Current Account

Posted on by user

Introduction
The Current Account is the operational backbone of commercial banking in India. It is the bank account used predominantly by businesses, firms, professionals and high-frequency transactors for day-to-day receipts and payments. Legally and commercially it is characterised by (i) transactional frequency, (ii) usually no interest paid by the bank (unless contractually agreed), (iii) an overdraft or credit facility in many cases, and (iv) the centrality of negotiable instruments and electronic payment systems (cheques, RTGS/NEFT/IMPS/UPI). For litigators and banking counsel the current account gives rise to a dense body of contractual, statutory and regulatory issues — cheque dishonour and criminal liability, banker’s lien and set-off, disclosure and KYC obligations, closure and dormant account disputes, and consumer/regulatory complaints. This article sets out the core legal framework and the practical use and strategies for practitioners.

Core Legal Framework
There is no single statutory definition of “current account” in Indian law; the concept is a product of banking practice, contract law and regulatory regulation. The principal legal instruments and provisions that govern disputes and operations involving current accounts are:

  • Banking Regulation Act, 1949: Governs banking business generally (definition of “banking” and supervision of banks). Key for regulatory compliance and the contractual relationship between bank and customer.
  • Reserve Bank of India (RBI) Directions and Master Circulars: RBI Master Directions on Know Your Customer (KYC) and AML/CTF (e.g., the Master Direction — Know Your Customer (KYC) Direction) and the Ombudsman Scheme (Reserve Bank of India — Ombudsman Scheme) set operational and compliance standards for opening, operating, freezing or closing accounts.
  • Negotiable Instruments Act, 1881: Cheques drawn on current accounts are governed by the NI Act; Section 138 (dishonour of cheque for insufficiency of funds) is the most litigated provision arising from current account operations.
  • Payment and Settlement Systems Act, 2007: Regulates electronic payment modes (RTGS/NEFT/IMPS/UPI) used to transfer funds from current accounts and allocates liabilities between system participants.
  • Prevention of Money Laundering Act, 2002 and the Prevention of Money‑Laundering (Maintenance of Records) Rules, 2005: Impose record‑keeping, client identification and reporting obligations on banks opening and maintaining current accounts.
  • Consumer Protection Act, 2019 and Banking Ombudsman Scheme: Give customers remedies against maladministration, refusal to operate accounts, delayed processing of instructions, erroneous debits and deficiency of service.
  • Deposit insurance: DICGC insures eligible deposits (including current accounts) up to the statutory limit (check current insured sum), which is practically relevant in insolvency/dissolution scenarios.

Practical Application and Nuances
How current accounts function in judicial work and everyday bank litigation — concrete issues and required evidence.

  1. Opening and KYC disputes
  2. Practical issue: Validity of account opening, signature authority, and beneficial ownership are contested when disputed transactions occur.
  3. Evidence to obtain: Account opening form (AOF), KYC documents, mandate and board resolution (for companies), proof of identity/address, specimen signatures, authorisation limits, email/SMS authorisations, scanned copies, and internal “Know Your Customer” due diligence notes. Under PMLA rules, banks must maintain records — request certified copies.

  4. Litigation tip: Challenge or defend by focusing on whether the bank complied with its KYC and customer identification obligations. If KYC gaps exist, the bank’s defence of acting on customer instructions weakens.

  5. Cheque operations and Section 138 prosecutions

  6. Practical issue: Drawer of cheque from a current account and cheque dishonour proceedings; bank’s role in clearing and issuance of cheque return memo.
  7. Evidence required for prosecution: Cheque(s) original, bank memo describing reason for dishonour (insufficient funds, account closed), customer’s bank statement showing particulars, demand notice (Section 138 requirement), proof of delivery of notice (postal receipt/acknowledgment), and that payee had a legal right to the amount.
  8. Defence lines for accused drawer: forged signature, cheque issued in discharge of debt not due, cheque misled by payee, stopped payment within permissible time, account had funds but bank’s mistake, or lack of mens rea where payment system/crediting errors are demonstrable.

  9. Practical counsel: For complainants, preserve the original cheque and return memo; obtain the bank’s certified copy of the ledger and clearing records (images). For accused, obtain the bank’s clearing cycle records, cut-off times, witness testimony from bank officials, and expert opinions on signature.

  10. Overdrafts and running accounts / suits for recovery

  11. Practical issue: Bank sues for recovery of overdrawn balances or draws upon security; borrower disputes balance or contends set-off.
  12. Evidence required: Running account statements, od facility letters, sanction letter and terms, overdraft notices, interest/fees calculations, correspondence authorising/closing overdraft.

  13. Strategy: Banks must prove contract, balance and lawful set-off of lien. Customers may attack interest computations, unilateral changes to charges (must conform with contractual notice and RBI disclosure), and unlawful levy of penal charges.

  14. Bank’s lien, pledge and right of set-off

  15. Legal position: Banks routinely exercise a right of set-off and possess a banker’s lien over assets subject to contract or statutory limitations. A lien or equitable charge must be shown by bank if it is alleged; express contractual lien is strongest.
  16. Practical proof: Mandate/terms of account, specific pledge or hypothecation documents, mark‑to‑file entries for lien/reservation, notices to customers of exercise of lien.

  17. Tactical point: Where third party claims funds in a current account (garnishee or injunction), the bank must balance competing claims and may interplead or retain funds pending adjudication.

  18. Closure, dormancy, inoperative accounts and freezing

  19. RBI prescribes classification of accounts as inoperative/dormant after specified inactivity. Closure or freezing often triggers litigation.
  20. Evidence: Customer instructions for closure, bank’s notice and statutory timelines, communication logs. For freezing on AML concerns, banks must show requisite internal approvals and reliance on PMLA/Sectional grounds.

  21. Practitioner tip: When representing customers, press for production of closure/ inactivity notices and compliance with circular timelines; for banks, show contemporaneous risk assessments and official orders.

  22. Electronic transfers, payment system errors and system frauds

  23. Issues: Wrong beneficiary payments, duplicate debits, cyber frauds and unauthorised transactions from current accounts.
  24. Statutory framework: Payment and Settlement Systems Act; RBI operational circulars; banks have grievance mechanisms and time-bound investigation obligations.
  25. Evidence: Message logs, transaction timestamps, SWIFT/IMPS/NEFT/RTGS logs, call recordings authorising transactions, IP logs for internet banking, device metadata for UPI.
  26. Practical tip: Preserve logs immediately; treat such suits as cases requiring urgent injunctions or interim relief and forensic analysis.

Landmark Judgments
(The following are representative principles that Indian courts have developed in disputes arising from current accounts — practitioners should cite updated case law and report citations for pleading and argument.)

  • On cheque dishonour and Section 138: Courts have repeatedly emphasised the procedural requirements for a valid Section 138 prosecution — existence of a legally enforceable debt/ liability, prescriptive demand, and opportunity to pay. The documentary trail (original cheque, return memo, bank statement and Section 138 demand notice served by registered post/acknowledgment) is decisive. Courts also scrutinise bank records to determine whether insufficiency of funds was genuine or a clearing/ bank error.

  • On banker’s lien and set-off: Judicial authorities have recognised an implied contractual right of set-off in the banker‑customer relationship where a clear indebtedness exists; however, the exercise of lien/set-off must be exercised in good faith, in accordance with contractual terms, and must not prejudice third parties. When a bank asserts a lien over securities or pledged goods, courts demand contemporaneous documentation and actual control over the asset.

  • On KYC and AML obligations: High Courts and appellate bodies have emphasised that statutory/regulatory obligations under PMLA and RBI KYC directions are not mere formalities. Failure by a bank to comply with KYC and record‑keeping obligations can attract regulatory censure and may be material in civil/criminal disputes that revolve around the legitimacy of transactional flows.

(Practitioners must rely on the most current reported decisions for precedent and to extract page-precise citations for pleadings. Leading law reports and SCC Online should be consulted to identify the latest controlling judgements.)

Strategic Considerations for Practitioners
How to leverage the doctrine of current accounts and avoid common pitfalls.

For Plaintiffs / Complainants (Payees, Creditors, Customers)
– Preserve originals: Retain original cheque(s), bank return memos, AOF and mandate. Seek immediate preservation orders where deletion of electronic logs is likely.
– Fast action on Section 138: Ensure demand notice is properly drafted; proof of notice delivery is critical. A defective notice is a procedural defence that courts regularly uphold.
– Choose forum strategically: For service deficiency or erroneous debiting, consider both the Banking Ombudsman (fast, cost‑effective) and consumer fora for higher compensation; for cheque dishonour, criminal court under Section 138 is appropriate.
– Plead bank’s breaches: If the bank failed KYC, mis‑applied set‑off or erroneously debited the account, plead regulatory contravention under RBI directions and PMLA to strengthen damages claims.

For Defendants / Account Holders (Accused of dishonour, disputing bank’s claims)
– Attack the bank’s records: Seek production of clearing images, MICR/CTS data, payment system logs and ledger entries. Issues like time‑stamps, double crediting, or simultaneous transactions can change the narrative.
– Raise jurisdictional/regulatory defences: For complaint under Section 138, prove absence of legally enforceable debt or the existence of true accord/adjustment. Challenge the sufficiency of the demand notice.
– Use interim reliefs: When banks freeze accounts citing AML or fraud, urgent interim relief in High Court may be necessary; parallel writ remedies can compel the bank to disclose the basis for freezing.
– Reconcile accounts early: Where commercial disputes are about balances, propose expert accounting reconciliation or arbitration if the contract has an arbitration clause.

For Banking Counsel
– Documentation discipline: Maintain contemporaneous sanction letters, ledger narratives, internal approvals for freeze/closure, and audit trails for set-off and lien. Courts give weight to internal records that are contemporaneous.
– Follow regulatory processes to the letter: Non‑compliance with RBI directives (e.g., KYC, dormant account norms) is an effective line of attack for the customer.
– Client counselling: Advise clients (banks) on proportionality and communication before unilateral closure/freeze; give written notice and offer remediation path where possible to avoid consumer claims.

Common Pitfalls to Avoid
– For complainants: Relying on photocopies or incomplete bank statements without certified copies; late issue of demand notice in Section 138 matters; treating the Banking Ombudsman route as exclusive.
– For banks: Poor record‑keeping, failure to produce clearing images or logs, non-adherence to specified notice periods before closure, arbitrary levy of charges without contractual basis, and failure to follow KYC/AML norms.
– For both sides: Underestimating the value of forensic evidence (transaction logs, device metadata) in electronic payment disputes.

Conclusion
Current accounts are operationally simple but legally complex. Disputes arising from them typically pivot on documentary proof (AOF, mandates, statements, clearing memos, system logs), regulatory compliance (RBI KYC and AML directions, Payment Systems rules) and precise tactical choices (criminal prosecution under Section 138, civil recovery, consumer/ombudsman complaints). Practitioners must prioritise early preservation of originals and electronic logs, scrutinise KYC and mandate documentation, and tailor forum and relief to the transaction’s character. Mastery of bank operational processes — clearing cycles, ledger notations, suspension/closure workflows and electronic message formats — is as important as mastery of statute and case law in achieving favourable outcomes.