UNIT 1:

THE SYSTEM AND STRUCTURE

Introduction

Today, the term, bank, means different things to different people in different
economies. In order to reconcile the divergent views on the meaning and
characteristics of banks, the banking laws in each economy provides operational
definition and functional classification which governs banking practices in the
economy. In practical terms, a bank means what the operating banking law in an
economy defines as a bank (Ezeuduji, 2000:8).

Every discipline or field of study has its peculiar terminologies and or concepts.
Some of the concepts and terms are entrenched in the relevant laws while some
evolve from practice of the profession, business or trade. Some of those terms may
or may not be defined by law. The need for conceptual clarification becomes
necessary to lay a basic and proper background for understanding of the subject of
study. This is more so that legal definitions of terms are subject to several
interpretations depending on the perception of persons until such is definitely settled
by judicial authority. It is against this backdrop that the definitions of the key terms
such as “Bank” (Banker), “Banking Business” and “Bank Customer” will be sought
from both the relevant statutes and practice for better understanding.

Learning objectives

The objectives include:

(a) Providing knowledge of various legal provisions affecting bankers

(b) Awareness about legal cases decided on the subject

(c) Precautions which a bank should undertake to avoid legal liability

(d) Understanding the rights and liabilities of a customer and a bank in regard to
various situations in their relationship.

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Banking law is not a discrete area of law like contract or torts. It conveniently
describes, however, the collection of legal principles which impact on banking
transactions and on the banker-customer relationship. In that sense, the activity of
banking is the location at which a diverse range of legal principles intersect which
we call banking law.

Those legal principles are drawn from a range of sources, including common law,
the Law Merchant, equity and statute. In addition, for banks that subscribe to it,
the Code of Banking Practice is a legally enforceable set of principles and rules
incorporated into the contract between the bank and its retail customers.

Banking Institutions and Central Bank

The Banking and Financial Services Act Chapter 397 of the Laws of Zambia
(hereinafter called “Banking Act”) defines financial institution as a person other than
a bank, conducting a financial service business which includes receiving deposits
from the public but does not include chequing.

Almost everyone one deals with financial institutions on a regular basis. Everything
from depositing money to taking out loans and exchanging currencies must be done
through financial institutions. Below is an overview of some of the major categories
of financial institutions and their roles in the financial system.

Commercial Banks

Commercial banks accept deposits and provide security and convenience to their
customers. With banks consumers no longer need to keep large amounts of currency
on hand; transactions can be handled with cheques, debit cards and credit cards.

Commercial banks also make loans that individuals and businesses use to buy goods
or expand business operations. Banks also serve often underappreciated roles as
payment agents within a country and between nations. Not only do banks issues
debit cards that allow account holders to pay for goods with the swipe of a card,
they can also arrange wire transfers with other institutions.

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Central bank (Bank of Zambia)

In some countries, including Zambia, the central bank is entrusted with both the
legal authority to carry our banking supervision as well as the power to issue
regulations for the banking industry.

The Bank of Zambia is mandated by Section 4(2)a of the Bank of Zambia Act of
1996 as amended to licence, supervise and regulate the activities of banks and non
banking financial institutions (NBFIs) so as to promote the safe, sound and efficient
operations and development of the financial system.

The Banking and Financial Services Act (BFSA) of 1994 as amended, supports the
Bank of Zambia Act of 1996 as amended, by amplifying the legal and regulatory
framework of licensing, supervising and regulating financial service providers (FSPs)
in Zambia.

As part of the governance structure there exist different committees, other functions
include:

(i) To formulate and implement monetary and supervisory policies

(ii) To licence, supervise and regulate banks and financial institutions
(iii) To issue currency notes and coins
(iv) To act as economic and monetary management adviser to the
Government

Non-Banking Financial Institutions

The term ‘financial institution’ is described in section 2 of the Banking and Financial
Services Act as ‘a person other than a bank, conducting financial services business’.

Non banking financial institutions include leasing companies, insurance companies,

Building Societies, Microfinance Institutions, Bureau de Change etc.

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UNIT 2:

OVERVIEW OF REGULATIONS OF THE FINANCIAL SYSTEM

The Banking and Financial Services Act

The Act provides for the regulation of the conduct of banking and financial services;
to provide safeguards for investors in and customers of banks and financial
institution.
Section 40 (1) provides that a financial services provider shall not make any
agreement or arrangement with another bank or financial institution with respect to
the rate of interest on deposit , charge on a loan, amount of any charge to any
person and the provision or refusal to provide financial service. The later section
40(2) creates an offence for non compliance of the same being liable on conviction
to a fine.
Section 43(1) of the Act deals with the operations of a bank and financial institution
insisting that there be a principal administrative office and that if there would be any
change in location that should be communicated to the Bank of Zambia.

Compulsory Liquidation, Winding up or Dissolution

Section 86 provides for the meaning of “insolvent” as when a bank or financial
institution ceases to be able to meet its obligations as the fall due or when its assets
are insufficient to meet its liabilities or the amount of its regulatory capital
requirement prescribed by the Bank of Zambia.
Powers of a Bank in relation to insolvent financial institutions reference is made to
Cap.388 and Section 87A.

The Securities Act

The Securities Act provides for the regulation of the securities industry; to establish
the Securities and Exchange Commission and to define its objects and functions; and
to provide for matters connected with or incidental to the forgoing. In other words it
meant to provide regulation of the securities industry.

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A security is a financial instrument that represents an ownership position in
a publicly-traded corporation(stock), a creditor relationship with governmental body
or a corporation (bond), or rights to ownership.

Bank of Zambia Act

Bank of Zambia is the supervisory authority in Zambia for banks and non-financial
institutions. Section 3 of the BOZ Act provide that and shall be a body corporate with
perpetual succession and a common seal, capable of suing and of being sued in its
corporate name, and with power, subject to the provisions of this Act, to do all such
acts and things as a body corporate may by law do or perform.

Further section 4(1) provides that the Bank shall formulate and implement monetary
andBank supervisory policies that will ensure the maintenance of price and financial
systems stability so to promote balanced macro-economic development.
Section 4 (2) Without prejudice to the generality of subsection (1) and r subject to
the other provisions of this Act the Bank shall-
(a) licence, supervise and regulate the activities of banks and financial institutions so
as to promote the safe, sound and efficient operations and development of the
financial system;
(b) promote efficient payment mechanisms;
(c) issue notes and coins to be legal tender in the Republic and regulate all matters
relating to the currency of the Republic;
(d) act as banker and fiscal agent to the Republic;
(e) support the efficient operation of the exchange system; and
(f) act as adviser to the Government on matters relating to economic and monetary
management.

Section 5 provides that the Minister may convey to the Governor such general or
Powers of particular Government policies as may affect the conduct of the Minister
affairs of the Bank andthe Bank shall implement or give effect to such policies.
Section 10 provides that the President may, appoint, for Governor a period not
exceeding five years, a person with recognised professional qualifications and
experience in financial and economic matters to be Governor of the Bank and the

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President may re-appoint the Governor upon the expiry of the Governor's term of
office. (2) An appointment under subsection (1) shall be subject to ratification by the
National Assembly.
Section 12 provides that there shall be a Board of Directors of the Bank in which
shall vest all the powers of the Bank and which shall be responsible for the
formulation of policy of the Bank.
Furthermore section 42 prescribes the minimum liquidity ratios and reserves
requirements to banks and financial institutions.
Section 48 provides that the Bank shall act as agent for the Government for such
Agency purposes and on such terms and conditions as the Minister may determine.
Under section 49 the Bank shall not advance funds to the Government except in
special circumstances and on such terms and conditions Government as may be
agreed upon between the Bank and the Minister. Section 50 deals with the
limitations of Banking of Zambia lending money to the government.

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UNIT 3:
THE BANKER/CUSTOMER RELATIONSHIP

The Concept of banking

Today, the term, bank, means different things to different people in different
economies. In order to reconcile the divergent views on the meaning and
characteristics of banks the banking laws in each economy provides operational
definitions and functional classification which governs banking practices in the
economy.

In Zambia the word bank is defined under interpretation section of the Banking and
Financial Services Act as: a company conducting banking business: see definition of
“ banking business”.

A bank refers to an institution which accepts deposits from the public and in turn
advances loans by creating credit. It is different from other financial institutions in
that they cannot create credit though they may be accepting deposits.

A bank has been defined by the use of the characteristics of banking as there is no
universally compressive definition. See United Dominion’s Trust Limited v Kirkwood
(1966) 2 QB 431 (CA)

Definition of a Customer

There is no statutory definition of what bank customer is. The main requirement to
become a bank’s customer is having an account irrespective of what form of account
(whether saving, deposit or current) provided the account is in his name.

According to Dr. Hart, “a customer is one who has an account with a banker or for
whom a banker habitually undertakes to act as such.” Supporting this viewpoint, the
KeralaHigh Court observed in the case of Central Bank of India Ltd. Bombay vs.
V.Gopinathan Nair and others (A.I.R.,1979,Kerala 74) : “Broadly speaking, a
customer is a person who has the habit of resorting to the same place or personto
do business. So far as banking transactions are concerned he is a person whose

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money has been accepted onthe footing that banker will honourup to the amount
standing to his credit, irrespective of his connection being ofshort or long
standing.”seeLadbrokes Cov Todd (1914)

This definition of a customer of a bank lays emphasis on the duration ofthe dealings
between the banker and the customer and is, therefore, called the ‘duration theory’.
According to this viewpoint a person does not become a customer of the banker on
the opening of an account; he must have been accustomed to deal with the banker
before he is designated as a customer.

In other words a ‘Customer’ is defined as

(i) a person or entity that maintains an account and/or has a business

relationship with the bank;
(ii) one on whose behalf the account is maintained (i.e. the beneficial
owner);
(iii) beneficiaries of transactions conducted by professional intermediaries,
such as Stock Brokers, Chartered Accountants, Solicitors etc. as permitted
under the law, and
(iv) any person or entity connected with a financial transaction which can pose
significant reputational or other risks to the bank, say, a wire transfer or
issue of a high value demand draft as a single transaction.

A customer of a banker need not necessarily be a person. A firm, joint stock

company, a society or anyseparate legal entity may be a customer.

The banker/customer contractual terms

The implied terms between the banker and customer have been laid down in the
case of Joachimson v Swiss Bank Corporation(1921) (CA) that the banker
undertakes:

(i) To recover money and collect cheques for its customers’ account
(ii) Comply with the customer’s written orders

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(iii) Give its customers reasonable notice before closing an account incredit
(iv) The bank is not obliged to pay the customer full amount of their balance
unless he makes a formal demand at the branch at which the account is held
(v) Customer must exercise reasonable care in drawing cheques as not to
mislead the bank.

Customer Implied Terms

These have been laid down in the case of Tai Hing Cotton Mill Limited v Lui Chong
Hing Bank Limited (1986) AC 80

(I) To draw cheques with reasonable care in order to prevent fraud but not wider
duty to take reasonable precautions in managing the affairs so as to prevent
cheques being forged.
(II) To inform their bank of any forged cheques drawn on their account of which
they were aware but that there is no duty to check bank statements for
unauthorized debit items.

Express Terms

While the banker/customer contract is mainly of implied terms there are some
express terms of this relationship which are important. These include; account
mandate covering joint and several liability on join accounts and account mandate
covering signing instructions

The Legal rights and duties of the customer and the Bank

Rights

(i) The bank has a right to make reasonable charges to their customers’ account
for its services.
(ii) To repay on demand from its customers any overdrawn balance
(iii) The bank has a right to be indemnified by its customers for expenses and
liabilities incurred while acting for them.

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(iv) The bank has a right to exercise a lien over any of the customers’ securities
that are in its possession.

Duties

The bank has a duty to abide to any express mandate from a customer, to honour
customers cheques, duty to of secrecy and to render statements of accounts. The
bank also has a duty to collect cheques and other instruments and to exercise
proper care and skill

Banks duty as an agent

An agent is a person who negotiates and concludes commercial/business

transactions on behalf of another called the principal.A banker acts as an agent of
his customer and performs a number of agency functions for the convenience of his
customers. For example he buys or sells securities on behalf of his customers,
collects cheques on his behalf and makes payments of various dues to his
customers.

In law, agents are recognized as having the power to affect the legal rights,
liabilities and relationships of the principal (see Cavmont Merchant Bank v Amaka
Agricultural Holdings SCZ Judgment No. 12 of 2001).

The law recognizes the following as agents even though they do not bear the title of
agent:

(i) Company Directors and other company officials

Being an artificial person, a company has to act through human agents. Then
authority to act as company agents is vested in the board of directors.

(ii) Partnerships

As a partnership has no separate legal identity from its members, every partner in a
firm is an agent of the firm as well as all other partners for the purpose of the
business of the firm.
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 (iii) Professionals

Acting on behalf of clients may be the agents of those clients. E.g. a lawyer
conducting litigation is his client’s agent and may have authority to settle the case
and that settlement will bind the client.

Creation of an Agency

(i) Express Appointment

The agreement between a principal and agent may be express or implied. Express
agreement may be made orally, in writing or by deed. The banker-customer
relationship gives the bank implied authority to collect cheques on behalf of its
customer.

(ii) Ratification

Notwithstanding the absence of the agent’s actual or apparent authority, a principal

can nevertheless adopt the agent’s acts done in his name without his authority by
ratifying them, unless the acts ore to his detriment. The requirements for effective
ratification are:

a. The principal can only ratify acts done in his name i.e. the agent must have
purported to have authority and not to have acted in his own name. (See
Watteau v. Fenwick [1893] 1 QB 346)
b. The principal must have been in existence at the time of the agent’s actions
done on his behalf.
c. The principal can only ratify a contract/transaction if he is competent to make
it at the time of the agent’s actions and at the time of ratification.

(iii) By Estoppel

Estoppel results not from any agreement but from the principal’s word of actions.
This is where the principal allows a person to appear as their agent to third parties,
e.g. company Director when dealing with a bank.

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Duties of an Agent

Whether there is a contract between the principal or not, the law imposes a number
of duties on an agent.

i. Duty to Obey Instructions - An agent is under a general duty to obey his

principal’s instructions. He is contractually obliged to perform the duties he
has undertaken to do under the contract and if he breaches or fails to
perform these obligations, he is liable for breach of contract.

ii. Duty to Exercise Reasonable Care- An agent owes his principal the duty of
reasonable care in executing his authority. The standard of care required is
what is reasonable in the circumstances and this will depend o the facts of
each case Also it is an established principle of law that even a gratuitous
agent owes a duty of reasonable skill and care to the principal. E.g. ( see
Chaudhry v. Probhakar [1988] 3 All ER 718; [1989] 1 WLR 29, CA.)

iii. Agent’s Fiduciary Duties- An agent has extensive powers to affect the
principal’s legal position and the principal must place trust in the agent. Thus
the law regards the relationship between the agent and his principal as being
one of a fiduciary nature and therefore imposes certain obligations on the
agent so that the principal can be protected against abuse of a agent’s
powers to bind him to a third party.

Termination of Agency

The relationship between principal and agent depends on consent. If withdrawn, the
agency will automatically end, as well as the agent’s actual authority to bind the
principal. An agency relationship may be terminated in the following ways:

a. By mutual consent between the agent and the principal.

b. By either party unilaterally withdrawing consent.

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 c. An agent may have been appointed for a fixed period of time or for a specific
task or set of tasks. Once the time elapses or the task(s) is/are completed the
agency will terminate.

By operation of law e.g. if the performance of the agency relationship becomes

illegal (e.g. one party becomes the citizen of an alien enemy) or impossible (where it
will be ended by the agency contract being frustrated).

Further the bank often deals with agents of its customers e.g company Directors,
Partners in a Partnership, etc. It’s important that the bank understands the scope
and extent of an agent’s authority before dealing with them.

The bank plays the role of an agent in the collection of cheques paid in by customers
for the credit of their accounts. The bank must insist on a written instruction or
mandate formats customers where an agent is to operate an account on behalf of
the principal.

Banks duty as trustee

Ordinarily, a banker is a debtor of his customer in respect of the deposits made by

the latter, but in certain circumstances he acts as a trustee also. A trustee holds
money or assets and performs certain functions for the benefit of some other person
called the beneficiary.

The legal position of the banker as a trustee, therefore, differs from that of a debtor
of his customer. In the former case the money or documents held by him are not
treated as his own and are not available for distribution amongst his general
creditors in case of liquidation.

There are three main types of trusts in relation to banking these being:

i. Express trusts
ii. Constructive trusts
iii. Quist close trusts

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Express Trusts

The relationship between the banker and customer as a trustee and beneficiary
depends upon the specific instructions given by the latter to the former regarding
the purpose of use of the money or documents entrusted to the banker. The bank
then owes a duty of care to the third party beneficiaries. (see Barnett v Barclays
Bank Co. ltd -1980).

Constructive Trusts

A constructive trust is an equitable remedy resembling a trust imposed by a court to

benefit a party that has been wrongfully deprived of its rights due to either a person
obtaining or holding legal right to property which they should not possess due to
unjust enrichment or interference.

A bank may be liable as a constructive trustee where:

i. It receives trust funds with actual or constructive notice were trust funds and
hence has become accountable for them that the transfer of the funds was a
breach of trusty.
ii. The bank knowingly participated in the dishonest and fraud purpose of the
trustees. (see Barnes v Addy -1974)

Quistclose Trusts

A Quistclose trust arises when money is paid to a recipient for a specific purpose, if
that purpose fails the money is held on trust for the payer.The Quistclose trust is
most pertinent on insolvency as this is when it is imperative to decipher if the
creditor in question holds a personal or proprietary right, the proprietary right of
course allowing the otherwise unsecured creditor to bypass the insolvency regime as
the beneficial owner and extrapolate the funds it transferred to the recipient.(See
Barclays Bank Limited v Quistclose Investments Limited-1970).

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Banks duty of secrecy

The account of the customer in the books of the banker records all of his financial
dealings with the latter and depicts the true state of his financial position. If any of
these facts are made known to others, the customer’s reputation may suffer and he
may incur losses also.

The buyer is, therefore, under an obligation to take utmost care in keeping secrecy
about the accounts of his customers.

A banker will be justified in disclosing information about his customer’s account on

reasonable and proper occasions as stated below:

a. Disclosure of Information required by Law

b. Disclosure permitted by the Banker’s Practices and Usages
c. Duty to the public to dislose
d. When the bank’s own interests require disclosure

Banks rights to payment, interest and other charges

Interest

As a creditor, a banker has the implied right to charge interest on the advances
granted to the customer. Bankers usually follow the practice of debiting the
customer’s account periodically with the amount of interest due from the customer.
So long as the banker/customer relationship exists the customer is liable for all
accrued interest whether compounded or not. (see Yournell v Hiernian Bank Limited
(1918).

Bank Charges

The term bank charges cover all charges and fees made by a bank to its customers.
It often relates to charges in respect of personal current accounts. These charges
may take many forms including: monthly account charges, interest in respect of
overdrafts and withdraws made.

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The Banking and Financial Services Act prohibits competitive conduct in the financial
services industry; see section 40

The bank or financial institution is mandated to provide a person who opens a new
account statement of all charges and interests.see section 47

Termination of banker/customer relationship

Banker-customer relationship is a contractual relationship between two parties and it

may be terminated by either part on voluntary basis or involuntarily by the process
of law. These two modes of termination are described below:

i. Voluntary Termination: the customer has a right to close his demand deposit
account because of change of residence or dissatisfaction with the service of
the bank or any other reason and the banker is bound to comply with this
request.

The banker also may decide to close an account, due to an unsatisfactory conduct of
the account or because it finds the customer undesirable for certain reasons.

However the bank can only close an account only after giving reasonable notice to
the customer.see Prosperity Limited v Lloyds Bank Limited (1923) 39 TLR 372

ii. If the Banker desires to close the account: if an account remains un-operated
for a very long period, the banker may request the customer to withdraw the
money. Such step is taken on the presumption that the customer no longer
needs the account.
iii. Termination by Law: the relationship of a banker-customer can also be
terminated by the process and by the occurrence of the following:(a) Death
of a customer (b) bankruptcy of customer (c) Garnishee order and (d)insanity
of customer.

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CHEQUES AND PAYMENT SYSTEM

The Cheque

A cheque can be defined as a bill of exchange drawn on a banker and payable on

demand.See section 2 of the National Payment Systems Act 1 of 2007.

There are three parties to a cheque of exchange these are:

i. the drawer- the person who makes the cheque;

ii. the drawee- the bank that is directed to pay the amount of the cheque
iii. the payee – the person to whom the amount is payable

Each cheque has its own number and the number of the account to be debited with
the amount shown.

The collecting bank

The collecting bank is the bank that collects the proceeds of the cheque from
another bank on behalf of its customer. This is where the payee has deposited a
cheque, and it has a duty to collect the money from the account of the writer of the
cheque.

The collecting bank also has statutory protection in an event or case of fraud or
wrongful payment. This is provided for under section 5 of the Cheques Act cap 424.

The collecting bank can also be liable in negligence see the following:

i. Ladbroke & Co. Todd(1914) 30 TLR 433

ii. Hampstead Guardians v Barclays Bank Ltd(1923) 39 TLR 229 in both cases
the court held that some further check on the identity was necessary and that
the bank had to repay the proceeds of the cheque.
iii. A.L. Underwood Ltd v Bank of Liverpool and Martins (1924) 1KB 775

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The Paying Bank

The paying bank is the banker on whom the cheques are drawn by his or her
customers. Further section 2 of the National Payment Systems Act 1 of 2007 defines
a paying bank as a bank that receives a payment instruction.The statutory protection
on the paying bank is limited against innocent mistakes when paying cheques.

However the paying bank can still be held liable in the following instances;

i. Payment of a post-dated cheque

ii. Payment on a forged or unathourised signature
iii. Wrongful dishonor of a cheque

See section 2 of the cheques Act, Cap 424.

Payment of Cheques

This is done through a cheque book provided by the bank to its customers. The
cheque authorizes the bank to make payment on presentation and to debit the
customer’s account.

The bank owes a duty to the customer to pay cheques drawn by him as long as the
cheques are properly drawn and signed and the account has sufficient funds or
overdraft facility.

Electronic Cheque clearing System

There is no specific legislation that governs payment systems, however the payment
system draws its legal backing from various legislation such as: Bank of Zambia Act
and Banking and Financial Services Act etc.

The clearing process starts with the deposit of a cheque by the customer with
his/her bank hereinafter called” bank 1”. Bank 1 arranges and scans the cheques
and submits it for clearing at the clearing house. Upon receipt of the cheque, the
clearing house communicates to the other bank hereinafter called “bank 2” the will

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fate the cheques and if everything is in order and the banker is satisfied about the
genuineness of the instrument payment is then made to the customer.

The clearing house then sends a report to a department at the central bank for
settlement herein after called “settlement bank”. Bank 1 also sends a report to the
settlement bank once it tallies the settlement bank will then debit bank 2 and credit
bank 1 with the said cheque amount the entire process takes 24hrs. Reference is
made to the diagram below:

Some of the advantages of the electronic clearing system are that; It shortens and
standardise the clearing period across the country to one clearing day (T+1)
meaning value to the cheque is given a day after the cheque is deposited and thus
facilitate early access to funds by customers. It encourage wider usage and
acceptance of cheques as a payment instrument, it also eliminates the cumbersome
physical presentation of cheques by banks to the Clearing House and save time and
costs associated with physical handling of cheques. Further it reduces the risks
associated with manual handling and physical movement of cheques and it also
reduces fraud.

Legal Rules governing the payment of cheques

Termination of Authority to pay;the bank will only pay if the following are in order:
(a) date (b)the payee (c) amount and (d)the signature. The bank has no authority
to pay if any of the about information is unsatisfactory.

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Countermand

Further a customer may revoke the banks authority to pay the cheque in a manner
commonly known as stopped cheque.

The countermand will only be effective if it meets the following:

a. Must be made by the drawer

b. Must be absolutely unequivocal- in writing with necessary and accurate details
c. Must be communicated to the account holding branch.See Curtice v London
City and Midland Bank Limited (1908)

Garnishee Order

This is a court order to the bank not to pay its customer’s creditor the amount owing
but pay to the court in favour of the person that obtains the order.

Injunction/ Mareva injuction

This is a court order that forbids the bank or person from continuing to do
something. It may be issued against the bank to freeze bank account.

Wrongful Debit of an Account

The bank is liable to its customers for the wrongful debit of the customer’s account
in the following situations: (a) where there is customer’s countermand (b) Post
dated cheques and (c) Breach of mandate.

DIRECT DEBIT

This refers to an instruction from a customer to their bank or other financial

institution authorizing it to pay varying amounts from their account to a named
payee. Direct debit are particularly useful for the payment of various recurring bills
such as electricity, water and loan repayments.

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Advantages

i. No additional paperwork when amending amount to b collected

ii. Consistently paid on time enchancing much improved cash flow
iii. The process is cheaper than cheque system

Procedure

The payee agrees with the payer and obtains a mandate detailing the nature of the
payment. This mandate is then passed over to the Payee’s bank that will set up
adirect debit and the payer at the same time informs his bank to accept claims
presented by the payee. See ZECH rules rule 52-3

Electronic Payment Systems

The National Payment System Act (2007) regulates the payment process from payer
to beneficiary including the settlement between banks.

This is achieved by way of the Direct Debit and Direct Credit clearing (DDACC) which
allows payment to be cleared directly to a customer’s account without need for any
paper vouchers.

The payee is the electronically credited with a corresponding debit to the customer’s
account at the paying bank. This has now become common practice with large
employers when paying salaries. See ZECH rules section 46.3

Advantages are that its simple and secure, reduces processing time and costs,
reduces a security risk and costs associated with delivering and collecting cash. It
also reduces fraud and theft.

Automated Teller Machines (ATMS)

These are essentially electronic funds transfer terminals which dispense cash,
handles deposits, transfer funds, pay bills and displays balances on the screen.

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There is an increased risk of fraudulent access to the customer’s account through
theft or loss on ATM cards.

Safeguards against ATM fraud

This is usually done by providing a card holder with a personal identification number
(PIN) which should not be written down or revealed to a third party.

Liability for ATM failure

The banks providing ATM services have a duty of skill and care in carrying out the
customer’s mandate. Also to ensure the machines is well maintained.See Greaves &
Co. (contractors) Limited v Baynham Meikle (1975)

Limitation of Liability

Banks usually include exclusion clause eg the bank cannot be liable when it has no
control over the equipment, such as failure of the internet.ATM overpays-then the
customer holds the overpayment in trust for the bank and the bank can sue for the
payment made under a mistake of fact.

In case of under payment the bank must adjust the customer’s account accordingly
to reflect the actual amount received by the customer.The balance shown on an
ATM screen is a bank representation on which the customer will rely.

Electronic Funds Transfer at Point of Sale(EFTPOS)

This is a form of payment system which allows a customer who has a bank account
to pay for goods and services using a debit or credit card. The transaction involves
the electronic conveyance of details of the transaction to the payer’s banks. The
payers bank then immediately debits their customer and credits the payee’s account.

The debit or credit card is swiped through a terminal which reads the details of the
card holder’s account. The retailer then enters the amount of the transaction which
is confirmed by the card holder by entering a PIN or signing the receipt authorizing
the transactions.
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Payment Process

The EFTPOS system accepts both the debit and credit cards. There are requirements
for this system to work.

i. a terminal in the retailer’s outlet

ii. a message transmission facility ( internet or phone line) linking the retailers
terminal to the bank computer.
iii. A magnetic strip on the debit or credit card which is a machine readable

Further an EFTPOS transaction is online and is completed once approved by the card
issuer; it cannot be countermanded by the card holder. However the problems which
may arise with EFTPOS transactions are as described under ATMs. Liabilities have to
be allocated between the card holder, card issuer, retailer’s bank and retailer
acquirer all dependent on the cause of the problem.

Fraud

If perpetrated by the retailer’s employee, though fraudulent use of a card holder's

card and PIN then the loss falls on the retailer. Where a thief uses the card and PIN
at an outlet the liability to an innocent card holder may be limited. If the EFTOS
system breaks down, then the liability has to be allocated according to fault.

Where the EFTOS transaction fails due to the bank's negligence, the card holder may
sue the bank in libel or defamation.

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UNIT 5:

INSOLVENCY

Insolvency is the state of being unable to pay the money owed by a person or
company as debts become due. Insolvency or liquidation of banks and financial
institutions is regulated by the Banking and Financial institutions Services Act and
Companies Act part VIII cap 388.

Where there is the company act is in conflict or inconsistent with the provisions of
the BFS act as regards insolvency then the BFS Act will prevail. See section 85 BFS
Act.

The Individuals-Bankruptcy Act 1990Section 3(1) provides for different cases of

bankruptcy. Section 18(1) Where a debtor either before or after he has been
adjudged bankrupt intends to make a proposal for a composition in satisfaction of
his debts, or a proposal for a scheme of arrangement of his affairs, he shall lodge
with the official receiver a proposal in writing, signed by him, embodying the terms
of the composition or scheme which he is desirous of submitting for the
consideration of his creditors, and setting out particulars of any sureties or securities
proposed.

In every other case the official receiver shall hold a meeting of creditors, and send to
each creditor, before the meeting, a copy of the debtor's proposal with a report
thereon; and if, at that meeting, a majority in number and three-fourths in value of
all the creditors who have proved resolve to accept the proposal, it shall be deemed
to be duly accepted by the creditors, and, when approved by the court, shall be
binding on all the creditors.

Adjudication

The court shall under the powers conferred by section 20 adjudge a debtor in the
following ways:

i. On the application of the debtor

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 ii. On the application of the official receiver
iii. On the expiry of the time prescribed for appealing against the receiving order

Further Section 28.(1) A bankrupt may at any time after being adjudged bankrupt,
apply to the court for an order of discharge, and the court shall appoint a day for
hearing the application, but the application shall not be heard until the public
examination of the bankrupt is concluded.

On the hearing of the application the court shall take into consideration a report of
the official receiver as to the bankrupt's conduct and affairs (including a report as to
the bankrupt's conduct during the proceedings under his bankruptcy), and may
either grant or refuse an absolute order of discharge, or suspend the operation of
the order for a specified time, or grant an order of discharge subject to any
conditions.

Companies- Companies Act

Winding up is the same as liquidation. The term winding up is associated with the
ending of a company’s life. There are two procedures or methods of winding up
namely compulsory or involuntary winding-up and another procedure is known as
voluntary winding up.

1. Compulsory Winding-Up

This is provided for under section 269 of the Companies Act. Only the High Court of
Zambia has the power to wind-up a body corporate.

i. Persons who may petition for compulsory winding up;

 The members or shareholders

 Any creditor
 Any member of the company
 Any person who is a Personal Representative of a deceased member
 Trustee in bankruptcy
 The registrar of Companies

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Further section 272(1) provides for the grounds for Compulsory Winding Up such as
if the company is unable to pay its debts, where the number of members is reduced
below two.

Commencement of Compulsory Winding-Up by the court is provided for under

Section 273. Presentation of a winding up petition entails taking the petition
accompanied by an affidavit verifying the facts for filing in the Commercial Registry
of the High Court.

The appointment of a Provisional liquidator is provided for in section 280 and rule 8
of the Winding-up rules. Rule 8 also entitles a petitioner, a creditor to make an ex
parte application for an appointment of provisional liquidator.

Effect of Commencing Winding-Up

Once the petition has been presented to the High Court any Disposition of the
property of the company including things in action, and any transfer of shares or
alteration in the status of the members of the company shall be void unless the
Court otherwise orders. See section 277. Further section 275(1) provides that on the
hearing of the winding-up the judge can either dismiss the petition or adjourn the
hearing conditionally or unconditionally.

Section 279(1) provides for the registration of the winding up order. One copy is to
be served before the Registrar and another to be published in the Government
Gazatte within 15days.

Powers of the liquidator are provided for in section 289 and liquidators remuneration
is covered under section 285 (1).

Voluntary Winding-Up

Voluntary winding up is provided for under sections 304 to 360 of the Companies
Act. It’s voluntary winding up because the company itself initiates the procedure.
Circumstances in which a company may be wound up voluntarily are provided for
under section 305.

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Consequences of passing a winding up resolution

Once a company has passed a winding u resolution, it must cease carrying on

business except so far as may be deemed necessary for the beneficial winding-up
thereof. The corporate state of the company as well as its corporate powers
continues until the company is actually dissolved.

A members’ voluntary winding up only takes place when the company is solvent.
The liquidation is entirely managed by the members who also appoint a liquidator.
The company is also required to file a declaration of solvency. (see section 308)

Appointment of Liquidator

The members will also pass an ordinary resolution appointing a liquidator as they
pass a special resolution to wind up the company. Once a liquidator has been
appointed, all the powers of the directors will cease except so far as the liquidator,
or the company by ordinary resolution with the consent of the liquidator, approves
continuance thereof. (See section 310)

Pecking Orders

Section 346 gives the breakdown of how the debts and liabilities of the company
should be paid by the liquidator when there is winding up. Where the liquidator is
not sure about the exercise of his powers he should apply to the High Court for
guidance.

Final Dissolution of a Company

Dissolution will occur where the liquidator has presented the final report to the
Registrar of Companies and the company will be struck off from the register and the
same shall be notified in the Government Gazette, upon which the company shall
stand dissolved as the date of the publication of the notice in the Gazette.

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Banks – Banks and Financial Services Act

According to section 86 insolvency is a bank or financial institution is insolvent when

it ceases to be able to meet its obligations as they fall due or when its assets are
insufficient to meet its liabilities or the amount of its regulatory capital requirement
prescribed by the Bank of Zambia of is nil or lower.

Acceptance of deposits by insolvent banks

Section 87. (1) provides that a bank or financial institution shall not, while insolvent
(a) receive any deposit; or (b) enter into any new, or continue to conduct any
existing, banking or financial service business, as the case may be, except that
which is incidental to the orderly realisation, conservation and preservation of its
asset.

Powers of Bank in relation to insolvent financial institutions

87A Where a financial institution licensed under this Act becomes insolvent the Bank
of Zambia shall take possession of the institution in accordance with the provisions
of paragraph (a)of subsection (2) of section eighty-one;

(b) if it is not a company under the Companies Act but is subject to the
supervisionor control of another authority, the Bank of Zambia shall revoke its
licence andgive directions to the appropriate authority to place the institution
intoliquidation or dissolution; or

(c) if it is a body established by written law, the Bank of Zambia shall revoke
itslicence and may recommend to the relevant authority that the institution beplaced
into Liquidation or dissolution.

Approval of Bank of Zambia required for voluntary winding up

Sectio 88. (1) provides that a bank or financial institution shall not, except with the
approval of the Bank of Zambia, pass any resolution for voluntary winding up or
dissolution under the Companies Act; or under any other written law; and where a

28
bank or financial institution passes a resolution for its voluntary winding up or
dissolution, it shall record the date, hour and minute of the passing of the resolution.

(2) The Bank of Zambia shall grant approvals to a voluntary winding up on such
terms and conditions as it may determine and only if it appears to the Bank of
Zambia that the bank or financial institution is solvent and has sufficient liquid assets
to repay its depositors and all its other creditors in full and without delay

Duties of bank or financial institution on voluntary liquidation

These include; (a) immediately surrender its licence to the Registrar, cease to do
business and thereafter exercise its powers only to the extent necessary to effect its
orderly winding up or dissolution (b) repay in full its depositors and other creditors;
and (c ) wind up, all operations undertaken prior to the receipt of the approval.

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UNIT 6:

LEGAL ASPECTS OF SECURITY

Definition and justification for security

A security is an interest or right or an asset pledged to guaranty the repayment of a

loan.The objective of the security is to protect the creditor against the debtor’s
failure to repay the loan.

Taking Securities from Companies

Fixed Charges

Fixed charges are the charges that are held against some specified tangible assets.
The charges are raised immediately after it makes a deal with a bank, especially
when it gets a loan. The bank has a right to take the asset and use it for retrieving
the missing amount usually through auction of the assets if the company fails to
adhere to the contract loan terms. (see Lllingworth v Heuldsworth (1904)

Floating Charges

A floating charge is a charge that is held over some company properties as security
for a loan from a bank and the company is only allowed to trade the property and
then replace it with new one.

The company is not allowed to sell the property to a point where it does not any
more tangible assets. In this form of charge there is no specified asset that is used
as security and the company may lose any of its property in case of a default.(see
Evans v Rival Granite Quarries Ltd[1910].

Registration of Charges

Section 99 Companies Act provides for the registration of charges over property or
undertaking of a company should be registered with the Registrar of

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Companies.Furthermore section 101 provides the priority in relation to another by
the order of creation as to times and dates competing charges.

Administration for foreclosed security

The floating may crytallise in circumstances where the company ceases its business,
if the company is wound up and if some event happens provided for in the
agreement.An official receiver may be appointed through the courts. The Official
receiver is an Officer of the Court and is not subject to the direction of the creditor in
whose interests he was appointed. His duties are to realise as much as possible from
the disposal of the Company assets so as to satisfy the outstanding debt for the
creditor on whose behalf he was appointed.

Types of Security

Security means the acquisition of rights over property which the bank has taken to
support a borrowers undertaking to repay.

(a) Real property comprises of freehold interest in land

(b) Personal property also called chattels cover all other aspects of a
person’s property.

Attributes of good security

The bank should not only take Security but that which has good attributes and easily
realisable.

(i) Value: should be stable and easy to quantify.

(ii) Checking title and charging thesecurity:should not be costly,complicated
and lengthy
(iii) Easy to protect
(iv) Easy to realise

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GUARANTEES

A guarantee is a contract by which a promisor otherwise known as a guarantor or

surety undertakes to be responsible to the promise for the debt or default of another
person known as a principal debtor or borrower. There are three persons involved
the lender, borrower and guarantor (surety).

A guarantee has to be in writing and should incorporate words such as I AGREE….or

I HEREBY UNDERTAKE…

Where an individual guarantees a borrowing by executing a deed and providing

some form of collateral over his property.

Another type is a Joint/ Co-guarantors where two or more parties jointly give a
guarantee. The bank guarantee form will normally have a joint and several liability
clause such that in case of default by the principal debtor, the joint guarantors
become liable for the entire debt both as individuals and as a group. See National
Provincial Bank v Brackenbury (1906)

Duties of the Bank

The bank owes the guarantor the following duties:

i. To accurately inform the guarantor about the extent of the liability involved
ii. To inform the guarantor and correct any misapprehension regarding the
principle debtor’s status.

Guarantor’s Rights

(i) To require the lender to pursue the principal debtor to pay the debt before
calling on the guarantor.
(ii) Is entitled to a re-imbursement from the principal debtor if he has paid off
the debt on his behalf.
(iii) The right to benefit from any security held by the lender

Discharge of a Guarantor
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 (i) When the principal debtor pays off the debt
(ii) When the customer cancels the debt

PLEDGE

Pledge means bailment of goods for the purpose of providing security for payment
of debt or performance of promise.

There should be delivery of goods (bailment). The bailment (delivery of goods) must
be by or on behalf of the debtor. The bailment (delivery of goods) must be for the
purpose of providing security for the payment of a debt or performance of a
promise.

A pledge gives the lender the right to exclusive possession of the pledged property
until the debt is discharged even though ownership remains with the pledger.

The lender has no right to dispose of pledged property in case of default unless with
a court order.

MORTGAGE

A mortgage is the transfer of interest in specific immoveable property, for the

purpose of securing the payment of money advanced or to be advanced by way of
loan, on existing or future debt or the performance of an engagement which may
give rise to a pecuniary liability.

From the above definition of mortgage, the following are the requirements of a
mortgage: There should be transfer of interest in the property by the mortgagor (the
owner or lessor).The transfer should be to secure the money paid or to be paid by
way of loan.

Types of Mortgages

(i) A legal mortgage is that which is based on law or where the

disposition (transfer) is in accordance with the provisions of the
law.
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 (ii) An equitable mortgage is one which concerns an equitable interest
in land which is not based on law but on common sense or mere
goodwill

Functions of security

The major objective of security is to protect the creditor against the debtors default
on loan repayment. Its function is comparable to insurance against unforeseen and
unforeseeable circumstances.Good security needs to have value, and be stable and
easy to quantify. It should not be too costly, easy to realise

Types of security arrangements

Security can also be classified according to the nature of the arrangement entered
into between the bank and the customer.

(i) Transfer of whole ownership

This is where the customer (debtor) transfers the whole ownership of the property
to the bank(creditor) with the agreement that it shall revert to the customer once
the debt is repaid.

(ii) Transfer of Possession

This is where the customer gives the bank mere possession and not ownership of
the security. This prevents the customer from disposing off the property.

(iii) deposit of documents of title

This is where documents of title such as title deeds to land or share certificate can
be deposited by the customer with the bank until repayment of a debt. If debt is not
paid the bank has a right to seek a court order for sale of the property.

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SHARES AND STOCKS

A share is defined as a unit of ownership interest in a corporation or financial asset.

There are different classes of shares these include; Ordinary Shares (see section 17
Companies Act Cap 388) and Preferential shares.

A stock is a type of security that signifies ownership in a corporation and represents

a claim on part of the corporation's assets and earnings.

Advantages of stock and shares as security

(i) the customer's title to the securities can be easily ascertained

(ii) the current value can easily be ascertained
(iii) the security can be taken with little difficulty

Disadvantages of stock and shares as security

(i) fluctuations in market prices

(ii) partly- paid shares maybe forfeited for non-payment of calls.

A legal mortgage is effected by transferring legal title to the shares to the bank by
way of delivery of the share certificate and a completed shares transfer form. Non
payment will enable the bank sell the shares and recover the advance.

An equitable mortgage is effected by mere delivery and deposit of the share

certificate with a memorandum of deposit. The bank usually takes a blank transfer
so that in case of non repayment, it can transfer legal owner and realize the
securities.

Discharging the mortgage

Legal Mortgage: title to the shares must be re-transferred from the bank to the
mortgagor.

Equitable Mortgages: the certificates are returned to the customer and the
memorandum of deposit and bank transfer are destroyed.

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LAND

Land law encompasses both the visible surface of the earth and everything above
and below the surface. This means it includes minerals, buildings, airspace etc.

Registered land is that land which has title whose proof is held by the land and
deeds registry. The evidence of title is by way of certificate of title.

BANKER’S LIEN

A lien is a creditor's right to retain possession of property belonging to a debtor until

the debt is repaid. In banking law it arises where a customer is indebted to a banker
by way of loan, overdraft or other credit facility.

See Brandao v Barnett(1846)12CI & Fin787

Exercising a Lien

A banker can exercise a lien over all of the customers documents deposited with it
as security to a loan or overdraft or other credit facility. However documents kept for
the purposes of safe custody are excluded from a lien as safe custody gives rise to a
contract of bailment.

The banker’s lien arises by operation of law as there is no initial intention by the
parties that a lien be created. A banker’s lien will not arise in the following
circumstances:

(i) where there is an agreement by the parties to exclude it.

(ii) The securities held in safe custody
(iii) where the bank knows that the securities are held by its customer as trustee.

……………………………………………………………………………………

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