Case Comment: Anumati vs Punjab National Bank

Introduction

In India, commercial banks offer Fixed Deposit (“FD”) accounts to customers, which are often created in the joint names of two persons, payable to either of them or to the survivor among them.

The issue in the present case arose out of a special leave petition against the order of the National Consumer Dispute Redressal Commission and it pertained to the pledge of a joint FD Receipt. In this case, the Appellant and her husband Mam Chand were joint holders of a FD account with the Respondent. Mam Chand pledged the FDR to the Respondent against a loan. Upon default of Mam Chand to repay the loan, the bank had exercised its right of set-off on this account claiming that as a joint holder, the Appellant’s consent for the same was not required as the FD account was created on the principle of payment to ‘either-or-survivor’ basis.

Decision of the court

The court discussed the following principles 

1. A joint holder does not become automatically authorised to pledge the amount in the account.

2. A FD created in the joint names of two holders is a joint account which is repayable on the expiry of the specified period.

3. The FDR being a written acknowledgment by the bank that it holds a certain sum for the use of its customers, the bank is a debtor to the account holders.

4. An ‘either or survivor’ clause in a joint FD account is a tripartite agreement, whereby the amount payable on maturity of the FD may be paid by the bank to either holder (for it to be a valid discharge). It cannot be bilaterally modified by one holder and the bank, without the consent of the other holder.

Decision in relation to the existing law

1. A FD created in the joint names of two persons is a joint account of the two persons and the amount is to be repaid on expiry of a fixed period. When the FD has an ‘either or survivor’ clause for a joint account, variation in the terms of the FD can be made only under the joint signature of the holders.

2. Section 171 of the Indian Contract Act 1872 provides that a bank has the right of set-off against a debtor. Set-off is a mutual debt, which is due to and from the same parties in the form of a cross claim for a specific amount.  If there is a mutual demand between the bank and customer, a bank can apply the money of the customer in its possession. The Patna High Court in Radha Raman Chaudhary v Chota Nagpur Banking Association Ltd held that for set-off, bankers have the right to combine monies from accounts of the same customer, but they cannot combine a customer's personal account with his joint account.

3. Under section 172 of the Contract Act, a pledge is a bailment of goods as security for payment of a debt or performance of a promise. A pledge by a co-owner of the goods is valid only with the assent of all other co-owners. If a loan is sought by one of the joint holders, before the date of maturity of the FD, the bank must require that the loan application be signed by the other holders as well, or that a letter of no objection to the loan be taken from them.

4. An FD is repayable on the expiry of the fixed period, which is chosen by the depositor/holder to suit his purpose and to enable him to receive money when he needs it. The terms and conditions of the FD were for payment of the interest and principal amount to the joint account holders. There is a clear distinction between payment of interest or repayment and the right of either holder to pledge the fixed deposit with another person or the bank.

Justification of its decision by the court

The court considered two main issues

1. Whether a jointly owned FD account can be pledged by one of the holders with the bank?

2. Whether the bank can apply the FD amount towards such pledge without the authority of the other joint holder?

The court cited Tannan to find that any variation in terms of a joint account can be effected only upon joint signatures of all joint holders, and one joint holder cannot ask the bank to issue premature repayment or a loan against the FD. It also cited a decision of the Calcutta High Court (Nath Bank Ltd v Sisir Kumar Sarkar), where during the joint lives of the holders, or till the bank demanded repayment of loan amount from the debtor holder, a joint FD was a ‘debt owed by the bank to the holders’, and it could not set-off the FD against a debt due from one of the holders.

Possible policy implication of the decision

1. Services rendered by a bank are within the ambit of services as defined under section 2(42) of the Consumer Protection Act 2019 (‘CPA’), and account holders are consumers availing of banking services for consideration. Accepting a pledge of a joint FD account without the consent of all holders, and withholding release of amount due on an FD upon its maturity would constitute deficiency in the service which has been undertaken to be performed by the bank under the FDR (contract between the bank and customer), under section 2(11) of the CPA 2019.

2. Terms of operation of FD accounts are governed by the terms of the FD, and relevant rules of the Reserve Bank of India in this regard. The RBI has notified that banks can allow premature withdrawal of an FD by the surviving joint holder on the death of the other, only if there is a joint mandate from the joint holders. This points to the recognition by the RBI of the principle of joint instruction by all holders.

3. In its notification on the repayment of Term Deposits, the RBI views the insistence on the signatures of both the depositors as a defeat of the ‘either-or-survivor’ mandate, which results in unjustified delays. The RBI has not specified the policy on requirement of authorisation by all joint holders for pledge of an FDR, although it can be derived that, as a pawnee, a bank can set-off a debt from the individual account of the debtor holder, so as to not affect the right of the joint holder.

Conclusion

The Supreme Court settled the position of law that since a bank is a debtor with respect to the joint FD account, it cannot set-off a debt due from one customer against such a joint ‘debt’ account. The reasoning of the court was logical as it considered the fact that Mam Chand’s right to receive the FD amount upon maturity was limited to him being survived by the Appellant, who would then be solely entitled to receive the amount, and this right could not be taken away without her consent.

Author: : Vipasha Chirmulay, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at Khurana & Khurana, Advocates and IP Attorney.

References:

1. M.L Tannan, Banking Law and Practice in India, (Lexis Nexis, 28th Ed. 2021)

2. R.N Chaudhary, Banking Laws, (Central Law Publications, 4th Ed. 2016)

3. Consumer Cases on Banking, Reserve Bank of India, available at https://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=171

4. Repayment of Term/Fixed Deposits in banks (2011), available at https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=6798&Mode=0

M.L Tannan, Banking Law and Practice in India, (Lexis Nexis, 28th Ed. 2021)

M.L Tannan, Banking Law and Practice in India, (Lexis Nexis, 28th Ed. 2021)

(1945) 15 Comp. Case 4

M.L Tannan, Banking Law and Practice in India, (Lexis Nexis, 28th Ed. 2021)

R.N Chaudhary, Banking Laws, (Central Law Publications, 4th Ed. 2016)

Paragraph 12, Anumati v Punjab National Bank

Paragraph 14, Anumati v Punjab National Bank

Consumer Cases on Banking, Reserve Bank of India, https://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=171   last seen 17/10/22

Premature Repayment of Term/Fixed Deposits in banks with “Either or Survivor”or “Former or Survivor” mandate – Clarification (2012), available at https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=7510&Mode=0

Repayment of Term/Fixed Deposits in banks (2011), available at https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=6798&Mode=0  last seen 18/10/22