CHAPTER ONE THE BANKER CUSTOMER RELATIONSHIP Introduction A bank is defined in terms of its operations broadly as a financial institution

and specifically as a bank. Essentially a financial institution is an organization that intermediates in the process whereby funds are channeled from where they are available in the economy to where they are needed. In its operations, a bank necessarily enters into legal relationships with the parties that consume its services. Legally therefore the operations of a Bank could be viewed as a relationship between the bank on the one hand and what is termed as a customer on the other hand. The relationship is important because, as in the case of any relationship, disputes can arise and when they arise, it would be important to have a basis for resolving these disputes. The framework for resolving disputes in this relationship is provided by the laws, rules and regulations that have developed overtime through custom and codification of such rules by the enactment of statutes by the legislative body of a country. In order to have a clear picture of this legal relationship it would be necessary to have a legal definition of the two parties to the relationship. Definition of a Bank It is necessary to define a bank because a bank is protected from liability by certain statutes including the Banking Act, 2004 Act 673 and the Bills of Exchange Act, 1961, Act 55. The Bills of Exchange Act for instance grants protection to a bank that sends a customers cheques for collection and a bank that pays a customers cheques, provided it is registered as a bank, and certain conditions are satisfied. In disputes regarding legality of a service, the decision depends on whether the party performing the service was a bank or not. In United Dominions Trust V Kirkwood1, the Court of Appeal held that a bank should: Accept money from and collect cheques for their customers, placing them into the customers accounts Honour cheques or orders drawn on them by their customers when presented for payment Keep current accounts or something of that nature and record debits and credits in them.

Other important factors that should be considered are:

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The business should be run prudently Senior management and directors should be competent The institution must have the reputation of a bank.

[1966] 2 QBD at pp. 442-4

With a view to overcoming ambiguities in the law as to what constitutes a bank, many countries have enacted legislation that specifies what a bank is, which institutions can call themselves banks and what services banking institutions can perform. The Banking Act, 2004, Act 6732 defines a bank as a body corporate which is issued with a license in accordance with the Act to carry on banking business. In Ghana therefore, for an institution to be able to refer to itself as a bank, the Bank of Ghana should have granted it a license to operate a banking business. The Act goes further to define banking business as: a) Accepting deposits of money from the public, repayable on demand or otherwise, withdrawable by cheques, draft, orders or by any other means b) Financing, whether in whole or in part or by way of short, medium or long term loans or advances, of trade, industry, commerce or agriculture. c) Any other business activities that the Bank of Ghana may prescribe or recognize as being part of banking business. The Banking Act3 provides details of the permissible activities of banks. These are: a) b) c) d) e) f) Acceptance of deposits and other repayable funds from the public Lending Financial leasing Investment in financial services Money transmission services Issuing and administering means of payment including credit cards, travelers cheques and bankers drafts g) Guarantees and commitments h) Trading for own account or for account of customers in (1) Money market instruments (2) Foreign exchange, or (3) Transferable securities i) Participate in securities issues and provision of services related to those issues j) Advice to undertakings on capital structure, acquisition and merger of undertakings k) Portfolio management and advice l) The keeping and administration of securities m) Credit reference services n) Safe custody of valuables o) Electronic banking p) Any other services as Bank of Ghana may determine. The Banking Amendment Act, 2008, Act 7384 provides for three major types of banking licenses: a) General Banking License b) Class 1 Banking License
2 3

S. 90 S. 11 4 S. 5A

c) Class 2 Banking License General banking business means both Class 1 and 2 banking business, Class 1 banking business means banking business other than Class 2 banking business, whiles Class 2 banking business means banking business or investment banking business conducted in currencies other than the Ghanaian currency except to the extent permitted by Bank of Ghana for trading on the foreign exchange market of Ghana and investment in money market instruments. Class 2 banking business is essentially banking business for non residents. A nonresident is a person who has not lived in Ghana for at least 12 months. There are other statutes which define a bank as an institution that is registered as a bank e.g. Bills of Exchange Act 1961 and Evidence Act, 1975, NRCD 323. In sum, no institution can term itself as a bank if it is not licensed by Bank of Ghana to conduct the business of a bank. In Ghana there is a distinction between banks and non-bank financial institutions. The non-bank financial institutions are regulated by the Non-Bank Financial Institutions Act, 2008, Act 774. The Non-Bank Financial Institutions Act defines 5 a non-bank financial institution as a non deposit taking financial institution rendering services including leasing, money lending, money transfer, mortgage finance, non deposit taking microfinance services, credit union operations, acceptance houses, building societies and discount houses. Now, deposit-taking institutions such as savings and loans companies, finance houses and other deposit-taking financial institutions are to be regulated under the Banking Act 2004 Act 673 as amended. The Non Bank Financial Institutions Act defines6 a deposit taker as a person other than a bank licensed under the Banking Act 2004, Act 673 which offers debt securities to the public and is in the business, directly or indirectly of lending money or providing other financial services determined by the Bank of Ghana. Definition of a Customer A customer also has to be properly defined because a customer has certain rights and protection under the banker customer relationship. Also banks owe specific duties to customers over and above that owed to a mere consumer. In Commissioner of Taxation V English, Scottish and Australian Bank Ltd. [1920], the court held that a person becomes a customer when an account is opened and that the duration is not important. In Great Western Railway V London and County Banking Corporation (1901) the Court decided that the mere cashing of cheques over the counter did not mean a bank had acted for a customer. Barclays Bank V Okenhare (1966) ruled that the opening of an account even without a deposit was sufficient. This case overruled the decision in Ladbroke V Todd (1914) when it was held that a deposit was necessary. Woods V Martins Bank (1959) concerned inaccurate investment given by a bank. The Bank was held to be liable in that it owed the person to whom advice was given the same standard of care as it would owe a customer.
5 6

S.46 S. 46

Characteristics of Banker/Customer Relationship Essentially, the banker customer relationship is said to be based on simple contract. Under the contract, the bank undertakes to perform certain services, specifically banking services to the general public and a customer offers to benefit from such services. Once the bank accepts this offer by providing the service, the contract is said to be formed. In Foley V Hill it was decided that when a customer deposits money with the bank, the customer is a creditor and the bank a debtor. The money becomes the property of the bank and is recorded as an asset in the books of the bank. The Bank is then free to use this money in whichever way it pleases subject to paying back the money to the customer when he demands it. In this case, contrary to the practice in general creditor debtor relationship, it is the customer creditor who has to seek the bank for payment. Conversely, when the bank advances money to a customer, the bank becomes a creditor and the customer the debtor. In Balmoral Supermarket Ltd. V Bank of New Zealand, the question arose as to when money deposited becomes the property of the bank. It was held that money stolen from the counter as the customer was about to pay it in was still the property of the customer. In Chambers V Miller on the other hand, it was held that if a bank cashier paid out money to the customer over and above the balance in the customers account, the money belongs to the customer and the bank cannot forcibly take the money back from the customer. In addition, the performance of other services to the customer generates other relationships. For example when a bank clears a cheque on behalf of a customer or pays a check, the relationship becomes that of principal and agent. When a customer deposits valuables and documents with the bank the relationship is that of bailor and bailee. When a bank acts as a trustee, the relationship is between a trustee and a beneficiary. Terms of the Banker Customer Contract Implied Terms The banker customer contract is largely based on implied terms incident on the performance and enjoyment of the service. These are terms that have come to be accepted over the course of time as being a suitable basis on which the relationship should be conducted. In Joachimson V Swiss Banking Corporation, the court laid out the implied terms that govern banker customer relationship as follows: The Bank undertakes to receive money and to collect bills for its customers account The bank borrows the money and proceeds from the customer and undertakes to repay them: o On demand o At the branch of the bank where the account is kept

o During working hours. The proceeds so received are not held in trust but the bank borrows the proceeds and undertakes to pay them. The bank promises to repay any part of the amount due against the unambiguous written order of the customer addressed to the branch were the account is kept. It is a term of the contract that the bank will not cease to do business with the customer except on reasonable notice. The bank undertakes to observe secrecy with respect to the customers account, information acquired from the account and other information acquired in the character of the customers bank, subject to certain exceptions. The customer will take reasonable care when writing cheques. It was also held that although a bank may offer a variety of different services to a customer, the relationship is contained in one contract. There is not a contract for each service performed.

In Tai Hing Cotton Mill V Liu Chong Hing Bank [1986] AC 80, the court held that another implied term is that the bank must only act on its customers valid written instructions and not on any forgery of those instructions. In London Joint Stock Bank V Macmillan and Arthur [1918] AC 777Hl and in Greenwoods V Martins Bank [1933] AC 51 HL it was held that a customer has only duties to: Exercise reasonable care when drawing cheques to prevent forgery and alteration; and Notify the bank if he actually knows of forgeries on his account. A customer who willfully ignores the obvious is considered to have actual knowledge.

Express Terms In some circumstances the banks have sought to incorporate express terms into the banker customer contract. These terms are normally built into mandate forms that customers normally fill in opening an account with the banks. Express terms normally take precedence over implied terms, though it has been held that any express terms must be made clear to customers to be effective Tai Hing case. On signing a mandate, a customer is bound by the terms whether or not he or she has read and understood them Lestrange V Graucob (1934). However these terms will not be effective if they are ambiguous and contain misrepresentations. In such situations the courts will construe them strictly against the bank. Rights and Duties of a Bank Duties of a Bank To comply with the customers mandate - standing orders, direct debits and cheques. To inform the customer as soon as it becomes aware of forgery of a customers signature. Greenwoods V Martins Bank

To allow customer to draw his money at the account holding branch and during working hours, subject to o The instruction being unambiguous London Joint Stock Bank V Macmillan and Arthur (1918) o Payment must be in accordance with the mandate o There must be sufficient funds. The Bank must give consideration to the following issues: Uncleared effects - AL Underwood V Bank of Liverpool and Martins Overdraft facility included in balance Combination of accounts Appropriation (Barclays Bank V Quitclose Investment Ltd 1970) Cheques card must be in accordance with the agreement. The Bank promises not to cease to do business with the customer except after a reasonable notice. Prosperity V Lloyds Bank 1923. The Bank undertakes to provide the customer with either a pass book or regular statements. Tai Hing Cotton Mills V Lui Chong Hing Bank Ltd. 1986 held that the customer has no duty to inspect his statements. The bank has a duty of confidentiality to the customer Tournier V National Provincial Bank (1924), subject to certain qualifications. See Banking Act 2004, Act 673, and below. The bank has a duty of care in its dealings with customers.

Rights of a Bank The Bank has rights of lien, combination and appropriation The Bank has a right to make a reasonable commission or charge in line with contemporary practice in the banking system. An overdraft is repayable on demand - Titford Property Co. V Cannon Acceptance Ltd. (1975), William & Glyns Bank V Barnes (1981)

Rights and Duties of a Customer Duties of a Customer Duty to draw his cheques in such a way as not to facilitate fraud or mislead the Bank London Joint Stock Bank V Mcmillan & Arthur (1918) To prevent estoppel, the customer must inform the bank as soon as he is aware of forgery of his account Greenwood V Martins Bank

Rights of a customer To draw money from his account at the branch of a bank within working hours To be informed about any fraud on the account. To be provided statements of account detailing transactions on the account. To be given notice of intended closure of account.

The Banks Duty of Care The bank owes a duty of care in performing its services to the customer. Although a customer has a duty to take reasonable care to prevent forgery and alteration of cheques, where the customer takes such care and the cheque is altered, the bank will be liable Smith V Lloyds TSB Bank (2000) 2 All ER A bank will be liable as agent for a customer if it pays a cheque, which is drawn in accordance with the mandate from, the customer even if the cheque is free from alteration if the bank knew or should have been aware of fraud or dishonesty. The test to be applied to establish breach of duty is that of a reasonable banker having reasonable grounds for believing that the account was being conducted fraudulently. Lipkin Gorman & Co. V Karpnale (1989) In Box V Midland (1979) 2 Lloyds Rep 391, the bank was held liable for negligent misstatement under the principle established in Hedley Byrne V Heller, when a bank manager wrongly advised a customer that his application for a loan would be approved when he submitted an Export Credit Guarantee Department (ECGD) Policy. However the application was declined and the customer suffered a loss after entering into an export contract. The Court held that the Bank has the duty to honour the words of its authorized officials. In Redmond V Allied Irish Banks (1987) 2 FTLR 264 it was held that the bank does not owe a duty to advise customer about the effect of a not negotiable crossing. In Verity and Spindler V Lloyds Bank (1995), a bank provided financial advice on the suitability of a mortgage on a property, which was subsequently sold at a loss. The courts held the bank liable for negligent advice because the bank had offered financial advice, the project was of a business nature, the customers were nave and the bank had inspected the property and declared that it was good. The Bank as a Trustee A Banks Liability Under an Express Trust A bank may on some occasions be appointed as trustee under an express trust. In this event, the bank is subject to the general law concerning powers, duties and liabilities of trustees. This includes the duty to take care of the trust property to the standard of a prudent business person. In Bartlett V Barclays Bank Trust Co. Ltd. [1980] 2WLR 430 it was held that a bank trustee has a greater duty since it holds itself out as having a special degree of care and skill as a bank. Constructive Trusts It has been established in Belmont Finance Corporation V Williams Furniture Ltd (no.2) (1980) CA that a bank may be liable as constructive trustee if it either:

a) Receives trust funds with actual or constructive notice that they are trust funds and that the transfer of the funds to the bank is in breach or trust, or b) Knowingly assists a trustee of the trust to dishonestly misapply trust funds. Knowing Receipt For the Bank to be liable under this head, it must be established that the bank has received trust property and that the bank knew that the property had come to it in breach of the trust. Millet J in Agip (Africa Ltd V Jackson [1989] stated that receipt necessitates that the recipient must have received the property for its own use and benefit. For that matter, if the bank acted merely as a conduit for funds, it would not be held liable. However if it used the funds to defray an overdraft, the bank would be said to have received the property in breach of the trust. According to Peter Gibson J in Baden V Societe General [1983] BCLC 325, knowledge for the purpose of knowing receipt could be of five types Actual knowledge Willfully shutting ones eyes to the obvious; Willfully and recklessly failing to make such enquiries as an honest and reasonable person would make; Knowledge of circumstances that would indicate the facts to an honest and reasonable man; Knowledge of circumstances that would have put an honest and reasonable man on enquiry.

Megarry VC in a recent case Re Montagu, stated that only types 1, 2, and 3 would suffice, rejecting the last two because they did not evince want of probity. Mere carelessness was not enough to make somebody a constructive trustee. Vinelott J in Eagle Trust Plc V SBC securities Ltd. [1992] 4 All ER submitted that 4 and 5 should not be applied to commercial transactions since they would require parties to be unduly suspicious. Scott LJ in Polly Peck International plc V Nadir (No.2) [1992] 4 All ER 769 stated that the Baden categories are not rigid categories with clear and precise boundaries. One category may merge imperceptibly with another. The real question one ought to ask is whether the bank manager should have been suspicious. If he should have been, then the bank would have been liable provided that the receipt is proven. If the bank is guilty of knowing receipt, it will be held liable as a constructive trustee, which means, inter alia, that it will have a duty to account to the beneficiaries from the moment it knew of the breach for monies received and may have to pay compound interest thereon. Dishonest Assistance

The four ingredients of this head of liability are as follows: (1) The existence of a trust which may be merely fiduciary; (2) The breach of that trust; (3) Assistance in the breach; (4) Dishonesty. In Royal Brunei Airlines Sdn Bhd V Tan [1995] 3WLR 64 it was held that it was enough to show that there has merely been a breach of trust and that the stranger dishonestly assisted in that breach even if the trustee was quite innocent. In this case, Lord Nicholls purported to apply an objective standard coupled with a subjective standard of honesty. He said when called upon to decide whether a person was acting honestly, a court will look at all the circumstances known to the third party at the time. The court will also have regard to subjective issues such as personal attributes of the third party such as his experience and intelligence, and the reason why he acted as he did. In Twinsectra V Yardley [2002] 2 AC 164, the House of Lords agreed that the test is not wholly objective. It allows the defendant to escape liability if he did not realize that his conduct would be considered dishonest by an objective onlooker. Quistclose Trusts If a bank receives funds from an individual which it knows are to be held separately for the customer for a specific purpose then the bank holds those funds for the individual as a constructive trustee. Furthermore, if the funds are not used for the specified purpose they are to be held for the benefit of the individual. Barclays Bank Ltd. V Quistclose Investments Ltd. [1970] AC 567 HL The Banks duty of confidentiality The bank owes an implied duty to its customer not to divulge information about its customers to third parties. However, Tournier V National Provincial and Union Bank of England set out four exceptions as follows; Disclosure Disclosure Disclosure Disclosure under compulsion of law in the public interest. in the banks interest e.g. suing a customer with the implied consent of the customer

Section 84 of the Banking Act 2004, Act 673 codifies this common law rule. It states that a director or officer or any employee of a bank shall not disclose information relating to the affairs of a customer with that bank except where the disclosure of the information is: Required by law, by a court of competent jurisdiction or by Bank of Ghana Is authorized by the customer Is in the interest of the bank.

Disclosure under the Compulsion of Law Various statutes require banks to disclose information for the purpose of prosecuting, investigating or preventing the commission of a crime. The Evidence Decree 1975 NRCD 323 The Evidence Decree 1995 NRCD 323 provides under Section 176 (Bankers Books) as follows: 176(1) A copy record made in the ordinary course of business by a bank is admissible to the same extent as the original copy if it is testified to be the correct copy by a witness who has copied the record 176 (2) A Bank may give oral testimony or testimony by affidavit 176 (3) Even where the bank is not a party to an action the court may compel a representative of the bank to produce the original records of a bank if the court finds that fairness requires such a compulsion. 176 (4) Provided reasonable advance notice to the bank, the court may on application by a party, order the bank to allow the party to inspect or copy any records of the bank which concerns the action. Anti-Money Laundering Act, 2008, Act 749 Section 30(1) of the anti-money laundering act states that a person or an institutions which knows or suspects that a) A business entity, an accountable institution or a trust has received or is about to receive the proceeds of unlawful activity b) A transaction to which the business entity a. Facilitated or is likely to facilitate the transfer of the proceeds of unlawful activity b. Has been used or is about to engage in money laundering. shall within 24 hours after the knowledge or the ground for suspicion submit a suspicious transaction report to the Financial Crimes Center. Narcotics Drugs (Control, Enforcement and Sanctions) Law 1990 PNDC law 236 Section 28 of the law confers authority on the Attorney General to make an order in writing authorizing any policeman specified in the order to make an investigation into the matter in a manner or mode specified in the order. Section 28(2) states that such order may authorize the investigation, inspection and taking of copies of any bankers books or bank account, or any share account or purchase account etc or the inspection of any safe deposit box in any bank, financial institution company etc. The section goes on to say that this will constituted sufficient authority for the disclosure or production by any person of

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all or any information or account or document or articles as may be required the officer. Under Section 28 (3) it is an offence not to disclose information as required by the Act. Disclosure in the Public Interest This is not a very widely used exception, possibly due to codification under certain laws such as anti-money laundering laws. Possibly, in times of war, it would be legal to disclose the activities of an enemy alien. Disclosure in the Interest of the Bank In Sunderland V Barclays Bank Ltd.(1938) it was held that the Bank was entitled to disclose the affairs of a wife when in a discussion with the wife, the husband took over the phone and enquired about what the problem was. Again in taking legal action against a customer, the bank would necessarily have to disclose information to the court pertaining to the debt Disclosure in the Interest of the Customer In the past, it is considered in line with bank practice to provide references in respect of bank customers. However this has an attendant risk that the wrong information may be provided leading to loss to customers. If a customer provides the banks name as a source of reference then the permission to disclose can be implied to have been given. It is the modern day practice now to seek the consent of customer before any reference is given. Turner V Royal Bank of Scotland [1998]

Appropriation of Payments Appropriation of payments may arise in two situations: 1. Where a customer has two or more accounts with the same bank and he or she pays money in, the money will be appropriated to one of the accounts. 2. Where a customer has one account and he or she pays money into it as well as drawing cheques upon it appropriation will settle the issue of which payment in relates to which payment out. Simpson V Ingham (1823) 2 B & C held that the general rule is that the party which pays money has the right to say to which of those debits the payment should be applied. Where the customer does not make this election, the right of appropriation devolves on the party who receives the money The debtors intention to appropriate may be shown or implied by the course of dealing or other circumstances Peters V Anderson (1814) 5 Taunt.

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Two or More Accounts The bank or creditor may appropriate to a debt that is statute barred though the debt is not revived by so doing Mills V Forbes (1839 S Bing NCC 455. It may however not appropriate to an illegal - debt ex Parte Randleson (1833) Where there are several overdrawn accounts, the bank may prefer to keep a lower overdraft on one than the other. For example, if a customer has a wages account, under insolvency law, if this account overdrawn at the time customer enters into liquidation or is declared bankrupt, the liquidator or trustee in bankruptcy is required to treat this debt as a preferential debt. Single Account In WP Greenhalgh & Sons V Union Bank of Manchester [1824] 2 KB 153 it was held that money paid into an account to meet a particular bill or cheque must be applied accordingly. The Rule in Claytons case In the absence of any specific appropriation in the case of a current account, the presumption is that: The first sum paid in is the first sum drawn out The first item of the debit side is discharged or reduced by the firs item on the credit side.

Devaynes V Noble, Claytons case (1916) Instances Where Claytons case is inapplicable A. Between a Trustee and Beneficiary The rule in Hallets case held that where trust monies are mixed with the trustees own funds in one account, the rule in Claytons case will not apply. Equity gives priority to the beneficiaries in the resultant balance on the basis that it is deemed that the customer took out his money in preference to trust money Knatchbull V Hallet (1880) 13 Ch D 696 B. Where there is a contrary Intention The rule in Claytons case may be displaced by a contrary intention. C. The rule only applies to running accounts Re Sherry 1884 Claytons Case not Applicable to Two Accounts Where the customer operates two accounts with the bank, it cannot be presumed that a credit to one account should be appropriated to a debit in another Bradford Old Bank V Sutcliffe. The rule must be applied separately to each account

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An exception to this rule occurred in Re EJ Morel (1934) Ltd., where a company maintained a number 2 account and a wages account. The arrangement was that the credit on the No. 2 account should always be sufficient to cover the debit on the wages account. The court held that the two accounts were in essence one account and that the bank could not claim as a preferential creditor. Stopping or Ruling Off the Account To prevent the rule from operating the bank can stop or rule off the account and pass any new transactions through another account. Death of Joint Account Holder In Royal Bank of Scotland V Christie (1841), failure to stop the account resulted in loss to the bank Notice of Second Mortgage Deely V Lloyds Ltd. [1912] AC 756 Determination of a Guarantee A clause can be inserted in the guarantee agreement that would prevent the rule in Claytons case from operating Westminster Bank V Cond 1940 46 Comm Cas. 60 Instances Where Claytons Case Operates in the Banks Favour Creation of a floating charge Re Mortimer Ltd. (1925) Advances for wages and Salaries Re Primrose Builders wages account, cheque for wages

Set Off/Combination of Accounts The banks right of set-off is the right to combine two or more of a customers account in order to establish the overall balance in the dealings between the bank and the customer. In the absence of specific agreement to the contrary, three fundamental conditions must be fulfilled before a bank can exercise its rights of set off: 1. The sum must be certain 2. The account must be in the same name 3. The account must be in the same right. Where there are three accounts, the bank is free to combine whichever it chooses A bank has common law right to combine accounts even if they are at different branches Garnet V Mckewan (1872) A bank may decide to exercise the right of set off in a number of situations. There are two broad situations in which this can occur, namely, where an event

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determines the banks duty to pay a customers cheque and where no such event occurs. Where the Banks duty to Pay Cheques Determined When any such event occurs that determines the banks duty to pay a cheque, then as a general rule, the bank has the right to set off what is due customer on one account with what is due the bank on the other. Three such events are: 1. The customers death 2. The customers mental incapacity 3. The customers bankruptcy/liquidation The Customers Death In the event of a customers death, the bank will be entitled to set off any credit balance against a debit balance in the customers name and pay off the balance to the deceaseds personal representatives on the presentation of a death certificate and probate or letter of administration. The Customers Mental Incapacity The same considerations apply as in the case when a customer dies The Customers Bankruptcy/ Liquidation Insolvency legislation normally specifies that when a debtor to whom a receiving order has been made, an account must be taken of mutual dealings with any creditor and the final balance established. The date of set off is normally the date of the receiving order - The Equitable Fire Insurance Co (1930) 2 Ch. 293 @ pp 310 Notwithstanding an agreement not to set off, once liquidation proceedings are set in motion for a company customer, the bank can exercise its right of set off. The date of set off is the date of the petition for winding up of the company. However if the bank had notice that the credit account intended for the set off holds some money held by the customer in trust the bank will have no right of set off Barclays bank V Quistclose Investment Ltd. (1970) Set off following insolvency Other issues If either the bank or customer is insolvent: At the relevant time there will be a statutory set off under the provisions of o England Section 323 of Insolvency Act 1986 (individuals) and section 490 of Insolvency Rules 1986 (companies) o Ghana Section 45 Insolvency Act 2006, Act 708 (Act however never came into force) and Section 39 of the Bodies Corporate (Official Liquidations Act, 1980, Act 180 Statutory set off is automatic and inexcludable. Any express or implied agreement not to set off or combine will become void Halesowen Presswork and Assemblies Ltd. V Westminster bank Ltd. (1972)

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Any agreement to extend right of set off will become void. The Debtors assets must be distributed according to insolvency law British Eagle International Airlines Ltd. CIE National Air France (1975) Debts not yet due and payable become due and payable on the onset of insolvency and therefore subject to statutory set off. Contingent liabilities are included Re Charge Card Services Ltd (1987) Debts or credit subsequent to notice of bankruptcy of individual or petition for winding up or summoning of creditors meeting of company customer cannot be set off. Where there are three accounts, one in credit, the other two debit, the two debits should be rateably set off Re Unit 2 Windows (1985)

When Accounts are not stopped Paying a cheque that will cause the account to be overdrawn In the ordinary course of business where a customer has two accounts, one debit the other credit, the bank can combine the two accounts in deciding whether to pay a cheque that would result in one account being overdrawn Garnet V Mckewan Deposit Account Against a Current Account Where a customer draws a cheque and the balance is not sufficient to meet it, it is usual for the bank to rely on the right of set off in paying the cheque. Loan Account Against Current Account In the case of a loan account even where the loan is due, notice must be provided. Limitations Where the debit account is not yet a debit e.g. loan repayable at a future date, or the other account is a contingent liability Jeffryes V Agra & Mastermans Bank (1866) You cannot retain a sum of money which is actually due against a sum of money which will be due in the future. Even where the loan is due, notice is required o Bradford Old Bank V Sutcliffe (1918) o Halesowen Presswork & Assemblies Ltd. V Westminster Bank Ltd. (1972) o Customer has the right to withdraw credit balance as at the date of receipt of notice. Any express or implied agreement not to combine may negate the banks right Buckingham and Co V London and Midland Bank The other account is Trust account or an account containing trust funds Barclays Bank V Quitclose Investment Ltd. A bank cannot exercise a right of set off of a credit balance that bears a name indicating that the funds in it belong to other people e.g. Client Account, John Arthur, Sole Executer of Robert Winslow.- Re Gross, Ex parte Kingston (1871) Ch App 632

In the event of bankruptcy all debts whether current or contingent must be set off.

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Equitable Right of Set off It was held in Bhogal V Punjab national Bank (1988) Uttamchandrah V Central Bank of India (1989) that A bank has a duty to pay within a reasonable time all cheques properly drawn by its customer An equitable set off is available if only there is clear and indisputable evidence of the nomineeship.

Bankers Lien Ordinary Lien and Pledge A lien is a type of security which carries the right to retain property belonging to another pending satisfaction of a debt owed by the owner of the property. The goods remain the property of the owner but the creditor has the right to retain them until the debt is paid. A pledge is a different type of security which carries the right to retain the property until the debt is paid. However, if the debt remains unpaid, it carries the right to sell the property to satisfy the debt. Bankers Lien as a Special Type of Lien A bankers lien is a special kind of lien equivalent to an implied pledge Brandao V Barnett (1846). The Brandao case held that the bankers lien could apply to securities in the banks possession. Share certificates Re United Services Co., Johnstons claim (1870) Insurance Re Bowes, Earl of Strathmore V Vane (1886) Limitations Lien does not apply to securities deposited with the bank for safe custody Brandao V Barnet It also does not apply to securities held in trust by customer It does not arise where there is an agreement to the contrary

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CHAPTER TWO BANK SERVICES

Indemnities There are instances where the bank may be called upon to provide indemnities to third parties in respect of their customers liabilities. Such indemnities include:
1. Bid Bonds 2. Performance Bonds 3. Advance payment bonds

A bank will only give an indemnity if it considers the customer good for that amount. It will take a counter indemnity from the customer which incorporates clauses that protect the banks interest. Some of them are:
Power to immediately debit customers account when a claim arises Immediate right of set off between accounts Lien over items held by the bank including those in safe custody

Procedure
Examine the indemnity to ascertain maximum liability and whether it is conditional or unconditional. Ensure the customer is considered good for the amount. Consider whether additional security would be required in support of the indemnity. Have the indemnity signed on behalf of the bank by head office or regional office Contact customer to call at the branch to sign the counter indemnity.

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In the case of companies, ensure that their regulations allow them to give counter indemnities

Indemnities issued to the Bank

Release of funds/safe custody items less than 5,000 to personal representatives without calling for probate o The indemnity will state that the personal representatives will obtain a grant of probate or LA if asked to do so by the bank

Issue of duplicate bank draft/fixed deposit receipt.

Safe Custody Safe custody is one of the most important services offered by banks to its customers. Valuables normally kept include jewellery, share certificates, life policies and title deeds. Items are normally deposited in a locked box, with the customer retaining the key. Alternatively, deeds, share certificates, life policies may be enclosed in an envelope and sealed. Most banks issue receipts to customers which must be returned when items are withdrawn. Customers may occasionally sign authority addressed to the bank for a named person to have access to the box. If the third party is to have the right to remove items from the box, this must be expressly stated. The courts have established that since safe custody is part of the broader contract between customer and bank, the bank is always regarded as bailee for reward whether or not his is paid. Port Swettenham Authority V TWWU & Co., CM SDN BHD (1979) Other Issues Where the item is deposited by two or more bailors jointly, delivery should be made on the authority of all Brandon V Scott (1857). Right of survivorship may accrue to survivor otherwise Personal Representative should give receipt. The bank must exercise care when it has knowledge of a breach of trust. Where there is bonafide doubt, the bank can retain the item for a reasonable time in order to clear up the doubt. Hollins V Fowler (1875) Death of Customer The bank will obtain good discharge in respect of articles by taking receipt of personal representatives after they have obtained a grant of probate or letters of administration. Grant should be shown to the bank. Where a will is deposited, the bank should release this in exchange for a receipt signed by all the persons named therein as executors Bankruptcy Where the bank has notice of petition of bankruptcy, the items should be held pending the appointment of a trustee in bankruptcy.

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Specific instructions should be obtained in the case of joint accounts, partnership accounts and limited liability company accounts. Legal Claims Legal claims may arise under the following headings: (a) Conversion (b) Negligence (c) Liability for criminal acts of the banks servant. Conversion Conversion occurs when the bank delivers items to a third party without the bailors authority. According to Halsburys Laws of England, any person who wrongly deprives another person of his possession of goods is liable to pay the value of the goods to the owner by way of damages. Good faith and absence of negligence are no defence in cases of conversion of goods. In Langtry V Union Bank of London 1896, a third party forged the plaintiffs signature and managed to prevail on the bank to hand over plaintiffs jewellery to him. The case was settled by consent in favour of the plaintiff bailor. Negligence In Houghland V RR Low Luxury Coaches (1962), the Court of appeal held that the standard of care required of a bailee, whether gratuitous or otherwise is the standard demanded by the circumstances of the particular case. It was further held that whether the action was brought in detinue or in negligence, the burden fell on the defendant to show that there was no negligence on their part in the care they took over the goods. In this case the defendants failed to show they had exercised due care. Ormrod L.J. dilating on the terms gratuitous bailee and bailee for reward said, the question to be considered was whether in the circumstances of the particular case, a sufficient standard of care had been observed by the defendants. As bailees, the Banker is expected to take the care such as an ordinarily efficient and prudent banker would take in similar circumstances. Examples 1. Thieves break into the strong room the bank is not liable 2. Customers deed is left outside the strong room the bank is liable. This is a clear case of negligence 3. The bank discovers that loss has taken place, but fails to inform the owner or police so that steps may be taken to recover the property this amounts to negligence Coldman V Hill (1919) Customer must be advised to insure the valuables Liability for Criminal Acts of Banks Servant

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In Re United Services Co, Johnstons claim (1871) 6 CH App 212 , a customer deposited share certificates with his bankers where they were kept in a safe. It happened that the manager had the only key. He misappropriated them for his personal use. It was held to amount to negligence on the part of the banking company and the bank was held liable. In Lloyd V Grace Smith and Co. (1912) AC 716, the House of Lords laid down the governing principle that an employer is vicariously liable for the wrongful acts of his employees or servants where they were committed in the course of their employment even though there was no benefit to them. The bank may not be liable for theft of employee whose duties do not include supervision of the item - Morris V Martins and Sons ltd (1966). However, it has been suggested that the bank may be liable in breach of contract for negligently employing a dishonest person or negligently permitting an unauthorised employee access to the property. Night Safe Ordinary relationship does not arise until the officers of the bank have opened the wallet and pad in the contents in the ordinary course of business Bankers Opinion A bank must give reference on the basis of facts actually known to him at the time; he is not obliged to make enquiries to ascertain new facts or other peoples opinion. Parsons V Barclays and Co. 1910 There exists potential liability to two parties: 1. The ultimate recipient of the reference 2. Its customer Liability to Ultimate Recipient Liability arises when an unduly favourable reference is given and the recipient relying on this extends credit to the customer who defaults. This may occur in: Fraudulent misrepresentation Negligence

Fraudulent Misrepresentation Liability here will proceed from the fact that the misrepresentation was made knowingly or recklessly, that the intention was to deceive, that someone should act on it and someone actually did act on it. Under Section 6 of Statute of Frauds Amendment Act (1828) no liability arises unless the statement is in writing and signed by the maker If signed by a Bank employee acting within authority, the bank will be liable.

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Ubaf Ltd. V European American Banking Corporation (1984) Lloyds V Grace Smith & Co. (1912) Negligence In Hedley Byrne & Co. Ltd. V Heller & Partners (1963), a negligent opinion was given, causing loss to the recipient. The bank escaped liability only because the opinion incorporated a disclaimer of liability. In England however, with the institution of the Unfair Contract Terms, 1977, such disclaimers have to be reasonable to be effective. Liability to Customer Breach of secrecy customer to establish loss to be entitled to more than nominal damages Tournier case Libel Bank can claim privileged statement in defence London Association for the Protection of Trade V Greenlands ltd. (1916). Customer would have to establish that the bank gave an unduly unfavourable reference which reduced his standing in the eyes of right thinking people.

CHAPTER THREE DETERMINATION OF THE BANKER CUSTOMER CONTRACT Introduction The banker customer contract may be terminated by mutual consent, by the customer alone or by the bank or by operation of law.

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Termination by customer A customer may demand repayment of the credit balance on the account at any time and without notice to the bank. Where the account is nil, confirmation needs to be sought to establish that the account has been closed. In Wilson V Midland Bank a customer telephoned the branch manager that he wished to close his account but later denied it. Meanwhile credits paid in by the customer were credited to another account in error whilst cheques issued by the customer where returned marked account closed. In practice, it is important to invite customer to make provisions for cheques already drawn. The bank should also ask customer to hand over any unused cheques. The bank should bear in mind any pending engagements such as the purchase of shares or treasury bills. All credit facilities, if any, should be cancelled and any securities held or items in safe custody should be returned to the customer. Although the contract is terminated, the relationship still subsists because of the implied term of duty of confidentiality. Joachimson V Swiss Banking Corporation (1921) Termination by bank A bank may only terminate the account after giving reasonable notice and making provisions for outstanding cheques. In Buckingham and Co. V London and Midland Bank, the bank closed customers account and combined a loan account and a current account. Subsequently customers cheques were returned. It was held that the bank has to give reasonable notice prior to closing an account and the customer is entitled to withdraw from his current without reference to the loan account. In Prosperity V Lloyds Bank ltd. (1923) one months notice was considered insufficient where banking arrangements were unusually complex. An overdrawn account may however be closed at any time without any notice. Where customer is using an account for an illegal purpose, no notice is required. Also claims arising from unauthorized debit could arise. Limpgrange Ltd. V BCCI SA (1986) It is important to note that although the contractual duty between the bank and the customer comes to an end, the duty of secrecy survives this contract.

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Termination by operation of law By the provisions of the law, the following events will determine he banker customer contract: Death of customer Mental incapacity of customer Bankruptcy/insolvency of bank or customer Garnishee Order Mareva Injunction

Death of a Customer In the event of the customers death, the right to receive any sums owing to him passes to his personal representatives. The mandate on the account ceases and for that matter, the account must be stopped. Section 74 of the Bills of Exchange Act, 1961 Act 55 provides that the duty of a bank to pay a cheque is determined by notice of death of the customer. All cheques signed by the deceased should be returned marked Drawer Deceased. If the customer died testate and appointed Executors in his will, the balance on the customers account vests in the Executors at the point of customers death. Woolsley V Clarke (1822) The probate is a mere authentication of the Executors title Smith V Mills (1786) If the customer dies intestate or does not appoint a customer in his will, the balance vests in the High Court, until an administrator is appointed. The bank would only pay out the deceased customers balance to the personal representatives on presentation of Probate or Letters of Administration as the case may be. Where the Will has been deposited with the bank in safe custody, the bank may release it to the Executors against an indemnity signed by all of them. Mental Incapacity of Customer The Mental Health Act 1972, NRCD 30 provides for a Magistrate to certify that a person is suffering from mental illness and therefore needs to be place under the care, observation and treatment in his own interest and in the public interest. Section 19 (c) of the Courts Act confers jurisdiction on the High Court over persons of unsound mind including the appointment of a Guardian for such a person. The High court is empowered to make such orders and give such directions as appear necessary or desirable to secure the maintenance safety and welfare of a person of unsound mind, the efficient administration, disposition and management of his property and affairs and for purposes ancillary thereto.

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In England, the Court of Protection certifies after considering the evidence that a person is incapable by reason of mental disorder of managing and administering his property and affairs. The Master of the Court of Protection has wider powers to ensure the maintenance or other benefit of the patient and members of his family. Also when the patients account is overdrawn he is to take care of the interests of creditors. The Master has the power to appoint a receiver for the patient section 99(1). The action of the bank would depend on whether a receiver has been appointed or not. Receiver Appointed Where a receiver has been appointed by the High Court (England Court of Protection), the Bank should request to see the order appointing the Receiver to ascertain his powers and duties. The Guardian will normally be a relative. The bank should close customers account and transfer the balance into a new account in the name of the guardian/receiver. If the patients business account is to be carried on, a separate account would be opened for the business When the customer had authorized a third party to act for him to draw cheques on his account that authority is treated as determined. In Drew V Nun [1879] 4 QBD 661 @ 667 it was stated that Where such change occurs as to the principal that he can no longer act for himself, the agent whom he has appointed can no longer act for him. Termination of Appointment of Receiver/Guardian When the Master of the Court of Protection (High Court in Ghana) is satisfied that the patient has become capable of managing his affairs, he may discharge the patient whereupon the customer would now be capable of resuming his contractual relationship with the bank. A Guardian is automatically discharged on his death. No Receiver Appointed In these circumstances, the bank would be faced with difficulties regarding the treatment of the account. In the event that the bank has information that its customer is suffering from some form of mental disorder it should make enquiries to ascertain whether the customer is well enough to attend to his own financial affairs. The enquiry should be addressed to the Medical Superintendant where customer is on admission. If not on admission the enquiry should be addressed to his medical advisor if any.

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If the feedback indicates that he is well, the account should be operated as usual. If the feedback was negative, the bank should stop the account and all cheques presented subsequently should be returned marked insufficient mandate. In R Beavan, Davies, Banks & Co. V Beavan, a bank allowed the customers eldest son draw from customers account for the maintenance of the customers household. The customer died at a time the account was overdrawn. The bank claimed the amount from the Executives, two of the four Executors resisted the claim. Held: By virtue of the doctrine of subrogation, the bank was entitled to recover all amounts paid for necessaries. However, the banks interest and charges could not be recovered. In Scarth V National Provincial [1930] 4 LDB 241 the bank transferred the balances on the account of a customer who had been certified lunatic into a newly opened account operated by his wife. When he recovered his sanity he claimed the amount transferred without his authority. The wife had used the funds to pay the husbands debt. The husband sued on recovery. Held: The bank could rely on the equitable doctrine whereby a party who has paid the debts of another without authority is allowed to take advantage of his payment. Bankruptcy of a Customer Bankruptcy is a process which takes some time unlike death which occurs at an instance in time. For that matter, it is necessary to establish at what point in time the banker customer relationship is determined. The banks duty and authority to pay a cheque is determined when the bank learns of a bankruptcy petition against the drawer. If customer deposits any cash, the bank should accept it. However it should make it clear to customer that he will not be permitted to withdraw funds from the account. Insolvency Procedure in Ghana Petition to the Official Trustee brought by either the debtor or the creditor Consideration of the petition Decision dismissal of petition or institution of a Protection Order Creditors meeting Consideration by High Court Decision by High Court rescission of Protection Order, approval of arrangement with creditors or issue of Insolvency Order. Winding up of Estate Where applicable, adjudication of bankruptcy.

The assets of the debtor vest in the Official Trustee on the passing of the Protection Order. When the protection Order is rescinded, the bank can resume contractual relationship with the debtor. The bank must also have in mind the provisions of the Insolvency Act relating to preferred creditors, restoration of property and repayment of gifts (transactions at an undervalue) Repayments by Preferred Creditors

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Section 39(1) states that where, between the making of an insolvency order and the debtors discharge, it appears to the Official Trustee that, during the six months ending with the making of the protection order and at a time when the debtor was insolvent, the debtor (a) Made a payment or any other transfer of property, or (b) Created a mortgage or any other charge, or suffered a judgment or incurred any other obligation, With the dominant intent that any of the creditors of the debtor should benefit at the expense of others, the Official Trustee shall give notice to the creditor so preferred requiring that creditor within the period specified in the notice to restore to the Official Trustee, whether by payment of money, transfer of property or surrender of rights, the benefit which has accrued to the creditor by reason of that preferment.

Restoration of Property Section 39 (2) provides that where an insolvency order is made against a debtor, a person who during the relevant period, received a payment of money, or any other transfer of property, in respect of a debt owed to that person by the debtor, shall on receipt of a notice given in that behalf by the Official Trustee, restore the property or its value to the Official Trustee. The relevant period is the period beginning twenty-one days before the presentation of the petition on which the winding order was made, or if the protection order was made on two or more petitions, before the presentation of the first petition and ending with the making of the protection order. The above provision i.e. 39 (2) do not apply to a payment or any other transfer of property (a) Made by the debtor to the debtors banker, in so far as it has been subsequently disbursed by the banker in meeting cheques drawn by the debtor; (b) Made in respect of a debt incurred during the relevant period (c) Made in respect of a secured debt (d) Made on the enforcement against at third party of a guarantee or indemnity, or of a mortgage, charge or lien on that partys property. 39 (4) where an insolvency order is made against a debtor, the property in the possession of the sheriff at the time of the making of the protection order being property of which possession was taken under an execution issued by a creditor of the of the debtor or the proceeds of that property, shall after deduction of the sheriffs and bailiffs charges in the execution be transferred to the official trustee. Persons complying with a notice given under subsection (1) or (2) may within one month after the notice was given, lodge a proof of debts or require the Official Trustee to amend that proof so as to enable the debt in respect of which the

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notice was given to rank for dividend at the value which is appropriate in view of the compliance Repayment of Gifts Section 40 (1) provides that where, between the making of an insolvency order and the debtors discharge, it appears to the Official Trustee that the debtor made a disposition of the debtors property otherwise than for full value or in settlement of a due debt or incurred an obligation otherwise than for full value, and was not made for the purpose of defeating creditors. (a) During the two years ending with the making of the protection order or (b) More than two years but less than ten years before the making of the protection order and at a time when the debtor was insolvent, The Official Trustee shall give notice to the person to whom the disposition was made or for whose benefit the obligation was incurred requiring such person with in the period specified in the notice to restore to the Official Trustee, whether by payment of money, transfer of property or surrender of rights, the excess of the benefit which had accrued to that person above the value of the consideration provided. Such excess benefit restored shall be treated as a provable debt in respect of which a proof of debts may be lodged within one month after it was restored. These provisions do not apply to a disposition made in consideration of marriage unless the High Court is of the opinion that the disposition was made for the purpose of defeating creditors.

Wages Account The purpose of opening a wages account is for the bank to claim as a preferential creditor Operation of Wages Account Cheques drawn on the account should be made payable to wages. Directors, partners and sole traders should submit a list of employees and the amounts to be paid on it. The bank should prepare an analysis of the balance on the wages account to ensure that the balance is only made up of qualifying wages. After the first four months operation of the wages account or when limit attained, the bank must credit wages account with the first amount originally debited. Rational for Opening Separate Wages Account It would be difficult to prove which payments of the company borrowing were for qualifying wages advances.

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The rule in Claytons Case would operated against the Bank

The wages account may not be essential if the bank holds a security that covers all advances.

Where the bank holds more than two accounts in addition to the wages account, credits would be set off ratably, in the absence of any contrary agreement between the bank and the customer Re Unit Two Windows.

To prevent diminution of possible preferential claims by the bank, the bank can take a written agreement from customer when they open wages account that any credit balances would be initially applied to non-preferential debts.

Procedure on Notice of Bankruptcy Individual Accounts

Stop account Return any cheque market Refer to Drawer Bankruptcy Order Made Any credits would b placed to suspense account Provide details of balances and any preferential claims as well as details of security held to the Trustee in Bankruptcy Forward balances after exercising right of set

Joint Accounts

Stop joint account whether in credit or overdrawn Request joint instructions from the Trustee and the solvent party with regard to disposal of funds including items held in joint names in safe custody Discuss possibility of opening new accounts for solvent parties and possibility of debiting cheques signed by him into this account.

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When solvent party(ies) do not agree, return cheques marked Refer to Drawer Joint account holder in bankruptcy proceedings. Cheques drawn by bankrupt should definitely be returned marked Refer to Drawer Bankruptcy Order Made If joint account overdrawn, the bank can claim the full amount under the joint and several liability clause If the bank holds security it has several options The bank can claim against the solvent party on the basis of joint and several liability any funds received can be credited into a suspense [realization account]

Partnership Accounts Stop account Where partnership account is in credit, allow individual personal accounts to operate Where in debit rely on joint and several liability clause and debit partners personal accounts

Both Firm and Individual bankruptcy Stop all accounts Proof of death against firm and estate of individual partner Securities charge form allows bank to employ proceeds of securities in any way it deems fit When individual partners accounts are in credit, the bank can set off, relying on joint and several liability clause

Bankruptcy Order against Individual Partner Firm account in credit o Bankruptcy order against one of the partners the firm account can continue to be operated

If bankrupt partner provide security firm account must be stopped while alternative arrangements are made Where account is in debit, it must be stopped to prevent the rule in Claytons case from operating against the bank

Bankruptcy Proceedings Against Surety

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Stop account Interview customer to arrange alternative security Proceeds should be credited to suspense account, and when the debt is paid, the funds may be paid out to the Trustee in bankruptcy.

Company Winding Up Stop account and disregard any instructions from the directors The bank must see a copy of the winding up The bank must provide account details to liquidator including balances, contingent liabilities and direct security Safe custody items can be withdrawn by the liquidator against a signed receipt Cheques should be returned marked Refer to Drawer Winding Up order made Any credit balances should be released to the liquidator

Undischarged Bankrupts An undischarged bankrupt must not obtain credit in excess of 250 (Ghana GHC 1,000) without advising the party concerned of his or her undischarged status. If the person wishes to trade in a different name, the bankruptcy status should be revealed. Any after-acquired property vests in the official trustee. Section 307(3) of the Insolvency Act 1986 of England provides that after acquired property vests in the Trustee. The bank may therefore have problems if it takes such property as security. Notwithstanding, section 307(4) offers some protection to the bank. It provides that: (a) A person is protected if he acquired the property in good faith, for value and without notice of the bankruptcy; or (b) A banker enters into a transaction in good faith and without such notice, the Trustee shall not in respect of that property or transaction be entitled by virtue of this section to any remedy against that person or banker, or any person whose title to any property derives from that person or banker Where the bank suspect bankrupt is trading through his spouses name, it must interview the account holder. If the suspicions are true, the account should be stopped and the Trustee advised. Bankrupts are disqualified from acting as directors Where the bank suspects that customer is a bankrupts and not discharged, it may take certain actions:

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1. Search on the bankruptcy register or contact the Official Receiver or Trustee in Bankruptcy 2. If customer is undischarged, stop the account 3. Advise the trustee of the existence of the account and await instructions 4. If no claim is received within 42 days, the bank can continue the account. Garnishee Order England Order 49 of Supreme Court Rules Ghana Order 47 of High Court Civil Procedure Rules, 2004 CI 47 Order 24 District Court Rules CI 59 Rule 1 of Order 47 CI 47 states that where a judgment Creditor has obtained judgment for the payment of money by some other party named the judgment debtor and the judgment is not for the payment of money into court, and another person within the jurisdiction referred to as the garnishee is indebted to the judgment debtor, the court may order the garnishee to pay the judgment creditor the amount of any debt due or accruing to the judgment debtor from the garnishee or as much as is sufficient to satisfy the judgment order and the costs of the garnishee proceedings. Under both the English and Ghanaian court rules, the applicant is required to take the following steps: a) An application for an order under the Rule shall be made supported by an affidavit that: a. Identifies the judgment or order to be enforced and states the amount remaining unpaid under it at the time of the application b. States that to the best of the information or belief of the deponent, the garnishee is within the jurisdiction and is indebted to the judgment debtor and states the sources of the deponents information or the grounds for the deponents belief A garnishee order shall in the first instance be an order to show course and shall specify the time and place for further consideration of the matter and in the meantime attach such debt or as much of it as may be specified in the order to satisfy the judgment or order and costs of the proceedings. An order to show cause is otherwise termed as a garnishee order nisi. Rule 3(1) provides that an order to show course under Rule 1 shall at least 7 days before the time appointed for the further consideration of the matter be served on a) The garnishee personally b) The judgment debtor unless the court otherwise directs. Rule 3(2) Service of the order shall bind the garnishee as from the date of the service on the garnishee of any debt specified in the order or as much of it as may be specified.

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Rule 4 (1) Where in the further consideration of the matter, the garnishee does not attend or does not dispute the debt due or claimed to be due from the garnishee to the judgment debtor, the court may make an order absolute under Rule 1 against the garnishee. Rule 5 when on further consideration of the matter, the garnishee disputes liability to pay the debt due, the court may summarily determine the question in issue or order that any question necessary for the determining the liability of the garnishee be tried in any manner in which any question in issue in an action may be tried. An order may be unlimited or limited. If it is unlimited, it will bind all debts owing to the judgment debtor. However any payment by the bank before the receipt of the order will discharge the bank. In the event that a bank receives an order attaching the whole balance, the bank must not permit any drawings from the account even if it is known that the judgment debt is much lower than the account balance Rogers V Whitely (1898) AC 118. The customer should be notified and advised that if he wishes to do so he may open a new account for future transactions. When it becomes necessary to refuse payment of cheques, the cheque should be returned marked Refer to Drawer or more specifically, Funds attached by Garnishee Order. Most often, a specific amount may be indicated. The practice here is for banks to transfer from the attached account into a suspense account, an amount sufficient to satisfy the order. The customer should then be notified whilst the account will continue being operated in the usual way. Garnishee Summons In England, garnishee proceedings may be taken in a county court. Here the Registrar issues a garnishee summons of limited amount. The summons will order a bank to pay within eight days of the order a specific sum of money to the county court Additional Practical Rules for Garnishee Order 1. The garnishee order nisi must state the name of the customer correctlyor with sufficient accuracy to enable the bank to identify the account in its books as that of the judgment debtor Koch V Mineral Ore Syndicate, London and South Western Bank Ltd., Garnishee (1910) 54 Sol Jo 600

2. The monies attached are those standing to the customers credit at the moment of service of the garnishee order nisi and for which he could sue Heppenstall V Jackson, Barclays Bank Ltd. Garnishee (1939) 1 KB

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Monies paid into account of the judgment debtor after service of a garnishee summons could not be attached e.g. proceeds of shares sold at customers instructions. Also if customer has more than one account and the net balance is a debit, no money is attached. When a loan account is not due, it cannot be set off against a current account. For that matter, the balance on the current account is attached. In the words of John Paget, it is the well-established rule that to entitle a garnishee to defeat the claim of a judgment creditor by means of set off, such set off must be in respect of an actual immediate, recoverable debt due to the garnishee from the judgment debtor at the date of the service of the garnishee order nisi, a debt at that moment and without preliminaries the garnishee could have sue and recovered. Tapp V Jones (1875) LR 10 QB 591 Uncleared Effects The proceeds will not be attached unless the bank would have allowed the customer to withdraw the funds Bower V Foreign and Colonial Gas Co. Metropolitan Bank, Garnishee (1874) 22 WR 740 Deposits In England, the Administration of Justice Act 1956 allows set off 3. A sum in foreign currency will be attached notwithstanding that the judgment is given in the local currency Choice Investments V Jeromnimm, Midland Bank, Garnishee [1981] 1 All ER 225 4. Joint Accounts/Partnerships a joint account or partnership account cannot be attached in respect of a debt owed by one of the parties Hirschorn V Evans, Barclays Bank Ltd., Garnishee [1938] 2 KB 101 5. A garnishee order naming two judgment debtors will attach a balance standing in the name of one 6. A garnishee order naming two judgment debtors will attach a balance standing in their joint names. 7. A Liquidators account cannot be attached in respect of a debt owed by a company of which he was liquidator. The reasoning is that they are separate entities.

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Lancaster Motor Co. (London) Ltd V Brewith Ltd,, Barclays Bank Ltd., Garnishee [1941]01 KB 675 8. Trust monies will be attached. Plunkett V Barclays Bank Ltd. [1936] 2 KB 107 The Bank must nonetheless notify the court that the account is a trust account, and for that matter should not be available to the judgment creditor. 9. Balances Abroad these are not attached because they are not within the jurisdiction. Richardson V Richardson, National Bank of India Ltd., Garnishee [1927] 228 Outbreak of War The account operation is suspended and customers right to be paid a credit balance on a current account is a right which survives the war. Arab Bank Ltd., V Barclays Bank (DCO) Mareva Injunction A Mareva injunction is an injunction granted by the court to restrain a defendant from transferring assets outside the jurisdiction of the court, so that the assets would be available to the plaintiff when the plaintiffs claim succeeded. Mareva Compania Naviera S.A. V international Bulkcarriers S.A. [1975] 2 Lloyds Report 509

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CHAPTER FOUR ACCOUNTS OF CUSTOMERS Introduction Initial considerations banks must have in mind before opening accounts for prospective customers include: The capacity of the person Authority to open the account Identity is the person the one he purports to be? Integrity does the person have the required integrity to operate the account? Occupation of the person

Capacity Age of majority in Ghana is 18 years. The Courts Act 2002 as amended, Act 620 defines an infant as a person under the age of eighteen. The law considers minors as being persons who need to be protected, in the sense that they lack a certain level of maturity to take decisions relating to economic transactions and contracts. For that matter the law holds that a minor does not have capacity to contract and for that matter a contract cannot be enforced against him in the event that he reneges from his obligations under the contract. This is subject to exceptions including contracts involving the purchase of necessaries for the minors use. In Ghana, the High Court has general jurisdiction over infants including the power to make such orders and give such directions for the control and administration of the estate of the infant, including the investment of money as the court may consider having regard to the welfare of the infant. The Childrens Act 1998 Act 560 also defines a child as a person below the age of 18 years. The general principle is that a contract made by a child with an adult is binding on the adult not on the child. He may however ratify the act on attaining majority

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or within a reasonable time after attaining majority. This is subject to three exceptions: Contract for necessaries Beneficial contracts Acquisition of property by the minor

Contract for Necessaries The Sale of Goods Act 1962 Act 137 provides that where necessaries are sold and delivered to a child, he must pay a reasonable price therefore. These goods must be suited to the actual requirement of the minor. For example, if the minor already has many waistcoats, more cannot be termed as necessary. Nash V Inman [1908] 2 KB CA Beneficial Contracts These are contracts involving the education of the infant, apprenticeship and contracts that are of long term benefit to the infant Acquisition of Property Contracts of Continuing Liability There are certain contracts of continuing liability such as contracts of tenancy, partnership or membership of a company which binds a minor unless he repudiates them during minority or within a reasonable time after coming of age. Although he may repudiate them, he may not recover the money paid. Steinbers V Scala Leeds Ltd. [1923] 2 Ch 452 There is also a class of contracts a minor may sue on but may not be sued e.g. where a minors account is in credit, and the bank is in breach of any of its duties e.g. secrecy and wrongful dishonor, the minor may sue the bank. Bills of Exchange The Bills of Exchange Act 1961 provides that where a bill of exchange (which includes a cheque) is signed by an infant, the drawing entitles a holder to receive payment. Lending to Minors An overdraft to a minor is void and repayment cannot be enforced against him if even he obtained the advance by a false representation. R Leslie Ltd V Sheill [1914] 3 KB 607 For that matter, when an advance is made to a minor, it is usual for a bank to obtain by way of security a guarantee executed by a person of full age, which

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should incorporate an indemnity clause to avoid the situation that arose in Coutts and Co. V Browne Lecky & Others [1947] KB 104 A bank may nonetheless be subrogated to the rights of a seller from whom the minor acquired some necessaries. Lewis V Alleyne (1888) 4 TLR Other Transactions A minor may act as an agent provided the principal has full contractual capacity. For this reason, a minor can be authorized by a customer to operate his account even though the account could be overdrawn. Smally V Smally A minor may become a Partner and his acts would bind the firm. He may be authorized to operate the account. However, he incurs no personal liability during minority. In Ghana, the Partnership Act specifically excludes minors from being partners. Lovell & Christmas V Beauchamp [1894] AC 607 A minor may hold an interest in land. However he may avoid any disposition of such interest on attaining majority or within a reasonable time thereafter. The same provision applies to shares. A minor cannot act as a personal representative or a trustee A minor can also not make a valid will unless he is in active service with the armed forces. A minor cannot give a guarantee though he could ratify this on attainment of majority. Authority to Open Account If a third party approaches the bank to open an account for a prospective customer, the bank must ensure that the prospective customer has authorized the opening of the account. Robinson V Midland [1925] 41 TLR 402 Stoney Stanton Supplies (Coventry) Ltd. V Midland Bank Ltd 2 Lloyds Report 373 Establishment of Customers Identity To protect itself from fraud in relation to conversion of cheques and money laundering and other fraud the bank must ensure that the one opening the account is whom he purports to be and that he is not impersonating another person. A fraudster who has stolen a cheque may open an account in the name of the payee of the cheque and the Bank risks being sued in conversion if the rightful owner was deprived of his rights to the proceeds of the cheque. A

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fraudster may also use the account to engage in money laundering and other similar crime which may involve in legal loss to the bank if found culpable. In Ladbroke V Todd (1914) the bank did not take any introduction from a prospective customer who opened an account with the bank and credited a stolen cheque into the account. Anti-money laundering legislation prescribes stringent procedures in the opening of accounts for prospective customers. Section 40 of the Anti-Money Laundering Act 2008 Act 749 provides that an accountable institution (including banks) shall in consultation with the Financial Intelligence Center, formulate and implement rules concerning amongst others the establishment and verification of persons whom the institution is required to identify. Usual means of identification include drivers license, national identity card and passport. In addition the bank would like to confirm the address of the prospective account holder by means of a utility bill which can be confirmed by an enquiry directed at the issuer. Bank of Ghana Know Your Customer (KYC) rules provide that banks must obtain detailed information about a customer including: Identity document number e.g. passport number Nationality Date of birth Occupation Name of employer Residential address Postal address

The identity must be verified using listing provided by the Financial Action Task Force (FATF) Applicants name, date of birth and Nationality can be confirmed by Birth certificate Passport Drivers licence Social security Number

Address and telephone number may be confirmed by: Tenancy agreement Utility bill Income tax certificate Reference letter Employers reference letter Other bank statements

In addition, the prospective customer is required to indicate the purpose for which the account is to be operated, the source of funds and the expected volume and type of activity.

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References In order to establish the integrity of a prospective customer, the practice is for banks to request for a reference from the prospective customer. A Bank may be construed as being negligent if it does not take the necessary references when opening an account especially for salaried workers. In such a circumstance, the bank cannot avail itself of the protection offered by the Bills of Exchange Act, 1961, Act 55 discussed under a subsequent chapter. A bank will therefore take references from the account holders employer. For other customers, the bank will take references from an existing customer. There has been no case law to determine whether the customer introducing the prospective accountholder can be held liable for the fraudulent acts of the accountholder. In Marfani and Co. V Midland Bank 1968, the bank failed to take steps to identify a new customer or to take any references. Customers Employer There have been instances where customer have stolen cheques from their employers and channeled them through their accounts. It is therefore prudent practice for banks to obtain information about a prospective customers employers so that they would be put on enquiry when the customer pays in a cheque drawn by his employers. Lloyds Bank V E B Savory and Co. Mandate The mandate form represents the aspects of the banker customer contract that are expressly laid down. The essence of the mandate form is to secure the particulars and other details of the prospective account holder as well as the authority to make withdrawals and issue cheques or other payment instructions against the account. KYC information is normally incorporated in the mandate. Power of Attorney This is a method of appointment of an agent by deed. (England Power of Attorney Act, 1971 and Enduring Power of Attorney Act 1985. Ghana, Power of Attorney Act, 1998, Act 549) To be effective, the power must be fully completed and without any blanks Powell V London & Provincial Bank [1893]. It must be signed sealed and delivered by the principal to the agent and witnessed by at least one witness. If signed by other person apart from the principal donor, it should be witnessed by at least two witnesses - Section 1 Power of Attorney Act. Powers of Donee

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Section 6 explains the effect of a General Power of Attorney. It states that a general power of attorney shall operate to confer on a) a done of power or b) if more than one done, on the donees acting jointly, or jointly and severally authority to do on behalf of donor anything which can be lawfully done by an attorney. Section 4 (execution of instruments) states that a donee of a power of attorney may (a) execute an instrument with his own signature and (b) do any other thing in his own name if authorized by donor and such document shall be effective as if done by the donor of the power. Revocation of Power of Attorney Granted as Security Section 2 (3) states that where a Power of Attorney is expressed to be irrevocable and is given as security to secure a proprietary interest or the performance of an obligation owed to the donee, it shall not be revoked by: The donor without the consent of the donee. The death, incapacity or bankruptcy of the donor or if a body corporate by its winding up or dissolution.

Protection of Donee and Third Parties on Revocation Section 3 A donee without notice of revocation will not incur any liability. The transaction will be valid as if the power had been in existence at the time of the transaction, unless the donor has reasonable grounds to believe the third party was aware of the revocation. If the donee is aware of revocation and acts to the detriment of the donor, he is liable to a fine of between GHC 10 and GHC 10,000 or a term not exceeding six months imprisonment. The third party can assume that an irrevocable power of attorney cannot be revoked except by consent of donee unless he was aware of the contrary.

Power to delegate Trusts by Power of Attorney Section 5 A trustee may delegate for not more than 12 months A donee of a power of attorney may include a Trust Corporation but shall not include other co-trustee if any, unless a trust corporation. Within 7 days of execution, written notice should be given to the donee specifying: o o Date on which power comes into operation Duration

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o o o

The donee Reasons for granting power Trust, powers and discretion delegated to each person who has power to appoint new trustees and to each of the other trustees.

A donor is liable for the defaults of the donee A donee can exercise powers but cannot delegate.

Special Consideration by Banks Has the document been drawn correctly? Is the document an original or certified copy? Is it certified by the donor or solicitor? The extent of authority should be checked Is duration acceptable or has it lapsed? Where power is revoked, the agent or third party are protected unless aware of the revocation. When bank becomes aware, the donor must countersign all cheques. The Bank must make note of this fact.

Banking and Agency Banks act as agents in a number of situations and must exercise all the duties owed by agents to their principals: In the collection and payment of cheques to third parties In obtaining travelers cheques from overseas on behalf of customers In effecting money transfers, both local and overseas In the purchase and sale of shares In the purchase of treasury bills on behalf of customers.

In the above situations, the bank must perform the service with the due skill, diligence and care in order not to cause loss to the customer. On the other hand there are situations where a customer owes the bank a duty of care as a principal in the agency relationship. There are two main situations: Duty to exercise care in drawing of cheques London Joint Stock Bank V Mcmillan and Arthur [1918] Duty to inform the bank on notice of fraud - Greenwoods V Martins Bank [1933],

Joint Accounts

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A joint account is an account owned and operated by two or more persons who are neither partners nor executors nor administrators nor trustees. Again, as with individuals all account holders should have reached the age of majority which is 18 years by virtue of the Courts Act and Childrens Act. The same considerations apply as in the case of individual accounts. Where one party is already know to the bank his introduction would be sufficient to establish their identity and integrity. There are two major incidents of a joint account, namely, the right of survivorship and joint liability. Under the common law, joint ownership implies the right of survivorship in the event that one party to the account is no more. This means, the balance on the account will be paid out to the remaining accountholder on the death of the other accountholder. Under joint liability, in the event that an advance is provided to the joint accountholders, the bank can only proceed against them jointly and not separately. Again the bank cannot proceed against the estate of a deceased joint accountholder. Banks therefore incorporate into the mandate form, a joint and several liability clause, in order that in the event of a default in the payment of a debt the joint accountholders owe the bank, the bank can proceed against the estate of the deceased party. Another advantage of joint and several liability is that the bank can proceed against the accountholders either collectively or consecutively. The main clauses in joint account mandate forms include: Clause 1 Request for account to be opened and further direction regarding opening of subsequent accounts Clause signing instructions. There is presumption against delegated authority, for that matter the mandate must clearly state whether only one party may authorize payment Husband v Davis [1851] Where the signature of one account holder is forged, the bank is not entitled to debit the amount of such a cheque to the account Jackson V White and Midland Bank [1967] Clause 3 Countermand of payment. It is prudent specifying that one person may give instructions countermanding a cheque. Clause 4 Treatment of Dividends under this clause, the bank will be given authority to credit to the account all dividends, interest and capital sums accruing to both/either of the account holders. Clause 5 Advances on request of both/either of them. Clause 6 Joint and Several Liability clause Clause 7 Safe Custody deals with delivery of safe custody items in the name of both/either of the account holders.

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Clause 8 Survivorship the survivorship clause gives the bank the authority to pay the balance of account over to the survivor(s) in the event that one joint account holder dies. Clause 9 Instructions to remain in force until written revocation. Death of Joint Account Holder The treatment depends on whether there is a survivorship clause. If the mandate is even silent, the bank would obtain a good discharge if it paid the balance to the surviving party. Cheques Presented after Death If a bank receives notice of the death of one party, any cheques presented for payment and signed by the deceased should be returned unpaid and marked drawer deceased. Cheques signed by the remaining survivor may be honored since the balance would vest in him under the survivorship rule Where there is more than one survivor, a fresh mandate should be obtained and subsequent cheques drawn in accordance with the mandate. In the case of cheques signed by both parties the bank may pay after confirming with surviving party. Bankruptcy Of Joint Account Holder Bankruptcy does not bring the right of survivorship into operation. For that matter, as soon as the bank learns of the petition against a joint account holder, no further withdrawals should be permitted. Cheques presented should be returned with an appropriate answer e.g. bankruptcy petition presented. Cheques signed by the other parties should bear an answer that casts no reflection on him. E.g. joint customer X involved in bankruptcy proceedings. Subsequently, any withdrawals would be under the authority of the Trustee in Bankruptcy and the joint account holder. The same applies to articles deposited for safe custody. Mental Incapacity of Joint Account Holder The same considerations apply save that a Receiver (Guardian Ghana) appointed by the High Court will give instructions to the bank jointloy with the remaining account holders. Garnishee Order A balance standing to the credit of a joint account holder will be attached by a garnishee order nisi which names all the account holders as judgment debtors. In the same manner, a garnishee order nisi anming two judgment debtors will attach a balance standing in the name of one of them.

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Miller V Mynn (1859) 28 LJ QB 324 On the other hand, a joint account cannot be attached in respect of a debt owed by one of the parties. Hirschorn V Evans, Barclays Bank Ltd. Garnishees [1938] 2 KB 801 Personal Representatives Administration of estates in Ghana is governed by the Administration of Estates Act 1961 Act 63. The Act defines a personal representative as the executor, original or by representation, or administrator for the time being of a deceased person; An executor is a person named in the will of a deceased person to act as personal representative in the administration of the estate of the testator and to carry into effect the provisions of the will. Under Section 61 a grant of probate is necessary to entitle an executor to administer the property, whether movable or immovable, of the testator. Before probate, the executor may, for the benefit of the estate, exercise the functions which pertain to his office but he shall not be entitled to make a disposition of any property. An administrator is a person appointed by the court to administer the estate of a deceased on the application of the family members of the deceased. An administrator is appointed when the deceased persons will does appoint any person as executor. The Act defines administrator as a person to whom administration is granted; Before an administrator can act, he must be given letters of administration by the court. An administration may be general or limited, or with the will annexed or otherwise. A balance on the account of a deceased person can only be paid out on the production of a death certificate and probate or letters of administration depending on whether the personal representative is an executor or administrator. Opening of Account Where an executor wishes to operate and executors account with the bank, he may be introduced by his solicitors. They will then be asked to complete a mandate similar to that of joint account holders. This mandate will show: Signing authorities any one or more may sign and such authority may not be delegated to third parties. If there are to be trusts , all must sign Joint and several liability clause

Where the will has been deposited for safekeeping, the bank would permit it to be removed in exchange for a receipt signed by all the parties named as executor in the will or their solicitors.

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Operation of Account If the account is in debit, the executors will have to pay. Where the account is in credit, this would be transferred into the Executors Account. Safe custody items should be delivered. Where the Personal representatives are to hold the residue of the estate upon certain trusts, the account should be restyled Trustees of Deceased. Any advances granted should be against the joint and several guarantee of all the executors. Executors have the power to provide security. Continuing Business Executors do not have the power to carry on the testators business except for the purpose of winding it up Collinson V Lister (1855) 20 Beaver It is nonetheless their duty to preserve the business as an asset. Strickland V Symons (1883) 22 Ch. D 671 If the executors act in good faith and to the best of their judgment they will not be liable for breachof trust in continuing the business for some years Garrel V Noble (1834) 6 Sim 504 Where authorized in the will to carry on the business they are not entitled to employ in the business any of the personal assets of the testator beyond the fund directed to be so employed. Re Ballman Ex Parte Garlans [1804] They are only entitled to employ the assets already invested in the business. Re Hodson, Ex Parte Richardson (1818) Advances for Business The bank must establish the power to carry on the business The bank must also establish whether creditors have assented to this. If this is the case, business creditor including the bank are entitled by subrogation to priority over the personal creditors of the deceased Where they have not assented, they would be entitled to being paid first out of the assets, notwithstanding that the executors have been empowered to carry on the business.

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Re Oxley, John Hornby & Sam Voxley [1914] 1 Ch 604 Banks can rely on joint and several liability clause. Executors do not have the power to charge assets outside the business as security McNellie V Acton (1853) They may give a valid charge over the business assets Devitt V Kearny (1883) Where funds to carry on the business are insufficient, they should apply to the court for directions Death of Personal Representative The survivors may continue to act and cheques signed by the deceased may be debited to the account. Flaunders V Clarke (1747) In practice, it is usual for banks to obtain a fresh mandate from the survivors for future operation of the account Where the account is overdrawn and subject to joint and several liability, it should be stopped to protect the bank from the operation of the rule in Claytons case. Where the last survivor dies, his executors who prove his will will become executors of the original testator. They will be asked to sign a mandate governing operation of the account. In the event that he died intestate or fails to appoint an executor, a grant of administrator de bonis non administratis must be obtained. on the death of the last surviving administrator, whether or not he leaves a will, a grant of de bonis non administratis must be obtained. Breach of Trust by Executors In practice executors may be involved in a breach of trust e.g. an executor may pay into his personal account payable to the executor in his personal capacity. Here the bank must be satisfied from its knowledge of the testators will that it is a proper payment. In instances where the account was overdrawn, it would serve as strong evidence of a breach of trust. Gray V Johnston (1868) The bank would also be justified in refusing to pay a cheque and would be liable where:

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That there has been some breach of the trust The bank is privy to this The breach is shown to have been for the personal benefit of the bank e.g. overdraft account being credited.

Trustees A trust is defined as the relationship that arises wherever a person (called the trustee) is compelled in equity to hold property, whether real or personal and whether by legal or equitable title, for the benefit of some person or persons or for some object by law in such a manner that the real benefit of the property accrues not to the trustees but to the beneficiaries or objects under the trust. A Trustee is an individual or corporate body appointed to take custody of an item of value including money on behalf of another person termed the beneficiary of the trust. In Ghana trusts are governed by the English Trustee Act1860 (23 & 24 Vic, c.1 sections 1 to 5 and 7 to 34 which is a statute of general application in Ghana by virtue of the Courts act, 1993. The legal incidents for a bank would be to ensure that the trust has been properly constituted and the trustees have been properly appointed as such. This could be ascertained by examining the Trust Deed or instrument by which the trust is established. The bank should ensure that it does not assist the trustees in the breach of the trust otherwise the bank will find itself liable to account to the beneficiaries under the trust. Account Opening If the trustees are unknown to the bank, it should take suitable references. The account name should be styled to indicate its nature. The bank should obtain and record the main provisions in the trust instrument. Mandate The bank will obtain the signing authorities. In the case of a charitable trust it would be sufficient for any two of the trustees to sign. On the other hand, all the trustees of a private trust should sign to authorize withdrawals from the account. If under exceptional circumstances this rule is relaxed, some safeguards should be put in place. Such safeguards include opening separate accounts Income account and Capital Account. At least two can authorize payments from the income account, however, all signatories should sign cheques drawn on the capital account. The bank should then take an indemnity from all the trustees and beneficiaries who are of full age. Operation of Account Borrowing

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Since trustees do not have an implied power to borrow, a bank needs to examine the trust deed to establish whether specific borrowing powers have been provided for. In the absence of any power to borrow, section six of the English trustee act provides for borrowing for capital purposes and section seventeen provides that a purchaser or mortgagee paying or advancing any money need not see that the money is wanted or how it is used. A trustee must not trust charge assets to secure borrowing on his personal account. The rule in Hallets case excludes the rule in Claytons case where the trustee has credited trust funds into his personal account. Delegation of Authority Trustees are generally not allowed to delegate unless authorized by a provision in a will or trust deed. Nonetheless, the Trustee Act 1925 (as amended by the Power of Attorney Act 1971) allows a trustee to delegate powers for up to a period of twelve months under a power of attorney. Section 9 states that a trustee may delegate powers to any person or trust corporation except for a co-trustee unless the latter is a trust corporation e.g. a bank. Similar provisions are contained in section of the Power of Attorney Act 1998, Act 549 Ghana. Death of Trustee Section eighteen provides that surviving trustees can continue to operate the account. They should establish whether the trust deed provides for a replacement trustee to be appointed. In case the account is overdrawn, the bank must stop the account to preserve its claim against the deceaseds estate. Where all trustees die and no trustee has been appointed the personal representative of the last trustee can take over until the appointment of a new trustee. Bankruptcy of Trustee Bankruptcy is not an automatic ground for resignation. However an interested party may apply to the court for his removal and the appointment of a new trustee in his place. Solicitors Account Solicitors must open a separate Client account in addition to its office account. Withdrawals from such account may only be authorized by a person who is either a solicitor with a practicing certificate, or who has been a fellow of the Institute of Legal Executives for a period of three years A client account should not become overdrawn. Liquidators

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The bank would wish to see the court order appointing the liquidator together with the authority to open the account. The powers of the liquidator include borrowing and charging the companys assets without having to seek authority from elsewhere. In England, where the liquidator wishes to carry on business, authority from the court and the committee of inspection would be required for any borrowing and provision of security. Unincorporated Associations Account Opening The account name should either be the name of the association or the name of the treasurer or secretary of the club which makes reference to the fact that it is being operated as a society account e.g. Jacob Mensah Re Tennis Club. Mandate The mandate must refer to a resolution passed by the club appointing the bank as its bankers. Signing authorities should refer to the officers being conferred with the mandate to sign. Borrowing Where there is to be borrowing on the account, the bank must obtain a copy of the clubs rules. A club does not constitute a separate legal entity, for that matter it is not capable of being sued directly. The members of the club will also not be liable for any borrowing unless they have undertaken to be liable. However they may be liable for any borrowings sanctioned by the clubs committee, acting within the clubs rules if any Bradley Egg Farm Ltd. V Clifford and Others (1942) A bank should for the avoidance of all doubt the bank would only lend against a third party security by way of a guarantee incorporating an indemnity clause whereby the signatories will assume personal liability. Where the society offers its property as security the bank should examine its trust deed. All trustees should sign the charge form and the bank should ensure that there has been no breach of trust. Death of an Officer Death of an officer does not determine the mandate to pay any cheque which the officer might have signed even though such a cheque may be presented after the persons death. The bank must advice the club to provide a new specimen signature of a new officer appointed to replace the deceased.

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CHAPTER FIVE BUSINESS ACCOUNTS SOLE PROPRIETORS AND PARTNERSHIPS Sole Proprietorship A Sole Proprietor is more a less a one man business. Such individuals may open an account in their personal name in which case the bank will treat the account in the same way as that of an individual. In other circumstances, the proprietor may open the account in the name of the business. The legal requirements here are government by the Registration of Business Names Act, 1962, Act 151. The bank would require the submission of the Registration Certificate in addition to a form designated as Form A. References may be taken from existing business customers. Partnership Account Introduction A partnership is a form of business organization comprising a minimum of two persons operating a business with the mutual objective of reaping profits from the business. Whilst the rules governing such business organizations have developed by custom and usages over time, most countries have codified such rules through legislation. In Ghana for example, partnership business is governed by the Incorporated Private Partnership Act, 1962 Act 152. Section 58 of the Act states that, notwithstanding the provisions of the Act, the rules of equity and common law relating to partnership continues to be in force unless inconsistent with the express provisions of the Act.

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Definition Section 3 of the Incorporated Private Partnership Act, 1962, Act 152 defines a partnership as meaning an association of two or more individuals carrying on a business jointly for the purpose of making profits. Under section 4(2), a corporate body cannot be a partner and the maximum number of partners is 20. Section 3 also clarifies the definition of a partnership by listing the types of association that would not constitute a partnership. These are: a) An association of members of a. Companies registered under the companies ordinance (Cap 193) b. Any company, body corporate or an unincorporated association formed under any enactment. c. A body corporate formed in accordance with the law of any foreign country whether or not carrying on a business in Ghana. d. A joint venture without a firm name for one or more specific operations. b) Family ownership or co-ownership of property does not necessarily create a partnership whether or not they share any profits accruing from the use of the property. c) Notwithstanding that sharing of profits is prima facie evidence of a partnership, a. the payment of an agent or servant out of profits shall not make such agent or servant a partner or member of the Partnership b. Also, a person shall not be deemed to be a partner if it is shown that he did not participate in the carrying on of a business or was not authorized to do so. Registration of Partnership firms (S. 4-7). The partners must submit a copy of the partnership agreement and an application letter including a statement containing the following particulars, signed by all the partners (s 5(1): The firm name Nature of business

Address and box number of the principal and all other places of business

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 Names and former names, residential addresses and business occupations of partners Date of commencement if within 12 months of statement

Particulars regarding charges requiring registration as under section 25 or a statement that there are no such charges. The registrar may not register the partnership due to the following detrimental factors Section 5 (2): Firm not registrable under act e.g. body corporate licensed under other legislation etc. Unlawful business Firm name misleading and undesirable

Any one of the partners is an infant, of unsound mind, or one guilty within the preceding five years of fraud or dishonesty in connection with any trade or business; or undischarged bankrupt Statement incomplete, illegible, inaccurate, irregular or on unsuitable paper. When the application for registration is approved the partners are granted a certificate of registration which states the names of the partners and that their liability is unlimited. The registrar will then publish the fact of registration in the Gazette stating the date of issue and terms thereof. The certificate serves as conclusive evidence of incorporation. Registration constitutes notice to the whole world of the fact of registration and not of the contents of any documents tendered. (S. 31) Under section 7, where there is the need for a change in any particulars such information must be delivered to the registrar on a statement in prescribed form signed by all the partners or authorized agents (in writing). Where the change in particulars is the firm name or identity of a partner, the Registrar on registration shall issue an amended certificate and insert notice in the Gazette stating the date of issue of the certificate and the terms thereof.

Corporate personality of the firm S. 12 A partnership firm is a body corporate distinct from the partners person and exists until dissolved under sections 51, 52 and 53. The partners are jointly and severally liable for the debts of the firm (Section 16). However, each person is entitled to indemnity from the firm and contribution of co-partners in accordance with their rights under the partnership agreement. Publicity S 13

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The business must be carried on under only the registered name. Such name should be affixed in a conspicuous position in easily legible letters at the firms business premises Names and former names and registered firm name should appear on all trade circulars and business letters of the firm. The latest certificate must be exhibited in a conspicuous position at the firms premises

Relationship of firms and partners to outsiders, (S. 14-18) Powers Of Partners to Bind the firm A partner is considered an agent of the partnership for the purpose of the business of the firm. Section 14 states that the acts of the partners will bind the firm where: Those acts that are authorized expressly or impliedly or were subsequently ratified. Those acts were done for the usual business of the firm unless the partner has no capacity to act in a particular manner and the person with whom he is dealing knows he has no authority.

Where the acts are for purposes not in the ordinary course of business, the firm will not be bound unless the partner has been authorized or the act is subsequently ratified. Any restrictions on the authority of a partner are effective and binding, only if third parties have notice of it. Acts on Behalf of the Partnership Section 15 states that an act or instrument relating to the business of a firm and done or executed in the firm name, or in any other manner showing an intention to bind the firm by any person thereto authorized, whether a partner or not, shall be binding on the firm. Powers of Partners By custom and usages in business, partners in a partnership firm will have the following powers where the business is either a trading or non-trading one: To buy and sell goods for the purpose of the business To give legally binding receipts to debtors To employ and dismiss employees

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To draw cheques on firms business account

In addition, purely trading firms will have the following powers: To contract and pay debts on behalf of firm To draw accept or discount Bills of Exchange To borrow money on the firms behalf Power to pledge goods and assets of the partnership as security for partnership borrowing.

The following will normally be outside the powers of a partner and must therefore be executed or authorized by all the partners: Execution of deeds Giving guarantees Acceptance of property instead of money in the settlement of debt Authorizing third party to use firms name in legal or other proceedings. Submitting disputes to arbitration.

Liability of Incoming and Outgoing Partners Section 17 A new partner is not liable to creditors for anything done before he became a partner. A retiring partner is liable for the debts and obligations before his retirement. He can however be discharged by agreement between partners and creditors For persons already dealing with the partnership, such person will be entitled to consider the retired partner a partner unless the person has actual notice of the retirement and the retired partner shall continue to be liable to him. In the case of parties not having previous dealings with the Partnership an advertisement in a newspaper circulating in the locality would serve as adequate notice. Other parties must have had actual notice of the retirement which would usually be by way of written notice or circular. Section 17 states that a partner is not liable after death, insolvency order or retirement (subject to the above required notices) Tower Cabinet and Co. V Ingram. Section 18 makes the partnership liable if all partners by their words, conduct or action hold out another person as a partner and the person consents or does not object to this representation

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Revocation of continuing guarantees (S. 19- 20) In the absence of any agreement to the contrary, a continuing guarantee given to a third person in respect of the transactions of a firm shall be revoked as regards future transactions by any change in the partners who are members of the firm. On the other hand, in the absence of any agreement to the contrary, a continuing guarantee given to the partnership firm in respect of the transactions of a third person shall not be revoked as to future transactions by any change in the partners who are members of the firm. Judgment Debt of Partner (s. 20) Where a writ of execution issues against a partner, it shall attach the interest of the partner in the firms profits and not the partnership property. It is only when the writ of execution is against the partnership that property of the partnership can be attached. The partners have the choice to redeem the interest charged at any time or in case a sale is directed, purchase the same. Creation Registration of mortgages and floating charges Section 21 31 Under the Partnership Act, partners can create floating charges over partnership assets. Section 21 defines a floating charge as an equitable charge on the whole or a specified part of the undertaking and assets present or future, whereby the firm is not precluded from dealing with the assets until: The security becomes enforceable according to the provisions of the charge, and the chargee pursuant to the power granted, appoints a manager or receiver or enters into possession. On application of chargee, (where the charge did not make provisions for such appointment) the court can also appoint a receiver or manager over the assets covered. The firm goes into liquidation

Section 21 (4) provides that a fixed charge will always have priority over a floating charge unless the floating charges expressly prohibits the taking of a subsequent fixed charge and the beneficiary of the charge was aware of this prohibition at the time of granting the charge. All documents and particulars relating to the charge must be registered within 28 days. Section 22(1). The following particulars are to be delivered: The date of creation of the charge The nature of the charge The amount secured or maximum amount (S. 23) Short particulars of the property

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The grantor of the charge Beneficiaries Restrictions in the case of a floating charge.

S 22 (5) a certified copy can be signed by all interested parties. Where a charge becomes void, it does not preclude the fulfillment of any obligations owed by the partnership and any moneys owed become immediately repayable notwithstanding any provision to the contrary in the document. Enforcement, Discharge or Vacation of Charges Section (S. 28-31) A memorandum of satisfaction may be made in whole or in part (S. 28) In the event of enforcement of security, registration of enforcement must be effected within ten days from date of order of appointment or entry into possession. This will be entered into a register (S. 30) Any notice of vacation should also be given within ten days. Copies of such notices must be published by the registrar in the gazette. Registration constitutes notice to the whole world of the charge and not of the contents of any documents tendered therein. Accounts of the Partnership Section 32 The Act requires that the partnership keeps proper books of account to record all business transactions of the firm. Again, at intervals of not more than fifteen months the firm is required to cause to be prepared a profit and loss account showing a true and fair view of the performance of the business and a balance sheet that gives a true and fair view of the assets and liabilities and state of affairs of the firm and of the value of the interest of each of the partners. Fiduciary Relation of Partners S. 34 Section 34 of the act states that the partnership relationship is a relationship based on trust i.e. a fiduciary relationship. For that matter: Every partner is to render to each other full information relating to everything affecting the firm The benefits derived from any transaction concerning the firm or use of property must be accounted to the firm by the said partner (Bentley V Craven) All profits from activities of same nature as the firm or in competition to the firm without consent must be paid to the firm.

Partnership Rules in Absence of Contrary Agreement

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The mutual rights of the partners may however be varied by express agreement or impliedly (S. 35 (1)). Section 35 (2) outlines the rules governing the partnership agreement in the absence of any contrary agreement: Equal share of capital and profits of the firm and contribution towards losses sustained The firm to indemnify partner for payments or liabilities incurred: o o In the ordinary and proper conduct of the business Anything done for the preservation of business or property of the business.

Excess contributions must be entitled to interest of 5 % This must be paid after profits have been ascertained. Each partner may take part in the management of the firm. No remuneration for partners No person may be introduced as a partner without his consent or the consent of all existing partners. No change in business without the consent of all the partners Books and accounts at the principal place of business.

Property rights of partnership (S. 37) The property rights of a partner shall be in personal estate and not in the nature of real or immovable property. Assignment of Interest in Partnership (s. 38) An assignment by any partner of his interest in the firm either absolutely or by way of charge shall only entitle the assignee to receive the assigning partners share of profits and the assignee is obliged to accept the account of profits agreed to by the partners. The assignment shall therefore not entitle the assignee to interfere with the management or administration of the firm or to require any accounts of the firms transaction or to inspect the partnership books. On the assigning partner ceasing to be a partner, the assignee will be entitled to receive the amount that would have been paid to the partner or his estate. Withdrawal from Firm and Consequences S.39 S.43 Under section 39 (1), a partner shall cease to be a partner in the firm in the event of: a) death

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b) his becoming an enemy alien c) an insolvency order is made against him under the provisions of Insolvency Act 2006 Act 708 Again, if partners elect in writing, a partner who charges his interest for a debt shall cease to be a partner. Section 39 (2) A partnership agreement shall provide that on the occurrence of any event specified therein, a partner will cease automatically to be a partner or at the option of the other partner. Examples of such events include mental disorder, physical incapacity, incompatibility of temperament or criminal disorder. In Carmichael V Evans 1904, the partnership agreement provided that if a partner was addicted to scandalous conduct detrimental to the partnership or any flagrant breach of duties as a partner, he will be expelled. One of the partners defrauded a railway company by traveling without a ticket and the partners sought to expel him from the partnership. The court held that they could do so. Section 39 (4) On application of a partner, a court may order that a partner cease to be a member in the following cases: When the partner is shown without doubt to have become permanently of unsound mind. When the partner is shown to have become in any other way, permanently incapable of performing his part of the agreement When the partner is guilty of conduct calculated prejudicially to affect the carrying off of the business When the partner willfully or persistently commits a breach of the partnership agreement or otherwise so conducts himself in matters relating to the firms business that it is not reasonably practicable for the partners to conduct business with him When in the opinion of the court, it is just and equitable for the partner to cease to be a partner e.g. where there is deadlock, or freezing out of one partner by the others.

Section 41 Existence of only One Partner Where there is only one surviving partner, section 41 states that the partner shall within six months of cessation admit another member or commence to wind up the firm under sections 47 and 48 Section 41 (3) specifies that continuing partners must within six months, admit persons or persons who have agreed to be successors. A partner may purchase the interest of a leaving partner at a price determined by agreement between the partners or by an arbitrator or the President of the Association of Accountants. In the absence of agreement, the partners shall commence to wind up the business under section 47 and 48

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The amount payable can be considered as a debt which must attract interest. Payment of Premium Section 42 provides for the payment of a premium when the firm is wound up or the partner who paid the premium ceases to be a partner. The court in such circumstances may order the return of the premium or such part as it thinks fit, having regard to the terms of the partnership agreement, to the length of time the partnership has been in existence and to all the circumstances of the case unless: The winding up or cessation of the partnership is in the opinion of the court wholly or chiefly due to the misconduct of the partner who paid the premium; or The firm is wound up or ceases to exist as a result of an agreement which makes no provision for the payment of the premium.

Rescinding of Partnership Agreement Section 43 provides that where a partnership agreement is rescinded on the grounds of fraud or misrepresentation of one of the parties, the rescinding partner will be entitled to: to a lien on the firm's assets, after satisfying the firm's liabilities, for any sum of money paid by him for the purchase of his interest in the firm and for any capital contributed by him; To be subrogated into the position of creditors for all payables paid To be indemnified against all liabilities by the guilty party.

Winding up of the firm in outline (S. 44-51) The Act provides for three modes of winding up (Section 44): Insolvency proceedings under the Insolvency Act 2006 Act 708 against all the partners jointly Under an order of court By voluntary liquidation of all the partners.

Insolvency Proceedings Section 46 states that where a firm is not being wound up under an order of court, insolvency proceedings may be instituted by one or more creditors under Act 708 jointly. A protection order will then be made against all partners jointly and the Official Trustee appointed to be liquidator of the firm. As from this date, all the interests of the partners and powers and authority relating to the firm shall vest in the

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Official Trustee. A copy of the protection order shall then be delivered to the Registrar. After the specified period in the protection order, an insolvency order will then be made and the assets of the partnership will now be administered by the Official Trustee. Winding up Under a Court Order Section 47 A firm notwithstanding that it is being voluntarily wound up, may be wound up under a court order on application of: Any partner of the firm Any former partner or legal representative who has not been paid the amount due in respect of his interest in the firm The Registrar

However, when insolvency proceedings have already been set in motion, a firm cannot be wound up under a court order. Section 47 (3) lays down the grounds on which the court will issue an order for the winding up the firm: The firm does not commence business within a year of registration or suspends business for a whole year. Business is carried on for more than six months with only one partner The firm is unable to pay its debts as they fall due In the opinion of the court it is just or equitable.

Where the court is convinced that the firm will not be able to pay its debts and liabilities in full within the next six months, it will make a protection order Section 47 (4) The court will then appoint the Official Trustee or other fit person to wind up the affairs of the firm and within 48 hours, a copy of the order must be delivered to the Registrar for registration and notice in the Gazette. Voluntary Winding Up Section 48 The partners can agree voluntarily to wind up the affairs of the firm. On agreement, the partners are required to notify the Registrar, who will have the matter published in the Gazette. The authority of the partners to bind the firm and other rights and obligation continue until the firm is dissolved or a protection order, court order to wind up affairs and complete transactions have begun. Where the partners suspect that there will be default within six months, they must notify the Registrar in prescribed form. Involuntary Winding Up Section 49

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When winding up is involuntary, every invoice order, business letter or any document in which firm name occurs must contain statement to the effect that the firm is being wound up and also state the name or official title of the liquidator. Distribution of Proceeds of Winding Up The following rules shall apply in settling accounts between the partners: Losses shall first be paid out of profits, then capital then by the partners in proportion in which they were entitled to profits. Capital deficiencies shall be borne in same proportion Assets shall be applied n the following manner: o o o o In settling the debts and liabilities of the firm to non partners In settling ratably advances due to partners In paying ratably what is due to each in respect of capital The ultimate residue divided in proportion in which profits are divisible.

Completion of Winding up Section 51 When the Registrar is satisfied that the winding up of the affairs of the firm is complete then, unless the undertaking of the firm has been disposed of as a going concern to another partnership and the change duly registered in accordance with section 7 of this Act, the Registrar shall strike the firm off the register and notify the same in the Gazette. Moribund Firms Section 52 It is required that the Registrar give two months notice to moribund firms, when it comes to his notice that the firm is not conducting business. The Registrar is required to send to the last registered principal place of business of the firm a letter by registered post enquiring whether the firm is carrying on business and stating that if this is not the case or if no reply is received within two months from the date, notice will be published in the Gazette with the view to striking the firm off the register. Where no reply is received or a reply is received that the firm is not carrying on business, the Registrar may publish in the Gazette and send by registered post to the last registered principal place of business of the firm a notice that at the expiration of two months from the date of the notice, unless contrary cause shall be shown, the firm shall be struck off the register. Dissolution of Defaulting Firm Section 53 The registrar may strike a firm off the register (after first sending a warning to the principal place of business of the firm) if in his opinion:

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the business of the firm is unlawful or the firm is operated for illegal purpose the firm has committed a breach of any of the provisions of the act

In the case of where a breach of any of the provisions of the Act is committed, the Registrar shall send by registered post to the last registered principal place of business of the firm a letter specifying the breach and requiring it to be remedied or ended to his satisfaction within the time specified. When the breach is not remedied within the time specified, the Registrar shall publish in the Gazette and send by registered post to the last principal place of business of the firm a notice that the firm has been struck off the register and dissolved. Notwithstanding the dissolution, the partners shall remain jointly and severally liable for the debts and obligations of the partnership. Partners have the right to appeal to the Court when struck off under sections 52 and 53 Bank Accounts of Partnership Opening of Account The Bank should first verify that there is a partnership by calling for the partnership agreement, if any, and an application letter on the letter head of the partnership signed by all the partners indicating the intention of the firm to open an account with the Bank. Where the partners are not known or not very well known, the Bank would take appropriate reference. The account must be opened in the name of the firm and not that of an individual partner. In Alliance Bank Ltd. V Kearsly, an account opened in the name of one of the partners got overdrawn. Later, the Bank sought recovery from the partnership. The Court held that it was not in the ordinary course of business to open an account in a name other than that of the firm. The Bank could therefore not recover the debt. Mandate The Partners will be made to fill the Banks usual form of mandate and this must be signed by all the partners. The mandate will show how and by whom the account is to be conducted, including withdrawal of securities held in safe custody. This mandate will normally include a joint and several liability clause binding all the partners. The mandate would indicate the number of partners required to sign to authorize payment by means of cheques. It would also incorporate a joint and several liability clause which serves to protect the bank in the event of death of one of the partners. Operation of the Account Payment and Collection of Cheques A mandate will normally state the partners who will have the authority or mandate to draw cheques on the account. In collecting cheques, the Bank should

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take care not to pay the proceeds of a cheque payable to a Partnership into an individual partners account. If it does so, it will not be able to enjoy the protection offered to banks under Section 81 of the Bills of Exchange Act, 1961 Act 55. Countermand of Cheques Any one partner may countermand the payment of a cheque Advances A trading partnership has the implied power to borrow in pursuance of the purpose of the business. The Bank must therefore ensure that any advance is used for the ordinary business of the firm. In practice, Banks obtain a signed undertaking by all partners to be liable for any overdrafts on the account. Such undertaking may be incorporated in the mandate. In the case of non-trading partnership, since they do not have the power to borrow or pledge securities, the Bank must obtain an express request signed by all the partners. Professional Partners Professional partnerships such as accountancy and law firms normally open client accounts where they keep client monies. A Bank must exercise the necessary care when dealing with such accounts to avoid getting involved in a breach of trust. The Rule in Claytons Case Effect of Death, Bankruptcy and Mental Disorder or Retirement To prevent the rule from operating against the Bank, the Bank will have to break the account and channel all subsequent transactions into a new account. This is to preserve the liability of the exiting partner or his estate. In the absence of agreement to the contrary, change in constitution of a partnership will revoke any continuing guarantees of the Partnership to third parties. An overdrawn partnership account where this is the case should be broken to prevent the Rule in Claytons Case from operating. Breach of Trust The bank should be put on enquiry when circumstance show that one partner is operating the account in breach of trust. Lipkin Gorman V Karpnale Changes in Partnership Death of Partner

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Death of a partner deceased estate will not be liable for deaths incurred after the partners death. Any overdrawn account should therefore be stopped. Any cheques presented should be marked partner deceased. If account continues, cheques may be honored though the bank must seek confirmation by the surviving partners that cheques signed by the deceased partner may be honored. Retirement of partner Notice is required If the account is overdrawn, the bank should stop the account and open a new account for the remaining partners. A retiring partner may be released from liability by novation a new partner agreeing to be liable for the retiring partners death. Admission of new partner If the new partner agrees to be liable, the account may be continued and a new signature taken. If not the account must be stopped and a new account opened for the new partners.

CHAPTER SIX COMPANY LAW Introduction The company is a form of business organization that usually involves a greater number of owners than a sole proprietorship or a partnership. It is a form that has arisen to meet the exigencies, complexity and rapidly expanding dimensions of business. It is a convenient form of business organization in the sense that it enables investors to contribute to the capital of the organization without taking active part in its management. The rules governing companies and its management have developed over time as disputes arose and were resolved. Eventually, most countries have tended to codify these rules and practices under companies legislation. In Ghana, the two main legislation governing companies are the Companies Act, 1963 Act 179, and the Bodies Corporate (Official Liquidations) Act, 1963 Act 180. Section 5 of the code prohibits the establishment of a Partnership with more than 20 persons as members. Section 6 provides for other legislation to govern companies in specialized areas such as banking and insurance. Section 7 states that the rules of common law and equity are preserved in so far as they are not inconsistent with the code. Nature of a Company

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In Salomon V Salomon and Co 1897, the court held that a company has a separate legal personality from that of its owners. A company can therefore sue other parties and be sued by other parties in its own name. A company is thus said to have a juristic personality, in other words a personality created by law. Section 24 of the Companies Code codifies this concept by providing that a company has the powers of a natural person of full capacity. Another term for this concept is the veil of incorporation. Another case that illustrates this concept is Macaura V Nothern Assurance Co. 1925 in this case, the owner of some timber tried to persuade the court that he and the company were one and the same so that the insurance company would have to pay on his personal fire insurance policy for the loss. The House of Lords again refused to lift the veil of incorporation, and confirmed that the company was a separate legal entity from the owner(s). In some instances however, the courts may be prevailed upon to lift off the veil of incorporation. Such instances include where the corporate personality is being used as a front to avoid liability arising from fraud or to avoid an undertaking. In Jones V Lipman 1962 the defendant tried to use the corporate veil to avoid the sale of land to plaintiff. The courts held that he was using the corporate veil to avoid the sale. Types Of Companies Act 179 provides for two major types of companies and their sub-classifications namely Limited liability companies o Companies limited by amounts remaining unpaid on subscribed shares o Companies limited by guarantee Unlimited liability companies A company limited by shares is the type of company whose members liability is limited to the amounts remaining unpaid on shares held by them. A company limited by shares shall be registered with shares. A company limited by guarantee is a company whose members liability is limited to the maximum that they undertake to contribute to the assets of the company in the event of liquidation. The minimum guarantee is 100 pounds. A company limited by guarantee shall not be registered with shares and shall not create or issue shares. Section 10 of the Act also provides that a guarantee company cannot have the objects of conducting business with a view to making profits. Members in such circumstances shall have their liabilities being unlimited and be made to pay a fine. Section 9 of the Act also provides that any of the above may be a public company or a private company. A private company is defined as one which: Restricts the right to transfer shares Limits the total number of its members and debenture holders to fifty. This excludes employees in bonafide employment or such ex-employees. Prohibits the company from making any invitation to the public to subscribe to its shares or debentures.

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Prohibits the company from making any invitation to the general public to deposit money for fixed periods or payable at call, whether or not they bear interest.

Any other type of company is a public company. This implies that a public company can make invitations for subscription of shares or deposits of monies and can have an infinite number of members. Conversion of company limited by Shares to Company limited by guarantee section 11 Under section 11 of the Act, a company limited by shares can be converted into a company limited by guarantee. This is subject to the following requirements: There is no unpaid liability on any of its shares; All its members agree in writing to such conversion and to the voluntary surrender to the company for cancellation of all the shares held by them immediately prior to the conversion; New Regulations, appropriate to a company limited by guarantee, are adopted by the company pursuant to section 22 of this Code; A member or members agree in writing to contribute to the assets of the company, in the event of its being wound up, to an extent not less than that prescribed by subsection (3) of section 10 of this Code. On delivery of new regulations and special resolution adopting same, coupled with a statutory declaration that the above provisions have been complied with, the Registrar of Companies will issue a new certificate of registration. Unlimited liability companies An unlimited liability company is a company not having any limit on the liability of its members. Formation: Promoters Section 8 of Act 179, states that, any one or more persons may form a company. This means that a company can have a minimum of one person as a member. Before a company is incorporated there are certain persons referred to as promoters who normally conceive of the project and take the steps necessary to incorporate the company. Section 12 describes them as persons who are engaged in or interested in the formation of a company. These persons are referred to as promoters. They do not include professionals engaged to perform certain duties in respect of the formation. Duties of Promoters Section 12 Until the formation of a company is complete and its working capital has been raised, the promoter shall, Stand in a fiduciary relationship to the company; Observe the utmost good faith towards the company in any transaction with it or on its behalf; and

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Compensate the company for any loss suffered by it by reason of his failure so to do. A promoter who acquires any property or information in circumstances in which it was his duty as a fiduciary to acquire it on behalf of the company shall account to the company for such property and for any profit which he may have made from the use of such property or information.

Section 12 (4) states that any transaction between a promoter and the company may be rescinded by the company unless, after full disclosure of all material facts known to the promoter, the transaction shall have been entered into or ratified on behalf of the company, if all the company's directors are independent of the promoter, by the company's board of directors; or by all the members of the company; or

by the company at a general meeting at which neither the promoter nor the holders of any shares in which he is beneficially interested shall have voted on the resolution to enter into or ratify that transaction. Pre-Incorporation Contracts Section 13 Under the common law relating to ratification of pre-incorporations contracts, the common laws stand was that a company did not have the capacity to ratify such a contract after its incorporation because it lacked capacity when the transaction took place. In Kelner V Baxter 1866 Baxter and two others agreed on behalf of a company yet to be formed to purchase trade stock for its business. Later the company was formed and accepted and used the trade stock, but failed to pay for the stock. HELD: The company was not liable as it could not ratify a pre incorporation contract with retrospective effect to a date before the company existed. Baxter and friends were therefore not able to recover their money. Section 13 of the Act however modifies this rule and provides that a company can ratify such pre-incorporation contracts and be bound thereby as though it was in existence at the time of the contract. Prior to such ratification, the promoters would be personally bound by the transaction or contract. Formation: Registration Procedure Section 14 Members in the process of formation would have put together regulations complying with sections 16 to 18 of the Act. The regulations are the rules members have agreed will govern the affairs of the company. Section 14 states that there shall be delivered to the Registrar a copy of the companies regulations complying with sections 16 18 of the code. Under section 16 regulations are required to state the following: The name of the company, with "Limited" as the last word of the name in the case of a company limited by shares;

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The nature of the business or businesses which the company is authorized to carry on, or if the company is not formed for the purpose of carrying on a business, the nature of the object or objects for which it is established; That the company has, for the furtherance of its authorized businesses or objects, all the powers of a natural person of full capacity except in so far as such powers are expressly excluded by the Regulations; The names of the first directors of the company; That the powers of the directors are limited in accordance with section 202 of this Code. The regulations may also contain other provisions relating to the administration of the company

Additional Provisions for Companies Limited By Guarantee In the case of a company limited by guarantee, regulations in the terms of regulation 3 of Table B in the second schedule of the act should be incorporated stating that the income and property of the company shall be applied solely towards the promotion of its objects and that no portion will be paid out to directly or indirectly to members except otherwise state therein. The regulations will also state that each member undertakes to contribute to the assets of the company in the event of its being wound up while he is a member or within one year after he ceases to be a member for the payment of the debts and liabilities and costs of winding up, up to a specified amount. The regulations should also state that if there are any surpluses after winding up such shall not be distributed to members but transferred to some other company limited by guarantee having objects similar to the objects of the company or applied to some charitable object, such other company or charity to be determined by the members prior to the dissolution of the company. Notwithstanding companies are free to adopt the format presented in the appendix to the code. These formats are: Table A Part 1 private company Table A Part 2 public company Table B Company limited by guarantee. Signature and attestation by one or more subscribers and witnessed by one person

Effect of Regulations Section 21 states that the effect of regulations is that of a contract under seal between the company and its members and officers and between members and officers whereby they agree to observe and perform the provision of the regulations, as altered from time to time, in so far as they relate to the company members or officers as such. Under section 14 of the code, unless in the opinion of the Registrar: The regulations do not comply with the code Objects or business or any of such objects or business is unlawful

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Subscribers infants or unsound mind Directors disqualified under section 182 and 186 See below

The Registrar shall register the regulations and upon this shall certify under his seal that the company is incorporated with the name provided in the regulations and if a limited liability company that its liability is limited. The companys existence commences from the date of registration. However, under section 27 Commencement of business no business to be transacted no borrowing power exercised or indebtedness incurred except incidental to incorporation or obtaining subscriptions to or payment of shares until delivery to Registrar a return in duplicate providing the following particulars as at the date of return: Name of company Authorized business or objects Names, former names of directors addresses, business occupations of directors and secretary and particulars of any other directorship Name and address of auditors If register of shareholders kept elsewhere, the address where it is kept If company has shares: o Amount of stated capital o Authorized shares of each class o Number and amount for each class of shares Return on minimum of 500 pounds Return to be signed by two directors and by the secretary Registrar on registration of return shall publish copy in the Gazette.

Alterations of Regulations A company may by special resolution change its regulations by altering, adding or adopting new regulations altogether. A special resolution requires 75 % majority. Section 22 provides as follows: Name shall only be changed with the consent of registrar and in accordance with section 15 The number of shares in accordance with sections 11, 57 to 63, 75 to 79, 218 or 231 Authorized business section 26. No conflict with court order under 218 Right attached to different classes altered under 47 and 231. The regulations may restrict or exclude power to alter all or any of regulations. In this case they may then only be altered under 231 New regulations should comply with section 16 Agreement in writing of shareholders There shall be no conversion of unlimited company or company limited by guarantee to that limited by shares

The Name of the Company Section 15 Section 15 outlines the code provisions in respect of the name of the company:

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Last word of company limited by shares should end with limited. The Registrar can refuse to register the company if in the opinion of registrar the name is misleading or undesirable o Ewing V Buttercup Margarine Company Ltd. where the defendants attempted to register a company with a name similar to their intended name. It was held that the name was misleading. o However in Aerators Ltd. V Tollit. 1902 it was held that aerators was a generic English word that any company could use. The name of the company can only be changed by special resolution and with approval of Registrar signified in writing Where the Registrar inadvertently registered a company with a misleading name, the company may change the name with the sanction of the Registrar. Where there was a change in the objects of the company, and it would be misleading to maintain the existing name, the Registrar may direct the company to change its name within a period not exceeding six weeks o Entry of new name in register o New certificate of incorporation is issued o Publication in Gazette o No effect on rights and obligations arising from previous contracts o Reservation of name up to two months notice.

Alteration in Number of Shares See Below Alteration of Objects By Section 26 a company may by special resolution alter its objects Again, on application of the following, the court will decide on whether or not the alteration of business objects should be approved. The registrar, For a private company, by any one to whom notice has been given For a public company, o By the holders of at least 15 % of the companys issued shares or any class thereof or if the company has no shares by not less than 15% of the members. o By the trustees for the holders of any debentures secured by a floating charge over any of the companys property. o By the holders of any debentures secured by a floating charge over any of the companys property. Membership/Capital/Shares The subscribers to the regulations and every other person who agrees to be a member of a company and whose name is entered in the register of a company shall constitute the member of the company section 30 A member has the right to attend and vote at annual general meetings of the company section 31. Section 32 provides for a register of members. Members have the right to inspect this register. Where there are any errors a member may apply for rectification of

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the error. The Registrar may close the register for purposes of determining cut off point for payment of dividends. The register constitutes prima facie evidence of matters by the code directed or authorized to be inserted therein. Liability of members section 37 The code provides that a member of a company limited by shares shall have his liability limited to the amount remaining unpaid on the shares he holds. This is subject to the following qualifications: Ceased to be a member for a period of one year upwards before commencement of winding up Past members not liable unless present members are unable to make required contributions Liability for shareholders limited to amount unpaid on shares Limited by guarantee up to maximum amount guaranteed. Dividends due not to be set off, but account to be taken for purpose of final adjustment of the rights of members and former members amongst themselves.

Shares A share is a document signifying a part ownership of a company. The code defines shares as the interest of members of a body corporate who are entitled to share in the capital or income of such a body corporate. Shares are in the nature of personal interest - section 39 and for that matter a shareholder possesses only an interest embodied in his right to take decisions and share in the profits of the company. A shareholder does not own the real property of the company. Section 40 provides that all shares issued in Ghana should be shares of no par value, meaning they should not have a nominal or face value. When a share is issued, although it does not have a face value, the company can assign a value to it for the purpose of subscription. Types of shares Under section 46 of the code, the regulations of a company may provide for different classes of shares by attaching to the shares, preferred, deferred or other special rights or restrictions whether with regard to dividend, voting repayment or otherwise. Section 48 defines a preference share as one which does not entitle the holder to any right to participate beyond a specified amount in any distribution whether by way of dividend, or on redemption, in a winding up or otherwise. Any other share shall be referred to an equity share. This is the same as an ordinary share. Under section 49 preference shareholders may vote on the following issues: On any resolution whilst arrears of dividend remain unpaid, within a period starting not more than 12 months or lesser period after the due date of the dividend as the regulations may provide Resolution that varies rights attached to the preference shares.

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Any resolution to remove an auditor or to appoint another in place of such auditor Resolution for the winding up of the company or during winding up.

Issue of Shares Shares up to the total number of shares authorized by the regulations may be issued at a time and consideration determined by the company and shall be paid at such times as agreed between member and the company subject to section 37 on shareholder liability. Once shares have been issued, a return has to be submitted within 28 days with the following particulars S 43: Amount of stated capital defined as paid up capital in cash, in kind or transferred from income surplus Number of authorized shares of each class. Total number of issued shares of each class and amount paid, details of consideration, whether in cash or kind and amount remaining payable detailing amount due as against amount not yet due. Total number of treasury shares of each class.

Other Provisions Section 52 all shares shall have a number. Section 53 Issue of share certificate with details of amount held and details including address of holder. Section 54 the statements made in a share certificate under the common seal of the company shall be prima facie evidence of the title to the shares of the person named therein as the registered holder and of the amounts paid and payable thereon. Section 55 the company may by special resolution declare that any portion of unpaid liability may be reserved for call up in the event of liquidation of the company Default Rule in Respect of Construction of Class Rights Section 51 deals with default rules on class rights. Unless contrary intention appears: No dividends to be paid without ordinary resolution Preference shares to be cumulative and no dividends paid unless arrears have been settled On liquidation all arrears payable up to date of actual payment in winding up If class is preferred as to dividends, there shall be no further rights to additional dividends If class is preferred as to distribution of asset in the event of winding up, they shall have no further rights.

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No regard will be made to whether or not property represents accumulated profits or surplus that would have been available for dividend All shares to rank equally in all respects Each equity share shall have one vote per share section 50

Variation of Rights Section 47(1) the rights of different classes is not to be varied unless to the extent provided in the regulations Section 47 (2) where there is express prohibition against variation, rights shall not be altered except with the sanction of the court under a scheme of arrangement in accordance with section 231 Rights in regulations are altered by special resolution Any such alteration would require prior written consent of holders of at least of the issued shares of each class. Notwithstanding any provision in the regulations, rights attached to a class of shares shall not be varied except with the written consent of holders of at least of the class of shares. Section 47 (6) defines variation of rights as including variation of votes exercisable at general meeting; reducing payment of dividend or other distributions Holders of at least 15% of the class may apply to court to have the variation cancelled.

Alteration in Shares and Prohibited Transactions in Shares Section 22 of the Code states that the number of shares shall be altered by special resolution and in accordance with sections 11, 57 to 63, 75 to 79, 218 or 231. Section 11 conversion from a company limited by shares to a company limited by guarantee Prohibited Transactions in Shares Section 56 subject to qualifications, a company shall not: Alter the number of its shares or the amount remaining payable thereon Release any shareholder or former shareholder from any liability on the shares. Provide financial assistance directly or indirectly for the subscription or purchase of its shares or the shares of its holding company Acquire by way of purchase or otherwise any of its issued shares or any shares of its holding company.

Section 57 deals with altering the number of shares. It says a company can only do so by alteration of its regulations. Alteration may be an increase through creation of new shares or a decrease through cancellation of shares that have not been taken up, or through consolidation. Section 58 provides for the situations under which financial assistance to acquire a companys shares would be allowed:

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Payment of a commission or brokerage not exceeding 10% of the price of the shares to any person in consideration of subscription or agreement to subscribe. Where lending is part of the ordinary business of a company Provision of funds for the purchase of shares to be held in trust for persons in employment of the company or associated company including directors in salaried employment Provision of funds for shares to be held by persons named above to be held beneficially by them and not as nominees of the company or any other person The payment of a lawful dividend, notwithstanding that it is used to discharge liability on shares or to repay money borrowed for the purpose of subscribing or purchasing.

Section 59 and 60 deals with the conditions and procedures through which a company may acquire its own shares. Section 59 states that notwithstanding section 56 of the code, a company may, if authorized by its regulations and subject to compliance with sections 60 to 63 of the code (a) Create and issue preference shares which are, or at the option of the company liable, to be redeemed on such terms and in such manner as may be provided in the Regulations and may convert existing shares whether issued or not into redeemable preference shares. (b) Purchase its own shares (c) Acquire its own shares by a voluntary transfer to it or to nominees for it The above is subject to the requirement that there is no unpaid liability on the companys shares. Section 60 provides that notwithstanding any provisions in its regulations, a company shall not redeem any of its redeemable preference shares except, (a) Out of a credit balance on the share deals account or out of transfers to that account in a manner provided under section 63 (b) Out of a fresh issue of shares made for the purposes of the redemption not more than twelve months before the date of redemption. Again, under section 61, a company shall not purchase any of its own shares except on compliance with the conditions below: (a) Shares shall only be purchased out of a credit balance on the share deals account (b) Redeemable preference shares shall not be purchased at a price greater than the lowest price at which they are then redeemable or will be redeemable at the next date thereafter at which they are due or liable to be redeemed. (c) No purchase shall be made in breach of section 62 Section 62 provides that no transaction shall be entered into whereby the total number of shares or of its shares of any one class held by persons other than the company or its shares nominees becomes less than eighty-five per centum of the total number of shares or of shares of that class, which have been issue. 4

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Section 63 provides for a share deals account for the redemption of shares or the acquisition of the companys own shares. Resolutions Reducing Capital Shares or Liabilities Subject to confirmation by the court, a company limited by shares may, by special resolution: (a) Reduce its stated capital in any way; (b) Extinguish or reduce the unpaid liability on any of its shares. (c) Resolve to pay or return to its shareholders any of its assets which are in excess of the wants of the company (d) Alter its regulations by cancelling any of its shares. Directors - S 179 216 Section 179 (1) defines directors as those persons appointed to direct and administer the business of a company. In addition, any person who holds himself out as being a director or knowingly allows himself to be held out as director, or a person on whose directions or instructions the duly appointed directors are accustomed to act shall be subject to the same duties and liabilities as if he was a duly appointed director of the company s 179(2) A company should have at least two directors section 180 Mode of appointment The first directors of a company shall be named in the companys regulations. The appointment of a person as a director requires his prior consent in writing s 181 Any casual vacancy is to be filled by the existing directors or by an ordinary resolution of the company. If the Regulations provide for appointment by class of shareholders, debenture holders, creditors, employees or other class, then when they do so the person acting shall vacate the position Disqualification of Directors Section 182 and 186 The following persons shall not be competent to be appointed as Directors: Infant Unsound mind Body corporate Anybody for whom an order has been made under section 186 Undischarged bankrupt unless granted leave.

Under section 186 by the court on application of Registrar or Official Trustee or trustee in bankruptcy or liquidator of any body corporate shall restrain the following from acting as directors: A person convicted on indictment, whether in Ghana or elsewhere, of any offence involving fraud or dishonesty or any offence relating to promotion, formation or management of a body corporate

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An Adjudicated bankrupt whether in Ghana or elsewhere, or It appears that a person has been guilty of any criminal offence, whether convicted or not in relation to any body corporate or any fraud or breach of duty thereof

Vacation of Office of Director and Removal from Office The office of a director shall be vacated if he becomes incompetent to act under section 182 or if he ceases to hold office by virtue of section 183 (minimum share qualification of directors) or if he resigns from office. Section 183 provides that when the regulations state that a Director must have a specified share qualification, he is to do so within two months or such other period as the regulations may specify. If he fails to do so he automatically ceases to be director. There is nonetheless no obligation for directors to hold shares or be members of the company unless the regulations provide that they should do so. Section 185 details the procedures for removing a director from office. Section 185 (1) states that notwithstanding any provision in the regulations or agreement with the director, a company may by ordinary resolution remove a director. Not less than 35 days prior to such meeting when the resolution would be moved, the notice of such resolution must be provided to the company. The company shall provide notice to all its members at the same time as it provides notice regarding the resolution to be passed. On receipt of a notice, the director is entitled to be heard at the meeting in which the resolution is to be passed and also to issue a written statement to the company, copies of which will be sent to all members. Any vacancy created by the directors removal can be filled at the meeting or in the same way as a casual vacancy. Secretary The Code provides that every company should have a secretary and makes it an offence not to have one for more than six months while carrying out its business. Executive Directors and Managing Director Section 192 makes if possible for a director to act for payment in the day to day management of the company. Under section 193 they may appoint one or more of their members to the position of managing director. Registration of particulars of directors Section 196 The company shall keep a register at its registered office of the particulars of directors including substitute directors appointed under section 187 but excluding alternate directors appointed under section 188. A substitute director is one appointed as a deputy of a substantive director, while an alternative director is one appointed to act when a substantive director is out of the country or for any reason unable to act as director. 196 (2) The register shall contain the following particulars with respect to each director, namely:

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his present forenames and surname; any former forename or surname; his usual residential address; his business occupation, if any; and particulars of any other directorships, other than alternate directorships held by him.

196 (3) provides that the register shall contain the following particulars with respect to the secretary or, where there are joint secretaries, with respect to each of them, namely, in the case of an individual, the particulars required by paragraphs (a) to (d) of the immediately preceding subsection; in the case of a body corporate, its corporate name and registered or principal office:

Provided that when all the partners in a firm are joint secretaries the name and principal office of the firm may be stated instead of the residential address of each partner. Section 198 provides for publication of present and former forenames and surnames of directors in all trade circulars and business letters. Acts of by and on behalf of a Company - Authority and powers Section 137 a company shall act through its members in general meeting or its board through officers or agents appointed by or under authority derived from the members in general meeting or the board of directors carrying on in the usual way the business of the company. The regulations are required to determine the respective powers of members in general meeting and the board of directors. Officers and agents may have express and implied authority to act on behalf of the company. Unless otherwise provided, the business of the company shall be managed by the Board of Directors. Notwithstanding this, members in general meeting may, act in any matter if the members of the board of directors are disqualified or are unable to act by reason of a deadlock on the board or otherwise; institute legal proceedings in the name and on behalf of the company if the board of directors refuse or neglect to do so; ratify or confirm any action taken by the board of directors; or make recommendations to the board of directors regarding action to be taken by the board.

The code also provides for the board of directors, unless otherwise provided in its regulations to exercise its powers through committees consisting of such member or members of their body as they think fit. Furthermore, they may from time to time appoint one or more of their body to the office of managing director and may delegate all or any of their powers to such managing director

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Acts of the Company Any act of the members in general meeting, the board of directors or a managing director while carrying on in the usual way the business of the company shall be treated as the act of the company itself. Authority of Officers Section 140 provides that except as provided by section 139 the acts of any officer or agent of a company shall not be deemed to be acts of the company unless (a) The company, acting through its members in general meeting, board of directors, or managing director shall have expressly or impliedly authorized such officer or agent to act in the matter. (b) The company shall have represented the officer or agent as having its authority to act in the matter, (c) The act of the officer was ratified by the company. Duties of Directors section 203 Directors are more or less agents for the company in the administration and direction of the affairs of the company. For that matter section 203 of the code provides that the directors shall: Being in a fiduciary relationship with the company exercise the utmost good faith in any transactions with the company or on behalf of the company They must act in the best interest of the company Also they must have regard but not exclusive regard to the interest of employees as well as members, and may give regard to special class of members, employees or creditors.

Financial assistance to directors Section 301 says it shall not be lawful for any public company to make a loan to a director of the company or of an associated company or provide any guarantee or security in connection with a loan made to such a person by any other person. This will not apply to granting such facilities to the associated company itself or to a company whose ordinary business is lending money or giving of credit guarantees. This amount should not, however, exceed one percent of the net assets of the company. Personal Liability of Company Directors Directors may be liable for the debts of the company in the following situations: Director provides guarantee for loan granted to a company When a director exceeds authority Promoters may be liable when the company does not ratify a pre incorporation contract.

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If they commit a tort e.g. if they obtain a loan by fraudulent misrepresentation When they sign cheques in their personal capacity rather than on behalf of the company Fraudulent and wrongful trading section 26 of Act 180 Disqualified person section 182 and 186 False declaration of solvency under section 247

Capacity Of Companies - Ultra Vires Rule Ultra vires mean acting beyond ones authority or power. There are two aspects of this concept, namely, a company acting ultra vires and a director acting ultra vires. The common law rule is that an ultra vires contract is invalid and can be rescinded by the company or other party to the transaction or contract. In re Introductions Ltd. V National Provincial Bank Ltd. Introductions was formed with the objects of providing accommodation for overseas students. The company later on was involved in the breeding of pigs. It secured a loan from the Bank to support the breeding of pigs and later defaulted. The Bank attempted to recover the loan. The court held that the loan was ultra vires as the power to borrow money must be subordinate to the main objects of the business. The loan was therefore not recoverable. The Company acting Ultra Vires Section 25 (1) proscribes a company from undertaken business not authorized by its regulations. Although the code provides remedies for ultra vires transactions, by section 25 (3) no contract is however invalid by reason only that it was ultra vires the authorized business of the company or that the company was exceeding the powers conferred on it. Directors acting Ultra Vires Section 204 states that the directors shall not without the authority of an ordinary resolution exceed the powers conferred or exercise powers for a purpose different from that for which the powers were conferred. Under section 202, Directors cannot without approval of ordinary resolution Sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking or of the assets of the company Issue any new or unissued shares other than treasury shares unless first issued to existing shareholders in proportion to existing holdings. Make voluntary contributions to any charitable or other funds, other than pension funds for employees of company or associated company exceeding two percent of income surplus

Section 205 provides that directors shall not engage in any transaction that results in a conflict of duty with the company. It further provides that the company can enter into such transactions with the consent of the other directors. Also a contract entered into can be ratified on full disclosure of facts. At the

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meeting ratifying such transactions, the director concerned should not vote. There is a time limit of 15 months for such transactions Remedies for ultra vires business Under Section 25 (2), a breach of subsection (1) of this section may be asserted in any proceedings under section 210, 218 or 247 of this Code or under subsection (4) of this section. By Section 25(4) on application of Member Holder of debenture secured by floating charge or trustees of such debentures the court may prohibit by injunction the doing of any act in breach of the ultra vires rule. Also section 25 (5) states that if the transactions sought to be prohibited in any proceedings under the immediately preceding subsection are being, or are to be, performed or made pursuant to any contract to which the company is a party, the Court may, if it deems the same to be equitable and if all the parties to the contract are parties to the proceedings, set aside and prohibit the performance of such contract, and may allow to the company or to the other parties to the contract compensation for any loss or damage sustained by them by reason of the setting aside or prohibition of the performance of such contract but not compensation for loss of anticipated profits to be derived from the performance of such contract. Under section 209 if a director commits any breach of his duties under sections 203 to 205 of this Code, The director and any other person who knowingly participated in the breach shall be liable to compensate the company for any loss it suffers as a result of such breach; The director shall account to the company for any profit made by him as a result of such breach; and Any contract or other transaction entered into between the director and the company in breach of such duties may be rescinded by the company.

Section 210 legal proceedings for enforcement of liabilities against directors for breach of duties under sections 203 -205 may be instituted by the company or any of its members Section 218 provides for remedy against oppression and may be brought by the oppressed member. Section 247 - declaration of solvency. Directors would be liable it the declaration was contrary to the situation pertaining at the time.

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The Rule in Turquands Case The rule in Turquands case protects parties dealing with the company in good faith and prevents a company from repudiating the contract. In Turquands case, a companys regulations provided that any borrowing should be authorized specifically by a Board resolution. The company borrowed with a board resolution though the amount was not specified and the company attempted to repudiate the contract on the basis that it was ultra vires. The court held that the Bank could presume that all regulations and procedures of the company had been duly followed and had no duty to inquire if it was so. They were only bound to read the regulations and no more. The rule would however not protect third parties who were aware of any restrictions The Companies Code has codified the rule in Turquands case under a number of sections. This includes Sections 139 to 142 and 202 (6). Section 142 states that any person dealing with the company or with a person deriving title under the company is entitled to assume that: The companys regulations have been complied with All directors, managing directors, officers and agents have been duly appointed and have the powers to act in furtherance of the business of the company and perform the duties customarily exercised or performed in these capacities. That the secretary of the company and other officer have authority to issue documents or certified copies of documents on behalf of the company and have authority to warrant the genuineness of such documents or the accuracy of copies so issued. All documents duly sealed if bears what purports to be the seal of the company and attested by what purports to be the signatures of two persons who can be assumed to be director and secretary of the company. And for that matter, the company and those deriving title from the company are estopped from denying the truth of any such assumption

However persons who have actual knowledge of any limitation or should have known by virtue of their relationship with the company, cannot make such assumptions Also section 139 (a) says not withstanding that the company acts through its members in general meeting, directors officers and agents, the company will not incur any liability to anybody if the person dealing with the company had actual knowledge that at the time of the transaction the Board etc had no power to act or acted irregularly or from the nature of relationship with the company the person would have known. Section 202(6) of the code also provides that no person dealing with the company in good faith or registering any disposition of or title to property shall be concerned to see whether or not the provisions of the section (202) relating to limitation of the power of directors have been complied with.

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Effect of Codification of Ultra Vires Rule The Companies code modifies the strict operation of the ultra vires rule by making an ultra vires contract still valid and enforceable. It also codifies the rule in Turquands case providing protection for parties dealing with the company in good faith. Notwithstanding the protection afforded to third parties, the code also provides remedies for members and debenture holders against a company and its directors acting ultra vires.

Company Accounts Account Opening Resolution with all the particulars of directors Regulations of the company Obtain certificate of incorporation If a public company certificate to commence business.

Mandate Details and signatures of all the directors Signing authorities relating to cheques, safe custody items etc.

Account Operation Conversion and Directors Bank accounts duty of care Collecting a cheque payable to a company and endorsed by a director for the account of the director Collecting for the account of a director a cheque drawn by him in his capacity as agent of the company Selangor United Arab Estates V Craddock company cheque used to pay for purchase of company shares. It is an offence for a company to lend money to its directors

Company Cheques Should be printed with full name of company. Abbreviations would not suffice - Durham Fancy Goods Ltd. V Michael Jackson Fancy Goods ltd. Signature of directors should indicate that they are signing for and on behalf of the company. Director will be liable if he signs in his own name. Unambiguous abbreviations like co. and ltd are acceptable Bank LIndochine est Le Suez v Eurogroup Finance co. ltd.

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CHAPTER SEVEN COMPANY LIQUIDATION Mode of winding up There are two major modes of winding up namely: By a private liquidation in accordance with the provisions of Part U of the Companies Code. By an official liquidation in accordance with the provisions of Bodies Corporate (Official Liquidations) Act 1963 Act 180

Procedure for Private liquidation Private liquidation commences with the passing of a resolution to the effect that the company is to be wound up by private liquidation. Liquidation is deemed to commence on date of resolution Under Section 247 (declaration of solvency) the Directors are required to make an affidavit within five weeks prior to passing of the resolution for the winding up that they have enquired into the affairs of the business and have reached a conclusion that the company will be capable of meeting all its debts and liabilities within a period not exceeding 12 months from the commencement of the winding up. The affidavit should also embody a statement of the assets and liabilities of the business as at the latest practicable date before the signing of the affidavit. Within 14 days a copy of the resolution should be submitted to the Registrar who will publish the fact in the Gazette. The financial year will now be deemed to end immediately before commencement of the winding up. Subsequent financial reports are to comply with the provisions of the code and are to be circulated among the liquidator, members and debenture holders of the company within three months of commencement of the winding up. Additional Provisions The only business that can be carried on is that which is incidental to the winding up of the business though the corporate state and corporate powers of the company continues until it is dissolved All invoices and letters issued on behalf of the company by any liquidator, receiver or manager should contain a statement that the company is being wound up under a private liquidation. Directors are liable to a fine if the grounds for stating that the company would be able to pay its debts and liabilities were not reasonable. The liquidator Section 250 Appointment and removal

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The resolution for private liquidation will include appointment of a liquidator who should have consented to be a liquidator. The person should have given prior consent to the appointment. Any vacancies arising from resignation, death or otherwise are to be filled by the company in general meeting. Such a meeting may be convened by the liquidator or a member. Any member or the registrar may apply to the court for the removal of a liquidator and appointment of a new person in place. The company or the court as the case may be shall provide notice of appointment or removal of a liquidator and such shall be published in the Gazette.

Remuneration of liquidator section 251 The remuneration of the liquidator is to be made by the appointing authority members in general meeting or the Court Disqualifications of Persons From Appointment as liquidator The following persons are disqualified from an infant; any person found by a court of competent jurisdiction to be a person of an unsound mind; a body corporate; any person convicted on indictment, whether in Ghana or elsewhere, of any offence involving fraud or dishonesty or any offence in connection with the promotion, formation or management of a body corporate; an undischarged bankrupt or any other person subject to insolvency proceedings under the Insolvency Act, 2006 (Act 708). A director of the company under liquidation An auditor of a company may however be appointed as a liquidator Nature of Relationship with Company A liquidator shall have the same fiduciary relationship as a director and the sections applicable to directors Section 203 to 206 shall be applicable to him All the powers of the directors shall cease on the appointment of the liquidator except as authorized by him and as necessary for the preparation of accounts. Powers of Liquidator A liquidator under private liquidation shall have the same powers as an Official Liquidator. Where more than one person is appointed as liquidator, the power may be exercised by such one or more of them or as may be determined under the appointment, or in default at least two of them. The Court is also vested with the same powers as in an official liquidation and the liquidator may consult the Court for direction.

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Books and Accounts During Private Liquidation A private liquidator is required to keep records and books of account with respect to his dealings and the conduct of the winding up including all the receipts and payments he has made. Also if he carried on the business of the company he is required to keep a distinct account of the trading. Where the winding up continued for more than a year, the liquidator is required to summon a general meeting before which he will lay before the meeting an account of his dealings in the previous year not later than three months after the end of the liquidation year. Within 28 days of the meeting, the Liquidator has to send a copy of the accounts to the Registrar for registration S 256 (4) Procedure on Full Winding Up Where the affairs are fully wound up the liquidator shall prepare and send to every member an account showing how the winding up was conducted and the results from trading and how property was disposed off and shall then convene a general meeting for the purpose of laying before it such account and of providing the necessary explanations. Within 28 days after such meeting, the liquidator is required to send to the Registrar, copies of the account and a statement of the holding of the meeting and its date. If no quorum was present the statement would indicate that the meeting was duly convened and that no quorum was present thereat. Under section 256 (5) the records and books of account will be in such format as prescribed by the Registrar from time to time and must give a true and fair view of the matters recorded and the administration of the companys affairs during the winding up. Section 256 (6) the accounts are required to be audited prior to the meeting and the auditors are required to state whether in their opinion and to the best of their knowledge: They have obtained the necessary information and explanations necessary for the purpose of the audit Proper books of account have been maintained by the liquidator in accordance with the code Such accounts are in accord with the books, records, provide all the information required by the code and give a true and fair view of the matters stated.

However, the auditors report will not be required if the liquidator or one of the liquidators is duly qualified under section 296 for appointment as an auditor of a public company and on or after the appointment as liquidator the company resolved by special resolution that the account would not be required to be audited under this section. The liquidator will be liable if he fails to act in accordance with the provisions of the code to a maximum fine of fifty pounds.

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The code provides for the auditor to preserve the Books and papers for a period of five years from dissolution of the company and thereafter may destroy them unless the Registrar directs otherwise. Liquidation Account Under section 257 of the Code, the liquidator shall open an account termed the Private Liquidation Account with a Bank nominated by the Company in General Meeting for the purpose of private liquidation. All transactions are to be routed through this account. Furthermore, a person interested in the liquidation may apply to the court for the liquidator to restore any property lost from the liquidation estate if it appears to the Court that there has been a loss. The Code compels the liquidator to credit the liquidation account with the value lost. Duty of Liquidator in the event of Insolvency Notice in prescribed form to be submitted to the Registrar to the effect that the company may not be able to pay its debts in full within the period stated in the affidavit. The Registrar will then publish a notice of this and where applicable that an order has been made under section 5 of the Bodies Corporate (Official Liquidations) Act 1963 Act 180

Avenue to apply to the court for stay of liquidation proceedings section 259 While the liquidation is proceeding, the company may by special resolution resolve that the proceedings be stayed. After passing of the resolution an application may be made by the liquidator or a member to the court for stay of the liquidation. At least, 28 days prior to the hearing, the applicant must provide notices to the Registrar, all the directors and the liquidator if he is not an applicant and the Registrar will cause this to be published in the gazette. All the parties served including the applicant are required to be present in court on the day of the hearing to call witnesses and to give evidence. Dissolution of Company on winding up section 260 When the Registrar is satisfied that winding up is complete, he shall strike the name of the company off the register. Dissolution without full winding up moribund companies section 261 Section 261 outlines the procedure for the Registrar to strike off the name of a moribund company from the register. This procedure includes the necessary notices which when not responded to will compel the Registrar to take action to strike off the companys name from the register. Official Liquidation

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Official Liquidation is governed by the Bodies Corporate (Official Liquidations) Act 1963, Act 180. By section one of the Act, Official liquidation is commenced in the following manner: Special resolution of the company. A petition addressed to the Registrar A petition to the Court A conversion from a private liquidation

Procedure on Resolution section 2 A special resolution of the company will state that the company shall be wound up under official liquidation A copy of this resolution will be submitted to the Registrar as soon as practicable who will publish the fact in the gazette. The resolution would appoint the Official Liquidator as Liquidator of the company and he would proceed to undertake his duties

Procedure on Petition to Registrar section 3 Section 3 provides that any of the following may petition the Registrar for Official winding up of a company: A person who is a creditor; or A member or contributory to a company May present a petition to the Registrar for an official liquidation of the company. The member should have held his shares for six months within the preceding 18 months prior to the presentation of the petition.

The registrar will make an order for official liquidation if satisfied that the company is unable to pay its debts under the following circumstances: Creditor not paid after 21 days of written demand. Execution or other process issued on judgment, decree or order of any court left unsatisfied. If it is proved to the satisfaction that the company is unable to pay its debt taking into consideration also the contingent liabilities and prospective liabilities of the company.

The Registrar will then place a copy of order on the companys file and publish the same in the Gazette Procedure on petition to court Section 4 Under Section 4 of Act 180 the following may petition the court for official winding up of a company: The registrar

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Creditor Member or contributory Attorney General where the objects of the business are unlawful, or the company is operated for an illegal purpose or the business being carried out is not authorized by its regulations.

The court will make an order for official winding up where: The company does not within a year from its incorporation commence to carry on all the businesses which it is authorized by its Regulations to carry on or suspends any of such businesses for a whole year; The company has no members; The business or objects of the company are unlawful or the company is operated for an illegal purpose or the business being carried on by the company is not authorized by its Regulations; The company is unable to pay its debts; or The Court is of the opinion that it is just and equitable that the company should be wound up. Where the petition is presented by members or contributories of the company on the ground that it is just and equitable that the company should be wound up, the Court, if it is of the opinion, that the petitioners are entitled to relief either by winding up the company or by some other means, and that in the absence of any other remedy it will be just and equitable that the company should be wound up, shall make a winding up order unless it is of the opinion, both that some other remedy is available to the petitioners and that they acted unreasonably in seeking to have the company wound up instead of pursuing that other remedy.

A copy of the winding up order will be sent to the Registrar which will enter this in the minutes relating to the company and make a publication in the Gazette.

Procedure on conversion from private liquidation On notice being given by private liquidator, the Registrar shall make order when satisfied that the company will not be able to pay its debts. A statement of assets and liabilities of the company is to accompany this notice. The Official Liquidator The Registrar is empowered to act as the Official liquidator under an official liquidation. section 7 Status of Liquidator section 8

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The liquidator shall be deemed to stand in a fiduciary relationship with the company and shall have all the powers of a director and for that matter sections 203 206 shall be applicable to him No liability shall attach to liquidator for breach of duty save for reimbursements of money lost to the company through the liquidators default

Powers of the liquidator To bring or defend any action or other legal proceedings in the name and on behalf of the company; To carry on the business of the company so far as may be necessary for the beneficial winding up thereof; To appoint a legal practitioner to assist him in the performance of his duties; To pay any classes of creditors in full; To make any compromise or arrangement, subject to the provisions of section 231 of the Companies Code, 1963, (Act 179) with creditors or persons claiming to be creditors or being or alleging themselves to have any claims, present or future, certain or contingent, ascertained or sounding only in damages against the company or whereby the company may be rendered liable; To compromise all calls and liabilities to calls, debts and liabilities capable of resulting in debts, and all claims, present or future, certain or contingent, ascertained or sounding only in damages, subsisting or supposed to subsist between the company and a contributory or alleged contributory or other debtor or person apprehending liability to the company, and all questions in any way relating to or affecting the assets or the winding up of the company, on such terms as may be agreed, and take any security for the discharge of any such call, debt, liability or claim and give a complete discharge in respect thereof; To sell the real and personal property and things in action of the company by public auction or private contract, with power to transfer the whole thereof to any person or company or to sell the same in parcels; To do all acts and to execute, in the name and on behalf of the company, all deeds, receipts and other documents and for that purpose to use when necessary, the company's seal; To prove and rank the claims in the bankruptcy, insolvency or sequestration of any contributory for any balance against his estate, and to receive dividends in the bankruptcy, insolvency or sequestration in respect of that balance, as a separate debt due from the bankrupt or insolvent and rateably with the other separate creditors; To draw, accept, make and endorse any bill of exchange or promissory note in the name and on behalf of the company, with the same effect with respect to the liability of the company as if the bill or note had been drawn, accepted, made or endorsed by or on behalf of the company in the course of its business; To raise on the security of the assets of the company any money requisite; To take out in his official name letters of administration to any deceased contributory and to do in his official name any other act necessary for

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obtaining payment for any money due from the contributory or his estate which cannot be conveniently done in the name of the company, and in all such cases the money due shall, for the purposes of enabling the liquidator to take out the letters of administration or recover the money, be deemed to be due to the liquidator himself; To do all such other things as may be necessary for winding up the affairs of the company and the distribution of its assets.

Establishment of Liquidation Funds Section 12 of Act 180 provides for the establishment of the Liquidation fund through which all transactions will be routed. The section states as follows: (1) There shall be a fund, to be known as the Liquidation Fund, into which shall be paid all moneys received by the liquidator under this Act and to which shall be debited all moneys disbursed by him hereunder. (2) There shall be an account within the Liquidation Fund, to be known as the fees account, to which shall be credited all moneys received by the liquidator by way of fees and other charges. (3) All payments required or authorized by this Act to be met out of the Liquidation Fund are hereby charged on that Fund. Commencement of Liquidation Liquidation is deemed to commence on passing or resolution or date of winding up order depending on what mode was adopted in proceeding with the liquidation. Cessation Of Directors Functions section 14 On the commencement of the liquidation all functions are to vest in the liquidator Cessation Of Companys Business section 15 The company is to cease business except in so far as is required for the beneficial winding up of the company Custody of Company's Property Section 16 provides as follows: (1) Save as may otherwise be directed by the liquidator, the property of a company shall, during winding up proceedings, remain vested in the company. (2) Subject to the provisions of the preceding subsection, the liquidator shall take into his custody or under his control all the property and things in action to which the company is or appears to be entitled.

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(3) Any property in the possession of the company at any time within six months before the commencement of a winding up shall be presumed to be vested in the company unless the contrary is shown. (4) The liquidator may, at any time after the commencement of a winding up, require any member or contributory and any trustee, receiver, banker, agent or officer of the company to pay, deliver, convey, surrender or transfer forthwith, or within such reasonable time as the liquidator may direct, to the liquidator any money, property or books and papers in his hands to which the company is prima facie entitled. General Duties of Liquidator in Administration of Companys Property Duty Duty Duty Duty Duty Duty Duty to to to to to to to collect debts section 36 vest property in liquidator section 37 realize assets section 38 verify ranking for dividends section 39 amend admitted proofs section 40 ascertain priority of debts section 41 consult creditors or members section 42

Publicity Section 57 notification of fact of liquidation on every invoice and business letter Dissolution and Striking Office Under Section 50 when the Registrar is satisfied that winding up has been completed, he will strike off the name of the company from the register and the company is thereby dissolve. Ranking of Company Debt Section 41 provides for the following classes of debt: Class A 4 months wages not exceeding 150 pounds Class A rates and taxes due and payable in the financial year preceding winding up Class A debts have priority over debts covered by floating charges Class B any other unsecured debt Class C owed to director or former director or relative

Account Operations Account to be stopped on being served with notice of winding up awaiting instructions of the liquidator. The Bank can claim as a preferential creditor for wages. The Bank as a preferential creditor for wages Ideally a separate account for wages should be opened to avoid the rule in Claytons case Re Primrose Builders 1950.

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Where the bank insists on an account being credited before the wage account is debited, there will be no loan entitling the bank to a preference Re E J Morel Ltd. 1934 The Bank may appropriate a fixed security to a general account leaving the wages account intact even after winding up has commenced. Re William Hall Contractors Ltd. 1967 However any other right of combination ceases on the commencement of winding up and the accounts would have to be ratably set off - Re Unit Two Windows Ltd. 1985.

CHAPTER EIGHT CHEQUES Introduction A cheque is essentially a means of making instructions regarding the withdrawal of money or payment to third parties. It is an instrument that developed from the practice of merchants sending payment instructions to gold smiths where they had deposited funds. Over time Banks begun to print special forms for such instructions which subsequently developed into what became known as cheques. Cheques are governed by the Bills of Exchange Act 1961 Act 55. Definition Section 72 of Act 55 defines a cheque as a bill of exchange drawn on a banker, payable on demand. It further provides that except other wise provided in the part applicable to cheques i.e. Part II, the provisions of the Act applicable to a bill of exchange payable on demand apply to a cheque. Section 1 of the Act also defines a Bill of Exchange as an unconditional order in writing, addressed by the person giving it, requiring the one to whom it is addressed to pay on demand or at a fixed or determinable future time, a sum certain in money, to or to the order of a specified person or to bearer. Reading the two sections together, a cheque can be defined as an unconditional order in writing, addressed by one person (the drawer) to another requiring the one to whom it is addressed (the drawee) to pay on demand, a sum certain in money to or to the order of a specified person or to bearer. Parties to a cheque There are in effect three parties to a cheque, namely: The drawer the one who writes the instrument and makes the order The drawee the one to whom the order is given to make payment

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The persons who receive payment. This includes the payee the specified person to whom payment is to be made, or who subsequently orders payment to be made to another person, and any other person to whom the cheque is transferred or negotiated.

An unconditional Order An unconditional order means an order without attendant conditions. Where there is a condition attached to payment, the instrument is no longer a cheque. For example where there is a condition that the payee should sign a receipt and the bank should only pay on condition that the payee signs the receipt, the order is not unconditional and as such is not a cheque. In Bavins & Sims V London and South Western Bank 1900 it was held that a request for receipt is unacceptable if addressed to a bank. However if the condition is merely addressed to the payee, then the order is unconditional and the instrument is a cheque. In Nathan V Ogdens 1905 for example where the instruction for the signing of a receipt was not addressed to the Bank it was held that the condition did not make the instrument conditional. A provision that the instrument be presented for payment within a prescribed period is not conditional. However, the mandate ceases on expiry of the period Thairwall V Great Northern Railway [1910] 2 KB 509. An instrument is a valid cheque if even it indicates the account of the drawee which is to be debited section 1(3) of the Act. In writing The order should be in writing and not oral. Writing includes print. Addressed by One Person to Another The person who addresses is the drawer and includes individuals, joint account holders, sole proprietors, partnership and companies. The person addressed is termed as the drawee i.e. the one who is to effect the payment. The Act recognizes the situation when both drawer and payee are the same persons. Section 3(1) states that a bill may be made payable to or to the order of the drawer or it may be made payable to or to the order of the drawee. Section 3(2) provides that where in a bill, a drawer and the drawee are the same person or where the drawee is a fictitious person or one not having the capacity to contract, the holder may treat the cheque at his option either as a bill of exchange or promissory note. Under section 4 (1) the drawee must be named or otherwise indicated on the bill with reasonable certainty. Currently all banks print cheques bearing the name of the bank and the branch of the bank at which the drawer keeps an account. Signed by the person giving it

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The drawer is required to sign the order to put it into effect. Joint account holders, Partnerships and companies normally provide the bank with a mandate as to who can validly sign a cheque to put the order into effect. In the case of partnership, the default rule under Section 21 is that the signature of the name of the firm is the signature of all. However the partners may agree that all partners should sign a cheque to establish a sufficient mandate. Furthermore, a person who signs in an assumed trade name is liable on the bill as though he signed in his name. Section 22 of the Act provides that a forged signature is wholly inoperative and that no right to retain the bill or to give a discharge therefore or to enforce payment thereof against any party can be acquired through or under that signature unless the party against whom it is sought to retain or enforce payment is precluded from setting up the forgery or want of authority. Section 23 provides that a signature by procuration operates as notice that the agent has but a limited authority to sign and the principal is bound by such signature if the agent in so signing was acting within the actual limits of his authority. Section 24 provides that where a person signs as drawer and adds words to signature indicating that he signs for or on behalf of a principal or in a representative capacity, he is not liable thereon. However mere addition to his signature describing him as agent or as filling a representative character does not exempt him from personal liability. Payable on Demand by One Addressed Section 8 of the Act states that an instrument is payable on demand when it is expressed to be so payable on demand on sight or on presentation or when no time of payment is indicated. A sum certain in Money The amount payable on the cheque should be indicated with sufficient certainty or the bank, the drawee is not bound to pay. Section 7 (2) of the Act provides that if words and figures differ, the amount in words may be paid. In Barlow V Broadhurst [1820] where the payment was subject to an amount owing to customer by payee being deducted, the court held that the amount was not certain. To or to the order of a Specified Person or to bearer The person specified in the cheque to whom payment must be made is the payee or the bearer. Section 5 (1) provides that where a bill is not payable to bearer the payee must be named or otherwise indicated therein with reasonable certainty.

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Section 5 (3) Where the payee is a fictitious or non existing person the bill may be treated as payable to bearer Bank of England V Vagliano Brothers 1891 Clutton V Attenborough 1897 Section 6 (3) A bill is payable to bearer which is expressed to be so payable or on which the only or last endorsement s an endorsement in blank Section 6 (4) a bill is payable to order which is expressed to be so payable or which is expressed to be payable to a particular person, and does not contain words prohibiting transfer or indicating an intention that it should not be transferable Endorsement of Cheques Section 29 (1) defines negotiation of a bill as being the transfer of the bill from none person to another in such a manner as to constitute the transferee the holder of a bill/ Section 29 (2) A bill payable to bearer is negotiated by delivery Section 29 (3) S bill payable to order is negotiated by the endorsement of the holder completed by delivery. Endorsement is necessary: When the cheque is payable to a named payee When the cheque is specially endorsed.

There are four major types of endorsements: Conditional endorsement, which can be ignored section 31 Blank endorsement section 32 (1) an endorsement in blank is one that specifies no endorsee and for that matter, such a bill becomes payable to bearer. Special endorsement section 32 (2) this is an endorsement that specifies the person to whom or to whose order the bill is to be payable. Restrictive endorsement section 33 a restrictive endorsement is one that prohibits the further negotiation of the bill or which expresses that it is a mere authority to deal with the bill as thereby directed and not a transfer of the ownership thereof e.g. Pay D Only, or pay D for the account of E, or Par D or order for collection.

Forged or Unauthorized Endorsement Any person who receives a cheque subsequent to a forged essential endorsement has no title to the cheque

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The person taking the cheque subsequent to the forgery can enforce the cheque against anyone subsequent to the forgery but not prior to the forgery e.g. the drawer.

Types of Holders Holder A holder is the payee or endorsee of a bill or note who is in possession of it or the bearer thereof section 97 A basic holder has the same title as his immediate transferor; so if he receives a cheque from a thief he will also have no title to the cheque. Holder for Value Section 25 (2) defines a holder for value as the holder of a bill for which value has at any time been given as regards all parties to the bill who become parties prior to such time. Section 25 (1) defines valuable consideration as including any consideration sufficient to support a simple contract or an antecedent debt or liability. A holder for value has as good title as his immediate transferor. Holder in due Course Section 27 defines a holder in due course as someone who: Has taken the cheque complete and regular on the face of it o o o There is no forgery of an essential endorsement The cheque is complete without any missing sections The cheque is not overdue and must be taken without notice of previous dishonour.

Takes the cheque in good faith and for value o Section 90 defines good faith as something that is done honestly whether negligently or not

Personally gives value on the cheque Takes the cheque without notice of defect in title of the person negotiating the cheque to him.

Section 27 (2) provides explanation on what constitutes a defective title. It says particularly, the title of a person who negotiates a bill is defective within the meaning of the Act where the person obtains the bill or its acceptance by fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith, or under such circumstances as amount to fraud. In Jones V Waring and Gillow, 1926 HL, the court held that a Holder in due course does no include the payee.

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Rights of a Holder in due Course section 36 (b) A holder in due course is the absolute legal owner of the cheque; his title cannot be disputed and is not affected by any defect in a previous title or by any counterclaim. Again, he can enforce payment of the cheque against any prior parties, and sue all in his own name if the cheque is dishonoured. Cheques as Negotiable Instruments A negotiable instrument is an instrument that enables the acquirer of such instrument to obtain absolute title to the instrument provided certain conditions are fulfilled. There are three tests of negotiability: The title can pass by mere delivery or delivery plus endorsement. The holder of the instrument can acquire absolute legal title by taking the instrument: o o o In good faith For value Without notice of defect in title of the previous holder (holder in due course section 27)

No notice of transfer needs to be given to the person liable on the instrument.

Crossed Cheques section 75 General Crossing Section 75 (a) and (b) Where a cheque bears across its fact an addition of the words and company or any abbreviation thereof between two parallel transverse line either with or without the words not negotiable, or two parallel transverse lines simply, either with or without the words not negotiable, that addition constitutes a crossing and the cheque is said to be crossed generally Special Crossing Section 75 (c) Where a cheque bears across its face an addition of the name of a banker, either with or without the words not negotiable, that addition constitutes a crossing and the cheque is crossed specially and to that banker. Not negotiable crossing Section 80 states that where a cheque is crossed not negotiable, whoever takes the cheque shall not have and shall not be capable of giving a better title to the cheque than that which the person from whom he took it had. Ladup Ltd. V Shaik and Ritz Casino Ltd. 1982 Account Payee only

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A crossing does not affect the negotiability or transferability of a cheque National Bank Ltd. V Silke 1891. However, if a bank acts negligently, it will lose statutory protection House Property Co. of London Ltd. V London and County & Westminster Bank 1915 Rights and Duties of each Party to a Cheque Rights of Drawer on Delay in Presentment of a cheque for payment Section 73 subject to the provisions of this act (a) Where a cheque is not presented for payment within a reasonable time of its issue, and the drawer or the person on whose account it is drawn had the right at the time of such presentment as between him and the banker to have the cheque paid and suffers actual damage through the delay, he is discharged to the extent of such damage, that is to say, to the extent to which such rawer or person is creditor of such banker to a larger amount than he would have been had such cheque been paid. (b) In determining what is a reasonable time regard shall be had to the nature of the instrument, the usage of trade and of bankers and the facts of the particular case. (c) The holder of such cheque as to which such drawer or person is discharged shall be a creditor, in lieu of such drawer or person, of such banker to the extent of such discharge, and entitled to recover the amount from him. Liability of the Drawer and Endorser Section 53 (1) provides that the drawer of a bill and therefore a cheque engages that on due presentment it shall be paid and that if dishonoured he will compensate the holder or any endorser who is compelled to pay it provided the requisite proceedings on dishonour are taken. A drawer of a bill is also precluded from denying to a holder in due course the existence of the payee and his then capacity to endorse. Under section 53(2) the endorser of a bill by endorsing it engages that on due presentment it shall be paid and that if dishonoured he will compensate the holder or a subsequent endorser who is compelled to pay provided that the requisite proceedings on dishonour are taken. The endorser of a bill is also precluded from denying to a holder in due course the genuineness and regularity in all respects of the drawers signature and all previous endorsements. He is also precluded from denying to his immediate or a subsequent endorsee that the bill was at the time of his endorsement a valid and subsisting bill and that he had then a good title to the bill. The Paying Bank

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The paying bank is the bank is the drawee bank on whom the cheque is drawn. Payment may be made either over the counter or through the clearing system. It may also be made by credit of an account at the paying bank. In the latter case the paying bank is also the collecting bank. Duties of the Paying Bank The paying bank has the duty to pay a customers cheque when presented for payment, subject to the following qualifications: The cheque must be unambiguous o o o London Joint Stock Bank V Macmillan and Arthur Undated overdue cheque Griffiths V Dalton 1940 In Arab Bank V Ross 1952, Ross made a promissory note payable on demand to Fathi and Faysal Nabulsy Co or order. The endorsement omitted the word co. the cheque was discounted to Arab Bank who claimed against Ross. It was held that the endorsement was ambiguous Words and figures must not differ section 7

There must be sufficient funds o o o o If there is a debit balance on another account the bank can exercise its right of combination and refuse to pay Garnett V Mckewan 1872 If customer has earmarked bank must comply with request if even account is in debit Barclays Bank V Quitclose Investment Ltd. Uncleared effects AL Underwood Ltd. V Bank of Liverpool. Limits on cheque card.

Payment must be demanded at the branch where the account is held may be modified by developments in technology. The cheque must not have been in circulation for an unreasonable time section 34 There must be no legal bar to payment e.g. o o o o o Notice of death Section 74 Mental incapacity of customer Countermand of payment Section 74 Insolvency of customer Closure of account

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Court proceedings against customer e.g. garnishee order or Mareva Injunction War Arab Bank Ltd. V Barclays Bank Co. 1954

Where the bank is aware or should have been aware that the money is held in trust. The cheque must be in proper form.

Risks for the Paying Bank The paying bank faces two types of risks namely: Breach of Contract Conversion

Breach of Contract Non compliance with drawers written instructions There is breach of contract if the bank does not comply with the drawers signature instructions. This will occur if the drawers signature is forged or where the bank pays on the basis of an insufficient mandate. An insufficient mandate arises when less than the required number of persons signs a cheque. For example if the mandate for a joint account states that the bank can only pay cheques against both signatures, the bank will be liable if it makes payment on the authority of only one signature. In Catlin V Cyprus Finance Corporation (London) Ltd 1983, it was held that a bank owes a duty to joint account holders individually and separately. Inchoate instruments and alterations to cheques An inchoate instrument is an instrument that is incomplete as regards a material particular. An altered cheque on the other hand is a cheque whose material particular has been changed.

Section 63 of the act provides as follows: (1) Where a bill or acceptance is materially altered without the assent of all parties liable on the bill, the bill is avoided except as against a party who has himself made, authorised, or assented to the alteration, and subsequent endorsers: Provided that where a bill has been materially altered, but the alteration is not apparent, and the bill is in the hands of a holder in due course, such holder may avail himself of the bill as if it had not been altered, and may enforce payment of it according to its original tenor.

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(2) In particular the following alterations are material, namely, any alteration of the date, the sum payable, the time of payment, the place of payment, and, where a bill has been accepted generally, the addition of a place of payment without the acceptor's assent.
Countermand of Cheques Section 74 of the Bills of Exchange Act states that the authority of a banker to pay a cheque drawn on him by his customers is determined by: Countermand of payment Notice of customers death

To be effective a countermand must come to the banks notice and constructive notice is not sufficient Curtice V London, City and Midland Bank In this case Curtice drew a cheque on the bank in payment of three horses which were not delivered. He telegraphed his branch of the bank to stop payment at 5.30 p.m. Unfortunately, the cheque was paid before the telegram reached the attention of the bank staff. The court held that the instructions were not effective. In Westminster Bank V Hilton, it was decided that the details of the stop instructions must be accurate. The wrong cheque number was quoted and as a result the cheque which should not have been paid was paid. The court held that the most accurate way of referring to a cheque was its number. In sum, to be effective, a countermand must: Be in writing; a telephone request must be confirmed in writing Communicated to the bank London Provincial & South Western Bank Ltd. V Buzzard 1918 Unequivocal in Westminster Bank Ltd. V Hilton 1926 it was held that the best and accurate way of identifying a stopped cheque is by the cheque number.

Conversion Conversion occurs when the paying bank pays the cheque to a person who is not entitled to receive payment. This may be a person who has stolen the cheque or who has obtained the cheque through any illegal or unauthorized means.

Wrongful Dishonor of a Cheque A bank wrongfully dishonors a customers cheque when the bank does not pay a customers cheque when it should have paid the cheque. This may occur when customers funds have been misdirected and the bank erroneously believes that

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customer does not have funds. A customer may bring the following claims against the bank: Breach of contract Libel

By wrongfully dishonoring a cheque the bank has breached its undertaking under the terms of the banker customer contract to pay customers cheque subject to customer being in funds amongst others. In some situations customer may sue the bank for liable especially when the impression has been given that customer has been dishonest in issuing a cheque when he knows he does not have funds. This impression is normally provided in the words used to explain to the payee or the holder of the cheque such as insufficient funds, refer to drawer and the like. Protections Available to the Paying Bank Protections for Breach of Contract Estoppel The first defence is the defence of estoppel. Section 22 of the Bills of Exchange Act states that a forged signature is inoperative unless the one against the cheque is to be enforced is stopped from denying liability. Estoppel is anything which prevents the person by his own acts or word from denying or confirming a fact or the validity of a document. Estoppel may arise from a misleading statement from a customer Brown V Westminster Bank 1964 It may also arise from a breach of duty by the customer Greenwood V Martins Bank 1933 London Joint Stock Bank V Macmillan and Arthur

Subrogation The bank can stand in the shoes of the one to whom payment has been made if that person was a creditor of the drawer - B Ligget (Liverpool) Ltd. V Barclays Bank Ltd. 1928 Payment under mistake of fact Payment under mistake of fact occurs when the bank pays when it should not have paid. Three conditions are necessary for the bank to be able to use this claim are that: Payment must not be made under the mandate

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It must be a mistake of fact not of law this rule has however been modified by a recent case in the UK Must be a result of the mistake The bank could however be estopped from claiming the money if: o o The bank made a representation to the beneficiary stating that payment had been made Cocks V Masterman 1829 The beneficiary must have relied on the representation making repayment inequitable United Overseas Trading V Jiwani 1976 The beneficiary must not be at fault In the Jiwani case, the bank misrepresented the state of the account, the customer was misled, and as a result he had changed his position in a way that would make it inequitable for him to be required to repay the money. Also Barclays Bank Ltd. V WJ Simms, Son & Cooke (Southern) Ltd.

o o

Protection against Conversion Sections 57, 58 and 79

According to section 57(1) a bill is discharged by 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.
In effect, for a bill to be discharged, the paying banker must: o Pay to the holder i.e. the payee, or endorsee in possession of an order cheque or the bearer of a bearer cheque. In good faith Without notice of any defect in the holders title Payment must be by a bank.

Under section 58 of the Act, when a bill payable to order on demand is drawn on a banker, and the banker on whom it is drawn pays the bill in good faith and in the ordinary course of business, it is not incumbent on the banker to show that the endorsement of the payee or any subsequent endorsement was made by or under the authority of the person whose endorsement it purports to be, and the banker is deemed to have paid the bill in due course, although such endorsement has been forged or made without authority.

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Section 58 of the Bills of Exchange Act says that in order to benefit from protection the bank must pay an order cheque: o o In good faith; and In the ordinary course of business.

Section 58 protects the bank from forged endorsements. Section 79 of the Bills of Exchange Act (deals with crossed cheques) states that the bank will be protected if it makes payment: o o o In good faith In accordance with the crossing; and Without negligence.

Section 59 confers on banks sufficient Authority to Pay draft them without proof of endorsement. It says: Any draft or order drawn whether in or out of Ghana upon a banker whether in or out of Ghana for a sum of money payable to order on demand or at some other time which shall, when presented for payment, purport to be endorsed by the person to whom the same shall be drawn payable, shall be a sufficient authority to such banker to pay the amount of such draft or order to the bearer thereof; and it shall not be incumbent on such banker to prove that such endorsement, or any subsequent endorsement, was made by or under the direction or authority of the person to whom the said draft or order was or is made payable either by the drawer or any endorser thereof.
The Collecting Bank The collecting bank is the bank that obtains payment in respect of a cheque from the drawee bank for the credit of its customers account. Duties of The Collecting Bank The collecting bank has the following duties: To exercise care in the collection of cheques Foreman V Bank of England To notify the customer on dishonour of cheque deposited for collection No duty to advise on particular collection Redmond V Allied Irish Bank 1987

Risks faced by Collecting Bank

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Conversion defined in Hiort V Bott 1874 as an unauthorized act that deprives another person of his property permanently or for an indefinite period of time. No notice of dishonour Incorrect clearing procedures

Protections available to Collecting Bank against Conversion There are three main defenses and protection for the Collecting bank. These are: Section 81 of Bills of Exchange Act The Bank as a holder in due course Contributory negligence of drawer.

Section 81 of Bills of Exchange Act

Section 81 states as follows: Where a banker in good faith and without negligence (a) receives payment for a customer of a cheque, whether crossed or uncrossed; or (b) having credited a customer's account with the amount of such a cheque, receives payment thereof for himself; and the customer has no title or a defective title, to the cheque, the banker does not incur any liability to the true owner of the cheque by reason only of having received payment thereof.
What Constitutes Negligence? In Lloyds Bank V EB Savory and Co. 1933 a bank is not acting negligently when in carrying the business of banking as reasonable men, they do so in a manner calculated to protect themselves and others from fraud. Marfani V Midland Bank Ltd. 1964 refers to knowledge a reasonable banker should have had about a customer An example of negligence is poor accounting procedure, for example, not taking or following up on references. In Ladbroke V Todd 1914 a thief opened an account with a stolen cheque. The Bank failed to take up reference. In Hampstead Guardian V Barclays Bank Ltd. 1923 the reference was unknown to the bank Not taking note of customers employers or employer of customers spouse would amount to negligence Lloyds Bank V E B Savory and co. 1933.

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However, no further enquiries are necessary Orbit Mining and Trading Co. Ltd. V Westminster Bank Ltd. 1963 A bank must exercise care in dealing with trading names - Registration of Business Names Act 1962 Act 151 Instances of negligence in the collection of a particular cheque are detailed below: Collecting without enquiry cheques drawn on the private account of an individual payable to a company and endorsed by that individual in his capacity as an official of a company - AL Underwood V Bank of Liverpool 1924 Collecting without sufficient enquiry cheques that are out of character for the account o o Nu-stilo Footwear V Lloyds Bank Ltd. 1956 Motor Traders Guarantee Corporattion Ltd. V Midland Bank 1937

Collecting without sufficient enquiry cheques payable to a partnership into the private account of a partner o o Baker V Barclays Bank Ltd. 1955 Smith & Baldwin V Barclays Bank Ltd. 1944

Collecting without sufficient enquiry for the account of an individual cheques payable to him in his official capacity o o Ross V London County Westminster and Parrs Bank Bute V Barclays Bank ltd.

Collecting without sufficient enquiry for the private account of an individual a cheque payable to him but also drawn by him in his capacity as agent on his principals account o Midland Bank V Rickett 1933

Collecting without sufficient enquiry a cheque payable to a limited liability company for an account other than the companys o Montrose Shipbuilding and Repairing Co. Ltd. V Barclays Bank Ltd. 1926

Collecting without sufficient enquiry cheques payable to the collecting bank for the private account of an employee where the cheque is signed by that employee o Lloyds Bank Ltd. V Chartered Bank of India, Australia and China 1929

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Collecting without sufficient enquiry cheques crossed account payee only for an account other than the payees. The bank would be negligent unless it had ensured that either the payee had already received the proceeds or would receive them as a result of the collection. o Bevan V National Bank Ltd. 1906

The Bank as a Holder in Due Course The weakness of this protection is that there is the necessity that value is given, and the cheque be regular on the face of it. The cheque may bear a forged endorsement or a not negotiable crossing. To qualify as a holder in due course, the bank must have given personal value on the cheque e.g. paying against uncleared effects, reducing an overdraft. In Westminster V Zang where interest was charged on an overdraft balance that was not reduced by the cheque it was held that the bank could not claim as a holder in due course. Contributory Negligence The bank may plead that the drawer contributed to the loss by his negligence. Any damages will be reduced such negligence - Lumsden & Co. V London Trustee Savings Bank 1971

CHAPTER NINE GENERAL SECURITIES A security is a binding contract that in the event of default, the bank will rely on the said security for the due repayment of a debt. Banks therefore takes security over property or assets of value belonging either to the debtor or a third party who wishes to support the debtor. This contract is evidenced by certain documents executed by all the relevant parties. The essence of these documents is to put the intention of all parties beyond doubt. Taking securities most often leads to difficulties where care is not taken. Banks take security from customers as a safety net to protect the bank from loss in the event of default of a customer in repaying a debt. The parties to a securities transaction are: The principal debtor mortgagor/chargor the borrower The creditor mortgagee/chargee the bank

When a loan facility is secured by property belonging to the borrower, the borrower is known as the mortgagor. If it is a third party security, the third party is termed as the surety. The third party may also provide a guarantee in which case it is known as the guarantor. A guarantor is the person who gives a guarantee i.e. promises to pay the creditor if the principal debtor fails to do so. The guarantor is also known as the surety. Qualities of Good Security

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Good security must have the following basic qualities: Marketability how readily can it be sold? Ascertainability of value how easy is it to value accurately? Stability of value how stable is the value over time? Transferability of ownership how easily can the bank gain ownership so that the asset can be sold?

Types of Assets used as Security Land Life policies Share certificates Business assets for corporate securities In addition quasi security such guarantees and letters of comfort may be taken

Taking the Security There are two major ways of taking a security, namely through a legal mortgage and through an equitable mortgage. Security could also be taken by way of a charge. Legal or Equitable Mortgage In the case of a legal mortgage the asset will be held by the bank and in many circumstances actual ownership of the asset will transfer to the mortgagee. With an equitable mortgage the title to the asset being used as security remains with the mortgagor and most ofter physical possession is left with the mortgagor. Implications A legal mortgage will take longer by the bank will have more rights than in the case of an equitable mortgage. Also the legal mortgagee will have the power of sale without approaching a third party (except courts if residential property). The equitable mortgagee will have to approach a third party mortgagor or the courts for enforcement. The most common form of equitable mortgage is retention of title documents plus execution of Memorandum of Deposit by mortgagor. Mortgages and Charges Strictly speaking a legal mortgage under common law involves a conveyance of the interest of the mortgagor in the property to the mortgagee, whereby the mortgagee becomes the owner of the property until the redemption of the debt. On redemption the mortgagee will have to convey the property back to the mortgagor.

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On the other hand, a charge only confers certain rights on the mortgagee bank in the event of default of the mortgagor in repaying the facility. Fixed and Floating Charges A fixed charge is a charge over a borrowers assets conferred on the charge holder, whereby borrower cannot dispose of such assets without the permission of the charge holder. Fixed charges are normally taken over assets that are not subject to change in the ordinary course of business and that are normally fixed to the ground i.e. they cannot be easily moved from one place to the other A floating charge is on the other hand a charge over the assets of the borrower which does not preclude the borrower from dealing with the assets until the occurrence of an event specified under the terms of the charge or the borrower enters into liquidation. Execution of the Security Execution of the security involves both parties signing a form that embodies all the terms of the security. Usually when the security is by way of equitable mortgage, the Bank in addition executes with the borrower a contract evidenced by a document known as memorandum of deposit. The essence of this deposit is to put the intention to execute the security beyond all dispute. In the absence of this the borrower can claim that the deposit of document of title was for the purpose of safe deposit and not security Memorandum of Deposit The Memorandum of Deposit is a contract embodying the terms of deposit of property or documents of title to property for the purpose of executing a security. A memorandum of deposit will normally contain the following clauses: The security clause Power of Attorney clause granting the bank power of attorney to execute a legal mortgage when required Description and value of the security. Name of person depositing the security

Advantages of Memorandum of Deposit Puts intent beyond doubt. The mortgagee benefits from protection clauses contained therein If under seal becomes agent of mortgagor under irrevocable power of attorney. In this instance he can act on the customers behalf to sell the asset or execute a legal mortgage form If the security is third party the bank still has the protection of clauses in the security document Other advantages depend on the type of security in question.

Standard Security Forms

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The clauses in standard security forms developed over time to overcome losses made by banks and give them more protection. Typical clauses found in security forms include the following: Continuing security this is to enable the security to cover all advances and thus overcome the rule in Claytons case. All monies clause this clause enables the charge to cover all monies owed the mortgagee by the guarantor or one who signs the charge form. It prevents the guarantor from proving in the insolvency of the principal debtor or claiming subrogation or repayment from the principal debtor until the debt has been repaid. Personal covenant to pay clause Repayable on demand clause to overcome the effect of section 4 (1) of the Limitation Decree 1972 NRCD 54, that any action on a contract can be taken only within 6 years of the date of cause for action. Preclusion of Claytons Case Clause Westminster Bank V Cond Change in constitution clause the guarantor/mortgagor will still be liable despite a change in the constitution of the principal debtor or the bank The applicable law the charge form will state that the law applicable is the law of the country. Consideration clause this specifies the value the bank is offering in Right of lien and set off, giving the bank the right of lien over any monies belonging to the charger or any articles or items held in safe custody and a right of set off in respect of credit balances held to the customers order. Right to release, vary the security held or grant accommodation to the debtor,. Beneficial ownership clause I whereby the mortgagor confirms that his is the beneficial owner of the securities charged and does not hold them as a trustee. Right of retention for a certain period of third party security after release. Additional security this clause states that the security is independent and not in substitution for another security. Conclusive evidence clause this clause states that any evidence provided by the bank as to the outstanding debt owed shall be conclusive evidence in the court of law Bache & Co V Banque Vernes et Commerciale de Paris SA 1972 Ultra vires clause

CHAPTER TEN SHARES AND OTHER FINANCIAL ASSETS AS SECURITY

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A share denotes ownership by the named person of a proportion of the company issuing the share and is indicated by the possession of a share certificate. A debenture stock generally denotes ownership of a loan stock issued by a company. According to section 54(1) of the Companies Act, 1963 Act 179, a share certificate is prima facie evidence of title to shares. Transfer of shares is effected by completing a transfer form and submitting it together with the share certificate through a stockbroker to the issuing company, whereupon a new certificate will be issued to the new owner. Once issued the company is estopped from denying any statement in it to a person who acted on it in good faith and suffered loss. Section 54 (2) provides that If any person shall change his position to his detriment in reliance in

good faith on the continued accuracy of the statements made in such certificate the company shall be estopped in favour of such person from denying the continued accuracy of such statements and shall compensate such person for any loss suffered by him in reliance thereon and which he would not have suffered had the statement been or continued to be accurate: Provided that nothing herein contained shall derogate from any right the company may have to be indemnified by any other person.
Case law: Balkis Consolidated Company V Tomkinson 1892. Bearer Securities These are negotiable instruments and this implies that transfer takes place by mere delivery provided: It takes place In good faith For value Without notice in defect of transferors title

Initial Considerations Nature of Company, whether private or public: Transferability: No restriction for public companies unlike the case of private companies where there is restriction of transfer to persons outside the family or to persons who are not already shareholders.

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Valuation: shares of public companies traded on a stock exchange can be easily valued. Private company shares are not publicly traded hence their valuation tends to be difficult. Lien: Section 102 of the Companies Code states that all companies may provide in the regulations that a company will have a lien on shares with unpaid liability and such lien shall constitute an effective charge on such shares and any dividend payable. Realization: listed company shares on the stock exchange are readily realizable whilst those of a private company are not.

Partly paid shares The bank will be liable for any outstanding call up, especially if the company is wound up where the bank was holder within 12 months of winding up. Directors shareholding In lending to a director with his company shares as security, there is the danger that his holding will fall below the minimum and he may have to resign his directorship Forgery of transfer document in Sheffield Corporation V Barclay 1905 it was held that the bank has to indemnify the issuing company if a forged transfer form has been passed to the company. Duplicate Certificates With an equitable charge, the bank may not notify the company and therefore it is possible for the holder to obtain a duplicate and transfer his holding leaving the bank with a worthless certificate. Rainford V James Keith & Blackman Co. Ltd. 1905 Prior Equitable Interest In Coleman V London County and Westminster Bank 1916 it was held that if a bank takes a legal charge without notice of a prior equitable charge, then the equitable chare can be overcome. If the bank takes an equitable charge, the prior equitable charge will automatically rank first. Rights and Bonus (scrip issue) both have the effect of lowering the price of the share and the Bank must ensure that any additional shares purchased or received are deposited with the bank. With the legal charge since the bank is the legal owner, correspondence in this regard will come to the bank first. In the case of an equitable charge a clause could be incorporated in the Memorandum of Deposit specifying that any such shares must by deposited with the bank.

Method of Taking Security Legal charge 1. The certificate will be deposited with the bank

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2. The memorandum of deposit will be completed by the registered holder. This puts his intent beyond doubt and gives the bank protection of the clauses quoted therein. 3. The holder must sign a stock transfer form. Banks must make sure that the signature is genuine. 4. The shares will then be forwarded to the issuing company with the transfer document and a new certificate will be issued in the name of the bank which now becomes the legal holder of the shares. 5. Bearer securities are merely returned with the Memorandum of Deposit and provided the shares are taken in good faith for value and without notice of defect of transferors title, the bank will have an absolute legal title that will defeat any defect the previous holder had London Joint Stock Bank V Simmons 1892 6. If a private company, the bank will need to examine its regulations for any restriction of transfer of title, lien on shares etc. Method of Taking Security Equitable charge 1. Deposit of certificate 2. Memorandum clauses under seal 3. Holder may be asked to sign undated stock transfer forms. However when the holder dies, the transfer will not be enforceable. 4. Stop notice could be served on the company. This notice has a dual purpose. Firstly it is to inform the company to advise the bank on the issue of duplicate certificate to overcome the dangers that occurred in Rainford V James, Keith, Blackman Co. Ltd. 1905. In this case the chargor obtained a duplicate certificate from the company and sold off his holding leaving the bank with a worthless paper. 5. Care needs to be taken when dealing with a private company as in the case of taking a legal charge. Contents of Memorandum of Deposit of Shares Agreement in respect of bonus shares/dividends or interest paid on shares the charger agrees to deposit any bonus or further shares received and installments and meet all calls when they fall due on such shares. Execute legal transfer of securities the charger undertakes to transfer the securities into the banks or its nominees name when requested to do so by the bank Power of Sale this clause gives the bank the power of sale over the security at any time after the demand is made.

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Power of attorney some bank forms incorporate a power of attorney clause covering equitable charges which enables the bank to create a legal mortgage in its favor, or which appoints the bank as an attorney of the charger so that the bank, as an attorney, has the power to sell shares without reference to the court for an order for sale. Blank transfer the charger hereby agrees to execute a completed, but unstamped, transfer form, which enables the bank to transfer the securities into its own name or that of its nominee company. Returning the securities this clause provides that the charger will accept equivalent shares (of the same class or denomination). The bank is then not under any obligation to re-transfer the actual shares that were mortgaged. Margin of cover- this clause requests the charger to keep a margin of cover to protect the banks position should the value of the shares drop unexpectedly.

Priorities With bearer shares , provided the bank took the mortgage in good faith, for value and without notice of defect in the transferors title, it becomes the absolute legal owner of the shares and its title cannot be defeated by any subsequent and previous claims. With a legal charge over registered stocks and shares, if the bank is aware of a previous equitable interest then this cannot be overcome by the legal charge Coleman V London County and Westminster Bank 1916 Equitable interest will rank after prior equitable interest. Realization of Security In the case of a legal charge, the bank will simply dispose of the security either over the counter or at the stock exchange depending on whether the share is listed or not. With an equitable charge, the bank can execute a legal mortgage under the terms of the memorandum of deposit and proceed to realize the security. In the absence of power of attorney, the bank needs the borrowers authority before it can dispose off the security. Release of Security To release any security the bank has to reverse the actions undertaken when it took the security. Legal Charge Transfer of shares back into the name of the mortgagor and obtain new certificate in mortgagors name Return certificate to mortgagor and mark MOD as cancelled

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If a bearer certificate, the bank will merely return the certificate to the mortgagor.

Equitable charge With the strongest possible charge, the procedure is as follows: Stop notice with issuing company will be removed MOD will be marked as cancelled Blank transfer form will be destroyed Certificate will be returned to mortgagor.

Advantages of stocks and shares Absolute legal title available Easy and inexpensive to take Easy to realize Notice of rights and bonus issue come direct to the bank

Disadvantages of stocks and shares as security Fluctuation in value Not easy to realize if a private company Problems with legal charges: o o Forgery Sheffield corporation V Barclay Possible claim of negligence if notice of bonus or rights issue is not sent to the mortgagor Additional administrative expenses relating to dividends Directors holding may fall below minimum It may be cumbersome if large holding is held. Lien on unpaid liability on the shares.

o o o o

Problems with equitable charges o They can be defeated by prior equitable charge

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Possibility of holder obtaining duplicate certificate Rainford V James, Keith, Blackman Co. 1905 Bonus or rights issue can affect value Restrictions in articles or lien with private company MOD under hand plus blank transfer form is not enforceable when holder dies.

o o o

CHAPTER ELEVEN LIFE POLICIES AS SECURITY Introduction A life policy is a legal agreement between the insurance company and the proposer that in return for the payment of regular premiums, the insurance company will pay a sum of money to a named beneficiary on the death of the life insured or on some other pre-agreed date.

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Types of Policies Endowment policy Term life policy Whole life policy Industrial policy Mortgage protection policy Pension policy not assignable Unit linked insurance policy

Parties to a Life Assurance Policy The The The The Insurance company proposer life assured beneficiary must sign the legal charge form deed of assignment

Issues Remarriage after dearth or divorce Minors Children born after date of assignment

Initial Security Considerations Priority Anyone with constructive notice of a prior charge cannot defeat that charge Dearle V Hall 1828 Insurable Interest Under Section 1 of Life Assurance Act 1774, no valid contract of life assurance can be effected without the presence of insurable interest between the life assured and the beneficiary. The question is: would the beneficiary suffer financially by the death of the assured? Examples of Insurable interest: Anyone with contractual capacity can insure his/her life for the benefit of his dependants. Husband and wife Creditor and debtor up to limit of liability Anderson V Edie 1795 Guarantor and debtor Employer and key employee Hebdon V West and vice versa. Also company and director Trustee and Beneficiary unless the trust deed states otherwise Tidswell V Ankerstein 1792 Litigant and Judge Parent and dependent child Howard V Friendly Society 1886

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A parent cannot insure the life of a child (Halford V Kymer 1830) or a woman the life of her sister Evanson V Crook 1911

The issue of insurable interest may not affect the bank seriously due to the following: An assignee does not need to have insurable interest Ashley V Ashley 1829 Insurable interest needs to be present only at the time of taking out the policy Dalby V India & London Life Assurance Co. 1854 The insurance company is unlikely to refuse to pay an assignee for value

Uberimae Fidei An insurance policy is a contract of utmost good faith and therefore should certain vital material facts not be disclosed, the contract may be voidable at the option of the injured party e.g. medical history, dangerous pastimes of the life assured. Section 18 of Marine Insurance Act 1906 defines a material fact as one which would influence the judgment of a prudent insurer in fixing the premium or determining whether he will take the risk Section 214 (3) of the Insurance Act of Ghana also states that a party to an insurance contract shall not be obliged to disclose a fact about which a question is no to asked by the insurer or his agent. Section 214 (3) (g) provides that notwithstanding, a party to a contract of insurance may rescind the contract where the other, with the intent to avoid the rejection of the risk by the insurer or the payment of a higher premium, conceals from or fails to disclose to the party to the contract a fact which that other party knows or has reason to believe to be material to the contract. Section 214 (3) (i) adds that a defense by the insurer to a claim shall not be maintained by reason of misstatement of fact by the insured where the insured can prove that (i) The statement was true to the best of the insureds knowledge or belief (ii) The fact misstated is not material to the risk In Ghana, Section 214 (3) (e) of the Insurance Act 2006 Act 724 states that a fact is to be considered as material if in the circumstances it would be considered material by a reasonable person. The import of these provisions is that the onus is on the insurance company to ask the questions that will elicit the necessary information. However this is subject to the fact that if the proposer was aware of a fact that he new would be material to the contract that the proposer would have to disclose. Examples of non disclosure are as follows:

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Not informing the insurance company of criminal record when applying for household insurance Woolcott V Sun Alliance & London Insurance Ltd 1978 Failing to disclose doubts regarding the mental health of the life assured. Failing to disclose that the risk has been declined by another insurer Insurance Co London Assurance V Mansel 1879 It is important to note that: o The onus is not on the insurance company to ask the right questions but rather on the person with the knowledge the proposer o Life insurance is not subject to the conditions of Unfair Contract Terms Act 1977 o Any change in circumstances deemed as material must be disclosed Canning V Farquhur 1886 o Undisclosed fact may not be relevant to the claim but may still be material.

Age Admitted Evidence of age must be called for e.g. birth or marriage certificate of married woman. Copies may be sent to the Insurance Company and admitted on the Policy. The bank may retain copies to deal with a future dispute. Beneficiary The bank should check on the beneficiary named and should pay particular attention to the beneficiary being a minor, possibility of third party security and policy being drawn under the Married womens Property Act of 1882 Murder and Unlawful Killing In Cleaver V Mutual Reserve Fund Life Association 1892 it was held that a murderer cannot claim under a policy held on the life of a victim. Suicide The law will not look kindly on a sane suicide as it would not aid a person who has intentionally committed an illegal act to benefit from such act. Beresford V Royal Insurance Company Ltd. On the other hand, the law would look more favorably is the suicide was in sane. Insane Suicide Moore V Woseley the law is not apparently clear cut on the matter and currently, it is up to the insurance company to insert a clause in the security document to the effect that it will not pay in the event that the life assured commits suicide. Non Payment of Premium The bank must ensure that all premiums are paid. If they are not paid, the bank can:

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Bring premiums to date and realize security Pay premiums on customers behalf Convert policy into a fully paid up policy.

Method of Taking Security - Legal Assignment Obtain Original Policy Document o To prevent claim of constructive notice of earlier charge Spencer V Clarke 1878 o To facilitate detailed inspection of policy clauses and details regarding insurable interest o The policy will include discharged assignment deeds and this serves as proof of a good chain of title Proof of up to date payment of premiums must be obtained Standard deed of assignment executed by beneficiary in the presence of a senior bank official or solicitor. The document serves to protect the bank through clauses contained therein e.g. continuing security, premiums, realization without reference to third party. Notice of assignment given to Insurance company requesting written acknowledgement from the Insurance Company o Priority of e.g. charges decided by date of receipt o Gives bank the right to sue in its own name on the policy o Acknowledgement commits the insurance company to pay policy monies only to bank o To set limit on claims of set off between insurance company and policy holder. The bank will hold the policy, deed of assignment and receipt of notice of assignment.

Method of Taking Security - Equitable Assignment Obtain original document and checking contents Obtain necessary signature on Memorandum of Deposit. This puts the intent of the assignor beyond doubt and gives the bank protection of the clauses in the MOD Giving notice of assignment to Insurance company this may be returned as the insurance company is not obliged to recognize an equitable assignment. Retaining policy along with MOD and acknowledged notice.

Clauses in the Mortgage Form All monies clause Continuing security clause Assignment of the benefit of the policy to the bank with an obligation that the bank reassigns the policy to the mortgagor once the loan is repaid and to forward any surplus monies to the mortgagor. Advance secured against the security of the policy is repayable on demand. An undertaking by the mortgagor to comply with the terms and conditions of the policy, to pay the premiums on the due dates, and to provide premium

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receipts to the bank. If the mortgagor fails to do so, the bank is entitled to pay the premiums and debit the borrowers account. The bank has a power to exercise its rights and deal with the policy without the borrowers consents.

Priorities of Assignment In a case there exists more than one assignment priority is determined by the date of receipt of notice from the insurance company Dearle V Hall 1828 Legal assignments have priority over equitable assignments so long as the legal assignment was taken without notice of the earlier assignment. If the assignee has notice actual or constructive e.g. inability to produce original document, of an earlier assignment the earlier equitable assignment will automatically rank higher in priority Spencer V Clarke Realization of Legal Assignment Upon default and after serving statutory notices, the bank is placed in a position to exercise its power of sale. It has three options: Arrange for a loan on the strength of the policy Sell the policy in a thriving market Surrender the policy by completing the insurance companys standard form of surrender and send form plus non vacated form of assignment to the insurance company

If the borrower and beneficiary are the same, if he dies, the bank has to submit the policy and a certified copy of death certificate to the company to claim the proceeds of the policy.

Realization of Equitable Assignment The power of sale here can only be exercised by consent of a third party, either the customer or courts, via a court order. An exception is when the MOD is under seal which nominates the bank to act on the customers behalf, giving it a power of sale. Release of Security - Legal Assignment The bank must vacate the deed of assignment by executing a form of discharge under seal The policy and vacated deed of assignment should be returned and customer informed of the need to keep the two together. The bank must inform the insurance company of lack of further interest in the policy.

Release of Security - Legal Assignment

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MOD marked or stamped cancelled and retained by bank and the policy returned to customer If notice was given, this should now be removed.

Advantages of Life Policies as Security The value increases over time It is easy and cheap It is easy to realize

Disadvantages of Life Policies as Security Invalidation may arise due to lack of insurable interest, lack of good faith, non payment of premiums etc. Bad publicity if related to widowhood A very careful examination is necessary or bank will not be protected from suicide, premiums fully paid etc.

CHAPTER TWELVE GUARANTEES Introduction A guarantee is a written promise by one person to be responsible for the debt, default or miscarriage of another incurred to a third party. A guarantee is essentially an undertaking by a third party, known as the guarantor to a Bank to be responsible for the default of a debtor in the settlement of the debtors obligations.

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In Ghana guarantees are governed by the Contracts Act 1960 Act 25. Section 14 (1) of the act provides that a contract of guarantee shall be void unless it is in writing and signed by the guarantor or his agent or is entered into in a form recognized by customary law Elluah V Ankumah 1968 GLR Guarantees and Indemnities To be enforceable, the original guarantee contract must be enforceable. In Coutts and Co, V Brown Lecky 1947 a bank lent money to a minor who failed to repay. The bank tried to enforce the guarantee provided. The court held that the bank could not do so since the guarantee was linked to a transaction that was not legally enforceable. The case is relevant to undischarged bankrupts and companies acting ultra vires. Banks overcome this by inserting an indemnity clause which makes a bank guarantee both a guarantee enforceable against the principal debtor, with the guarantor bearing the secondary liability and as an indemnity where the guarantor is primarily liable. . An indemnity is a primary liability which in effect means payment will be made in any case, while the guarantee is a secondary liability. The second difference is that an indemnity does not have to be in writing e.g. agent and principal; forged share transfer form Sheffield Corporation V Barclay 1905. In Mountstephen V Lakeman [1871] it was held that an indemnity imposes a primary liability to pay and need not be evidenced in writing. Liabilities Covered A guarantee may either be specific or continuing. Specific guarantee covers one specific transaction Continuing guarantee Covers present or future debts and prevents the rule in Claytons case operating to the banks disadvantage A continuing guarantee may either be o o Limited where the maximum will be stated, but this includes charges and interest. It may also be unlimited where the guarantor will be liable for any amount of indebtedness.

Types of Guarantee A guarantee may be offered by one party, whereby it is termed a sole party guarantee or by more than one party whereby it is termed a multiparty guarantee. Multi party guarantees may be joint, several or joint and several In a multi party guarantee, all guarantors must sign the unaltered form:

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In National Provincial Bank V Brackenbury 1906 the fourth guarantor died before signing. None of the guarantors was liable. In James Graham & Co. Timber Ltd V Southgate Sands & Others 1985 the fourth guarantors signature was forged. The court held that it was not enforceable against any party. In Ellesmere Brewery Co. V Cooper 1896 the fourth guarantor altered the amount for which he was liable and signed. The guarantee was not enforceable.

Advantages of Joint and Several Guarantees Whole debt can be enforced separately consecutively (one after the other) or jointly (all at once) In the event of death, bankruptcy or mental incapacitation, the bank can claim from the estate of the deceased or representatives of the other two. The credit balance in the name of the guarantor or surety can be used to recoup the money.

Other Types of Guarantees Guarantees may be offered by individuals or by business entities like partnership and limited liability companies (company guarantees)

A lender may take guarantees from the directors of a company either supported or unsupported with the directors personal assets, to cover lending to the company. A joint and several guarantee is normally taken, whereby in the event of default, the bank can proceed against the guarantors jointly (at the same time) or severally (at different times) against individual guarantors. Issues to consider:

Joint and several guarantees may be taken especially where there is some doubt about repayment possibilities The bank must take care to avoid ill will especially in circumstances where the directors do not understand the import of the guarantee. Joint and several guarantee of directors Companies may also provide guarantees to support their subsidiarys debts It is important to check whether company regulations empowers directors to offer such guarantees Resolution of Board should be provided
The regulations should be checked to ensure that the company can give guarantees, interested directors; commercial justification must be present; care must be taken with inter-company guarantees

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Letters of Comfort In some instances, company regulations may prevent a company from providing a guarantee covering its subsidiarys borrowing. Again, some companies may not wish to enter into such guarantees because they have to be disclosed in their financial reports as contingent liabilities. In such situations, they may be prepared to issue a letter of comfort to the bank. A letter of comfort is letter providing comforts to the lender in lieu of the guarantee to enable the lender provide the facility. The courts have held that the legal effect of a letter of comfort depends on the intention as embodied in the word used in the letter. In Kleinwort Benson V Malaysia Mining Company, the Parent company stated in the letter of comfort that it is its general policy to ensure that its subsidiaries meet their financial obligations. The court of appeal held that it was not legally binding on the parent company to settle the debt. Since the letter did not expressly promise that such a policy would be continued in the future.
Duties of the Bank Duty of Disclosure before security is signed It is important to know that a guarantee is not a contract uberrimae fidei i.e. of utmost good faith. The bank does not have a general duty to pass on information to the guarantor about the principal debtor Cooper V National Provincial Bank 1945. In this case, where the principal debtors account could be operated by his wife, who was an undischarged bankrupt, the court declined to set the guarantee aside. The court held that it was within the category of what can be naturally expected. The guarantor is required to make his own enquiries. However, in Hamilton V Watson, the court stated that the banks should disclose anything that might not naturally be expected to take place between the debtor and the creditor to that effect that the suretys position shall be different from that which he naturally expects. Again in Lloyds Bank V Harrison 1925 the guarantee was set aside where the bank wrongfully did not disclose that the Principal debtor was in serious financial difficulties when the guarantee was taken. In Cornish V Midland Bank plc 1985 it was held that the bank has a duty to explain the nature of a guarantee document to a customer. However in Ohara V Allied Irish Bank 1984 it was held that a bank has no duty to explain the nature of the document to a stranger (non-customer) In Midland Bank plc V Perry 1987 failure to explain the effect of signing a third party legal charge document amounted to negligence by the bank and damages had to be paid by the bank. Prevention of forgery

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A forged signature is no signature section 22 Bills of exchange Act . James Graham Timber Co. Ltd V Southgate Sands 1985 signature of one of the joint and several guarantors forged. First National Security V Hegarty 1985 girlfriend forges wifes signature. Prevention of non est factum This cannot succeed if claimant has been careless e.g. in Saunders V Anglia Building Society 1970 where an old lady failed to put on her glasses to read the document in question. For a claim to be successful: The one should have a disability The document should be radically different from what she thought she was signing. The one should not have been careless and should have taken every precaution to ascertain the contents and significance.

Misapprehension/Misrepresentation The Bank must correct any misapprehension and not create any misrepresentation o o Mckenzie V Royal Bank of Canada 1934 giving incorrect information Royal Bank of Scotland V Greenshields 1914 not answering direct questions of the guarantor

The terms of the guarantee must not be misrepresented to the customer. At law, misrepresentation entitles the party misled to avoid the contract whether misrepresentation was innocent, negligent or fraudulent. A transaction may be set aside for misrepresentation or undue influence, whether procured by the Bank or customer. To prevent misapprehension e.g. where the guarantor thinks the debtor has no other liabilities. The bank must correct any likely misapprehension at the first opportunity. In Barclays Bank V OBrien, the wife thought the charge on the matrimonial home was limited in value to GBP 60,000.00 In Lloyds Bank V Waterhouse, the illiterate farmer thought the guarantee was for the purchase of anew farm. However it was an unlimited guarantee. However, the bank must have in contemplation its duty of secrecy under Tournier V National Provincial (1924) . If the security is third party, he must arrange a meeting between the bank, debtor and mortgagor/guarantor

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Mckenzie V Royal Bank of Canada (1934) it was held that the bank mistakenly advised a potential guarantor that other securities will be realized unless she entered into the guarantee. It was deemed unenforceable. Prevention of claim of undue influence Undue influence occurs when one party to a contract is unable to exercise his own freewill on deciding whether or not to enter the contract. Undue influence occurs only in third party securities and occurs in a situation where surety is not allowed to exercise his own free will Lloyds Bank V Bundy 1974 Tai Hing Cotton Ltd. V Lui Chong Hing Bank and Others

The courts have identified two main classes of undue influence. These are Class 1 Undue Influence this amounts to actual undue influence Class 2 Undue Influence this is when the law will presume that there has been undue influence. Class 2 undue influence is further divided into two classes o Class 2 A where there is conclusive presumption of undue influence from relationship where there is a clear trust/dependency relationship o Class 2 B where the guarantor has to prove the existence of a relationship of trust before the court will presume there is a presumption of undue influence..

Under Class 2A Undue influence is presumed in the following situations: Parent and dependent child (when it is the child raising undue influence by the parent) Guardian and ward Doctor and patient Solicitor and client Trustee and beneficiary Religious advisor and disciple

Presumption of undue influence must be rebutted by the party attempting to enforce the security contract. In the case of Class 2B e.g. parent and child (when it is the parent who is raising undue influence) and banker and customer, undue influence must be proved by the guarantor. The courts will consider undue influence to have arisen if it is proven that there is an appropriate degree of trust, confidence or influence. For a claim to succeed where there is a presumption of undue influence, the following conditions must be present:

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Undue influence must be exercised by the bank or its agent Kings North Trust V Bell Avon Finance Company Ltd. V Bridger 1985 The bank must have actual or constructive notice of undue influence Midland Bank V Perry 1987 The transaction must be manifestly disadvantageous to the claiming party National Westminster Bank plc V Morgan 1985

If the claimant is unable to establish presumed undue influence, it is open to him to try to prove actual undue influence, termed class 1 undue influence. The requirement here is for the claimant to show that the other party had the capacity to influence him, the other party so influenced him, that the influence was undue and that it caused the complainant to enter into the transactions. It is not necessary for the complainant to show manifest disadvantage CIBC Mortgages V Pitt 1994 AC 200 HL Undue influence by the Bank Undue influence by the bank occurs when the bank gives the guarantee form to the principal debtor to be given to the guarantor or in rare cases where the bank has some influence on the guarantor. In Lloyds Bank V Bundy 1975 an old farmer tended to rely very much on the advice of a bank and signed a guarantee form in favor of his son. His total liability under the guarantee was more than he had accepted and the courts decided that the facts of the case showed that there had been undue indluence. In Tai Hing Cotton Mill Ltd. V Lui Chong Hing Bank Ltd. 1985 it was stated that undue influence by the Bank has been found to be rare

Overcoming Undue Influence It is not advisable for the Principal debtor to obtain the guarantors signature. Apart from the obvious risk of forged signature, the principal debtor will almost certainly be deemed to act as the Banks agent and the bank would be responsible for any misrepresentation or undue influence. Undue influence can be overcome by insisting the guarantor secures an independent solicitor. A clause can be incorporated in the guarantee document to the effect that such independent advice has been provided: signed by the above-named after the contents have been explained to him by me. This clause has not yet been tested by the courts. If the guarantor is not willing to take this route, he will be asked to sign a free will clause. Additional Duties the Bank Owes to the Guarantor In Standard Chartered Bank V Walker & Walker 1985 it was held that a receiver appointed by the bank owed a duty to the guarantor to obtain the true

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market price value of any direct security. However, the bank should not interfere. This can be contrasted in the decision in China & Southsea Bank Ltd. V Tan San Gin 1989 where increased liability was due to a fall in price of shares held as security. Specific Clauses in Bank Guarantee Forms Whole debt clause removes a co-guarantors right of subrogation until the whole debt has been paid. Determination of guarantee by notice Death does not determine guarantee Beckett V Addyman 1882 Continuation of account despite determination of guarantee Consideration clause which states that the guarantee is being granted in consideration of the bank granting the facility to the principal debtor. Payments can be made into a suspense account this clause allows the bank to prove in the insolvency of the principal debtor for the whole amount whilst having the guarantors payment in the suspense account. Power to open new account on determination of guarantee Guarantee remains the property of the bank Conclusive evidence clause Change in constitution of parties. This clause will state that the guarantee continue to bind the parties irrespective of the change in constitution of the principal debtor. o Under section 15 (1), of the Contracts Act 1960 Act 25 a continuing guarantee given to a third person (e.g. the bank) in respect of the transactions of a partnership is, in the absence of agreement to the contrary, revoked as to future transactions by any change in the constitution of the partnership. This means where the constitution of the partnership is changed, the guarantee is revoked in the absence of agreement to the contrary o Section 15 (2) also provides that a continuing guarantee given to a partnership is not, in the absence of agreement to the contrary, revoked by any change in the constitution of the partnership. Indemnity clause this makes the guarantor primarily liable in the event that e.g. the principal does not have capacity to borrow. Security from debtor the guarantor undertakes not to take security from the debtor Action against principal debtor not allowed unless guarantors have paid the full debt.

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Clause excluding guarantors common law rights in the event of variation, release, compounding and granting of time. For example any variation e.g. change in interest will extinguish the guarantors liability. If the bank releases any of the principal debtors security, the guarantors liability will be reduced by the lost amount. By compounding the lender accepts less than full payment. Under common law, the guarantor is also discharged when the principal debtor is granted time.

Rights of Guarantor Section 16 (1) of Contracts Act provides that where the guarantor pays off the creditor, he can take over the securities held by the creditor in respect of the debts. He is deemed to have done so on the implied authority of the principal debtor until the principal debtor pays him A guarantor has the right of contribution from co-guarantors. He can claim indemnity from the principal debtor He has the right to know the extent of liability He has the right to be informed of any facts that would naturally dissuade him from entering into the guarantee Hamilton V Watson

Advantages of Guarantees as Security Easy to take Lack of formality, registration procedures Can easily be enforced by court action As with any other third party security, it can be ignored when claiming against the principal debtor. Moral dimension borrower less likely to default If given by a director, it increases his commitment to let the project succeed Funds can be placed in a suspense account Re Sass 1896

Disadvantages of Guarantees Depends on financial stability of guarantor A technicality may defeat the banks claim especially in the case of company guarantees May result in bad feeling Litigation may be necessary to enforce payment especially with unsupported guarantees. Early settlement may result in the credit being reclaimed as a preference

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CHAPTER THIRTEEN LAND AS SECURITY

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Nature of Land Land in law has a wider connotation than understood in ordinary English parlance. In law the approach to the definition of land is summarized by the Latin quotation quid quid platantur solo, solo cedit, to wit, whatever is attached to the soil becomes part of it. Land therefore includes the buildings and chattels attached to it as well as growing crops Legal estates and Interests An estate in land connotes an ownership interest in land whilst an interest in land connotes right attached to the land. In Ghana the legal estates in land include: Allodial this is the highest form of ownership which in Ghana is held by corporate body such as a stool or a family. Customary freehold this is an interest carved out of the allodial interest and is held by members of the stool or family after settling on a vacant land held by the stool. Common law freehold this is an ownership interest acquired by non family members when stool or family land is sold to them. Leasehold a leasehold is the grant of possession to a land or property for a fixed period of time which may be renewable. There are also lesser ownership interests such as customary tenancies, namely abunu and abusa.

Legal and equitable interests include: Legal and equitable mortgages Easements and rights of way Restrictive covenants

Registered and Unregistered Land Unregistered Land Unregistered land is land that is not governed by a system of registration of title to land. Title to unregistered land is evidenced by a bundle of title deeds which is a collection of transactions affecting the land over a long period of time. Such transactions include sales of the land, mortgages etc. Conveyancing is based on the concept of good root of title. In Britain, a good root of title is a minimum of 15 years whilst in Ghana it is a minimum of 30 years. Although title is not registered, any instruments affecting the unregistered land including wills and mortgages must be registered. Section 25 (1) of the Land

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Registry Act 1962 Act 122 provides that the registration of any instrument shall be deemed or constitute actual notice of the instrument and of the fact of registration to all persons and for all purposes as from the date of registration unless otherwise provided in any enactment In purchasing an unregistered land, a prospective purchaser must conduct a search at the land registry to ensure that there are no instruments registered there that affect the land. A search is done against the name of the vendor at the land charges registry (deeds registry) and the newly established collateral registry. Other searches include local land charges registry e.g. compulsory purchase order. The standard form of enquiry may be filled which will reveal matters such as plans to build new roads in the local vicinity. This may affect the value of the land. Registered Land Registered land is land governed by a system for the registration of title to land. In Ghana registered land is governed by the Land Title Registration Law 1986 , PNDC Law 152. Title to land is evidenced by a land certificate which constitutes a state guaranteed title to land. Section 18 provides that the land register shall be conclusive evidence of title of the proprietor of any land or interest in land appearing on the register. There are three parts to a land title register (Section 16): Property register - an entry of the description of the parcel with reference to the Registry Map and a plan approved by the Director of Surveys under sections 15 and 34 of the Law; Proprietorship register: an entry in respect of every proprietor of the parcel, stating the name of such proprietor and the nature of his proprietorship o Under section 19, description may be: Allodial holder Customary law freeholder he holds the land for an estate of freehold vested in possession or an estate or interest less than freehold according to the rules generally known as the rules of the common law Good leasehold - he holds a leasehold interest, that is to say, he holds an interest under a lease for a term of years of which more than two years are unexpired; he holds a lesser interest in land, that is to say, he holds an interest in land by virtue of any right under contractual or share cropping or other customary tenancy arrangement.

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Charges register - an entry in respect of every interest held in the parcel by any person, stating the name of the proprietor of the interest and the nature of his interest. e.g. legal mortgages/restrictive covenants

Other minor interests may be entered in the proprietorship and charges register. These include notices, cautions, inhibitions and restrictions. These issues normally deal with matters such as bankruptcies, occupational rights of spouse to residential property and equitable interests. Section 18 (1) The land register shall be conclusive evidence of title of the proprietor of any land or interest in land appearing on the register. 18 (2) Nothing in subsection (1) shall affect any right or interest in land acquired under the law relating to prescription or the Limitation Decree, 1972 (N.R.C.D. 54); provided that where title to registered land has been acquired under the law relating to prescription or the Limitation Decree, 1972 (N.R.C.D. 54) the registered proprietor shall hold the land upon trust for the person who claims to have acquired the title.

3) Any person claiming to have acquired land or an interest therein under the provisions or rules referred to in subsection (2) may apply to the Land Registrar for an appropriate amendment to be made to the land register. (4) On receipt of an application under subsection (3) the Land Registrar shall, after giving notice thereof to all persons whose rights are liable to be affected and giving such persons an opportunity to make representations to him, follow as far as practicable in regard to the application, the provisions of section 23 of this Law.
Searches Searches are normally made to ascertain any prior encumbrances on land. Priority searches after search with reference to copy in land registry. This is to ascertain whether any entries have been made since copy was made Priority period or suspension period. In Britain, it is 30 days, whilst in Ghana it is 14 days. The priority period protects from anything except overriding interests.

Companies Register The search here may reveal fixed charges over land and floating charges over the whole of a companys undertaking. Types of Shared Ownership Where legal title is shared, this normally takes two forms, namely joint tenancy and tenancy in common.

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Section 88 provides that where an instrument is made in favor of two or more persons the entry in the land register giving effect to it shall show (a) whether such persons are joint proprietors or proprietors in common; and (b) where they are proprietors in common, the share of each proprietor. Under the Conveyance decree, 1973 NRCD 175 the presumption is that where a grant is made to two or more persons, it is presumed to be made to them as tenants in common in equal shares unless a contrary intention is expressed in the grant. Prior to this legislation the presumption was in favor of a joint tenancy unless a contrary intention was expressed. Under Intestate succession law, 1985 PNDC Law 111 (section 4) a surviving spouse and child of the intestate shall hold any house of the intestate they are entitled to as tenants in common in equal shares.

Joint Tenancy A joint tenancy arises whenever land is conveyed or devised to two or more person without any indication to show that they are to take distinct and separate parts. They therefore own the land jointly. There are two essential characteristics of joint tenancy, namely the right of survivorship and the four unities. A joint tenant to land enjoys the right of survivorship. This means if one joint tenant dies, his interest in the land will pass on to the surviving joint tenant. This implies that the interest in a joint tenancy cannot pass under a will or intestacy. The four unities are unity of possession, unity of interest, unity of title and unity of time. The possession relates not to a portion of the land but to all the land. A joint owner who is excluded from possession can sue for partitioning of the property. Unity of interest means that the interest of each tenant is the same as that of the others as to extent, nature and duration. Unity of title implies that the joint tenants must acquire their title through the same act or documents. By the concept of unity of time, the interest of each and every tenant must vest at the same time. If the interest vests at different times, it is impossible to have a joint tenancy. Tenancy In Common Tenancy in common is the type of shared ownership where the owners have a distinct share of a property that has not been divided. Their interests may be separate or different. So long as a tenancy in common exists, no tenant can claim sole ownership of any part of the property. There is no right of

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survivorship. The size of each tenants share is fixed once and for all times in proportion to their contribution to the acquisition or the share granted to him. When a tenant in common dies, his share passes to his estate under will or intestacy. He may also dispose off his share whilst he is alive. The person who receives his share steps into the tenants shoes and becomes a tenant in common with the others. Lesser Interests in Registered Land Interests in land such as easements, restrictive agreements and profits require registration whilst licenses and overriding interests do not Overriding Interests Section 46 (1) of the Land Title registration Law 1986 PNDC Law 152 provides as follows: Unless the contrary is recorded in the land register any land or interest in land registered under this Law shall be subject to such of the following overriding interests whether or not they are entered in the land register as may for the time being subsist and affect that land or interest: such rights of way, rights of water, profits, or rights customarily exercised and enjoyed in relation to the parcel not being recognised interests in land under customary law, as were subsisting at the time of first registration under this Law; customary rights which were subsisting at the time of first registration in respect of concessions granted under the Concessions Ordinance (Cap. 136); natural rights of water and support; rights of compulsory acquisition, resumption, entry, search and user conferred by any other enactment; leases for terms of less than two years and not capable of extension to terms of two years or more by the exercise of enforceable options for renewal; rights, whether acquired by customary law or otherwise, of every person in actual occupation of the land save where enquiry is made of such person and the rights are not disclosed; subject to the provisions of this Law, rights acquired or in the course of acquisition by prescription or under the Limitation Decree, 1972 (N.R.C.D. 54); charges for unpaid rates and other moneys which without reference to registration under this Law, are expressly declared by any enactment to be a charge upon land; electric supply lines, telephone and telegraph lines or poles, pipelines, aqueducts, canals, weirs and dams erected, constructed or laid in pursuance or by virtue of any power conferred by any enactment.

William and Glyns Bank V Boland 1981 Mr. Boland contributed to purchase price. Mr. Boland held legal title on trust for benefit of himself and his wife. The bank took a legal mortgage over the property. Boland defaulted. The

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House of Lords held that the bank was not entitled to vacant possession of the land and therefore had only an equitable mortgage on Mr. Bolands share. Principle of overreaching the beneficial owners claim Under English law, it has been held that where there are two or more legal owners to land, a mortgagee can overreach the hidden beneficial owners claim - City of London Building Society V Flegg. Interests in Unregistered Land A mortgagee must ensure that there are no parties with beneficial interests in the property. The principle of overreaching also applies to unregistered land. However if there is a sole legal owner, the position hinges on whether the purchaser has notice, actual or constructive of the beneficial interest. Where the purchaser has notice, he does not get good title. An example of constructive notice is where the legal owner does not occupy the property and the purchaser fails to make enquiry of whoever occupies it. Where the legal owner occupies the property, the purchaser would not have constructive notice unless the situation should raise some suspicion in his mind. When this is so, purchasers and mortgagees have to make enquiries or be deemed to have constructive notice Caunce V Caunce 1969 The meaning of occupation In Kingsnorth Finance Co. Ltd. V Tizard 1986, an ex-wife visited home every afternoon and stayed one night in every fortnight In Abbey National Building Society V Cann 1990 the claimant never lived in the house but brought belongings into newly acquired house 35 minutes to execution of the mortgage. This was considered insufficient. Action to be Taken By Mortgagee Discover who is in occupation and ask if each has a beneficial interest. Non-legal owners must sign deed of postponement o o Abbey National Building Society V Cann 1990 Bristol and West Building Society V Henning 1985

Mortgages of Land In Ghana, mortgages are governed by the Mortgages Decree 1972 NRCD 96, Home Mortgages Finance Act 2008 Act 770 and the Borrowers and Lenders Act, 2006, Act 773. Section 1(1) of NRCD 96 defines a mortgage as a contract charging immovable property as security for the due repayment of debt and any interest accruing thereon or for the performance of some other obligation for which it is given in accordance with the terms of the contract. Section 1 (3) also provides that no mortgage shall be enforceable unless:

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It is evidenced in writing, signed by the mortgagor or by his agent authorized in writing to sign on his behalf; or It is excused from the necessity of writing by the operations of the rules of equity including rules relating to fraud, duress, hardship, unconscionability and part performance; or Is excused from the necessity of writing by any enactment in the case of a customary law transaction

Characteristics of a Mortgage Essentially, a mortgage in Ghana is a security for the payment of a debt or a discharge of an obligation for which it is given. Section 1(1) defines a mortgage as a contract charging immovable property as security tfor the due repayment of a debt or any interest accruing thereon or for the performance of some other obligation for which it is given. The decree emphasizes that a mortgage does not give rise to a new ownership interest and provides in section 1(2) that a mortgage shall be an encumbrance on the property charged and shall not operate so as to change the ownership right to possession or other interest (whether present or future) in the property charged. Another characteristic of a mortgage is its redeemability. In the case Noakes & Co. Ltd V Rice [1902] AC 24 Lord Machaghten said Redemption is of the very nature and essence of a mortgage as mortgages are regarded in equity. A mortgage cannot therefore be executed in a manner as to make it irredeemable. Equity will therefore grant a relief whether there is any clog or fetter on the equity of redemption that may imply irredeemability of the mortgage or render the mortgagors right of redemption illusory. A mortgagee cannot successfully impose a condition that the mortgage property shall become absolutely his upon the occurrence of a specified event. A mortgagor has two rights of redemption: The contractual right to redeem The equity of redemption The contractual right to redeem arose only after the contractual date has passed Brown V Cole (1845) 15 SM 42 The equity of redemption arose as soon as the mortgage was made and had an attribute of an equitable interest in land In Khoury V Mitchuel [1989] GLR 161 at page 163 Wuaku JSC as he then was held inter alia that the true position in equity was that the mortgagors equity of redemption was inviolable; the maxim was once a mortgage, always a mortgage.

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In some, situations, the mortgagor could redeem the property before the contractual date of redemption e.g. when the mortgagee demanded payment or went into possession of the property or went to the court to enforce payment. Requirement for Registration of a Charge Section 3 (2) states that every writing evidencing a mortgage shall be deemed to be an instrument registrable in accordance with the Land Registry Act, 1962 Act 122. The writing must: State the name and address of each mortgagor or mortgagee State the nature of the mortgagors interest in the property being mortgaged and the extent to which the interest is subject to the mortgage Identifies the mortgaged property by reference to location and boundaries or to a previously registered describing the same property Where the mortgage secures payment of money, the date due, the principal sum lent and if further advances are to be made and secured by the mortgage, writing so states

Where there is any transfer or encumbrance of a mortgage it must be registered Again, any writing discharging a mortgage or part shall also be registered. Borrowers and Lenders Act, 2008 Act 773 Section 21 of the Borrowers and Lenders Act provides for a collateral registry for the registration of charges and collaterals created by borrowers to secure credit facilities provided by lenders. Section 25 (1) of the Act provides for registration of charges within 28 days after the date of the creation of the charge. Companies are also required to meet the requirements of the Companies Code. Under section 25 (3) a charge that is not registered is of no effect as security for borrowers obligation for repayment of the money secured and the money secured shall immediately become payable despite any provision to the contrary in any contract. Section 26 enumerates the details that are required to be contained in the register. These are: (a) The name of the borrower (b) The name of the lender (c) The nature of the charge (d) The date of creation of the charge (e) The amount secured by the charge (f) Short particulars of the property charged

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(g) In the case of a floating charge, the nature of any restrictions on the power of the borrower or chargor to grant further charges that rank in priority to or with the charge created. Section 26 (4) and (5) state that the Registrar shall issue a certificate of registration of particulars of any charge registered o the borrower and such certificate shall serve as evidence in the absence of a copy of the document on the charge. Types of Mortgage over Land Legal Mortgage Equitable Mortgage

Legal Mortgage Section 1 (2) provides that a mortgage shall be an encumbrance on the property charged, and shall not, except as provided by this Decree, operate so as to change the ownership, right to possession or other interest (whether present or future) in the property charged. By demise i.e. granting of a long lease to mortgagee. By deed expressed to be by way of legal mortgage Mortgagees signature must be witnessed

Taking First Legal Mortgage Over unregistered Land Obtain title deeds and ensure good root of title Value property Search at land charges Registry Search at local land charges registry Ensure no right of occupation Execute the mortgage Register Search again. Ensure that there is fire insurance in place.

Taking First Legal Mortgage over Registered Land Obtain land certificate and inspect for details

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Update land certificate Request an official search Value property Search at local land charges department Ensure there are no overriding interests Execute the mortgage Register the mortgage at the land title registry. Notice should be given to insurance company Receive charge certificate.

Equitable Mortgage The common law requires a minimum only of intention by the owner to grant security right in return for value given e.g. loan. Section 2 of the miscellaneous Provisions Act 1989 requires any contract for future disposition of an interest in land to be in writing signed by both parties and to incorporate all the terms expressly agreed by the parties. Both parties must sign. In practice banks require: The title deed/land title certificate to be deposited Memorandum of deposit signed by both mortgagee and bank Inclusion of all agreed terms.

Notice of deposit of land certificate can be registered. Notice of intended deposit of land certificate is not yet available. This serves as protection against subsequent legal mortgage. In the case of unregistered land, the equitable mortgage has to be registered as a land charge if the title deeds are not held. Priority for Unregistered Land - Mortgages Decree and Land Registry Act Section 19 (1) of NRCD 96 states that subject to express agreement among encumbrancers, priorities among them shall be in order of time subject to: Fraud Estoppel for gross negligence or otherwise Purchasers for valuable consideration without notice of prior interest

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Priority of legal over equitable interest where equities are equal

Section 19(2) - Notice may be actual or constructive. Constructive notice is a fact that is deemed to arise where the fact would have been disclosed by reasonable enquiry as to: The possession and contents of title documents The title of the property back to a good root of title more than 20 years old (However NRCD 175 pegs the number of years at 30) The rights of any person occupying the property.

Section 26 (2) of the Land Registry Act, 1962 Act 122 provides that an instrument upon registration shall take effect from the date of execution if it was presented for registration within whichever of the following periods is applicable: If executed at the place where it is registered, the period of 15 days from its date If executed elsewhere in Ghana, the period of 60 days from its date If executed abroad, the period of three months from its date.

Tacking Tacking refers to the practice of linking subsequent advances to the original mortgage. Section 19 (3) of the Mortgages Decree, provides that in determining priorities, no tacking shall be allowed except where the mortgage is expressed to secure further advances. However this is not effective against a purchaser for valuable consideration without notice of prior mortgage. Consolidation Section 19 (4) provides that consolidation shall not be allowed. The doctrine of "consolidation," as applied to mortgages in England consists in the right of the holder of two mortgages on different pieces of land, which belong to the same person, to retain each mortgage as a subsisting lien on the land until the debts secured by both the mortgages are paid. Contribution, Exoneration and Marshalling Section 19 (5) provides that in determining the incidence of obligations, The rules of equity relating to contribution, exoneration and marshalling shall apply Contribution The doctrine of contribution rests on the principle that a fund which is equally liable with another to pay the debt, shall not escape because the creditor has been paid out of the other funds alone.

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If several properties, whether of one or of several owners are mortgaged for or subject equally e.g. not as surety or collateral to one debt, or if the owner of several properties, having mortgaged one of them, charges his real estate with or devises in trust for payment of his debts, and the properties descend or are devised to different persons (the rule will not hold with one person) The several properties will contribute ratably to the debt, being valued for that purpose after deducting from each property any other encumbrance by which it is affected. The principle extends to sureties who are liable for the same debt and whose liabilities are contemporaneous. Each property must be equally liable. Exoneration Exoneration is the right of exoneration is the right to have the court to order the debtor to pay in order that the surety need not.

Marshalling The doctrine of marshalling rests upon the principle that a creditor who has the means of satisfying his debt out of several funds shall not by the exercise of his right, prejudice another creditor whose security comprises only one of the funds. For example X & Y are mortgaged to A; and Y is mortgaged to B. B may require the securities to be marshaled i.e. that As mortgage shall be thrown on property X so far as it will suffice and Property Y, or so much as is not required for As mortgage be left to satisfy Bs mortgage. Priority for Registered land Priority depends on the order of registration irrespective of the dates of the mortgage and notwithstanding that the entry in the land register may have been delayed. Section 62 of Land Title Registration Act 1986 PNDC Law 152. If prior mortgagee does not consent to subsequent mortgage, the latter must register a caution which serves as notice of his interest in the land as mortgagee. Standard Mortgage Terms Exclusion of consolidation. In Ghana, under section 19 (4) consolidation of encumbrances have been abolished. Power of sale and power to appoint a receiver The banks consent is required before creating a further mortgage

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Use of property does not conflict with Town and Country Planning Acts. Exclusion of mortgagors power to grant leases or sub-leases. Any such lease will therefore be invalid.- Dudley and District Benefit building society V Emerson 1949 A promise by the mortgagor to keep the property in good repair and insured. The bank may take other steps to verify that the property is insured e.g. by demanding premium receipts A continuing security clause to cover further advances to protect against the effect of Claytons case. Without this clause even if the second mortgagee is received, the bank will not enjoy first priority for further lending. Furthermore in Deely V Lloyds Bank where a running account was not ruled off, when notice was received, the bank lost priority even though there was no new lending. A power to grant leases at a premium.

Memorandum of Deposit Continuing security clause Promise to grant legal mortgage if requested to do so. The bank will acquire the power of sale if mortgagor agrees. If not, the bank may seek order for specific performance. The bank may be granted irrevocable power of attorney by the mortgagor. If the bank holds title deeds it will enjoy automatic power of sale Re White Rose Cottage 1965

Realizing the Mortgage Section 35 (1) of the Borrowers and Lenders Act provides that the Mortgages Decree1972, (NRCD 96) does not apply to the rights of a lender under this Act in the event of default on the part of a borrower. It further provides that were there is any conflict between the Mortgages Decree and the Borrowers and Lenders Act, applicable to enforcement of the lenders rights, the Act prevails. For the sake of reference nonetheless, the provisions of the Mortgages Decree are listed below: To exercise power of sale section 18 Replaced by Section 33 (b) To appoint a receiver section 16 Replaced by Section 29 of Act 773 power to appoint a receiver or manager To enter into possession section 17. Replaced by Section 29 of Act 773 power to appoint a receiver or manager

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To sue on the mortgagors covenant to repay section 15 of NRCD 96 Replaced by section 33 (a) of Act 773 Section 6 personal liability of the mortgagor.

Section 32, of the Borrowers and Lenders Act 2008 Act 773 states that when a borrower fails to make payment on the due date for a payment, the lender shall give notice of default to the borrower in writing, and request the borrower to pay the amount due within thirty days. Such notice may be sent by hand, courier service, registered mail or other means determined by the lender in consultation with the borrower. Where the notice is delivered by hand, it shall take effect on the date it is received by or on behalf of the borrower; and by courier service or registered mail, it shall take effect on the day it is officially recorded as delivered by return receipt or its equivalent. Where the borrower fails to pay or make satisfactory arrangements to pay the amount outstanding to the lender within thirty days after the date of receipt of the notice, the lender may enforce the rights provided for under the Act. Section 33 of the Act states that where a borrower fails to pay an amount secured by a charge under the Act, the lender may sue the borrower on any covenant to perform under the credit agreement or realize the security in the property charged on notice to the person in possession of the property. Power to Appoint a Receiver or Manager Section 29 of the Act states that a lender in whose favor a charge is created can either (a) Appoint a receiver or manager (b) Apply to the court for the appointment of a receiver or manager The receiver or manager is appointed to do the following: (h) To take possession of and protect the property (i) To receive the rents and profits and discharge the outgoings of the property (j) To realize the security on behalf of the lender. Section 30 provides that registration of appointment shall be within ten days after date of appointment, court order or entry into possession. The Registrar shall then enter the notice of appointment of the receiver or manager in the register of particulars of charges. The same procedure is required to be followed when the receiver goes out of possession. Section 34 provides that a lender is not obliged to initiate proceedings in court to enforce the right of possession. Where the lender faces obstruction he may

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use the services of the police to evict the borrower or other person in possession pursuant to a warrant issued by a court. It is an offence to obstruct a lender in the lawful exercise of his right to vacant possession. Power of Sale The mortgagee has a duty to obtain a proper price. The law is careful to protect the interest of the mortgagor and imposes a duty on mortgagee to act in good faith and to take reasonable care to sell at a proper price Cuckmere Brick Co. Ltd V Mutual Finance Ltd 1971. He is however not obliged to delay the sale in expectation of a rising market. He may not sell the property to himself see SCB V Walker 1983 Negligent Valuation Swingcastle Ltd V Gibson 1990 In Parker-Tweedale V Dunbar Bank plc 1989 the beneficiary under a trust for sale has no grounds to object to sales price but could only have a claim against the legal owner for breach of trust. Equity protects the guarantor and mortgagor as in SCB V Walker 1983 and China and South Sea Bank V Tan 1990 A creditor may choose the timing of its sale, but when it does so, he must take care to obtain the best price Discharge of Mortgage over Registered Land By form 42 under regulation 67 of Land Title Regulations signed by mortgagee and sent to the Land Title Registry with charge certificate. The land registrar will delete entry on the charges register and return land certificate to the mortgagor, unless there are other mortgagees outstanding. Discharge of equitable mortgage will involve notice to land registry by mortgagee that the notice on the charges register should be deleted. The mortgagee will return the land title to the mortgagor and cancel any MOD or deed (if under seal)

Discharge of Mortgage over Unregistered Land The Legal mortgage is discharged by signing the back of mortgage deed. Now forms part of chain of title and must be preserved. Any registered land charge should be vacated by notice to land charges registry. With equitable mortgage return of title deeds subject to notice of second mortgage and cancellation of MOD or any deed. Any land charge should be vacated. Risks of the lender Some defect in the mortgagors title e.g. overriding interests and beneficial interests

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A forged signature on a mortgage deed. The charge will be void in this instance.- First National Securities V Hegarty 1984 Pitfalls in respect of leasehold Claim of undue influence or non est factum by one of the mortgagors.

Sub Mortgage A sub-mortgage is a mortgage of a mortgage whereby the original lender borrows by mortgaging his mortgagors security. The original lender mortgagee now becomes the sub-mortgagor and the new lender the submortgagee. The original mortgage becomes the head mortgage (the security) The lender with a security of a sub-mortgage can regardless of the value of the security, only recover monies from the mortgagor, because the reductions are made by periodic installments. It is not easy for the sub-mortgagee to maintain the security margin hence the bank should write down the value of the security pro tanto, whenever the monies are paid by the original mortgagor. There should be no defect in completing or registering the security by the head mortgagee or the sub-mortgagee bank will have a defective security. Where the head mortgage is equitable, any sub-mortgage will be equitable.

CHAPTER FOURTEEN CORPORATE SECURITIES Initial Considerations The power of the Company and its Directors Until quite recently, any transaction that took place outside the rules and regulations of a company were ultra vires and void Re Introductions 1969.

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However, section 139 of the Companies Code 1963 Act 179 provides that so long as the third party acted in good faith in a transaction with the company, such act could not be called into question by reason of anything in the regulations. The essence of this provision is to protect innocent third parties from the ultra vires rule. Registration of Charges In addition to the normal procedures, some securities granted by limited liability companies must be registered at the Companies Registry. Section 107 of the Act states that every charge created by the company other than the following charges)) shall be void unless certain particulars together with the original or certified copy of the instrument if any, by which the charge was created or evidenced are delivered in prescribed form to the registrar for registration within 28 days after the creation of such charge: Under Section 107 (3) the following are not required to be registered: Pledge of goods Possessory lien on goods Pledge, deposit, letter of hypothecation, trust receipt Bill of lading Dock warrants or other documents of title to goods Bills of exchange and promissory notes Other negotiable instruments for money

Section 107 (2) nonetheless provides that when the charge becomes void, it does not preclude the contract for repayment of money, and for that matter the money becomes payable. Under Section 107 (4) the following particulars require registration: Date of creation of charge Nature of the charge Amount secured, or maximum amount, where the charge is to secure a fluctuating amount (section 108) Short particulars of property charged Persons entitled to the charge

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In the case of a floating charge, the nature of restriction on the power of the company to grant further charges ranking in priority or pari passu with charge thereby created.

Under section 107 (5) also, a debenture series together with the original or certified copy of the deed creating the charge must be registered within 28 days with the following particulars: The date of the resolution authorizing the issue of the series and the date of the covering deed, if any, by which the security is created or defined. The total amount secured by the whole series The names of the trustees The particulars specified in b, d, f of sub-section 4

If particulars of the charge are not delivered within 28 days, the charge is void against an administrator or liquidator of the company or any person who for value acquires an interest n or right over the property subject to the charge. The charges register is maintained by the Registrar and anyone can request for a certificate (signed and sealed by the Registrar stating the date of registration of charges Section 117 Section 112 - The Registrar shall give a certificate under his hand of the registration of particulars of any charge registered in pursuance of such sections and the certificate shall be conclusive evidence, except in favour of the company or of any other person who shall have delivered false or incomplete particulars or an incorrect copy of any document, that the requirements of sections 107 to 110 of this Code have been complied with. It is the duty of the company to register the charges; however any person interested may register the charges section 111 Late Registration Section 115(2) (1) The Court, on being satisfied that the omission to register particulars of a charge within the time required by this Code or that the omission or misstatement of any particulars with respect to any charge or in a memorandum of satisfaction was accidental, or due to inadvertence or to some other sufficient cause, or is not of a nature to prejudice the position of creditors or members of the company, or that on other grounds it is just and equitable to grant relief, may, on the application of the company or any person interested, and on such terms as seem to the Court just and expedient, order that the time for registration shall be extended, or as the case may be, that the omission or mis-statement shall be corrected (2) When the Court grants an extension of time for registration the charge shall not, unless the Court shall otherwise order, adversely affect any person who, prior to the date of actual registration of particulars of the charge, shall have acquired any proprietary rights in, or a fixed or floating charge on, the property subject to the charge, and shall be ineffective

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against the liquidator and any creditors of the company if the winding up of the company commences before the date of actual registration. The copies of every instrument requiring registration must be kept at the registered office of the company or any registered officer where register of debenture holders is kept. A member/creditor of the company can inspect the register without paying a fee. However, any other person is required to pay a fee. Under section 118 the registration serves as notice to the whole world of the particulars registers but not of the contents of any document. Nature of Bank Debenture Form Section 80 (2) of the Companies Code defines a debenture as a written acknowledgement of indebtedness of a company, setting out the terms and condition of the loan. It was defined in a similar way in Levy V Abercorris Slate and Slab Co 1887. Section 86 (2) provides that a debenture may be secured by a fixed or floating charge. Interest on a debenture is paid whether profits are made or not and capital is paid in priority to shareholders in the event of winding up. Types of Charges Fixed Charges A Fixed charge is a charge over the assets of a company such that the company cannot dispose off the assets without the permission of the charge holder. A fixed charge attaches itself to the easily identifiable assets of a company including: Fixed assets e.g. land and buildings, machinery Relates to assets that are valuable, easily identifiable and not subject to regular change or turnover exception book debts. Intangible assets e.g. trademarks copyrights and uncalled share capital Future acquired assets equitable charge here. The future book debts of a company including present book debts.

The company cannot deal with assets caught without obtaining the banks written consent in advance. Book debts are debts arising in the due course of business which would or could in the ordinary course of such a business be entered in the well kept books relating to that business Independent Automatic Sales Ltd. V Knowles and Foster 1962 To enable the charge to cover all debts banks word the debenture to include all book debts and other debts. All monies must be paid into an account held by the fixed charge holder. A serious risk to bankers if there is an existing fixed charge to another bank over future book debts. A bank can protect itself against this by conducting a search

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at the Companies Registry and ensure the absence of such a charge before receiving credits into the new account Seibe Gorman and Co Ltd V Barclays Bank 1979 Floating Charge A floating charge was defined in Re Yorkshire Woolcombers Association 1903 as a charge over present and future assets: Which will change from time to time in the ordinary course of the companys business The company is free to carry out its ordinary business until the floating charge holder takes steps to enforce the security (crystallization)

The floating charge will catch all future and present assets not covered by a fixed charge. Crystallization of a floating charge Crystallization of a floating charge may occur (section 87) where either The debenture holder appoints a receiver Winding up proceedings commence The company ceases to trade or makes preparations to cease to trade On the occurrence of some other event quoted in the debenture Re Bright Life Ltd 1986

Section 87 (1) of the Act defines a floating charge as an equitable charge over the whole or a specified part of the companys undertaking and assets both present and future so however that the charge shall not preclude the company from dealing with such assets until: o The security becomes enforceable and the holder thereof pursuant to a power on that behalf in the debenture or deed securing the same, appoints a receiver, or manager or enters into possession of such assets - Evans V Rival Granite Quarries 1910; The debenture may provide for the events that will make the security enforceable The company ceases to carry on business Re Woodroffes (Musical Instruments) Ltd Disposes all assets and business with the view to cease trading Hubbock V Helms 1887 Breaches a contractual provision e.g. charging assets caught elsewhere without prior permission of bank Re Bright Life Ltd 1986 Creditor takes possession of assets caught Re Hamiltons Windsor Iron Works Ex parte Pitman & Edwards 1897

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The court appoints a receiver or manager of such assets on the application of the holder; or The company goes into liquidation o Compulsory Re Colonial Trust Corporation Ex Parte Bradshaw 1879 o Voluntary Re Roundwood Colliery

Section 87 (2) On the happening of any of such events the charge shall be deemed to crystallize and to become a fixed equitable charge on such of the company's assets as are subject to the charge. Section 87 (3) If a receiver or manager is withdrawn with the consent of the chargee, or the chargee withdraws from possession, before the charge has been fully discharged, the charge shall thereupon be deemed to cease to be a fixed charge and again become a floating charge. Section 87 (4) A fixed charge on any property shall have priority over a floating charge affecting that property unless the terms on which the floating charge was granted prohibited the company from granting any later charge having priority over the floating charge and the person in whose favour such later charge was granted had actual notice of that prohibition at the time when the charge was granted to him. Disadvantages of Floating charges Stock value is difficult to assess and may vanish at the time of crystallization Assets seized by judgment creditors Subsequent fixed charge Preferential creditors section 41 of Act 180 The hardening period o Under section 90 of the Companies Code, if the winding up of a the company commences within 12 months of the creation of the floating charge on the undertaking or property of the company, such a charge shall, unless it is proved that he company was solvent immediately after the creation of the charge be invalid, except to the amount of any cash paid to the company at the time of, or subsequently to the creation of the charge and in consideration of the charge, together with interest on that amount at the rate of 5 % per annum o The company must be insolvent at the date of giving the charge or become insolvent as a result of giving. o The charge is not valid for outstanding loans, but valid for new loans. It therefore defeats the rule in Claytons Case Re Yeovil V Glove Co. Ltd. 1965 Re Thomas Mortimer 1925

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New monies should not be paper transactions

Re GT Whyte & Co Ltd 1982 Re Matthew Ellis Ltd 1933 Reservation of title to inventory if title is reserved in the supplier, the banks security will rank behind that of the supplier.

Reservation of Title Clause In Aluminium Industrie Vaasen BV V Romalpa Aluminum Ltd. -1976 , known as the Romalpa Case, it was held that the supplier or company supplying the stock can have a clause in the sales contract quoting that the purchaser does not become an owner of the stock until paid in full and is merely holding the stock in trust. Any proceeds form sale of stock were also held in trust for the supplier until paid over to him. This is subject to the following: The wording of the clause must not create a charge which would be void unless registered within 28 days of creation o Re Bondworth Ltd 1979 o Re Peachdart Ltd. 1983 The goods must be easily identified o In Borden UK Ltd. V Scottish Timber Products Ltd 1979 the clause failed as resin and boards were mixed together to produce chipboard o In Hendy Lennox (Industrial Engines) Ltd V Grahame Pattick Ltd. 1984 the clause was upheld as the engines could be easily identified. With regards to proceeds of sale: o Proceeds must be held in a trust account separate o If the bank holds a fixed charge over book debts as in Seibe Gorman and co, it will rank above the Reservation of title clause.

Protection Inspection of sales contract Mixed stock Fixed charges over book debts.

Advantages of Floating Charges Easy to take and covers assets that are normally outside the reach of banks e.g stocks and future assets A floating charge holder can prevent the appointment of an administrator under an administration order. The bank has 7 days to block the appointment by appointing its own administrative receiver.

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Remedies of Debenture Holder Sue in court for the debt Apply to the court for foreclosure notice. This vest title to assets in the name of the debenture holder To exercise power of sale To petition for the winding up of a company To appoint an administrative receiver under a floating charge.

Appointment of Receiver/Manager Section 116 Registration of Enforcement of Security Section 116 (1) of the Act provides that if any person obtains an order for the appointment of a receiver of any property of the company or appoints such a receiver or enters into possession of such a property, under any powers contained in any charge, notice of the fact in the prescribed form shall within 10 days from the date of the order, appointment or entry into possession, be given to the registrar who shall enter the fact in the register of the particulars of charges relating to such company. Again section 116 (3) provides that a receiver/possessor going out of the possession must give notice within 10 days in a prescribed form and the Registrar shall enter notice in particulars of charges. Any default attracts a fine in both cases. A receiver is a licensed insolvency practitioner appointed in writing by the floating charge holder usually following default by the company this prevents the appointment of a liquidator under an insolvency order. He is an agent of the company and therefore the bank is not liable for any contract entered by him nor for his negligence. SCB V Walker and Walker 1982 if the bank interferes, it will be liable. Duties of Receiver To notify the company of his appointment Within three months prepare a report stating events leading to appointment, disposal or proposed disposal of assets and funds available to each category of creditor To realize those assets caught under the debenture To distribute proceeds as follows: o His expenses o Debt of fixed charge holder o Preferential creditor o Debt of floating charge holder o Any surplus is paid to the company

Powers of a Receiver/Manager

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To get in and realize the assets of the company he acquires no personal liability To bring or defend legal actions in the companys name To use the company seal to execute contracts for the company To carryon the business of the company if a manager To grant or accept leases or tenancies on the companys behalf To call up uncalled capital

Additional Powers To sue for defend and prove in the winding up of the company To apply for foreclosure To exercise power of sale under the legal charge.

Entry of Satisfaction on Discharge. Discharge is effected by a written memorandum signed by both the company and chargee and both will receive written confirmation - section 114 The Registrar, on application in the prescribed form and on evidence being given to his satisfaction with respect to any charge of which particulars have been registered, (a) that the debt for which the charge was given has been paid or satisfied in whole or in part, or (b) that the whole or part of the property charged has been released from the charge or has ceased to form part of the company's property or undertaking, shall enter on the register a memorandum of satisfaction in whole or in part, or of the fact that the whole or part of the property has been released from the charge or has ceased to be part of the company's property, as the case may be, and where he enters a memorandum of satisfaction in whole he shall, if required, furnish the company with a copy thereto Other Matters The regulations need to be checked and the bank needs to pay serious attention to the problem of commercial justification Charterbridge Corporation Ltd V Lloyds Bank Ltd 1969. Certain actions are prohibited such as the granting of a guarantee or other security in respect of the borrowing of a director section 301

Effect of insolvency upon securities

Floating Charges

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Under section 90 of the Companies Code, if the winding up of a the company commences within 12 months of the creation of the floating charge on the undertaking or property of the company, such a charge shall, unless it is proved that he company was solvent immediately after the creation of the charge be invalid, except to the amount of any cash paid to the company at the time of, or subsequently to the creation of the charge and in consideration of the charge, together with interest on that amount at the rate of 5 % per annum The company must be insolvent at the date of giving the charge or become insolvent as a result of giving. The charge is not valid for outstanding loans, but valid for new loans. It therefore defeats the rule in Claytons Case Re Yeovil V Glove Co. Ltd. 1965 Re Thomas Mortimer 1925

New monies should not be paper transactions Re GT Whyte & Co Ltd 1982 Re Matthew Ellis Ltd 1933

Preferences A preference is said to occur when a company pays any one of its creditors shortly before it becomes insolvent, with the intention that that creditor will be in a better position than other creditors who have not been paid. It occurs when the debtor: Does anything which has the effect of putting a person who is a creditor or guarantor of the debtors liabilities into a position which in the event of the debtors bankruptcy or insolvent liquidation, will be better than the position of the creditor or guarantor would otherwise have been; and Was influenced by a desire to produce the effect mentioned above this motive can be rebuttably presumed if the debtor and creditor were connected persons or associates; and The preference occurred when the debtor was unable to pay his debts and occurred within the relevant time six months under section 29 of the Bodies Corporate (Official Liquidations) Act 1963 Act 180

Section 29 of Act 180 states that where, at the time between the making of a winding up order and the end of the liquidation of the company it appears to the liquidator that, during the six months ending with the commencement of the winding up and at a time when the company was insolvent the company,

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(a) Made any payment or other transfer of property, or (b) Paid any mortgage or other charge, or (c) Suffered any judgment or incurred any other obligations, with the dominant intent that any of its creditors should benefit at the expense of others, the liquidator shall give notice to the creditor so preferred and require such creditor within the period specified in the notice to restore to the liquidator whether by payment of money, transfer of property or surrender of rights, the benefit which has accrued to the creditor by reason of his being preferred. Restoration of Property Section 30 (1) states that on the commencement of a winding up every person who during the relevant period received a payment of money or other transfer of property in respect of a debt owed to him by the company shall, on receipt of a notice given in that behalf by the liquidator, restore the property or its value to the liquidator. (2) For the purposes of the immediately preceding subsection the expression "relevant period" means the period beginning twenty-one days before the presentation of the petition on which the winding up order was made or, if made on two or more petitions before the presentation of the first petition, and ending with the making of the winding up order. (3) The provisions of subsection (1) of this section shall not apply to any payment or other transfer of property, (a) Made by the company to its banker in so far as it has been subsequently disbursed by the bank in meeting cheques drawn by the company; (b) Made in respect of a debt incurred during the relevant period; (c) Made in respect of a secured debt; or (d) Made on the enforcement against a third party of a guarantee or indemnity, or of a mortgage, charge or lien on that party's property. (4) On the commencement of the winding up all property in the possession of the sheriff at the time of the making of the winding up order, being property of which possession was taken under an execution issued by a creditor of the company or the proceeds of such property shall, after deduction of the sheriff's and bailiff's charges in the execution, be transferred to the liquidator. (5) Where a person has complied with a notice given under section 29 of this Act or under subsection (1) of this section he may, within one month after the notice was given, lodge a proof of debt or require the liquidator to amend his proof, as the case may be, so as to enable the debt in respect of which the notice was

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given to rank for dividend at the value which is appropriate in view of his compliance Fraudulent Trading Section 26 (5) of Act 180 provides that whenever the business of a company is carried on at a time when to the knowledge of the directors of the company, the company had no reasonable prospect of paying its debts as they fall due any such business shall be deemed to have been carried on with intent to defraud the creditors of the company. Under Section 26 (1) of Act 180 if in the course of the official winding up of a company it appears that any business of the company has been carried on with intent to defraud the creditors of the company or creditors of any other person or for any fraudulent purpose, the Court may, on the application of the liquidator or of any creditor, member or contributory of the company, if it thinks fit so to do, declare that the persons who were knowingly parties to the carrying on of the business in the manner aforesaid shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the Court may direct. Transactions at an undervalue and other transactions Section 31 provides as follows: (1) Where it appears to the liquidator that the company made any disposition of its property otherwise than for full value or in settlement of any due debt or incurred any obligation otherwise than for full value, (a) During the two years ending with the making of the winding up order, or (b) More than two years but less than ten years before the making of the winding up order and at a time when the company was insolvent, the liquidator shall give notice to the person to whom the disposition was made or for whose benefit the obligation was incurred requiring that person, within the period specified in the notice, to restore to the liquidator, whether by payment of money, transfer of property or surrender of rights, the excess of the benefit which thereby accrued to him above the value of any consideration provided. (2) Excess benefit restored under this section shall, save where a director of a company commits a breach of duty under the provisions of sections 203 to 205 of the Companies Code, 1963 (Act 179), be treated as a provable debt in respect of which a proof may be lodged at any time within one month after its restoration.

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CHAPTER FIFTEEN

PLEDGES OF GOODS Introduction A pledge is a security whereby goods or documents of title to the goods are deposited with the lender such that in the event of default in paying the original debt, the bank can sell the goods to defray the debt. There are normally three parties to a pledge, namely the pledgor, the pledgee and possibly a third party who has custody of the goods. There must be delivery of the goods to the lender:
Actual pawn brokerage Constructive o o o o Key to store Transfer of bill of lading Delivery of warehouse keepers warrant Delivery by attornment whereby warehouse keeper acts as attorney to lender

Exporters
Procedure o Irrevocable documentary credit

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 o o o

Arranged by exporter Arranged by importer

Revocable documentary credit Acceptance credit opened by exporter Negotiation of bills under documentary credit

Credit granted against security of pledge over goods. Bill of exchange drawn on importer and accepted by bank. The exporter may discount the bill on the market to provide the needed funds Documents o o o o o o o o Invoice Marine insurance policy Consular invoice Certificate of analysis Cargo declaration A weight note A certificate of origin A certificate of inspection

A prudent buyer often stipulates for some additional document e.g. certificate of analysis, issued by a third party to provide independent evidence of the existence and quality of the goods

Irrevocable Documentary Credit At the request of the overseas buyer, a local bank gives an irrevocable undertaking to an exporter to accept bills of exchange drawn by him on the bank at say 90 days after sight for sums not exceeding a stated figure, provided that the bills drawn under the credit are in respect of a current shipment and are accompanied by specified shipping documents relating to the goods.

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The bank must take care to ensure that there are no inconsistencies in the credit document and the various documents attached. For example, the invoice should describe the goods in the same way as the credit. They should also be made up in the name of the applicant. The bill of lading should be a clean bill of lading. Revocable documentary Credit This would normally not be acceptable due to its revocable nature Acceptance Credit Opened by Exporter The Acceptance House would require security which is usually a pledge to them of the shipping documents. They will forward these documents to their agents in the importers country to be released to the importer against payment. Negotiating of Bills Under Documentary Credits The overseas buyer will arrange for the branch of the bank in the exporters country to negotiate bills drawn by the exporter upon the importer provided the bills are accompanied by the shipping documents The exporter will then present a bill drawn on the importer and presents them with the documents attached to the local bank which purchased the bills in accordance with the documentary credit. The bank then forwards the bill and documents to the importers country where the documents are surrendered to the importer either for cash or against the acceptance of the bank No Credit Established The exporter will draw a bill of exchange upon the importer and deliver them to his own bank which will either
a) Negotiate them b) Make an advance against them c) Merely take them for collection

Importers An application for documentary credit will normally include the following:
Undertaking to provide the bank with the required funds to meet drafts drawn under the credit

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The bank and its correspondents are not to be responsible for the genuineness, correctness or form of any document or any endorsements or for any misrepresentation as the quantity, quality or value of any goods comprised therein In the event that insurance is inadequate, the bank is authorized to insure the goods, and customer undertakes to indemnify the bank for premiums paid Goods are to be pledged to the bank as continuing security for all advances made. The customer also undertakes to make good any deficiencies arising from the sale of the goods together with the usual commission and charges The bank is not to be liable for any mistake or omission in the transmission of messages by cable The uniform customers and practices for documentary credits apply.

A bank becomes a pledge as soon as it has made any payment in respect of the credit. Where customer is able to provide the necessary funds, the bank will release the documents to him. Where customer is unable to do so, the bank may release the documents against certain precautionary measure including the execution of a trust receipt by the customer. Trust receipt In practice, it is normally too cumbersome for the bank to take delivery of the goods, warehouse them and then arrange for the sale. For that matter the bank would be prepared to release the documents of title usually a bill of lading to the customer in exchange for a Trust Receipt or Trust Letter signed by the customer. The Trust receipt will include a number of promises by from the customer:
Customer undertakes to hold the documents and the goods represented thereby and the net proceeds thereof as trustee of the bank Where the goods are to be warehoused, the customer undertakes to warehouse them in the name of the bank, to deliver the warehouse keepers warrants to the bank and to insure the goods.

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If the goods are to be sold, the customer undertakes to pay the proceeds of all sales to the bank and to give to the bank on request, authority to receive from the buyers the purchase monies for the goods.

Advantages of Trust Receipt

The trust receipt enables the bank to obtain the original pledge so that if the customer becomes bankrupts, the trustee in bankruptcy/liquidator cannot claim the goods for the benefit of unsecured creditors: Northwestern Bank Ltd V John Poyntes, Son and Macdonalds [1985] AC 56 Re David Allester Ltd [1922] 2 Ch 211

Risks Provided a subsequent pledge takes the pledge in good faith and without notice of the prior pledge, he can obtain priority ahead of the bank. To overcome this risk, the bank must monitor the position closely. In practice, the bank will only permit the system of trust receipts to be used only for its customers of undoubted integrity Saunders, Brothers V Maclean & Co [1883] 11 QBD 327 Clauses in letter of pledge
Agreement to deliver goods to bank or agent Continuing security Power of sale in the event of default Undertaking to insure Undertaking to pay rent and other expenses in respect of warehousing of goods Agreement that the bank will not be responsible for the default of any broker employed to deal with the goods

The letter of pledge is exempt from stamp duty as an agreement under hand Goods already warehoused

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Warehouse keeper receipts in an independent warehouse do not represent a document of title to goods and for that matter a mere deposit of the receipt with a bank will not create a valid pledge. The way out would be for the bank to ask its customer to sign a transfer order, directing the warehouse keeper to hold the goods in the name of the bank. The receipt and transfer order will be forwarded to the warehouse keeper who will hold the goods in the name of the bank and issue a new receipt in the banks name before the advance is granted. The bank will hold a letter of pledge before releasing the goods Goods on Customers Premises The bank may lease a portion of customers premises and store the goods there. The part is sealed and the goods handed over to the bank. Advantages
It is self-liquidating as when the goods are sold, the sales proceeds are received into the account , in effect, paying off the borrowing Complications with title are avoided since this service is normally rendered to reputed and undoubted customers Charging formalities are easy and few costs are incurred

Disadvantages
It requires detailed controls and a lot of paper work on an on-going basis as the goods are moved from one location to the other It would be necessary to take regular opinions about warehouse keepers and purchasers to ensure that the bank can place full trust in all the parties involved Where warehousing charges have not been paid, the keeper will have a lien superior to the security of the bank Accurate valuation of the goods may be difficult Some goods may be perishable especially edible produce Price fluctuations may erode the security margin The customer may not be able to meet costs incurred for insurance and storage and the bank would need to pay them to protect its security

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Where the goods are stored in customers warehouse and he has the key, possible a duplicate, he may sell the goods behind the banks back. There may be retention of title clauses in the original sales contract.

CHAPTER SIXTEEN OTHER SPECIALIST SECURITIES Assignment of Debts An assignment of debts is a charge taken over an existing specific debtor rights under a contract and will protect the bank against any claim by a trustee in bankruptcy, unless the charge was technically deficient or the trustee can show that the granting of the charge was a preference of the bank

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Where the assignment is expressed to be charged over general book debts, then it would be void unless registered under Bills of Sales Act 1878. Legal Assignment A legal assignment must comply with section 136 of the Law of Property Act 1925:
It must be in writing Express notice must be given to the debtor The bank should ask the debtor to acknowledge receipt of the notice and confirm the amount of the debt and whether debtor has received any notice of prior assignments

Taking The Security

Obtain and peruse the contract document thoroughly o o Banks rights as assignee will be known Rights of the third party will be revealed e.g. in the event of default on the part of the customer in performing his part of the contract Retention clauses Prior written promise of debtor

o o

Complete the banks standard form of assignment identifying the debtor or contract rights by reference to the parties involved If the date of contract is known, this should be inserted in the assignment The charge form must be dated, signed by the customer and witnessed by a bank official or the customers own solicitor if independent advice is taken. The bank should then give notice in duplicate to the debtor who should be asked to acknowledge notice by signing and returning the copy. He will also be asked to confirm the amount of the debt and to declare whether he has any set off against the assignor at the time of receiving the notice. The bank would also enquire whether the debtor has had notice of any prior charge and will ask him to give an undertaking to pay all monies due the assignor to the bank as assignee.

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Where the debtor is unknown, the bank should obtain a bankers opinion about his ability to pay and his general trustworthiness. The statute report should be renewed from time to time if the period involved is very long With some contracts e.g. building contract, it would be important to ensure that the builder is adequately covered by insurance and that notice of its interest in the policy is given to the company by the bank.

Importance of Notice
The notice entitles the bank to sue in its own name under section 136 of Law of Property Act 1925. Where notice is not given, the assignment takes effect as an equitable assignment Priorities are determined by the time the debtor received notice. Hence if the bank does not give notice it would rank behind another assignee, who takes his security without notice of the banks charge and give notice to the debtor first The debtor can only exercise those rights of set off or counter claims existing at the time when notice was received. Where notice is not given and if he acquired rights against the customer after the date of the assignment he would be enabled to exercise those rights in equity as against the assignee If in error, debtor pays out money to another person, the bank cannot claim against him In the absence of notice, the debtor will be effectively discharged. If he however pays the debt after receiving the notice, the bank can recover from him In the absence of notice, the banks assignment would be postponed to a subsequent assignee for value without notice of a previous assignment who gave notice to the debtor Marchant V Morton, Down and Co. [1901] 2 KB 829 In the absence of notice the bank is subject to any equities arising between the debtor and creditor after the date of assignment. The assignment is always subject to equities prior to the notice given. I If debtor disregards the notice and pays the customer, and not the bank, the bank could sue the debt and recover the money

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An assignment by a company should be registered within 28 days otherwise it will be void against a subsequently appointed liquidator re Kent and Sussex Saw Mills [1947]. The company went into liquidation and the bank claimed. The bank had failed to register the assignment. It was held that the banks charge was void for want of registration Equitable Assignment An equitable assignment would arise if the assignee were not in writing or where notice had not been given to the debtor The main disadvantage is that the bank cannot sue in its own name and in consequence has to invoke customers support in any action in the courts to recover the money due There can be no legal assignment of a future debt, but it is possible to charge monies due under a contract at a future date,. In this case the assignment would be an equitable charge. Release When the customer pays, the charge form may be cancelled and placed with the banks obsolete documents. Where a charge has been given by a limited liability company, it will be necessary for the company to remove the entry at the companys registrar. Realization A legal assignment enables the bank to sue the debtor in its own name and recovery can be achieved only by negotiation, legal proceedings and enforcement of judgment In the case of equitable assignment the bank would need the support of its customer or join him in the proceedings so that it could sue in his name Advantages
Easy to take as the usual form of charge is short with a few clauses and will be worded in such a way as to create an absolute assignment It is self-liquidating

Disadvantages
The amount of the security may turn out to be uncertain due to counterclaim by the debtor who may exercise a set off, or allege bad workmanship or breaches of contract

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Litigation may become necessary to recover monies Debtor may not be able to pay a good bankers opinion on the debtor is an essential part of the process.

Mortgage of a Beneficiarys Interest in a Trust There is no legal bar which prevents a beneficiary under a trust from mortgaging his interest as security for an advance provided he has attained the age of 18. However there are some instances where the terms of the trust prohibit this,. When this is the case, it is impossible to take a security over the beneficiarys interest. Such trusts are referred to as protective trusts. A life tenant is a person who enjoys certain interests in land which reverts to another person, termed the remainderman when the tenant dies. Normally when a life interest is granted, another person would be identified on whom the interest would devolve. This is known as a reversionary interest and the person who holds this interest is known as the remainderman. A life interest is an equitable interest and for that matter, the bank can only take an equitable mortgage. Since the life tenants interest will cease upon his death, it would only be acceptable as security if supported with an insurance policy on the life tenants life. Taking the Security The bank should first examine the trust deed in detail and if necessary seek professional advice from a solicitor. The value of the life interest should be quantified as far as possible The banks standard charge would be executed under which the life tenant will assign his interest to the bank. After the mortgage is executed, the bank has to serve notice on the trustees in order to preserve its priority under the rule in Dearle V Hall. Under this rule, priority is determined by the order in which notice of the mortgage is received by the owner of the legal estate. The bank would enquire if there have been any prior charges. If the answer is no, it could go ahead and execute the mortgage. A formal acknowledgment should be requested. The bank would ask for an undertaking that future payment due the beneficiary will be made directly to the bank. The interest of a life tenant usually includes the right to occupy or use property during his life time or to derive some income from the property. Realization 169

If customer defaults, the bank will only have rights in respect of the income accruing from the trust. Demand notice should first be served on the customer. The bank could sell the interest by auction in a specialist market. Alternatively the bank could sell the customers life interest to a third party. Another option would be to receive the income paid for the remainder of the life tenants life, and ensure that the debt is reduced. No withdrawals should be made on the account. Release The charge form should be released under seal and then given to the life tenant or trustees, the latter being informed that the bank is no longer interested. When the life tenant dies and income ceases, the charge may simply be placed with obsolete documents with the branch. Mortgage by Remainderman In taking security over a remaindermans interest, the bank must ascertain whether the remaindermans interest is certain to take effect in possession at some future date. If the reversion is contingent on his surviving the life tenant then it would be of no value as security unless supported by a mortgage of a life policy on the remaindermans life. If customer defaults, the bank can sell the remaindermans interest in the trust. Otherwise, it could hold the interest until it falls into possession. Procedure
Examine the Trust Instrument to ensure that there is a chargeable interest and that there is no restriction to its being mortgaged The bank must then ascertain the market valuation of the property. This should be done on a regular basis if the trustees have the power to vary the assets in the trust from time to time The bank must examine the tax position critically and whether therefore the value of the remaindermans interest can be accurately valued Enquire about prior charges and any advances trustees may have made.

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Enquiries must be made as to the age and health of the life tenant which would enable the bank to estimate approximately how long it might be before the remainderman receives his benefit Execute the charge form and witness in the presence of a bank official or the customers solicitor. Provide written notice to the Trustees to preserve the banks priority. The notice will request the trustees to undertake to pay all monies that become due to the remainderman to the bank. The bank should enquire about whether a trust corporation has been nominated to receive notice. If so, then the notice should be given to the trust corporation and an acknowledgement requested. The bank must from the outset ascertain whether the trustees are persons of integrity and if unknown status opinions on them from their bankers should be obtained

Realization
Demand notice should be served before the power of sale arises Sell interest on a specialist auction market In approving the facility initially, the security value should have been written down to allow for the costs to be incurred in realizing the security. The sale would be by way of assignment of the banks interest and to effect this, a special document would have to be drawn by solicitors The bank will hand over its mortgage, unreleased to the purchaser and should also provide notice to the trustees.

Release The charge form should be released under seal and given to the charger, or if he so wishes to the trustees, with an Advice Note that the bank is no longer secured. If the trust falls in and benefit passes to the remainderman, the proceeds will be paid to the bank which would give a receipt for them. The charge form would then be set aside. If the bank is to continue the facility then it can take a charge over the prop

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