Nominations by bank customers

By Viraja Wanasinghe

Bank customers may enter into various kinds of transactions with their respective financial institutions. In dealing with these transactions, the issue of such customers making nominations as regards third party beneficiaries crops up time and again. This process may be complicated by the fact that at the same time, these customers might make last wills and leave these very same properties to their heirs or to other third parties who might not be their nominees. Such a situation could give rise to much legal conflict and it is in everyone’s best interests concerned that the true legal position be ascertained.

If any person maintains a savings account, has a fixed deposit, or own treasury bills or treasury bonds or has deposited jewellery and other valuables in his bank, the officer handling the account might ask him whether he wishes to nominate any person as his nominee for these assets.

As many bank customers do not know what a nomination entails, it would be useful if they are made aware of its value and significance so that they know exactly what they are getting into when they sign a nomination form at their bank.

At the outset, it must be made clear that nominations cannot be made with regard to current accounts.

The procedure or process of making nominations in the above manner comes within the purview of the Civil Procedure Code of the country. This Code lays down all procedures and processes that must be followed in a court of law when dealing with civil actions of all kinds.

Section 544 of the Civil Procedure Code deals with the legal aspect of making nominations to accounts.

Section 544 (1) states that any person over 16 years of age who has:

Moneys in any account other than a current account in any licensed commercial bank or specialised bank,

Shares in any company registered under the Companies Act,

Any life insurance policy issued by a recognised insurance company

Any money in deposit with any recognised finance company

Any movable property lodged in any licensed commercial or specialised bank

may nominate any person (called the nominee) of his choice who will be paid the dues payable under (a) to (d) or the movable properties under (e) above in the event of the death of the person/account holder in question.

This nomination procedure  was introduced in 1993 to the Civil Procedure Code under an amendment ( Act No 14 of 1993 ) for the purpose of  streamlining the existing processes and procedures in Banks  as well as  other financial  institutions  such as Finance Companies and other institutions such as Insurance Companies with regard to savings accounts,  fixed deposits and life policies .

 A further amendment  was made to section 544 (1) above in 2005 by the Civil Procedure Code  (Amendment) Act No 4 of 2005 where the section was extended to cover instruments pertaining  to any monetary interest issued by a company or any other body of persons. 

It must be pointed out that while the above section deals with a situation where a single person is nominated as a nominee, there are instances where customers have nominated not one, but several persons as their nominees. In view of this practical difficulty, as a viable solution, the section may be interpreted as including the singular as well as the plural.

Also, this may give rise to many operational difficulties for banks and other financial institutions. In such instances the bank should insert an appropriate survivorship clause in the nomination form to avoid complications in the event one nominee dies and the others survive.

Another fact that must be pointed out is that it is not compulsory for a customer to nominate any person as his nominee, as the above section clearly states that, a customer ‘may’ nominate any person as his nominee. It is clear that according to the section, he has a discretion or choice in the matter. If the word ‘shall’ had been inserted there instead of the word ‘may’ then the customer will be under a compulsory requirement to make a nomination. In view of the above, a customer is perfectly within his rights in informing his Bank that he does not wish to make a nomination at all.

Revocation of nomination 

A nomination may be revoked at any time by the customer or by the death of the nominee.

At this juncture, due to the discussion regarding last wills above, it would be pertinent  for clarification purposes to  briefly discuss the law pertaining to this area as well as situations where a person dies without leaving a will. 

Testate and intestate succession:

When a person with any assets dies, such assets will have to be distributed among his heirs, if any. 

However a person’s properties cannot be distributed among his heirs as they see fit but according to the law as laid down by a court of law after a full inquiry has been held.

The accepted legal procedure in this area is that when a person dies leaving assets (both immovable and movable) exceeding the sum of Rs. 4,000,000 in value then the first step that has to be taken is to discover whether he has left a last will.

If he has left a last will then his heirs will have to file a testamentary action in court, produce the will and get it proved. Thereafter the executor appointed by court distributes the assets according to the directions given in the last will under the supervision of court.

This legal procedure is referred to as testate succession.

However , if it is found that he has not left  a last will , then  here too the heirs have to file action in court where they have to prove that the person in question had left certain properties and that they are his lawful heirs. This procedure is different from that followed in testate succession above where a last will was made.

Once the assets and the heirs have been properly identified, then letters of administration are issued and an administrator distributes the assets as decided by court to the heirs identified in the inquiry held.

The legal procedure involved is called intestate succession. 

The bank’s duty of care

It must be kept in mind that a bank has a legally imposed duty of care towards its customers and it will carry out a thorough inquiry where an heir or a nominee makes a request for the monies lying in a deceased customers account to be released to their custody.

As regards a request made by an heir, all documents pertaining to the testamentary case filed in court will be examined by the bank at length before the monies are released.

As regards a nominee, the bank needs to be satisfied as to the true identity of the nominee, before it releases the assets.  

Nomination supersedes the last will

An important aspect that has to be kept in mind is that section 544(2) states that such nomination takes effect on the death of the person/account holder concerned notwithstanding anything in his last will to the contrary.

The word ‘notwithstanding’ is of importance here and understanding its true meaning is of crucial value.

Read in its entirety, section 544(2) appears to have only one reasonable and acceptable meaning, that is, that a nomination made by a bank customer would override or take precedence over what he has laid down in his last will.

This would mean that the nominee would be given preference over the heirs as named in the last will. In other words, he would have a priority claim to the customer’s monies lying at the bank or other institution as opposed to an heir under a valid last will.

That is, in a situation where a customer has nominated a person as his nominee for his savings account and has also left a last will where another person is named as his heir for the same account, in the event of the customers death, the nominee has the right to the monies lying in the account over and above the right of the heir.

In such an instance the bank cannot be taken to court as it has acted within the scope of section 544(2) by releasing the monies to the nominee instead of to the heir and is legally in a strong position of having acted within the law.

In some situations the nominee and the heir may be one and the same so there is no conflict. 

Many customers appear to be ignorant of the provisions of section 544 above probably due to the fact that it is contained in the Civil Procedure Code which is not something coming within the knowledge of the general public and many were under the erroneous impression that the last will took precedence over any nomination.

Conclusion

In view of the above situation, as most customers are ignorant of the application of section 544(2), it is recommended that where a particular customer wishes to appoint a nominee, the Bank should also; in all fairness inform the customer that his nominee will override even his heirs named in his last will in the event of his death.

(Please note that any opinion and the information presented herein are that of the author’s. The author is currently holding the post of senior legal officer at a leading commercial bank and, counts nearly 25 years of experience as an Attorney at Law, mainly in the fields of banking and labour law. He holds an LLB from the Faculty of Law, University of Colombo and an MBA in Human Resource Management from the Faculty of Management and Finance, University of Colombo.)