Banking News

Bank accounts of lunatic and insolvent persons


Dealing with accounts of lunatic and insolvent persons remains a delicate job for bankers. Whenever bankers learn that one of their customers is incapable of operating the account due to mental incapacity or if there is an insolvency petition filed in the court, the operation in such customer’s account shall be immediately stopped.

While dealing with such accounts, bankers need be to extra careful.  Any act of stopping the operation by the bankers on wrong information received by them may put them in embarrassment and difficulty.

Accounts of lunatic persons
Lunatics are persons of unsound mind.  A contract with the insane person is ab-initio void. Banks are  in such cases relied upon the ‘Guardianship Certificate’ issued either by the District Court under Mental Health Act 1987 or by the Local Level Committees set up under “Mental Retardation and Multiple Disabilities Act 1999”.

Though the persons of unsound mind are disqualified from contracting, the disqualification does not apply to contract already entered into by lunatics, during the period of their sanity or contracts which are ratified by them during such period.  The banks upon receipt of a notice that a customer of their bank has been declared incapable stop the operation immediately in the customer’s account. Whenever banks learn that the customer is suffering from mental incapacity and no declaration is received by them on his mental health, the Bank Manager will make proper enquiry and then suspend the operation in the account till the customer is recovered from his illness.

Bankers as a matter of abundant precaution will write a letter to the hospital where he is admitted or to his attending doctor if he is at home. The operation in the account will be allowed or stopped only on the basis of doctor’s certificate or a court order.

If a Power of Attorney is operating the account, the authority to operate the account when customer himself becomes mentally incapable to operate the account.  The same rule applies to the operation of account with joint names, when one of them becomes mentally incapable, the operation in the account will be stopped.

Mentally retarded persons are eligible for bank finance:

The govt made an act especially for mentally retarded and as per provisions of that act, public sector banks must extend loans to the persons suffering from austim, retardness.

However, as said earlier ‘Lunatics’ are persons of unsound mind. A contract with the insane person is void ab-initio. Therefore bank cannot directly grant the loan to a mentally retarded person. The legal guardian can avail of such loan on behalf of the mentally retarded person. Sec 53 of Mental Health Act 1987 provides for persons belonging to the category of mental illness.The ‘Guardianship Certificate’ issued either by the District Court under Mental Health Act 1987 or the District Level Committees set up under “Mental Retardation and Multiple Disabilities Act 1999”. It is IMPORTANT to note that PARENTS of the mentally retarded person of 18 years of age shall have ‘Guardianship Certificate’ to avail financial assistance for such disabled person.

Accounts of insolvent persons

When an insolvency petition has been filed in the Court, in respect of a customer of the bank, the bank shall immediately stop paying cheques drawn by the customer irrespective of cheque dated before or after the date of the petition. Once the customer is adjudicated as insolvent by the Court, the relation between the bank and insolvent customer stands terminated. All assets of the insolvent person vests with Court Receiver/Official Assignee appointed by the Court ,who would distribute (administer ) the assets of the insolvent to the Creditors as per procedure laid down in the Presidency Towns Insolvency Act 1909/ Provisional Insolvency Act 1920. No account should be opened in the name of an un-discharged insolvent. Minors, Lunatics, Corporations cannot be declared as insolvent.

CLICK for Related article: Guidelines-on-opening-and-operating-bank-account-by-mentally-ill-persons

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