Banking And Insurance Law 2017

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LL.B VI TERMBanking, Insurance Law and NegotiableInstrumentsCases Selected and Edited byO.B. LalGunjan GuptaArti AnejaFACULTY OF LAWUNIVERSITY OF DELHI, DELHI- 110 007January, 2017

LL.B. VI TermPaper: LB – 6032 – Banking, Insurance Law and NegotiableInstrumentsPART – A: BANKINGPrescribed Legislation: The Banking Regulation Act, 1949 (B.R. Act)Prescribed Books:1. C.R. Datta & P.M. Bakshi, M.L. Tannan’s Banking - Law and Practice in India(21th ed., 2008)2. R.K. Gupta, Banking - Law and Practice (2nd ed. 2008)3. Mark Hapgood, Paget’s Law of Banking (13th ed., 2007)4. M.L. Tannam, Banking Law and Practice in India (23rd ed., 2010)Topic 1: The Evolution of Banking Services and its History in IndiaHistory of Banking in India, Bank Nationalization and social control over banking, Varioustypes of Banks and their functions, Contract between banker and customer: their rights andduties, Role and functions of Banking Institutions.Topic 2: Banking System in India and Control by Reserve Bank of IndiaDefinition of ‘bank’, ‘banker’, ‘banking’, ‘banking companies’; Development of bankingbusiness and companies; Regulations and restrictions; Powers and control exercised by theReserve Bank of India (B.R. Act, sections 5-36AD)1.2.Sajjan Bank (Pvt.) Ltd. v. Reserve Bank of India, AIR 1961 Mad. 8Canara Bank v. P.R.N. Upadhyaya (1998) 6 SCC 526PART B: INSURANCEPrescribed Legislations: Insurance Act, 1938The Marine Insurance Act, 1963The Life Insurance Corporation Act, 1956The General Insurance Business (Nationalization) Act, 1972The Insurance Regulatory and Development Authority Act, 1999Prescribed Books:1. K.S.N. Murthy & K.V.S. Sarma, Modern Law of Insurance in India ed., 2002)S.V.Joga Rao, M.N. Srinivasan’s Principles of Insurance Law (9th ed., 2009)M.N. Mishra, Law of Insurance (9th ed., 2012)Birds, John, Modern Insurance Law (2003)M.B. Shah, Landmark Judgments on Insurance (2004)Topic 3: Law of InsuranceNature and Scope of Insurance; Classification; General Principles – Proximate Cause3.Pink v. Fleming (1890) 25 QBD 396Topic 4: Doctrine of Utmost Good Faith4.Mithoolal Nayak v. Life Insurance Corporation of India,AIR 1962 SC 814Kasim Ali Bulbul v. New India Assurance Co., AIR 1968 J & K 39Smt. Krishna Wanti Puri v. Life Insurance Corporation of India,AIR 1975 Del. 19Smt. Dipashri v. Life Insurance Corporation of India,AIR 1985 Bom 192Life Insurance Corporation of India v. Asha Goel, AIR 2001 SC 5495.6.7.8.Topic 5: Rules of Construction of Insurance Policy9.10.11.New India Asssurance Co. Ltd. v. M/s Zuari Industries Ltd.(2009) 9 SCC 70Simmonds v. Cockell (1920) All ER Rep. 162Harris v. Poland (1941) All ER 204: 1 K.B.D. 204PART – C: NEGOTIABLE INSTRUMENTSPrescribed Legislations:1. The Negotiable Instruments Act, 1881 (N.I. Act)2. The Information Technology Act, 2000 (I.T. Act)Prescribed Books:1. O. P. ‘Faizi’ & Ashish Aggarwal, Khergamvala on The Negotiable Instruments Act(20th ed., 2008)2. Ranganath Misra, Bhashyam & Adiga’s The Negotiable Instruments Act(18th ed., 2008)3. Avtar Singh, Negotiable Instruments (4th ed., 2005)

4. S. Krishnamurti Aiyar, Law Relating to the Negotiable Instruments Act(10th ed., 2009)Recommended Readings:1. Law Commission of India, Eleventh Report on the Negotiable InstrumentsAct, 1881 (1958)2. Law Commission of India, One hundred and twenty fifth Report relating toEstablishment of Evening Courts (1988)3. Law Commission of India, Two hundred thirteenth Report on Fast Track4. Magisterial Courts for Dishonoured Cheque Case (2008)Topic 6: Kinds of Negotiable InstrumentsPromissory Note, Bill(N.I. Act, sections 4-7, eMohammad Akbar Khan v. Attar Singh, AIR 1936 PC 171Ponnuswami Chettiar v. P. Vellaimuthu Chettiar,AIR 1957 Mad. 355Ashok Yeshwant Badeve v. Surendra Madhavrao Nighojakar,AIR 2001 SC 1315 : (2001) 3 SCC 726Topic 7: ‘Holder’ and ‘Holder in Due Course’Definition of Holder and Holder in Due Course; Comparison between Indian and EnglishLaw; Rights of holder in due course; Law Commission of India, Eleventh Report, 1958 (N.I.Act, section 8 read with 78; 9, 19-25, 53, 58, 59 and 118; and the English Bills of ExchangeAct, 1882, sections 2, 29 and 90) Chand v. Madanlal Khemka, AIR 1947 All. 52Singheshwar Mandal v. Gita Devi, AIR 1975 Pat. 81Nunna Gopalan v. Vuppuluri Lakshminarasamma,AIR 1940 Mad. 631S.D. Asirvatham v. G. Palniraju Mudaliar, AIR 1973 Mad. 439U. Ponnappa Moothan Sons v. Catholic Syrian Bank Ltd.(1991) 1 SCC 113Topic 8: Transfer of Negotiable InstrumentsModes - Negotiation (N.I. Act, sections 14, 46, 47, 48, 57); Assignment (The Transfer ofProperty Act, 1882, sections 130-132); Meaning of Indorsement - Who can indorse (N.I. Act,sections 15 and 51); Kinds of Indorsement – Indorsement in Blank and Full (N.I. Act,sections 16 and 54), Conditional Indorsement (N.I. Act, section 52), Restrictive Indorsement

(N.I. Act, section 50), Sans Recourse Indorsement (N.I. Act, section 52); Partial Indorsement(N.I. Act, section 56)Topic 9: Liability of Parties and Discharge of Parties from Liability onPromissory Note, bill of exchange and ChequeLiability of Maker, Drawer, Drawee and Indorser (N.I. Act, sections 30, 31, 32, 35 and36) Modes – Cancellation [N.I. Act, section 82 (a)]; Release [N.I. Act, section 82 (b)];Payment [N.I. Act, section 82(c)]; Material Alteration (N.I. Act, sections 87-89)20.Canara Bank Ltd. v. I.V. Rajagopal (1975) 1 M.L.J. 42021.London Joint Stock Bank, Ltd. v. Macmillan(1918-19) All ER Rep. 30Shivalingappa v. P.B. Puttappa, AIR 1971 Mys. 27322.Topic 10: Crossing of ChequesObject of crossing; Kinds of crossing – general, special, not-negotiable & account payeecrossing; who may cross; Rights and duties of paying banker; Protection of collecting banker(N.I. Act, sections 123-131-A) Tailors Priya v. M/s. Gulabchand Danraj, IR 1963 Cal. 36Great Western Rail Co. v. London & County Banking Co. Ltd.(1900-3) All ER Rep. 1004 (HL)Bapulal Premchand v. Nath Bank Ltd., AIR 1946 Bom. 482Indian Overseas Bank v. Industrial Chain Concern 1990)1 SCC484Topic 11: Liabilities for Dishonour of ChequesDishonor of cheque for insufficiency etc. of funds; cognizance of offences (N.I. Act,sections 138-147) The Negotiable Instruments (Amendment) II Ordinance, 201527. Cements Ltd. v. Kuchil Kumar Nandi (1998) 3 SCC 249Kusum Ingots & Alloys Ltd. v. Pennar Peterson Securities Ltd.(2000) 2 SCC 745: AIR 2000 SC 954Dalmia Cement (Bharat) Ltd. v. Galaxy Traders & Agencies Ltd.(2001) 6 SCC 463: AIR 2001 SC 676MMTC Ltd. v. Medchl Chemicals & Pharma (P) Ltd.,AIR 2002 SC 182Goaplast Pvt. Ltd. v. Chico Ursula D’ Souza,AIR 2003 SC 2035: (2003) 9 SCALE 791C.C. Alavi Haji v. Palapetty Muhammed.2007 (7) SCALE 380Dashrath Rupsingh Rathod v. State of Maharashtra(2014) 9SCC129

34.35.36.Rangappa v. Sri. Mohan (2010) 11SCC441Laxmi Dyechem v. State of Gujarat and Ors. (2012) 13SCC375The Negotiable Instruments (Amendment) II Ordinance, 2015IMPORTANT NOTE:1. The students are advised to read only the books prescribed above along withlegislations and cases.2. The topics and cases given above are not exhaustive. The teachers teaching the courseshall be at liberty to add new topics/cases.3. The students are required to study the legislations as amended up-to-date and consultthe latest editions of books.*****

PART – A : BANKINGSajjan Bank (Private) Ltd. v. Reserve Bank of IndiaAIR 1961 Mad. 8RAMACHANDRA IYER, J. – The Sajjan Bank (Private) Ltd., which is carrying on business atAlandur, originated from Sajjan and Co. Ltd., which was incorporated in November 1944with the main object of carrying on money-lending business. In May 1946, the company wasconverted into a banking company and in November of that year its name was changed intoSajjan Bank (Private) Ltd. All its shares are held by its three directors who are said to beclosely related. The Banking Companies Act, 1949, referred to hereafter as the Act, cameinto force on 16.3.1949.Section 22 of the Act provided amongst other things that every banking company inexistence at the commencement of this Act should before the expiry of six months from suchcommencement and, every other company before commencing banking business in India,apply in writing to the Reserve Bank for a licence under the section to carry on bankingbusiness. The section further provided that the Banking Companies in existence at thecommencement of the Act could continue to carry on their banking business till final orderswere passed on their application for licence.3. On 14.9.1949, the petitioner bank applied under S. 22 of the Act, to the respondent fora licence to carry on banking business. The Officers of the Reserve Bank inspected thepetitioner bank under S. 22 of the Act in July 1952. A report of that inspection was preparedon 11.10.1952. The inspection appears to have revealed the existence of certain defects in theworking of the bank. The Reserve Bank therefore decided to keep in abeyance theconsideration of the question of issuing a licence evidently with a view to watch the progressof the bank in eradicating the defects pointed out by the inspection report.The defects noticed were the subject matter of subsequent correspondence between thepetitioner and the Reserve Bank. A fresh inspection of the petitioner Bank was carried out inSeptember 1956 under S. 35 of the Act. That also revealed certain defects. The respondentwas evidently not satisfied that the affairs of the petitioner Bank were being conducted in theinterests of the depositors. The question of the grant of licence was taken up. The petitionerwas directed to show cause against the refusal of the licence. The bank was also furnishedwith a copy of the inspection report.After considering the representation of the petitioner, the respondent by its letter dated18.3.1957, declined to grant the licence to the petitioner to carry on banking business in theterms of the first proviso to sub-section (2) of S. 22 of the Act. Aggrieved by that, thepetitioner has moved this court for the issue of a writ of certiorari to quash the order of therespondent refusing to grant a licence to carry on business as a banking company.5. Mr. Rajah Iyer, the learned advocate for the petitioner, raised before me threecontentions: (1) That S. 22 of the Banking Companies Act was unconstitutional in so far as itproceeded to restrict the fundamental right of the petitioner to carry on its business, namely,

the banking business; (2) even if the provisions of S. 22 of the Act be held to be in accordancewith the Constitution, the action of the respondent was arbitrary; (3) In any event theprocedure adopted by the respondent was illegal and in that after an inspection under S. 35, itcould only proceed to act under S. 35(4) and not refuse the licence altogether.7. The Reserve Bank of India came into existence on 1.4.1935. It is a central bankcombining in its functions the regulation of both the credit and the currency of the country.Prior to its formation the responsibility for the currency was vested in the CentralGovernment. The Imperial Bank of India performed the banking functions. This dichotomybetween currency and credit was found to be a weakness in the Indian monetary system by theRoyal Commission of Indian Currency and Finance in 1926. The Commission recommendedthe establishment of a Central Bank by charter on certain lines which experience had provedto be sound. It is said that the structure of the Bank was modelled very largely on the Bank ofEngland.It is a non-political statutory body, the general superintendence and management of thebank’s affairs being vested in the Central Board of Directors. For each of the four regionalareas, Bombay, Calcutta, Madras and New Delhi, there is a local Board functioning. Thefunction of the local Boards is to advise the Central Board on such matters as may be referredto them or perform such duties as the Central Board may validly delegate to them. Thepreamble to the Reserve Bank Act states that the bank was constituted to regulate the issue ofbank notes, to keep up reserves with a view to secure monetary stability in India and generallyto operate currency and credit system of the country to its advantage.The main function, therefore, of the Reserve Bank is to regulate the monetary system ofthe country so as to ensure the maintenance of economic stability and assist in its growth.The Bank has got the sole right to issue currency notes and it also acts as the Banker to theGovernment. It also acts as a banker to the various commercial Banks and other financialinstitutions and it has got various rights and duties prescribed in Chapter II of the ReserveBank Act. For the performance of its duties in regard to the regulation of the credit of thecountry, the Reserve Bank is invested with powers of control of the bank rate, open markettransactions etc.The Reserve Bank’s responsibilities include the development of an adequate and soundbanking system not only for trade and commerce but also for the agricultural industry. TheReserve Bank is, therefore, occupying a position of considerable importance in the economicdevelopment of the country and its monetary system.8. Originally, joint stock banks were governed in respect of their incorporation,organisation and management by the Indian Companies Act of 1913, which was common tobanking as well as non-banking companies. In 1936, certain new provisions were introducedto the Indian Companies Act of 1913, in regard to the banking companies. In 1949, theBanking Companies Act was passed to consolidate and amend the law relating to the BankingCompanies. The necessity for the legislation was for safeguarding the interests of thedepositors, shareholders and of the economic interests of the country in particular. Under S.5(b) of the Act, the term “banking” has been defined as

“accepting, for the purpose of lending or investment, of deposits of money from thepublic, repayable on demand or otherwise, and withdrawable by cheque, draft, orderor otherwise.”This definition follows the accepted legal concept of the word “banking.” The essence ofa banking business is, therefore, receiving money on current account for deposit from thepublic repayable on demand and withdrawable by cheque, draft or otherwise.9. An ordinary moneylender who does not accept moneys on terms enabling a depositorto draw cheques upon him would not, therefore, be a bank or banker properly so called. Theprovisions of the Act would, therefore, apply only to the limited class of cases where the bankor banker allows the withdrawal of money by the issue of cheques. A banking company hasbeen defined to be a company that transacts the business of banking in India. Section 6provides that in addition to banking business banking company may engage themselves invarious allied businesses which are more or less incidental to or essential for the carrying onof the banking business.Section 13 prescribes the minimum standards as to paid up capital and aggregate reserves.Sections 12 and 12(a) prevent the control of companies by a few persons to the detriment of amajority of shareholders and permits the Reserve Bank of India to require a banking companyto call for a general meeting of the shareholders of the company, to elect fresh directors inaccordance with the voting rights. Section 14 prohibits the creation of charges on unpaidcapital. Sections 17 and 18 provide for minimum reserve funds and cash reserve. Section 20prohibits loans on security of the company’s shares and unsecured loans to its directors tofirms or private companies in which they are interested. Section 21 gives power to theReserve Bank of India to control its advances. Section 22 prescribes a system of licensing ofbanks, the power of licensing being vested in the Reserve Bank of India. I shall advert to thatsection in greater detail presently.Section 23 places restrictions on the opening of new places of business or change ofexisting place of business. Sections 24 and 25 require the maintenance of sufficient liquidassets. Section 26 obliges a bank to report to the Reserve Bank every year about unclaimeddeposits. Sections 27 and 28 invest a power in the Reserve Bank to call for information andto punish them if it so decides. Sections 35 and 36 confer power in the Reserve Bank of Indiato call for periodical returns and inspection of books of accounts and empower the CentralGovernment to take action against banks conducting business in a manner detrimental to theinterests of the depositors. Section 35-A gives powers to the Reserve Bank of India to givedirections to the banking companies in general, or to any banking company in particular, inthe national interest or to prevent the affairs of any banking company being conducted in amanner detrimental to the interests of the depositors or in a manner prejudicial to the interestsof the banking company or to secure proper management thereof.There are also other provisions relating to the management, restriction on the holding ofshares and in regard to the winding up of banking companies. Thus the legislation is acomprehensive measure, covering the establishment, the working and the liquidation of thebanks. The Reserve Bank of India is substantially invested with the power of regulation of thebanking companies. In this country there are various types of banks ranging from the village

moneylender to a big commercial bank. It was found necessary in the interests of the publicthat there should be a regulation of the banking system. Section 22 introduces a completesystem of licensing of banks by the Reserve Bank. Shortly stated the grant of a licence in thecase of banks incorporated in India is dependent upon the maintenance of a satisfactoryfinancial condition. In the case of foreign banks there is a further condition imposed that thecountry of their origin could not discriminate in any way against the banks registered in IndiaSub-sections (1) and (2) provide for the necessity of obtaining a licence by a bankingcompany and the time at which the licence is to be applied. The proviso to sub-section (2)authorises an existing banking company to continue to function until it is granted a licence orrefused a licence. The conditions for granting the licence by the Reserve Bank are set out insub-section (3). The section also provides for the cancellation by the Reserve Bank of alicence granted by it. In that case, the concerned bank is given a right of appeal. Similarenactments exist in the laws of certain foreign countries like America.10. Mr. Rajah Aiyar contends that the provisions of S. 22(1) are unconstitutional as beingin restraint of trade or business as in effect an arbitrary power is vested in the Reserve Bank ofIndia to grant or refuse a licence, which according to him is really a permit for the doing ofthe business to be granted by the body. He, therefore, contended that the provisions of S.22(1) of the Act are unconstitutional and invalid. In support of that contention he relied uponthe principle stated in Namazi v. Dy. Custodian of Evacuee Property, Madras [AIR 1951Mad 930]. That was a case where a disposition of property by an intending evacuee was madesubject to permission by the Custodian of Evacuee Property. No rules were framed under theAct for his guidance. The nature of the enactment was that the custodian who was a mereofficer of the Government could arbitrarily refuse to approve of a transfer by an intendingevacuee. My Lord, the Chief Justice, observed:“It may be said that the Custodian would not ordinarily refuse to approve anytransfer unless for proper grounds. But surely that would be gambling on thereasonableness of the Custodian. As the section stands, there is nothing to preventthe Custodian from most unreasonably refusing to approve of any transfer byintending evacuee.”It was held that while a permit system would be unconstitutional in so far as it related tothe exercise

2. R.K. Gupta, Banking - Law and Practice (2nd ed. 2008) 3. Mark Hapgood, Paget’s Law of Banking (13th ed., 2007) 4. M.L. Tannam, Banking Law and Practice in India (23rd ed., 2010) Topic 1: The Evolution of Banking Services and its History in India History of Banking in India, Bank Nationalization and social control over banking, Various

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