LAW RELATING TO BANKING: DIPLOMA MAY 2013 – SOLUTIONS
SECTION A: ANSWER ALL QUESTIONS: 60 MARKS
QUESTION ONE:
(a) Recently, one of the financial institutions, namely an insurance company,
had severe economic problems to the extent of failing to pay its debts. The
Reserve Bank of Malawi was appointed as Liquidator of the bank, with
exclusive powers to manage and control the Insurance Company. State five
powers that the Reserve Bank of Malawi shall have over the insurance
company? (5 marks)
ANSWER:
(i) Temporarily continue its operations
(ii) Stop or limit the payment of its obligations
(iii) Employ any necessary officers and employees
(iv) Execute any instrument in the name of the bank or financial institution
(v) Initiate, defend and conduct in the name of the bank or financial
institution any action or proceedings to which it may be a party.
(b) A bank or any financial institution is mandated to obtain prior written
approval from the Central Bank before undertaking certain matters. Mention
ten of these matters?
ANSWER:
(i) Appointment of executive officers
(b) Change in the articles of association
(iii) Opening of establishments abroad
(iv) Liquidation
(v) Financial restructuring
(vi) Takeover of assets or liabilities of other banks or financial institutions
(vii) For the sale or disposal of its shares or businesses
(viii) Opening and closing of branches and static or mobile agencies
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(Viv) reduction of its capital base by repayment of capital or distribution of
reserves.
(x) Participation in any other company to an extent in excess of ten per cent
of the paid up capital for such company.
QUESTION TWO:
(a) PL Bank Limited has been served with a garnishee order nisi granted by
the High Court, with respect to one of its reputable customer. Mention two
general rules of practice that the Bank must follow in these circumstances? (5
marks)
ANSWER:
(i) The person who makes demand on the basis of an order should, if not
done so already, be asked to specify the statutory power under which he is
acting so that the bank can consider its own position and if need be obtain
legal advice. Basically, court orders will always have the statutory provision
from which they are made/applied/granted. Hence, it is very easy for the
bank to know.
(ii) The ban should at the first opportunity inform its customer of the demand
and explain to him the legal obligation of the bank to comply. Remember,
court orders are to be complied with despite resentment.
(b) The Government is in the process of updating its pay roll. As one way of
knowing bank accounts of civil servants, the Government has written all
banks to submit names of civil servants who receive their salaries through the
banks and their bank account details. Advise the banks on what response to
give to the Government. (5 marks)
ANSWER:
The general rule is that by mutual arrangement, an employer may pay
employees through banks. That practice, however, does not give the
employer any right to access information about the account of the
employees.
Where the employer has sent such a request, the bank must politely refuse to
comply with the request and suggest that the employer asks the employees
themselves for the information, and not the bank. Of course, it is very in order
for the bank to let the employee of the request, and tell him to provide the
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details if the employee so wishes. The general duty of confidentiality does not
allow disclosure of information by banks to third parties except in few
instances.
In the case at hand, the banks must refuse to provide that information to
Government for fear of not breaching the principle of confidentiality. The civil
servants themselves can provide that information if they so wish.
(c) Mention five points that are needed for a valid presentment for
acceptance of a bill of exchange as per 41 of the Bills of Exchange Act?
ANSWER:
(i) Presentment must be made by or behalf of the holder
(ii) Presentment to be made to the drawee or to some person authorised to
accept or refuse acceptance on his behalf.
(iii) Presentment to be made at a reasonable hour
(iv) Presentment be made on a business day
(v) Presentment be made before the bill is overdue.
QUESTION THREE
(a) With respect to cheques, there are certain situations where if payment is
made, that payment will be deemed to have been made not in the ordinary
course of business. Mention three of those situations? (6 marks)
ANSWER:
(a) Outside normal banking hours, though it is allowed to pay customers who
happen to be in the bank at the time its doors are closed.
(b) Of a large sum in cash to a suspicious looking stranger
(c) By sending cash through the post to pay a cheque apparently indorsed
to the person requesting payment. Such payment would be so unusual that it
could not be in the ordinary course of business.
(b) A cheque is a bill of exchange drawn on a banker payable on demand.
Mention four characteristics of a cheque as a bill of exchange? (9 marks)
ANSWER:
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(i) A cheque is payable on demand
(b) It is drawn on a banker
(iii) The amount payable is a sum certain, so that interest may be provided
for.
(iv) If a cheque contains a requirement that a receipt has to be signed, the
document is a conditional order and not a cheque, but if the requirement to
sign the receipt is expressed as, an instruction to the payee, then the cheque
is valid because the order contains no condition.
QUESTION FOUR
(a) Briefly, describe various ways through which a bill of exchange is
discharged? (9 marks)
ANSWER:
A bill is discharged in several ways, one of which is payment in due course by
or on behalf of the drawee or acceptor. Payment in due course means
payment made at or after the maturity of the bill to the holder thereof in
good faith and without notice that his title to the bill is defective.
Another way is where the acceptor becomes the holder of the bill in his own
right, at or after its maturity.
Another way is where the holder renouncing his rights against the acceptor
absolutely and unconditionally at or after the maturity of the bill and either in
writing or by delivering the bill to the acceptor.
Another way is by intentional cancellation by the holder or his agent, if the
cancellation is apparent. A cancellation made unintentionally, or under a
mistake, or without the authority of the holder, is inoperative. Where a bill
appears to have been cancelled the burden of proof lies on the party who
alleges that the cancellation was made unintentionally, under a mistake, or
without authority.
(b) Mention three circumstances where acceptance may be deemed
qualified? (6 MARKS)
ANSWER:
(i) By including a condition
(ii) By being partial
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(iii) By specifying at one place only
(iv) By specifying a time for payment different from that expressed in the bill
(v) On a bill addressed to joint drawees, if one or more of them do not
accept.
SECTION B: ANSWER TWO QUESTIONS OF YOUR CHOICE
QUESTION FIVE
(a) What are the five essential terms of the contract between banker and
customer as implied by law as per the case of JOACHIMSON V SWISS BANK
CORPORATION (1921)? (10 marks)
ANSWER:
-
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The bank undertakes to receive money and collect bills for its
customer’s account.
The bank borrows the proceeds and undertakes to repay them
The bank will not cease to do business with the customer except upon
reasonable notice, so that there is time for his outstanding cheques to
be presented before the account is closed the same rule applies to
withdrawal of overdraft facilities.
The bank is not liable to pay until the customer demands payment from
the bank
The customer on his part undertakes to exercise reasonable care in
executing his written orders so as not to mislead the bank or to
facilitate forgery.
(b) Jones has dawn a cheque on his bank. The bank due to inadvertence
refused to honour the cheque citing insufficient funds. Later, it was
discovered that the bank made a mistake as the account had sufficient
funds. Jones intends to sue the bank in defamation. What measures should
the bank undertake to avoid this suit? (5 marks)
ANSWER:
In order to minimise the consequences, the bank must through a telephone
call to the holder of the dishonoured cheque or to the bank through which it
was presented, followed by an apology, may save the bank at fault from an
expensive claim in defamation. The bank is said to have a moral duty in
restore its reputation with its customers. It is said that in framing the apology,
the bank should use skill to avoid giving an impression of admission of the
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claim. If the bank does not do the above, chances are high that Jones will
succeed in his claim.
(c) What are the four exceptions to the confidentiality principle in bankercustomer relationship? (4 marks)
ANSWER:
(i) Where the bank is required by law to disclose
(ii) Where there is a public duty to disclose
(iii) Where the interest of the bank requires disclosure
(iv) Where the customer has given express or implied consent.
QUESTION SIX:
(a) Mention three circumstances under which a power of attorney is
terminated automatically? (6 marks)
ANSWER:
(i) If the donor is a company which goes into liquidation or is dissolved
(ii) Death, mental incapacity or bankruptcy of the donor usually revokes the
power of attorney
(iii) If granted for a specified time or to effect a specified transaction, when
the period expires or the transaction expires.
(b) Discuss the case of CHATTERTON V LONDON AND COUNTY BANK (1891)? (7
marks)
ANSWER:
C collected his pass- book together with the paid cheques from the bank at
weekly intervals. He went through the entries and ticked them off before
returning the pass-book to the bank. After 11 months, he discovered that 25
cheques bore signatures forged by his clerk who had been able to deceive
him in the checking process also. He denied the right of the bank to debit
these cheques to his account and the bank relied, among other defences,
on his apparent confirmation of the debit entries. It was held that a customer
has no duty to his bank to examine his pass-book, nor to draw its attention to
errors.
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(c) Discuss the case of LAD BROKE AND COMPANY V TODD (1914)? (7 marks)
ANSWER:
Thieves intercepted all the letters which Lad Brokes, bookmakers, had sent to
clients with their winning cheques on one particular day. The thieves took out
the cheques and substituted crude forgeries. One of the cheques was for £75
payable to a Mr. Jobson and crossed ‘A/C payee only’. One thief took this
cheque to the John Bull Bank, which was owned by Mr. Todd, and opened
an account in Jobson’s name though he gave erroneous Christian names,
using the stolen cheque as initial deposit and asked for that cheque to be
specifically presented. This was done, the cheque was paid and the next
day, Mr. Jobson withdrew the money from his account and disappeared. Mr.
Todd said that he had not made any enquiries at all about Mr. Jobson
because he was obviously a University man and told a plausible story about
not wishing his usual banker to see a cheque drawn by a bookmaker. The
court held that Mr Jobson was a customer of the bank from the moment his
account was opened but that the banker had been negligent in not making
enquiries, for example, at the college he claimed to attend, which could
easily have revealed him as an imposter.
QUESTION SEVEN:
(a) Zakeyo is one of the villagers who operate a business at a nearby trading
centre. He is illiterate and ignorant in property matters. After doing business
for a period of five years, he thought of securing a house at the trading
centre where to operate his business. He thought of securing a mortgage,
and he was granted by X bank, giving his business a security. He defaulted in
settling the mortgage. X bank enforced the mortgage by putting on sale his
business as a going concern. He intends to sue the bank for misrepresentation
of mortgage. Advise him. (8 marks)
ANSWER:
The law seeks to protect the poor and those who are ignorant in property
matters who do not know the consequences. It is said that to be protected,
the person must be shown to be ignorant on property matters. In the case of
BAHBRA V UNITED BANK, 1990, Mr. A asked Mr. B, the plaintiff, if he could
borrow the deeds of MR. B’s house in order to provide security for a loan to
Mr. A. Mar A’s son took Mr. B to the defendant bank’s branch where the
manager explained the impact of the charge to Mr. B in his native language,
Punjabi. He also advised him to obtain independent advice. Mr. B signed the
mortgage but later when the bank tried to enforce its security sought to
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avoid the charge on the grounds that as poor and ignorant person, he
should be protected. It was held that Mr. B was not ignorant of property
transactions as he had two previous mortgages. He had not been coerced
and every effort had been made to explain the consequences of his actions.
The fact that he had little English and was not well educated was irrelevant.
Reverting to the present case, Zakeyo can be protected only if it is indeed
proved that he was not well conversant with property matters. Further, it is his
onus to show that he was well explained on the consequences of the
mortgage. Hence, the chances are there that he might succeed though that
he is the one to show that he was under a wrong impression of the
transaction.
(b) If undue influence on the part of the bank is alleged by the guarantor,
there are principles that apply. Mention four of those principles. (8 marks)
ANSWER:
(i) Undue influence is overbearing a person’s free will the guarantor should
prove more than persuasion.
(ii) The law readily infers undue influence in a relationship between a stronger
and a weaker person. There are many relationships where undue influence is
presumed though this presumption is rebuttable. However, it is stated that
banker-customer relationship does not fall into that capacity.
(iii) If the dealings between one person and another disclose that one is
stronger than the other is, and is exerting that strength in the course of
persuasion or negotiation, undue influence is likely to be attributed to the
stronger party.
(iv) Where the above relationships exist, undue influence will still not be found
unless the guarantee is to the manifest disadvantage of the guarantor.
(c) In obtaining a guarantee, mention two standard precautions to be taken
by the bank to avoid assertion of undue influence? (4 marks)
ANSWER:
(i) The bank should include in the guarantee a free will clause by which the
guarantor declares that he signs voluntarily and with full knowledge of the
nature of the obligation.
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(ii) The bank must invite guarantor’s professional adviser, usually a solicitor to
witness the guarantor’s signature with an attestation clause to the effect that
he has explained the nature and contents of the document to the guarantor.
QUESTION EIGHT:
(a) In conversion of instruments, what are the two categories of people who
cannot bring an action for conversion of an instrument? (4 marks)
ANSWER:
(i) The issuer or acceptor of the instrument
(ii) A payee or indorsee who did not receive delivery of the instrument directly
or indirectly or through delivery of an agent or a co-payee.
(b) What are the purposes of International Monetary Fund (IMF)? (12 marks)
ANSWER:
(i) To promote international monetary consultation, cooperation and
collaboration.
(ii) To facilitate the expansion and balanced growth of international trade
(iii) To assist in the establishment of a multilateral system of payments
(iv) To make its general resources temporarily available to its members
experiencing balance of payments difficulties under adequate safeguards.
(v) To shorten the duration and lessen the degree of disequilibrium in the
international balances of payments of members.
(vi) To promote exchange stability.
(c) The United States of America is said to be the dominant member of the
World Bank. What are some of the things that make this statement true? (4
marks)
ANSWER:
The bank’s headquarters is in the United States of America, just near the
presidential palace. Its president is always a citizen of the United States of
America, and the United States Congress is more active than the Legislature
of any other country with regard to monitoring the bank and demanding
reforms of it.
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