Business of Banking - Essay Example

The term ‘business of banking’ was historically been defined by judges in accordance with the facts and evidences of every individual case. Hence there was no specific definition of the term, until the incorporation of the Banking Act in the year 1989. The term banking business was defined under sec. 5 of this act to include a business which is defined as 'banking' according to the constitution or a business which is carried on by a corporation which entails the act of taking money on deposit and making advances of money; or any other financial activities which are prescribed under this definition (Ellinger, Lomnicka, 1994). However it was soon realized that the current definition was not adequate and hence required to be redefined to include a broader perspective. Accordingly various additional set of activities were included to broaden the scope of the term. According to section 11 of the Banking Act, certain activities included in the definition applied only to individuals and / or corporations, and any non-corporation which is not defined under this section, is forbidden to carry out “any banking business”. Similarly under section 8, non-ADI corporations are forbidden from carrying out “any banking business” (Comlaw, 2011). There is an ambiguity over the term “any banking business”. The sections 7 and 8 of the banking act prohibit the execution of 'any banking business' although there is no clear consensus regarding the term. There are serious doubts regarding what can possibly be considered as "any banking business". According to the section 5, banking business includes acceptance of funds from the public AND making loans to them, but whether a business which is involved in only accepting deposits but not make any loans, is considered as 'banking business' and vice versa, is questionable (Weaver et al, 2003). In Commissioners of the State Savings Bank of Victoria v Permewan, Wright & Co. Ltd, Issacs J, stated that the "essential characteristics of the business of banking may be described as the collection of money by receiving deposits upon loan, repayable when and as expressly or impliedly agreed upon, and the utilization of the money so collected by lending it again, in such sums as are required (Guest, Chalmers, 2005, 11). In United Dominions Trust Ltd v Kirkwood [1966] 2 QB 431 at 445ff, Lord Denning stated that, the times have changed drastically, ever since the definition of banking put forward by Issac, and newer instruments of payment are now added and used as acceptable modes of payment. This includes the use of cheques - crossed as well as uncrossed, and hence the same must also be included within the definition of banking (Gillies, 2004, 780). The Privy Council, in Bank of Chettinad Ltd v Colombo v Income Tax Commissioners, Colombo [1948] A.C. 378, accepted the following definition of banking: "a company which carries on as its principal business, the accepting of deposits of money on current account or otherwise, subject to withdrawal by cheque, draft or order (Brindle, Cox and Coleman, 2004, 426). The definition of 'business of banking' discussed so far, are inadequate on two grounds: firstly, there is significant ambiguity over the term "any business" used in the definitions and secondly, not all modes of payments are appropriately covered under the definitions. Thus on account of these two reasons, defining what comprises of 'the business of banking' becomes a daunting task. 2. The two key duties imposed on customers in accordance with MacMillan and Greenwood rule under the Australian law include (Hocking, Smith, 1999, 156): (i) The duty to exercise adequate care while drawing cheques so as to prevent misleading the bank or to encourage forgery – (the MacMillan duty) and (ii) The duty to inform the bank if any cheques allegedly signed by the customers are forged (the Greenwood duty) The first duty was laid down in the London Joint Stock Bank Ltd. v Macmillan case while the second was laid down in the Greenwood v Martins Bank Ltd., case (Kelly & Holmes, 1997, 258; Perry and Kelly, 1987,9). The purpose of the MacMillan duty was to restrict and prevent cases of forgery and eliminate the opportunities for fraud, as far as possible by levying specific duties on the customers. In London Joint Stock Bank Ltd v Macmillan & Arthur (1918) it was held that the duty to prevent occurrences of fraud and forgery lies solely with the customer, who is expected to take reasonable precautions against such occurrences; and any negligence on the part of the other party may lead to reduction in damages on the basis of contributory negligence. It was argued that the damages suffered by the plaintiff would be reduced by 10 per cent, despite the negligence on the part of the bank to verify the background of the client; the plaintiff was also equally responsible by being negligent towards their duty to act responsibly and prevent opportunities for forgery, such as not taking adequate precautions to properly fill the blank spaces in their cheques, thus giving an opportunity for forgery (Kelly & Holmes, 1997, 258). As per the Greenwood duty, the customer is required to intimate the bank regarding cases involving forgeries. If however, the customer fails to do so, the customer is stopped from denying the validity of the forged signature. In the case of Greenwood v Martin's Bank (1933), the husband failed to inform the bank regarding the forging of his signature by his wife for withdrawing money from the bank, despite having knowledge regarding her activities. He subsequently brought this matter up with the bank and informed them about the forgery, and charged the bank for wrongfully debiting his account. It was held that the husband can no longer be entitled to any respite from the bank, since he had the knowledge as well as an opportunity to stop the forgery by informing the bank about it in time; however, he failed to do so. Hence, it was on account of his failure to act appropriately that he suffered losses. The cheques withdrawn were hence would be considered as genuine (Kelly & Holmes, 1997, 258). References: Brindle, M., Cox, R., Coleman, R., (2004). Law of bank payments, Sweet & Maxwell Publications, Pp. 426 Ellinger, E. P., Lomnicka, E., (1994). Modern banking law, Oxford University Press. Gillies, P., (2004). Business Law, Federation Press, Pp. 780 Guest, A. G., Chalmers, M. D., (2005). Chalmers and Guest on bills of exchange, cheques and promissory notes, Sweet & Maxwell, Pp. 11 Hocking, B., Smith, A., (1999). Liability for negligent words, Federation Press, Pp. 156 Kelly, D., Holmes, A., (1997). Business Law Q & A, Pp. 258 Perry, F. E., Kelly, J. E., (1987). Law and Practice relating to Banking, Taylor & Francis Publication, Pp. 8-10 Comlaw (2011). Banking Act 1959 Available at: http://www.comlaw.gov.au/Details/C2004C00162 (accessed: 2011/04/20) Weaver, G., Craigie, C. R., Prudence, G. B., Tyree, A. L., (2003). The law relating to banker and customer in Australia, Thomson Lawbook Co. Read More