the loss when the bank pays on an instruction the customer did not give; who bears the loss when the bank collects for someone who was not entitled; and what the bank may disclose and to whom. Take the characterisation of the relationship first, briefly, since each of the three answers depends on it, and take termination last, as the point at which the questions stop arising.

(The same question is set on six of the eleven papers in this folder. The other plans used here are the anatomy of the relationship, the banker's duties, and the life cycle of the account.)

Question one: who bears the loss of a payment the customer did not authorise

A bank pays under a mandate, and a payment outside the mandate is made with the bank's own money. That is the whole answer in principle, and everything else is qualification.

Section 31 of the Negotiable Instruments Act, 1881, states the duty: the drawee of a cheque having sufficient funds properly applicable must pay when duly required, and in default must compensate the drawer for any loss or damage. Wrongful dishonour sounds in substantial damages for a trader without proof of special damage, on Marzetti v. Williams, (1830) 1 B & Ad 415, and Rolin v. Steward, (1854) 14 CB 595.

A forged signature is no mandate at all, and the leading Indian case is Canara Bank v. Canara Sales Corporation, (1987) 2 SCC 666. 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. The Supreme Court held the bank liable to recredit: a forged signature is wholly inoperative, the payment is therefore unauthorised, and the customer's failure to detect it from the pass book is no defence, since the customer owes the bank no duty to examine his statements. The duty of care runs one way.

Question two: who bears the loss when the bank collects for the wrong person

When it collects, the bank is its customer's agent, and an agent who receives money for a principal without title converts the true owner's property. Section 131 removes that exposure on conditions.

Section 131 provides that a banker who has in good faith and without negligence received payment for a customer of a cheque crossed generally or specially to himself shall not, in case the title to the cheque proves defective, incur any liability to the true owner of the cheque by reason only of having received such payment. Section 131A extends the protection to drafts.

The four conditions: good faith and absence of negligence; receipt for a customer; a crossing already on the instrument when it reached the banker; and receipt as agent rather than as a holder for value in the bank's own right.

Where the bank has given value, by allowing the customer to draw against an uncleared cheque, it may be a holder for value in its own right, and its position is then governed by the law of holders rather than by section 131. The two capacities are alternatives and are commonly pleaded in the alternative.

Question three: what may the bank disclose

Tournier v. National Provincial and Union Bank of England, [1924] 1 KB 461, holds the duty of secrecy to be a legal duty implied in the contract, surviving the closing of the account, and Bankes LJ stated four exceptions: compulsion of law; a duty to the public to disclose; the interests of the bank; and the express or implied consent of the customer.

In India the first exception has expanded until it dominates, taking in the income tax authorities, the Prevention of Money Laundering Act, 2002, the know your customer reporting obligations, the compulsory sharing of credit data under the Credit Information Companies (Regulation) Act, 2005, and production under the Bankers' Books Evidence Act, 1891.

By operation of law. Death determines the mandate, agency being ended by the death of the principal under section 201 of the Indian Contract Act, 1872, and the balance passes to the legal representatives subject to any nomination under section 45ZA of the Banking Regulation Act, 1949, now permitting up to four nominees. 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, Devaynes v. Noble, (1816) 35 ER 781, then operates from that date.

By act of a third party. A garnishee order under Order XXI Rule 46 of the Code of Civil Procedure, 1908, a notice under section 226(3) of the Income Tax Act, 1961, or an attachment under the Prevention of Money Laundering Act freezes the balance; a notice of assignment obliges the bank to pay the assignee; notice of a trust or an adverse claim puts it on inquiry.

Dormancy is not termination: section 26 requires a return of accounts unoperated for ten years and section 26A the transfer of the balance to the Depositor Education and Awareness Fund, the depositor's right to claim from the bank being preserved.

For full marks, cover: begin from the causes of bank failure and match each to the provision aimed at it, because that turns the second limb into the organising idea of the whole answer and the winding up code into what happens when every one of those provisions has failed; the causes are connected lending, concentration, maturity mismatch, fraud and concealment, and contagion; then the code itself in outline, with section 43A as the proof that it is no longer where the depositor's protection lies; then section 45 as the route actually used.

(This question is set in nearly identical terms on eight of the eleven papers in this folder, and each page here takes it on a different plan. The others are the statutory machinery in sequence, the three resolution tools, the depositor's journey, the comparison with the general insolvency law, and the four actors.)

The definition of "substantial interest" in section 5 was the weak point and it has just been repaired. Fixed in 1968 at five lakh rupees, it had come to catch shareholdings of no economic significance while missing real ones. The Banking Laws (Amendment) Act, 2025, raised it to two crore rupees, the first revision in fifty seven years, in a package of nineteen amendments across five Acts commenced in two stages, on 1 August 2025 for governance and audit and 1 November 2025 for nomination.

Cause two: concentration

A bank whose exposure is concentrated in one borrower, one group or one sector fails when that borrower fails. The provision aimed at it is section 21, under which the Reserve Bank may determine the policy in relation to advances and give binding directions on the purposes of advances, margins, maximum amounts and rates of interest. The large exposures framework issued under it caps exposure to a single counterparty and to a group of connected counterparties as a proportion of eligible capital. Section 19 limits the holding of shares in any company and restricts subsidiaries, which is the same principle applied to the investment book.

Cause four: fraud and concealment

A loss that is hidden grows. The provisions aimed at concealment are sections 29 to 31 on accounts, audit and publication, section 35 on inspection, and above all the income recognition, asset classification and provisioning norms issued under section 35A, which fix when a loan must be recognised as non performing. The asset quality review conducted in 2015 and 2016 mattered more to the health of Indian banking than any statutory amendment of that period, precisely because it forced recognition.

The Master Direction on frauds sits here too, and it has been made procedurally fair. In State Bank of India v. Rajesh Agarwal, decided on 27 March 2023, the Supreme Court read the rule of audi alteram partem into the Directions, holding that classification as fraud entails serious civil consequences and that the borrower must be given notice, the material relied on, an opportunity to represent and a reasoned order.

Section 38(1) provides that the High Court "shall" order winding up if the bank is unable to pay its debts or if the Reserve Bank applies under section 37 or section 38, so there is no discretion. Section 38(3) lists the grounds for an application by the Bank: failure of the capital requirement in section 11, disentitlement under section 22, prohibition from receiving fresh deposits under section 35(4)(a), and continued failure or contravention after notice. Inability to pay is established by the Reserve Bank's certificate, given after a refusal to meet a lawful demand within two working days at a place having an office of the Bank and five working days elsewhere.

Section 39 makes the Reserve Bank, the State Bank of India or another notified bank the official liquidator. Sections 41 and 41A require a preliminary report and a notice calling for claims, and section 42 empowers the High Court to decide all claims. Section 44 permits a voluntary winding up only on the Bank's certificate that the company can pay in full, and section 44A governs voluntary amalgamation.

The route actually used

Section 45 permits the Reserve Bank to apply to the Central Government for a moratorium of up to six months and, during it or, since the Banking Regulation (Amendment) Act, 2020, at any other time, to prepare a scheme of reconstruction of the bank or of its amalgamation with another banking institution, where satisfied that it is necessary in the public interest, in the interests of depositors, to secure proper management, or in the interests of the banking system as a whole. The scheme may reduce the rights of members and depositors so far as necessary and takes effect on sanction by the Central Government.

The record: Global Trust Bank amalgamated with Oriental Bank of Commerce in 2004; Yes Bank under moratorium on 5 March 2020 and reconstructed by a scheme notified on 13 March 2020, with State Bank of India taking a controlling stake and the moratorium lifted in thirteen days; Lakshmi Vilas Bank amalgamated with DBS Bank India Limited in November 2020; the Punjab and Maharashtra Co-operative Bank amalgamated into Unity Small Finance Bank in January 2022. In each case depositors were carried across in full and shareholders were extinguished, and no bank was wound up.

On what happens when the causes have done their work, Ganesh Bank of Kurundwad Ltd. v. Union of India, (2006) 10 SCC 645, decided on 28 August 2006, is the only reported test of a section 45 scheme. The moratorium on Ganesh Bank was advertised on 7 January 2006, the Federal Bank proposed the next day, and the Reserve Bank prepared a scheme of amalgamation. The bank and its shareholders challenged the haste and the extinction of their interest.

The challenge was dismissed. The Court held that once a moratorium is imposed the Reserve Bank is under a duty to prepare a scheme under section 45(4), and that merging a weak bank into a strong one in the interests of the weak bank's depositors is what the section exists to achieve. The case is the practical answer to the second limb of this question: prevention that has failed is not followed by liquidation but by a transfer, and the loss falls on the shareholders who allowed the causes to operate.

The winding up code is what is left when all of those have failed, and it has two striking features. Its central provisions are mandatory rather than discretionary, section 38 obliging the High Court to order winding up once the Reserve Bank has certified inability to pay. And its depositor preference in section 43A has stood at two hundred and fifty rupees since 1960, which tells the reader plainly that this is not where protection now lies. It lies in deposit insurance of five lakh rupees payable in ninety days, and in section 45, which since 2020 lets the Reserve Bank reconstruct a bank without first freezing the depositors it is trying to protect. A code that the system is designed never to use is still worth knowing, because everything else in the Act is built to keep a bank away from it.

(a) Privileges of a holder in due course

Section 9 defines him as a 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 if payable to order, before the amount 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. The four elements are consideration, possession or the character of payee or indorsee, acquisition before maturity, and absence of sufficient cause to believe in a defect. The last is not mere honesty: a person who shuts his eyes to an obvious defect has sufficient cause.

The justification should close the note. A negotiable instrument is meant to circulate as money does, and it can only do so if a taker need not investigate his transferor's title. The law therefore confers a title better than the transferor's, a deliberate exception to nemo dat quod non habet, and the price of the exception is the strictness of section 9.

(b) Presentment for acceptance and for payment

Presentment for acceptance exhibits a bill to the drawee so that he may become the acceptor and take on primary liability; presentment for payment is the demand at maturity on the party primarily liable. A promissory note has no drawee and needs no acceptance; a cheque is payable on demand and is never accepted; only a bill needs acceptance, and only in the cases the Act specifies.

Section 61 requires presentment for acceptance where a bill is payable after sight, since time cannot run until it is seen, and where the bill expressly stipulates for it. Section 62 applies the same rule to a note payable after sight. Section 63 allows the drawee forty eight hours, exclusive of public holidays, to decide.

The consequence of failure is the whole point. Parties secondarily liable, the drawer of a bill and the indorsers, are discharged; the party primarily liable is not. A holder who delays therefore loses the very parties he took the instrument for, since indorsers are usually taken as additional security. And in the case of a cheque, presentment within its period of validity is a precondition of any complaint under section 138, so delay destroys the criminal remedy as well.

(c) Legal perspectives of automation

Four statutes make electronic banking work and each contributes one thing.

The Information Technology Act, 2000, supplies form. Section 4 provides that a requirement of writing is satisfied by an electronic record accessible for subsequent reference; section 5 gives legal recognition to electronic signatures. Sections 43, 43A, 66 and 72A supply liability and offences, section 43A obliging a body corporate handling sensitive personal data to compensate where negligence in maintaining reasonable security practices causes wrongful loss.

Above these sits regulation: the customer liability directions of 6 July 2017, the failed transaction directions of September 2019, the Reserve Bank Integrated Ombudsman Scheme, 2021, and the Digital Personal Data Protection Act, 2023. The evaluation to close on is that automation moved the legal question from form to security: the old law asked whether an instrument was in the right form, the new law asks whether the system was reasonably secure and who bears the loss when it was not.

(d) Automated teller machines and the use of the internet

A machine creates no new relationship. A withdrawal is a demand under the Joachimson mandate, authenticated by a personal identification number, and the card is not a negotiable instrument because it is neither an unconditional order for a sum certain nor transferable.

Unauthorised withdrawal is governed by the Reserve Bank's directions of 6 July 2017: zero liability where the loss arises from the bank's own fraud, negligence or deficiency, or from a third party breach reported within three working days; limited liability on a sliding scale thereafter; and the burden of proving customer liability on the bank. The principle is the same as in Canara Bank v. Canara Sales Corporation, (1987) 2 SCC 666, that a payment outside the mandate is the bank's own loss.

(e) The banker's right to claim over securities and set off

The general lien under section 171 of the Indian Contract Act, 1872, entitles a banker in the absence of a contract to the contrary to retain as security for the general balance of account any goods bailed to him. It is general rather than particular, arises by operation of law, and does not reach goods bailed for a specific purpose inconsistent with retention, articles in safe custody, or securities lodged for a particular transaction.

In Syndicate Bank v. Vijay Kumar, (1992) 2 SCC 330, the Supreme Court described it as an implied pledge, so that fixed deposit receipts deposited with a letter of authority could be realised. The characterisation is what gives the right value, since a pledgee may sell after reasonable notice under section 176 of the Contract Act.

Set off combines two or more accounts of the same customer held in the same right, on debts due and certain; it does not operate between a personal account and a trust or executorship account, does not reach a contingent liability, and does not ordinarily reach a fixed deposit before maturity unless taken as security.

The case law these notes rest on

On the holder in due course, the presumption that protects him is governed by Rangappa v. Sri Mohan, (2010) 11 SCC 441, decided on 7 May 2010 by three judges. The accused admitted his signature on a dishonoured cheque but denied that any legally enforceable debt existed. The Court held that the presumption under section 139 includes the existence of a legally enforceable debt or liability, not merely the issue of the cheque; that section 139 is a reverse onus clause enacted to improve the credibility of negotiable instruments; and that it is rebuttable on the preponderance of probabilities, the accused being entitled to rely on the complainant's own material.

Where the drawer is a company the complaint must be framed correctly, and Aneeta Hada v. Godfather Travels and Tours (P) Ltd., (2012) 5 SCC 661, decided on 27 April 2012, decides how. An authorised signatory of International Travels Ltd. issued a cheque for Rs 5,10,000 which was dishonoured, and she was prosecuted without the company being made an accused. The Court held that arraigning the company is imperative where the offence is committed by a company, applying lex non cogit ad impossibilia only where a legal bar prevents proceeding against it. A holder who fails to join the company therefore loses the prosecution however good his instrument.

Conclusion. The five notes divide neatly. Two of them, the holder in due course and presentment, are the classical law of the instrument, and they are two halves of one policy: negotiability is protected by giving the innocent purchaser for value a title better than his transferor's, and it is disciplined by requiring the holder to present promptly on pain of losing the parties secondarily liable.

The other three are the law of the modern bank, and they show a subject in which Parliament supplies the power and the regulator supplies the rule. Automation was made lawful by four statutes, each contributing one element, form, instrument, system and proof, but the rules that decide real disputes about a cloned card or a failed withdrawal come from directions of 2017 and 2019 issued under section 35A of the Banking Regulation Act and the Payment and Settlement Systems Act, 2007. And the banker's ancient lien, set off and appropriation have been supplemented by a statutory power to sell without a court and by a priority that now depends on registration rather than on possession. In each case the direction is the same: away from the court and towards the regulator and the register.

(a) The banker's lien

Section 171 of the Indian Contract Act, 1872, is the source. It provides that bankers, factors, wharfingers, attorneys of a High Court and policy brokers may, in the absence of a contract to the contrary, retain as a security for a general balance of account any goods bailed to them; and that no other persons have a right to retain as a security for such balance goods bailed to them, unless there is an express contract to that effect.

Two features of the section are the substance of the note. The lien is general, not particular: it secures the whole balance owing on the account and not merely the transaction on which the goods came into the bank's hands, which distinguishes it from the ordinary lien of an artificer or repairer. And it arises by operation of law, so no agreement is required, although an agreement may exclude it, which is what "in the absence of a contract to the contrary" means.

The lien should be distinguished from set off, which is not a right over property at all but a right to combine two accounts of the same customer held in the same right and strike a single balance, and from appropriation under sections 59 to 61 of the Contract Act, which decides which of several debts a payment discharges.

A closing sentence should place it in the modern law. In Central Bank of India v. Siriguppa Sugars and Chemicals Ltd., (2007) 8 SCC 353, a pledgee bank's rights over sugar stocks were held to prevail over the State's claim for cane dues and over the growers' claims, both being unsecured. And since the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, a secured creditor may realise its security without any court at all, with sections 26D and 26E, inserted in 2016, making registration with the Central Registry both the condition of that enforcement and the source of priority over all other debts. The banker's lien of 1872 is the first step in a long movement towards creditor self help.

Good practice is also a matter of documentation and registration, and this half is usually omitted. Correct stamping, because section 35 of the Indian Stamp Act, 1899, makes an insufficiently stamped instrument inadmissible; a search and legal opinion on title and a valuation by an approved valuer; confirmation that the security is not agricultural land, which section 31 of the Act of 2002 excludes from enforcement; registration of a company's charge under section 77 of the Companies Act, 2013, within thirty days, failing which it is void against the liquidator and other creditors; registration with the Central Registry; acknowledgements under section 18 of the Limitation Act, 1963, to keep the debt alive; and guarantees drafted to survive variation, since section 133 of the Contract Act discharges a surety where the principal contract is varied without his consent.

(c) The Debts Recovery Tribunal

The Tribunal works under two statutes and the two point in opposite directions, which is the feature worth building the note on.

Under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, renamed the Recovery of Debts and Bankruptcy Act, 1993, by the Insolvency and Bankruptcy Code, 2016, it is the bank's forum. It was recommended by the Tiwari Committee of 1981 and by the first Narasimham Committee, both of which found that recovery through ordinary civil suits was taking a decade or more.

It decides applications by banks and financial institutions for the recovery of debts above the prescribed amount, ten lakh rupees originally and twenty lakh rupees since the notification of September 2018, and the jurisdiction of civil courts over such claims is excluded. The application is under section 19; the Tribunal is not bound by the Code of Civil Procedure, 1908, and follows the principles of natural justice; it may attach or injunct pending adjudication; and the defendant may set up a counter claim.

An appeal lies to the Debts Recovery Appellate Tribunal, and a borrower's appeal is conditional on a deposit of fifty per cent of the amount, reducible for reasons recorded in writing to not less than twenty five per cent. That condition descends from Mardia Chemicals Ltd. v. Union of India, (2004) 4 SCC 311, which struck down the seventy five per cent deposit then required by section 17(2) as onerous, oppressive and illusory as a remedy, and which also held that the borrower must be allowed to make a representation and the creditor to give reasons, a direction Parliament then enacted as section 13(3A).

Its constitutionality was upheld in Union of India v. Delhi High Court Bar Association, (2002) 4 SCC 275, the Supreme Court holding Parliament competent, the classification of bank claims rational and the availability of a counter claim a sufficient answer to the objection that the borrower had no forum, while directing that the qualifications and service conditions of presiding officers be brought into line with judicial standards.

Its priority against competing claimants was settled in Central Bank of India v. Siriguppa Sugars and Chemicals Ltd., (2007) 8 SCC 353. Sugar stocks pledged to a bank were claimed by the State for cane dues and by the cane growers for the price of their cane. The Court held that the pledgee bank's rights prevailed, because the competing claims were unsecured while the bank held a possessory security.

On lending, what a bank may charge was decided in Central Bank of India v. Ravindra, (2002) 1 SCC 367, on 18 October 2001 by a Constitution Bench. A loan carried eleven per cent interest with quarterly rests on 31 March, 30 June, 30 September and 31 December. The Court held that a contract for interest with rests capitalises the interest so that principal and accrued interest form the principal sum adjudged under section 34 of the Code of Civil Procedure, 1908, but that interest on interest cannot be capitalised, being contrary to public policy, and that penal interest may be charged only once for a period of default. Section 21A of the Banking Regulation Act, 1949, separately bars reopening the transaction as excessive.

The banker's lien is what the bank may do for itself when the borrower defaults, and its history is the history of that self help expanding: a general lien by operation of law in 1872, characterised as an implied pledge with a power of sale in 1992, and supplemented since 2002 by a statutory power to take possession and sell with no court at all. And the Debts Recovery Tribunal is what happens when self help is not enough, wearing two hats that pull against each other, the bank's forum for recovery and the borrower's only forum for challenging an enforcement carried out without adjudication. Its inability to cope with either is the single most important fact about debt recovery in India, because it explains why every statute since 1993 has been designed to avoid it.