Published on

May 28, 2026

Malaysian Banking Law – Fiduciary Relationship Between Banker and Customer

Malaysian Banking Law – Fiduciary Relationship Between Banker and Customer
Introduction
Generally, the banker-customer relationship is contractual and debtor-creditor in nature. However, in certain situations, the bank may also owe fiduciary duties to its customer. A fiduciary relationship arises where the customer places trust and confidence in the bank and the bank is expected to act honestly, loyally, and in the customer’s best interests.
Fiduciary duties commonly arise when the bank acts as an adviser, agent, or trustee for the customer. In such situations, the bank must avoid conflicts of interest, avoid making secret profits, and must not take unfair advantage of the customer.


When Fiduciary Duties Arise
A bank may owe fiduciary duties where it acts as an adviser to the customer, especially in investment matters. For example, when a bank advises a customer on investments or financial products, the customer may rely heavily on the bank’s expertise and judgment. In such circumstances, the law may impose fiduciary obligations on the bank.
Fiduciary duties may also arise where the bank acts as a trustee over trust funds. Some funds may be held under an express trust, while others may become subject to a constructive trust imposed by equity.
An express trust exists where the trust relationship is clearly created by agreement or intention. A constructive trust, on the other hand, arises by operation of law where fairness and justice require the bank to hold property or funds for another person.


Duty to Avoid Taking Undue Advantage
Sometimes courts impose fiduciary duties on banks where equity requires the bank not to take unfair advantage of its customer. This usually happens where the bank’s interests conflict with the customer’s interests.
The bank must therefore:

• act honestly;
• act in good faith;
• avoid conflicts of interest;
• avoid secret profits; and
• avoid abusing the customer’s trust.

Woods v Martins Bank Ltd & Anor
The case of Woods v Martins Bank Ltd & Anor illustrates how fiduciary duties may arise in banking relationships.
In this case, the bank granted a large overdraft facility to a company. The bank later advised Woods to invest money in that same company. If Woods invested in the company, the company would be able to repay its debt owed to the bank.
The court held that the bank had breached its fiduciary duty because the bank placed itself in a position of conflict of interest. The advice given to Woods was not entirely independent because the bank stood to benefit personally if the investment succeeded.
The bank therefore failed to act solely in the customer’s interests and improperly placed its own interests above the interests of the customer.


RHB Bank Bhd v Kwan Chew Holdings Sdn Bhd
In contrast, the Federal Court in RHB Bank Bhd (substituting Kwong Yik Bank Bhd) v Kwan Chew Holdings Sdn Bhd held that the bank did not owe fiduciary duties in the particular circumstances of the case.
The bank appointed accountants as co-signatories to cheques issued by the customer company. The customer argued that this created a fiduciary relationship.
However, the court rejected the argument and held that the relationship remained commercial in nature. The bank was merely protecting its financial interests as a lender and had not assumed fiduciary obligations toward the customer.
This case shows that fiduciary duties do not automatically arise in every banker-customer relationship. Courts will examine the facts carefully before imposing fiduciary obligations on banks.


Conflict of Interest
One of the most important fiduciary duties is the duty to avoid conflicts of interest. A fiduciary must not place himself in a situation where personal interests conflict with the interests of the customer.
In banking practice, conflicts of interest may arise where:

• the bank promotes products that benefit the bank financially;
• the bank receives undisclosed commissions;
• the bank acts for multiple parties with conflicting interests; or
• the bank gives advice that indirectly benefits itself.

Banks are therefore required to identify, avoid, manage, or disclose situations involving actual, perceived, or potential conflicts of interest.


Fiduciary Duties in Agency Relationships
Sometimes banks act as agents for customers, particularly when carrying out instructions, managing investments, or conducting specialised transactions. In such situations, fiduciary duties may arise because agents are expected to act loyally and honestly for their principals.
The bank must therefore:

• avoid secret profits;
• disclose conflicts of interest;
• act within authority; and
• prioritise the customer’s interests where fiduciary obligations exist.

This demonstrates that agency relationships in banking may involve both contractual duties and fiduciary duties simultaneously.


Critical Analysis
Courts are generally cautious about imposing fiduciary duties on banks because banks are commercial institutions and not trustees in ordinary banking transactions. The normal banker-customer relationship is primarily contractual and debtor-creditor in nature.
However, modern banking increasingly involves investment advice, wealth management, and financial advisory services. As banks become more involved in advising customers, the possibility of fiduciary obligations becomes more significant.
The courts therefore attempt to balance:

• commercial banking practicality; and
• protection of customers from abuse of trust.

Fiduciary duties are more likely to arise where:

• customers place special trust in the bank;
• the bank exercises influence or discretion;
• advisory services are provided; or
• conflicts of interest exist.

On the other hand, ordinary banking services such as accepting deposits or processing payments usually do not create fiduciary relationships.


Conclusion
A bank may owe fiduciary duties to its customer in certain special situations, particularly where the bank acts as an adviser, agent, or trustee. Fiduciary duties require the bank to act honestly, loyally, and in the customer’s best interests.
The bank must avoid conflicts of interest, avoid secret profits, and must not take unfair advantage of the customer. However, fiduciary duties do not automatically arise in every banker-customer relationship because ordinary banking relationships remain primarily contractual and debtor-creditor in nature.
Cases such as Woods v Martins Bank Ltd & Anor demonstrate situations where fiduciary duties may arise due to conflicts of interest, while RHB Bank Bhd (substituting Kwong Yik Bank Bhd) v Kwan Chew Holdings Sdn Bhd shows that courts will not impose fiduciary duties unless special circumstances justify such obligations.

​

Published on

May 28, 2026

Malaysian Banking Law – Difference Between Breach of Trust and Breach of Fiduciary Duty

Malaysian Banking Law – Difference Between Breach of Trust and Breach of Fiduciary Duty
No. Breach of trust and breach of fiduciary duty are closely related but they are not exactly the same. Both arise from equitable principles and involve duties of loyalty and honesty, but they occur in different legal relationships and involve different obligations.


1. Breach of Trust
Meaning
A breach of trust occurs when a trustee fails to carry out duties owed under a trust relationship.
A trustee holds property or money for the benefit of beneficiaries. The trustee must manage the trust property according to the terms of the trust and for the benefit of the beneficiaries.
If the trustee misuses the trust property, acts outside the trust powers, or fails to protect the trust property, there is a breach of trust.


Main Features of Breach of Trust
The relationship involves:

• trustee;
• trust property; and
• beneficiary.

The trustee has control over property belonging beneficially to another person.


Examples of Breach of Trust
A trustee commits breach of trust where he:

• uses trust money for personal purposes;
• transfers trust property without authority;
• misappropriates beneficiary funds;
• invests trust assets improperly; or
• fails to follow trust terms.

Banking Example
A customer holds housing development funds in trust for purchasers. The customer wrongfully transfers the trust money into his personal account and spends it for private purposes.
This amounts to breach of trust because trust property was misused.


2. Breach of Fiduciary Duty
Meaning
A breach of fiduciary duty occurs when a fiduciary fails to act loyally, honestly, or in the best interests of another person.
A fiduciary relationship arises where:

• trust;
• confidence; and
• reliance exist.

The fiduciary must:

• avoid conflicts of interest;
• avoid secret profits;
• act in good faith; and
• prioritise the beneficiary’s interests.

Main Features of Breach of Fiduciary Duty
The relationship may involve:

• agent and principal;
• adviser and client;
• banker and customer in special situations;
• director and company; or
• solicitor and client.

Unlike trust law, fiduciary relationships do not always involve trust property.


Examples of Breach of Fiduciary Duty
A fiduciary breaches duty where he:

• acts in conflict of interest;
• earns secret commissions;
• abuses trust and confidence;
• acts dishonestly; or
• prioritises personal interests.

Banking Example
A bank investment adviser secretly receives commissions from promoting investment products without informing the customer.
This is breach of fiduciary duty because the adviser acted in conflict of interest and failed to act loyally toward the customer.


Main Difference Between the Two
Breach of Trust

• focuses on misuse of trust property.

Breach of Fiduciary Duty

• focuses on disloyal conduct and conflicts of interest.

Simple Comparison
Breach of Trust
Usually involves:

• trustee;
• trust property; and
• beneficiaries.

Main issue:

• improper handling of trust assets.

Breach of Fiduciary Duty
Usually involves:

• fiduciary relationship;
• loyalty obligations; and
• abuse of confidence.

Main issue:

• conflict of interest or disloyal conduct.

Relationship Between the Two
A trustee is also a fiduciary.
Therefore:

• every trustee owes fiduciary duties.

As a result:

• a breach of trust may also involve breach of fiduciary duty.

However:

• not every fiduciary relationship involves a trust.

For example:

• an investment adviser may owe fiduciary duties even though no trust property exists.

Example Where Both Exist Together
A trustee secretly transfers trust funds into his own account and profits personally from the money.
This may involve:

• breach of trust because trust property was misused; and
• breach of fiduciary duty because the trustee acted dishonestly and for personal benefit.

Remedies
Remedies for Breach of Trust

• restoration of trust property;
• compensation to beneficiaries;
• tracing;
• constructive trust; and
• account of trust property.

Remedies for Breach of Fiduciary Duty

• account of profits;
• equitable compensation;
• rescission;
• injunctions; and
• constructive trust.

Banking Law Position
In banking law:

• ordinary banker-customer relationships are usually contractual and debtor-creditor in nature.

However:

• fiduciary duties may arise in advisory or agency situations;
• breach of trust issues may arise where trust funds are involved.

Banks themselves are generally not trustees of customer money, as recognised in Foley v Hill.
However, banks may become liable as constructive trustees if they knowingly assist misuse of trust property.


Conclusion
Breach of trust and breach of fiduciary duty are related but distinct concepts.
Breach of trust mainly concerns improper handling or misuse of trust property by a trustee. Breach of fiduciary duty mainly concerns disloyalty, conflicts of interest, dishonesty, or abuse of confidence by a fiduciary.
A trustee always owes fiduciary duties, so some breaches of trust may also amount to breaches of fiduciary duty. However, fiduciary duties may exist even where no trust relationship or trust property is involved.

​

Published on

May 28, 2026

Malaysian Banking Law – Constructive Trustee and Beneficiary Relationship

​Malaysian Banking Law – Constructive Trustee and Beneficiary Relationship
Case Scenario
Lim Wei owns a construction company in Malaysia. His company received RM800,000 from several purchasers for a housing development project. Under the agreement, the money was supposed to be held in trust and used only for construction purposes.
Lim deposited the money into the company’s account at Public Bank Berhad. The bank later became aware that Lim was transferring large portions of the money into his personal account and using it for unrelated business ventures and luxury purchases.
Despite suspicious transactions and clear indications that the money was trust money belonging to third parties, the bank continued processing the transfers without investigation.
The housing project eventually failed, and the purchasers lost their money. The purchasers brought an action against the bank, arguing that the bank became liable as a constructive trustee because it knowingly assisted in the misuse of trust funds.
The legal issue is whether the bank can be treated as a constructive trustee and held liable to the beneficiaries for allowing trust money to be misapplied.


Introduction
Ordinarily, the relationship between banker and customer is that of debtor and creditor. However, sometimes third parties may have rights over money deposited in a customer’s account. These rights may arise because the money belongs beneficially to another person or is held on trust.
In certain situations, courts may impose liability on a bank as a constructive trustee. A constructive trustee is not an express trustee appointed by agreement. Instead, the law imposes constructive trustee liability where fairness and justice require the bank to account for improperly handled trust property.
A bank may therefore become liable where it knowingly assists in a breach of trust or knowingly receives trust property in circumstances that make it unconscionable for the bank to retain or deal with the property.


Meaning of Constructive Trust
A constructive trust is a trust imposed by law to prevent unfairness or unjust enrichment. It arises not because the parties intentionally created a trust, but because equity considers it unjust for a person to deny the beneficial rights of another.
When a bank is treated as a constructive trustee, it means the court considers the bank responsible for dealing improperly with trust funds or assisting in a breach of trust.
The bank may become liable if it:

• knowingly receives trust money;
• knowingly assists in misuse of trust funds;
• acts dishonestly; or
• ignores obvious suspicious circumstances involving trust property.

Relationship Between Bank and Third Parties
Although the account is usually in the customer’s name, the money inside the account may actually belong beneficially to third parties. For example:

• money may be held under an express trust;
• customer may act as trustee for beneficiaries; or
• funds may be subject to assignment or fiduciary obligations.

In such situations, the bank must exercise caution if it becomes aware that the customer is misusing trust money.


Constructive Trustee Liability
Constructive trustee liability commonly arises in two situations:

1. knowing receipt; and
2. knowing assistance.

Knowing Receipt
Knowing receipt occurs where:

• the bank receives trust property;
• the property is transferred in breach of trust; and
• the bank knows or ought to know that the transfer is improper.

The bank may then be required to return or account for the trust property.


Knowing Assistance
Knowing assistance occurs where:

• a trustee breaches trust obligations; and
• the bank knowingly assists or facilitates the breach.

Liability may arise where the bank ignores obvious warning signs or dishonestly assists the customer in misusing trust money.


Application to the Case Scenario
In the present case, the housing purchasers entrusted money for a specific purpose, namely the housing development project. Lim therefore held the funds subject to trust obligations.
Public Bank may become liable as a constructive trustee if it knew or ought reasonably to have known that:

• the funds were trust money;
• the transfers were suspicious; and
• the customer was misusing the money.

The repeated transfer of large amounts into Lim’s personal account and unrelated expenditures may amount to suspicious circumstances requiring investigation.
If the bank knowingly ignored these suspicious activities and continued facilitating the transactions, the court may hold that the bank knowingly assisted in breach of trust.
As a result, the bank may be liable to compensate the beneficiaries for losses suffered.


Difference Between Express Trustee and Constructive Trustee
An express trustee is intentionally appointed to hold property for beneficiaries under a trust arrangement.
A constructive trustee, however, is imposed by law due to wrongful conduct or unconscionable behaviour.
Thus:

• express trust → created intentionally;
• constructive trust → imposed by equity.

Duties of a Constructive Trustee
Where constructive trustee liability arises, the bank may owe duties to:

• account for trust property;
• restore improperly transferred funds;
• avoid dishonest assistance; and
• compensate beneficiaries for losses caused.

Critical Analysis
The concept of constructive trustee liability is important because it protects beneficiaries and prevents abuse of trust property. Banks play a significant role in financial transactions and may become involved in transactions involving trust funds.
However, courts are careful not to impose constructive trustee liability too easily on banks. Modern banking operations involve millions of transactions daily, and banks cannot realistically investigate every transaction conducted by customers.
Therefore, courts usually require:

• actual knowledge;
• dishonest conduct; or
• clear suspicious circumstances

before imposing constructive trustee liability.
This approach balances:

• protection of beneficiaries; and
• practical commercial banking operations.

If banks were automatically liable whenever customers misused money, banking operations would become unmanageable and commercially impractical.
Nevertheless, where banks knowingly assist fraud, ignore obvious warning signs, or benefit from misuse of trust property, courts may impose equitable liability to prevent injustice.
Modern banking compliance systems, anti-money laundering obligations, and fraud detection measures have increased expectations that banks should identify suspicious activities involving customer accounts.
Thus, while banks are not general trustees of customer funds, they may become constructive trustees where their conduct becomes sufficiently improper or unconscionable.


Case Scenario Solution
In this case, the purchasers may argue successfully that Public Bank became liable as a constructive trustee because the bank knowingly assisted Lim in breaching trust obligations.
The strong indicators include:

• repeated suspicious transfers;
• movement of trust money into personal accounts;
• misuse of funds unrelated to the housing project; and
• the bank’s continued processing despite suspicious circumstances.

If the court finds that the bank had sufficient knowledge or dishonestly ignored the misuse of trust funds, the bank may be ordered to:

• compensate the beneficiaries;
• account for the trust money; or
• restore improperly transferred funds.

However, if the bank genuinely lacked knowledge and processed the transactions in the ordinary course of banking business without suspicious indicators, the court may refuse to impose constructive trustee liability.


Conclusion
Although the ordinary banker-customer relationship is primarily debtor and creditor in nature, banks may sometimes become liable as constructive trustees where trust property is improperly handled.
Constructive trustee liability arises where the bank knowingly receives trust property or knowingly assists in breach of trust. Courts impose such liability to prevent injustice and protect beneficiaries whose property has been misused.
However, courts are cautious not to impose liability too broadly because banks are commercial institutions rather than general trustees of customer funds. Liability usually arises only where the bank possesses sufficient knowledge, acts dishonestly, or ignores obvious suspicious circumstances.
The doctrine of constructive trust therefore balances commercial banking practicality with equitable protection against abuse of trust property.


References

1. Foley v Hill
2. Woods v Martins Bank Ltd & Anor
3. Westminster Bank Ltd v Hilton
4. RHB Bank Bhd (substituting Kwong Yik Bank Bhd) v Kwan Chew Holdings Sdn Bhd
5. Principles of Equity and Trust Law
6. Malaysian Banking and Financial Services Principles

Published on

May 28, 2026

Malaysian Banking Law – United Merchant Finance Bhd v Majlis Agama Islam Negeri Johor [1999] 1 MLJ 657 (Federal Court)

​Malaysian Banking Law – United Merchant Finance Bhd v Majlis Agama Islam Negeri Johor [1999] 1 MLJ 657 (Federal Court)
Case Scenario
Majlis Agama Islam Negeri Johor deposited RM1 million with United Merchant Finance Bhd through its Batu Pahat branch. The deposit was evidenced by two fixed deposit receipts of RM500,000 each issued by the finance company.
When the fixed deposits matured, the Majlis demanded repayment of the RM1 million together with interest. However, the finance company refused or failed to make payment.
The Majlis then sued the finance company and argued that:

1. the finance company was contractually bound by the two fixed deposit receipts to repay the RM1 million with interest; and
2. alternatively, the finance company was liable as a constructive trustee holding the deposited funds on behalf of the Majlis.

The finance company denied liability and filed a defence. The dispute eventually reached the Federal Court.
The legal issue was whether the finance company could be held liable as a constructive trustee and whether the matter could be decided summarily without a full trial.


Facts
The plaintiffs deposited RM1 million with the defendants and received two fixed deposit receipts worth RM500,000 each.
The plaintiffs argued that they were entitled to rely on the fixed deposit receipts and assume that all procedures connected with the deposits had been properly carried out by the defendants.
Alternatively, the plaintiffs claimed that the defendants became constructive trustees of the deposited funds.
The defendants denied the claim and maintained that there were genuine issues requiring investigation.
The plaintiffs applied for summary judgment, arguing that there was no real defence to the claim.
The High Court dismissed the application because it found that there were bona fide triable issues requiring a full hearing.
The Court of Appeal disagreed and granted summary judgment in favour of the plaintiffs.
The defendants then appealed to the Federal Court.


Issue
The Federal Court had to determine:

1. Whether the defendants had raised genuine issues requiring a full trial.
2. Whether the claim based on constructive trustee liability could be decided summarily.
3. Whether the defendants should be given an opportunity to defend the action fully.

Held
The Federal Court allowed the appeal.
The Court set aside the decision of the Court of Appeal and granted the defendants unconditional leave to defend the action.
The Court held that the issues raised were sufficiently serious and complex to require a full trial.


Judgment of Mohamed Dzaiddin FCJ
The Federal Court agreed with the High Court judge that the case was not straightforward.
The court accepted that the issues of:

• constructive trustee liability;
• fraud; and
• the authenticity and significance of the fixed deposit receipts

required close investigation through oral evidence and witness examination.
The court noted that evidence from a separate criminal proceeding involving the former President of the Majlis, Dato’ Rahmat Asri, could have an important impact on the case.
In that criminal case, Dato’ Rahmat had been charged with criminal breach of trust involving the same RM1 million and the same fixed deposit receipts which formed the subject matter of the civil action.
The Federal Court considered that these facts justified allowing a full trial so that all evidence could be examined properly.


Constructive Trustee Issue
The Federal Court paid particular attention to the Majlis’s alternative claim that the defendants were constructive trustees of the deposited funds.
The court observed that constructive trustee liability in the context of banker-customer relationships is a complicated and highly technical area of law.
The court agreed with the High Court judge that this issue could not be properly determined without a full trial.
The court further noted that the plaintiffs had not provided detailed particulars supporting the constructive trustee allegation.
Therefore, the plaintiffs were required to prove their claim through proper evidence at trial.


Reliance on Lipkin Gorman v Karpnale Ltd
The Federal Court relied heavily on the English decision of Lipkin Gorman v Karpnale Ltd.
The court referred to the earlier Court of Appeal decision in that litigation, where Parker LJ stated that a bank could not become liable as a constructive trustee unless it had first breached its contractual duty of care owed to the customer.
The principle established was:
Step 1
The claimant must prove that the bank breached its contractual duty.
Step 2
Only after proving breach of contractual duty can constructive trustee liability potentially arise.
Therefore:
No breach of contract
→ No constructive trustee liability.
Breach of contract
→ Constructive trustee liability may be considered.
The Federal Court accepted this principle and held that the Majlis had to prove the alleged breach of contractual duty before constructive trustee liability could be imposed.


Knowing Receipt and Knowing Assistance
The High Court had relied on the principles from Barnes v Addy concerning constructive trusts.
The case recognised two categories of constructive trustee liability:
Knowing Receipt
This occurs where a person receives trust property knowing that it has been transferred in breach of trust.
The recipient may be required to account for the property.


Knowing Assistance
This occurs where a person knowingly assists another in committing a breach of trust.
Liability arises because the person participated in the wrongful conduct.
The High Court considered that these principles might potentially apply in the relationship between the finance company and the Majlis, but such issues required detailed factual investigation.


Critical Analysis
This case is important because it demonstrates the cautious approach taken by courts when dealing with constructive trustee claims against banks and financial institutions.
The Federal Court recognised that constructive trustee liability is not automatically imposed merely because money is deposited with a bank or finance company.
A claimant must prove:

• breach of contractual duty;
• knowledge or involvement;
• factual circumstances giving rise to equitable liability; and
• sufficient evidence supporting the claim.

The decision reflects the courts’ concern that banks and financial institutions process large volumes of transactions daily and should not be treated as trustees in every transaction involving customer funds.
The court therefore requires strong evidence before imposing constructive trustee liability.
Another important aspect of the case is the relationship between contract law and equity. The court emphasised that constructive trustee liability in banking often depends upon an underlying breach of contractual duty. This illustrates how equitable remedies frequently operate alongside contractual obligations rather than independently of them.
The decision also reinforces the importance of procedural fairness. The Federal Court considered that the defendants should be allowed to examine evidence arising from the related criminal proceedings before judgment was entered against them.


Case Scenario Solution
If the facts are applied to an examination scenario, the correct approach would be:
First, determine whether the bank or financial institution breached any contractual duty owed to the customer.
Second, determine whether there is evidence of:

• knowing receipt;
• knowing assistance;
• dishonesty; or
• participation in misuse of funds.

Third, determine whether the facts are sufficiently clear to justify constructive trustee liability.
Following United Merchant Finance Bhd v Majlis Agama Islam Negeri Johor, a court is likely to require detailed factual evidence and a full trial before imposing constructive trustee liability.
Therefore, unless breach of duty and knowledge are clearly established, the claimant may not succeed.


Significance of the Case
The case establishes several important principles:

1. Constructive trustee claims against banks are complex and fact-sensitive.
2. The claimant bears the burden of proof.
3. Constructive trustee liability generally requires proof of breach of contractual duty.
4. Issues involving knowing receipt and knowing assistance usually require detailed factual investigation.
5. Courts are reluctant to impose constructive trustee liability without a full examination of the evidence.

Conclusion
United Merchant Finance Bhd v Majlis Agama Islam Negeri Johor is a leading Malaysian authority on constructive trustee liability in banking relationships. The Federal Court held that allegations that a bank or financial institution is a constructive trustee require careful factual examination and normally cannot be resolved summarily.
The decision confirms that constructive trustee liability is closely connected to breach of contractual duty and that claimants bear a heavy burden in proving such claims. The case therefore protects financial institutions from automatic trustee liability while preserving equitable remedies where wrongdoing can be properly established.


References

1. United Merchant Finance Bhd v Majlis Agama Islam Negeri Johor
2. Lipkin Gorman v Karpnale Ltd
3. Barnes v Addy
4. Principles of Equity and Trust Law
5. Malaysian Banking Law – Constructive Trustee and Beneficiary Relationship

Published on

May 28, 2026

Malaysian Banking Law – Banker’s Rights: Commission, Interest and Right of Set-Off

Malaysian Banking Law – Banker’s Rights: Commission, Interest and Right of Set-Off
Introduction
Apart from owing duties to customers, a bank also possesses several important legal rights arising from the banker-customer contractual relationship. Three of the most significant rights are:

1. Right to Commission or Service Charges
2. Right to Interest
3. Right to Set-Off (Combining Accounts)

These rights enable banks to recover the costs of providing banking services, earn income from lending activities, and protect themselves against outstanding debts owed by customers.


1. Right to Commission or Service Charges
Legal Principle
A bank is entitled to charge its customers reasonable commissions, fees, and service charges for services provided.
These charges may include:

• Maintaining bank accounts;
• Processing remittances or fund transfers;
• Issuing bank drafts;
• Providing trade finance facilities;
• Managing overdraft facilities;
• Other banking services.

In practice, such charges are usually standardized and are commonly determined according to banking industry practices and guidelines established by banking associations and regulatory requirements.
The customer’s obligation to pay such charges arises from the contractual agreement between the bank and the customer.


Case Scenario
Facts
Ahmad opens a current account with XYZ Bank.
Over several months, he uses the bank to:

• Transfer money overseas;
• Request bank drafts;
• Maintain a business current account.

At the end of the month, XYZ Bank deducts:

• RM10 account maintenance fee;
• RM25 remittance fee;
• RM15 bank draft processing fee.

Ahmad argues that the bank has no right to deduct these charges because he never specifically approved each fee.


Solution
The bank is likely entitled to recover these charges.
When Ahmad opened the account, he agreed to the bank’s terms and conditions, which normally contain provisions allowing the bank to impose service charges for banking services rendered.
Therefore, the deductions are valid provided:

• The charges are disclosed;
• The charges are consistent with the contractual terms;
• The bank complies with applicable banking regulations.

Practical Application
Examples commonly encountered include:

• ATM replacement card charges;
• Telegraphic transfer fees;
• Cheque book charges;
• Foreign currency conversion fees;
• Annual credit card fees.

Banks rely on this right daily to recover operational costs.


2. Right to Interest
Legal Principle
A bank has the right to charge interest on money lent to a customer.
The interest rate is usually determined by:
Express Agreement
A written agreement specifies:

• Interest rate;
• Method of calculation;
• Frequency of compounding.

Implied Agreement
In some situations, an agreement may be implied from the conduct of the parties.
For example, where a customer overdraws his account and the bank permits the overdraft, the bank may charge its normal interest rate applicable to unsecured lending.


Case Scenario
Facts
Siti has RM500 in her current account.
She issues a cheque for RM2,000.
Instead of dishonouring the cheque, the bank honours it and creates an overdraft of RM1,500.
One month later, the bank charges interest on the overdraft amount.
Siti argues that she never signed a loan agreement and therefore should not pay interest.


Solution
The bank is likely entitled to charge interest.
Although no formal loan agreement exists, the bank effectively advanced funds to Siti when it honoured the cheque despite insufficient funds.
By accepting the benefit of the overdraft facility, an implied agreement arises under the usual course of dealings between banker and customer.
Consequently, the bank may charge its normal overdraft interest rate.


Practical Application
This commonly occurs where:

• Customers exceed overdraft limits;
• Banks permit temporary overdrawing of accounts;
• Credit facilities are granted informally before formal documentation is completed.

Interest compensates the bank for the use of its money.


3. Right of Set-Off (Combining Accounts)
Legal Principle
The right of set-off allows a bank to combine accounts and apply money standing to the credit of one account against debts owed by the customer on another account.
The purpose is to prevent a customer from claiming money from the bank while simultaneously refusing to repay debts owed to the bank.
In effect, the bank may:

• Reduce the amount payable to the customer; or
• Reduce the customer’s indebtedness to the bank.

Conditions for Exercising Set-Off
A bank may generally exercise the right only when:
(a) The Debt is Certain
The amount owed must be clearly ascertainable.
(b) The Debt is Due and Payable
The debt must already be payable and not merely a future obligation.
(c) No Agreement Prohibits Set-Off
There must be no express or implied agreement preventing the bank from exercising the right.
(d) Accounts Must Be Held in the Same Right
The accounts must belong to the same customer in the same legal capacity.


Meaning of “Same Right”
The bank generally cannot combine:
Account A
Account B

Personal account
Trustee account

Personal account
Company account

Executor account
Personal account
These accounts are held in different legal capacities.


However, the bank may combine:
Account A
Account B

Personal savings account
Personal current account

Current account
Overdraft account
because they belong to the same person in the same legal capacity.


Case Scenario
Facts
Ravi maintains:
Account 1

• Savings Account: RM20,000 credit balance.

Account 2

• Personal Loan: RM15,000 outstanding and overdue.

Ravi demands withdrawal of the RM20,000 from his savings account.
Instead, the bank transfers RM15,000 from the savings account to settle the overdue loan.
Ravi claims that the bank wrongfully took his money.


Solution
The bank is likely entitled to exercise its right of set-off.
The requirements are satisfied because:

• Ravi owes a definite amount (RM15,000);
• The debt is overdue and payable;
• No agreement prohibits set-off;
• Both accounts are held by Ravi personally in the same capacity.

Accordingly, the bank may combine the accounts and use the credit balance to discharge the debt.


Practical Application
Banks frequently exercise set-off where:

• A customer defaults on a loan;
• A credit card debt becomes overdue;
• An overdraft remains unpaid;
• Several accounts are maintained with the same bank.

This right provides an efficient method of debt recovery without commencing court proceedings.


Critical Analysis
The right of commission and interest reflects the commercial nature of banking. A bank is not a trustee holding money for free; it operates as a business and is entitled to remuneration for services and lending activities.
The right of set-off is particularly important because it protects banks from the risk of having to repay a customer while simultaneously being unable to recover debts owed by that same customer.
However, the right is not unlimited. Courts require strict compliance with the conditions of certainty, maturity of debt, and the “same right” requirement to ensure fairness to customers and to prevent abuse of power by banks.


Conclusion
Under Malaysian Banking Law, a bank possesses important contractual rights against its customers:

• Right to commission or service charges for banking services provided;
• Right to interest on loans, overdrafts, and other credit facilities;
• Right of set-off allowing the bank to combine accounts and apply credit balances against debts owed by the customer.

These rights arise from the banker-customer contract and play a vital role in ensuring the efficient and secure operation of the banking system while balancing the interests of both banks and customers.

​L

Published on

May 28, 2026

Malaysian Banking Law – Step-by-Step Cheque Clearing System

Malaysian Banking Law – Step-by-Step Cheque Clearing System
Introduction
The cheque clearing system is the banking system used to process cheque payments between different banks. It allows the bank receiving the cheque and the bank paying the cheque to exchange information and settle payment safely.
The clearing system does not decide whether the cheque should be paid. Its role is to pass cheque information between banks and assist settlement. The final decision to honour or dishonour the cheque is made by the drawee bank, also called the paying bank.


Step 1 – Drawer Issues the Cheque
The process begins when the drawer writes and signs a cheque. The drawer is the person who owns the bank account and instructs his bank to pay money.
For example, Ali writes a cheque for RM5,000 payable to Ahmad. Ali is the drawer because he is giving an instruction to his bank to pay RM5,000 to Ahmad.


Step 2 – Payee Receives the Cheque
The payee is the person who is supposed to receive the money. In the example, Ahmad is the payee because the cheque is payable to him.
At this stage, Ahmad has the cheque, but he has not received the money yet. The cheque must first go through the banking clearing process before the money can be credited into his account.


Step 3 – Payee Deposits the Cheque into His Bank
The payee deposits the cheque into his own bank account. This bank is called the collecting bank because it collects the cheque payment on behalf of the payee.
For example, Ahmad deposits Ali’s cheque into his CIMB account. CIMB becomes the collecting bank because it is collecting payment for Ahmad.
The collecting bank acts as the agent of the payee because Ahmad authorises the bank to collect the cheque proceeds for him.


Step 4 – Collecting Bank Checks the Cheque
Before sending the cheque into the clearing system, the collecting bank performs basic checks. It checks whether the cheque appears valid on its face.
The collecting bank may check the date, amount, payee name, account details, endorsements, and whether the cheque appears altered or suspicious.
This is not the final payment decision. The collecting bank is only doing preliminary checks before sending the cheque for clearing.


Step 5 – Collecting Bank Sends Cheque Information to the Clearing System
After the preliminary checks, the collecting bank sends the cheque information into the clearing system.
The information may include the cheque image, cheque number, bank details, account details, amount, and payee information.
This is the main role of the clearing system. It receives cheque information from the collecting bank and forwards it to the correct drawee bank.


Step 6 – Clearing System Sends Information to the Drawee Bank
The drawee bank is the bank that is ordered to pay the cheque. It is also called the paying bank.
For example, if Ali wrote the cheque from his Maybank account, then Maybank is the drawee bank.
The clearing system forwards the cheque information to Maybank so that Maybank can check whether the cheque should be paid.
The clearing system itself does not pay the cheque. It only acts as the middle platform between the collecting bank and the drawee bank.


Step 7 – Drawee Bank Verifies the Cheque
The drawee bank checks the cheque carefully. This is the most important verification stage because the drawee bank must decide whether to honour or dishonour the cheque.
The drawee bank checks whether the drawer’s signature is genuine, whether the drawer has enough money, whether the cheque is properly drawn, whether the cheque is stale, whether there are stop-payment instructions, and whether there is any fraud or alteration.


Step 8 – Drawee Bank Honours or Dishonours the Cheque
After verification, the drawee bank makes a decision.
If the cheque is valid and there are sufficient funds, the drawee bank honours the cheque. This means the bank accepts the cheque and agrees to pay the amount.
If there is a problem, the drawee bank dishonours the cheque. This means the bank refuses payment.
Common reasons for dishonour include insufficient funds, forged signature, stale cheque, closed account, stop-payment instruction, or suspected fraud.


Step 9 – Decision Is Sent Back Through the Clearing System
After deciding whether to honour or dishonour the cheque, the drawee bank sends the result back through the clearing system.
If the cheque is honoured, the clearing system assists with settlement between the banks.
If the cheque is dishonoured, the clearing system sends the unpaid cheque result back to the collecting bank.


Step 10 – Settlement Between Banks
If the cheque is honoured, the paying bank must transfer the money to the collecting bank.
For example, Maybank deducts RM5,000 from Ali’s account and settles that amount with CIMB through the clearing system.
This stage is called interbank settlement because payment is settled between two banks.


Step 11 – Collecting Bank Credits the Payee’s Account
After settlement is completed, the collecting bank credits the money into the payee’s account.
For example, CIMB credits RM5,000 into Ahmad’s account.
At this point, Ahmad receives the money and the cheque clearing process is complete.


Step 12 – If the Cheque Is Dishonoured
If the drawee bank dishonours the cheque, the collecting bank will not receive payment.
The collecting bank will inform the payee that the cheque was unpaid or returned. The payee will not receive the money from that cheque.
For example, if Ali does not have enough money in his Maybank account, Maybank may dishonour the cheque. CIMB will then inform Ahmad that the cheque has been returned unpaid.


Role of the Clearing System
The clearing system acts as the middle platform between banks. Its role is to receive cheque information from the collecting bank, forward it to the drawee bank, return the drawee bank’s decision, and assist with settlement if payment is approved.
The clearing system does not decide whether the cheque is valid. It also does not decide whether the cheque should be paid. That decision belongs to the drawee bank.


Role of the Collecting Bank
The collecting bank is the bank of the payee. Its role is to receive the cheque from the payee, check the cheque, send cheque information to the clearing system, and credit the payee’s account once payment is received.
Legally, the collecting bank acts as the agent of the payee because it collects payment on the payee’s behalf.


Role of the Drawee Bank
The drawee bank is the bank of the drawer. Its role is to verify the cheque and decide whether to honour or dishonour it.
If the cheque is properly drawn and there are sufficient funds, the drawee bank should honour the cheque. If there is a valid reason, the drawee bank may dishonour the cheque.


Simple Flow
The cheque clearing system can be understood as follows:
Drawer issues cheque to payee. The payee deposits the cheque into the collecting bank. The collecting bank sends the cheque information to the clearing system. The clearing system forwards the information to the drawee bank. The drawee bank checks the cheque and decides whether to pay. The decision goes back through the clearing system. If honoured, settlement occurs between banks and the payee’s account is credited. If dishonoured, the cheque is returned unpaid.


Conclusion
The cheque clearing system is important because it allows banks to process cheque payments safely and efficiently. It connects the collecting bank and the drawee bank by transmitting cheque information and helping with settlement.
The collecting bank collects payment for the payee. The clearing system passes information between banks. The drawee bank decides whether to honour or dishonour the cheque. Once the cheque is honoured and settlement is completed, the collecting bank credits the money into the payee’s account.

​

Published on

May 21, 2026

Malaysian Banking Law – Updated Principles on the Contractual Nature of the Banker–Customer Relationship

​Malaysian Banking Law – Updated Principles on the Contractual Nature of the Banker–Customer Relationship
Contractual Nature of the Relationship
The relationship between banker and customer is fundamentally contractual.
For deposit accounts, the parties must agree upon terms that are sufficiently certain to create a binding contract. The essence of the banking contract is that:

• the bank may use the deposited money for its own purposes;
• the bank undertakes to repay an equivalent amount;
• repayment may be:
  • on demand;
  • at a fixed time; or
  • together with agreed interest.

The relationship is therefore primarily one of:
debtor and creditor.
This principle applies to:

• current accounts;
• savings accounts;
• fixed deposits;
• loan facilities;
• financing arrangements.

Standard Chartered Bank v Tiong Ngit Ting (f)
Standard Chartered Bank v Tiong Ngit Ting (f)
Facts
The plaintiff claimed RM10,000 together with interest based on a letter dated 17 September 1955 stating that the bank had credited the plaintiff’s fixed deposit account with RM10,000.
The bank denied liability and argued that:

• the alleged deposit did not appear in its records;
• the letter was not a proper fixed deposit receipt;
• if the money remained unclaimed, it should have appeared under the Unclaimed Monies Act 1965.

The Sessions Court allowed the plaintiff’s claim, and the bank appealed.


Held
The High Court allowed the bank’s appeal.
The court held that the letter did not amount to a valid fixed deposit receipt because it lacked essential contractual particulars such as:

• the period of the fixed deposit;
• the maturity date;
• the rate of interest.

Without these essential terms, there could not be a proper fixed deposit contract.
The court explained that a fixed deposit requires agreed contractual terms fixing:

• the deposit period;
• repayment date;
• interest payable upon maturity.

The letter therefore resembled only a pay-in slip rather than a true fixed deposit certificate.


Principle From Standard Chartered Bank v Tiong Ngit Ting
The case confirms that the banker-customer relationship is contractual and depends upon agreed terms.
For a fixed deposit account to exist:

• the essential contractual terms must be certain;
• the parties must agree on:
  • duration of the deposit;
  • maturity date;
  • interest rate.

Without those terms, no enforceable fixed deposit contract arises.


Nature of Deposit Accounts
The court referred to academic commentary explaining that:

• for current accounts, repayment is generally on demand and usually without interest;
• for savings or fixed deposits, repayment may occur at a fixed date or upon call with interest.

Thus, the bank’s promise is always to repay an equivalent amount rather than the exact same money deposited.


Debtor–Creditor Relationship
The court reaffirmed that the ordinary banker-customer relationship is one of debtor and creditor rather than trustee and beneficiary.
When money is deposited:

• ownership passes to the bank;
• the bank becomes debtor;
• the customer becomes creditor.

The bank may use the money for its own commercial purposes subject to the obligation to repay the customer according to the banking agreement.
This principle originates from:

• Foley v Hill.

Foley v Hill
In this landmark House of Lords decision, Lord Brougham explained that money deposited with a bank becomes part of the bank’s general assets.
The bank is therefore not a trustee of the money but merely a debtor obliged to repay an equivalent amount.
This principle remains central to modern banking law.


Joachimson v Swiss Bank Corporation
Joachimson v Swiss Bank Corporation
Atkin LJ provided the classic description of the banker-customer contract.
The bank undertakes to:

• receive deposits;
• collect bills for the customer;
• honour payment instructions;
• repay money upon demand.

The customer undertakes to:

• exercise reasonable care;
• avoid facilitating forgery or fraud.

The case also established that:

• the bank must generally give reasonable notice before terminating the relationship;
• repayment usually requires demand by the customer.

Fiduciary Relationship vs Contractual Relationship
The courts distinguish between:

• ordinary contractual banking relationships; and
• exceptional fiduciary relationships.

Kian Lup Construction v Hong Kong Bank Malaysia Bhd
Kian Lup Construction v Hong Kong Bank Malaysia Bhd
Justice Ramly Ali identified three main banking relationships:
1. Traditional Banking Relationship
Where customers deposit money into:

• current accounts;
• savings accounts.

This creates a debtor-creditor relationship.
The bank is debtor and the customer is creditor.


2. Financial Advisory Relationship
Where the bank acts as financial advisor.
In this situation:

• fiduciary obligations may arise;
• the bank may owe a duty to provide careful advice.

The court referred to:

• Hedley Byrne & Co Ltd v Heller & Partners Ltd.

The special relationship arises where:

• advice is sought for a known purpose;
• the advisor knows it will be relied upon;
• the customer relies on the advice without independent inquiry;
• loss results from reliance.

Only this category generally creates fiduciary obligations.


3. Lending Relationship
Where the bank provides:

• loans;
• overdrafts;
• financing facilities.

Here again, the relationship is ordinarily contractual and based on debtor-creditor principles.
The bank is creditor and the customer is debtor.


Principle From Kian Lup
The court emphasised that:
ordinary banking relationships are contractual, not fiduciary.
Therefore:

• current accounts;
• savings accounts;
• loan facilities;
• financing relationships

generally do not create fiduciary duties.


Aseambankers Malaysia Bhd v Shencourt Sdn Bhd
Aseambankers Malaysia Bhd v Shencourt Sdn Bhd
The Court of Appeal confirmed that the banker-customer relationship is purely contractual.
The court held that:

• negotiations between lender and borrower do not automatically create fiduciary duties;
• ordinary banking relationships are commercial relationships;
• banks primarily act to protect their own commercial interests.

The court stated:
“The nature of the banker customer relationship is entirely contractual. There is nothing fiduciary about it.”


CIMB Bank Bhd v Sebang Gemilang Sdn Bhd
CIMB Bank Bhd v Sebang Gemilang Sdn Bhd
The Federal Court considered whether a bank acted dishonestly when dealing with monies under a sinking fund arrangement.
The court held that the bank merely acted within the ordinary banker-customer relationship when it closed the sinking fund and credited the monies to the customer’s account.
Without proof of dishonesty, the bank could not be liable as a constructive trustee.
This demonstrates judicial reluctance to impose fiduciary liability in ordinary banking transactions.


Duty of Care Owed by Banks
Although the relationship is contractual rather than fiduciary, banks still owe customers a duty of care.
A bank must:

• exercise reasonable care and skill;
• properly interpret customer instructions;
• act according to customer mandates.

Redmond v Allied Irish Banks Plc
Redmond v Allied Irish Banks Plc
The court held that a bank owes its customer a duty to take reasonable care and skill in:

• interpreting instructions;
• ascertaining customer intentions;
• carrying out banking instructions.

Bank Pertanian Malaysia v Mohd Gazzali Mohd Ismail
Bank Pertanian Malaysia v Mohd Gazzali Mohd Ismail
This case confirms that express contractual terms between banker and customer are enforceable.
Where repayment is stated to be “on demand”, demand becomes an essential contractual requirement before legal action may commence.


Bekalan Sains P & C Sdn Bhd v Bank Bumiputra Malaysia Bhd
Bekalan Sains P & C Sdn Bhd v Bank Bumiputra Malaysia Bhd
The Court of Appeal held that banks may suspend further facilities where borrowers fail to comply with repayment obligations or restructuring conditions.
The case confirms that banker-customer obligations are reciprocal.
Banks owe duties to customers, but customers must also:

• service interest payments;
• comply with conditions precedent;
• honour restructuring obligations.

Practical Application
Suppose a customer claims that a fixed deposit exists merely because money was paid into a bank.
The court will examine whether the essential contractual terms exist, including:

• maturity period;
• interest rate;
• repayment terms.

Without certainty of terms, there may be no enforceable fixed deposit contract.
Similarly, where borrowers fail to comply with repayment obligations under restructuring agreements, banks may suspend further credit facilities.


Critical Analysis
Modern banking law strongly emphasises the contractual nature of banker-customer relationships.
The courts generally avoid treating banks as fiduciaries because banking relationships are commercial in nature and banks act primarily for profit.
However, the law still imposes:

• duties of care;
• duties of confidentiality;
• obligations to follow customer mandates.

Modern banking developments such as:

• digital banking;
• electronic transfers;
• internet banking;
• investment services;
• AI-driven financial systems

continue to expand the scope and complexity of banker-customer relationships.
As banking services become more sophisticated, courts increasingly balance:

• customer protection;
• commercial practicality;
• banking efficiency;
• financial stability.

Conclusion
The banker-customer relationship under Malaysian banking law is fundamentally contractual.
The relationship usually creates a debtor-creditor relationship rather than a fiduciary relationship.
Cases such as:

• Foley v Hill;
• Joachimson v Swiss Bank Corporation;
• Standard Chartered Bank v Tiong Ngit Ting (f);
• Kian Lup Construction v Hong Kong Bank Malaysia Bhd;
• Aseambankers Malaysia Bhd v Shencourt Sdn Bhd;
• Bekalan Sains P & C Sdn Bhd v Bank Bumiputra Malaysia Bhd;

collectively establish that:

• banking relationships are primarily contractual;
• banks generally act as debtors or creditors rather than fiduciaries;
• fiduciary duties arise only in exceptional advisory situations;
• banks nevertheless owe customers duties of care and confidentiality;
• express contractual terms remain central in determining banking obligations.

Published on

May 21, 2026

Malaysian Banking Law – Definition of Banker, Customer and the Contractual Banker–Customer Relationship

​Malaysian Banking Law – Definition of Banker, Customer and the Contractual Banker–Customer Relationship
Introduction
The banker-customer relationship is one of the most fundamental legal relationships in banking law because it determines the rights, duties and obligations existing between banks and customers.
In Malaysian banking law:

• banking relationships are contractual in nature;
• rights and obligations arise through agreements between banks and customers;
• both parties owe reciprocal legal duties to one another.

The law governing banker-customer relationships derives from:

• common law principles;
• banking practice;
• judicial decisions;
• statutory regulation under the Financial Services Act 2013.

The banker-customer relationship governs banking activities such as:

• deposits;
• withdrawals;
• remittances;
• standing orders;
• cheques;
• banker’s drafts;
• letters of credit;
• loans and financing;
• foreign currency transactions;
• Islamic banking facilities.

Definition of a Banker
General Meaning
A banker generally refers to:
A person, corporation or financial institution carrying on the business of banking.
Traditionally, banking business involves:

1. accepting deposits;
2. maintaining current accounts;
3. paying cheques;
4. collecting cheques;
5. providing financing facilities.

These functions distinguish banks from ordinary commercial lenders or finance companies.


Absence of Exhaustive Definition
At common law, there is no complete or universal definition of “bank” or “banker”.
The meaning of banking changes according to:

• commercial practice;
• economic development;
• financial systems;
• technological advancement.

Bank of Chettinad Ltd of Colombo v Commissioner of Income Tax
The Privy Council recognised that the meaning of “banking” may differ across countries and historical periods because banking practices evolve according to economic and social conditions.
This demonstrates that banking law adopts a flexible and functional approach to defining bankers.


Bank of New South Wales v Commonwealth
Dixon J explained that banking should be given a broad meaning because banking forms part of the commercial and economic organisation of society.
The court further recognised that it is impossible to formulate a completely exhaustive definition of banking.


Essential Characteristics of a Banker
United Dominions Trust Ltd v Kirkwood
This is one of the leading authorities concerning the definition of banker.
The court identified several essential banking functions:

1. conducting current accounts;
2. paying cheques;
3. collecting cheques.

These functions remain central indicators of banking business.


Lord Denning’s Explanation
Lord Denning famously observed:
“A banker is easier to recognise than to define.”
The courts may therefore consider factors such as:

• commercial reputation;
• soundness;
• stability;
• public recognition;
• overall banking character.

Paget’s Law of Banking
According to Paget’s Law of Banking:
No institution can properly be regarded as a banker unless it:

1. takes current accounts;
2. pays cheques;
3. collects cheques.

This traditional formulation remains highly influential.


Malaysian Statutory Position
Under the Financial Services Act 2013, a bank refers to a person carrying on banking business under a licence issued by Bank Negara Malaysia.
Banking business generally includes:

• accepting deposits;
• paying and collecting cheques;
• providing financing;
• prescribed financial activities.

Malaysia therefore adopts:

• statutory regulation;
• licensing requirements;
• central bank supervision.

Core Banking Functions
1. Acceptance of Deposits
One of the most important characteristics of a banker is accepting deposits into:

• savings accounts;
• current accounts;
• deposit accounts.

Once money is deposited:

• ownership passes to the bank;
• the bank becomes debtor;
• the customer becomes creditor.

This principle was recognised in:

• Joachimson v Swiss Bank Corporation.

2. Maintaining Current Accounts
Banks maintain accounts through which customers conduct banking transactions such as:

• deposits;
• withdrawals;
• cheque issuance;
• transfers.

3. Paying Cheques
Banks honour cheques drawn by customers against available funds.
This function is one of the traditional indicators of banking business.


4. Collecting Cheques
Banks collect cheques deposited by customers through clearing systems.


5. Providing Financing
Banks commonly provide:

• loans;
• overdrafts;
• trade financing;
• Islamic financing;
• credit facilities.

However:
Financing alone does not automatically amount to banking business.


Light Style Sdn Bhd v KFH Ijarah House (Malaysia) Sdn Bhd
The court recognised that financing activities alone are insufficient to constitute banking business.


Continuous Banking Operations
Banking generally involves:

• systematic activities;
• continuous operations;
• regular customer dealings.

A single isolated transaction is usually insufficient.


Banque Nationale De Paris v Wuan Swee May & Anor
The court held that isolated transactions alone do not necessarily amount to carrying on banking business.


Debt Recovery Alone Is Not Banking
Bank of China v Lee Kee Pin
Debt recovery alone does not constitute banking business.


Taking Security Alone Is Not Banking
Koh Kim Chai v Asia Commercial Banking Corporation Limited
Taking security alone does not amount to carrying on banking business.


Development Finance Institutions
Development finance institutions may provide financing without necessarily being banks.
Examples include:

• industrial financing;
• agricultural financing;
• economic development financing.

Sabah Development Bank Bhd v Skbs (Sabah) Sdn Bhd & Ors
The court recognised that development finance institutions are not automatically banks merely because they provide financing.


Definition of Customer
A customer generally refers to:
A person accepted by a bank for the purpose of carrying out banking transactions.
A customer may:

• maintain an account;
• deposit money;
• withdraw funds;
• obtain financing;
• use remittance services;
• purchase bank drafts;
• issue cheques.

Customer status may arise once:

• an account is opened;
• money is accepted;
• banking instructions are accepted;
• a banking relationship is established.

The duration of the relationship is not decisive.


Judicial Development of Customer Status
Great Western Railway Co v London and County Banking Co Ltd
Casual banking services alone are insufficient to establish customer status.
A recognised banking relationship is generally necessary.


Robinson v Midland Bank Ltd
The existence of an account relationship is the main indicator of customer status.


Commissioners of Taxation v English, Scottish and Australian Bank Ltd
Customer status may arise immediately once an account is opened and money is accepted.


Ladbroke & Co v Todd
A person may become a customer even before a cheque clears if the bank has accepted the account relationship.


Barclays Bank Ltd v Okenarhe
Casual services alone do not create customer status.


Tate v Wilts and Dorset Bank
Mere intention to open an account is insufficient.
The relationship must actually materialise.


Woods v Martins Bank Ltd
Accepted banking instructions and contractual dealings may establish customer status even before formal account opening.


Oriental Bank of Malaya v Rubber Industry (Replanting Board)
Even a fraudster became a customer once the account was opened and cheques were accepted for collection.


Importers Co Ltd v Westminster Bank Ltd
One bank may become the customer of another bank.


Kehar Singh a/l Jasa Singh v The Standard Chartered Bank
A walk-in customer purchasing a bank draft may still be owed a duty of care.


Nature of the Banker–Customer Relationship
The banker-customer relationship is fundamentally contractual in nature.
All banking transactions are based upon:

• general contract law;
• special banking contracts;
• express contractual terms;
• implied contractual terms.

The most cited judicial explanation is found in:
Joachimson v Swiss Bank Corporation
Atkin LJ explained that:

• the bank receives money and collects bills for the customer;
• the money is not held on trust;
• the bank borrows the money and undertakes repayment;
• repayment occurs upon demand;
• the bank undertakes to honour written payment instructions;
• the bank must provide reasonable notice before terminating the relationship.

The customer also undertakes:

• to exercise reasonable care when issuing instructions;
• not to facilitate forgery or fraud.

The relationship therefore creates reciprocal obligations between banker and customer.


Bank Pertanian Malaysia v Mohd Gazzali Mohd Ismail
Bank Pertanian Malaysia v Mohd Gazzali Mohd Ismail
Facts
The case involved an application for an order for sale of charged land securing a housing loan.
The charge agreement provided that repayment was to be made “on demand”.
The issue was whether the bank’s claim was barred by limitation.
The defendant argued that limitation began running from the first default in instalment payment.
The bank argued that limitation only began once formal demand was issued because the agreement expressly required demand.


Held
The High Court held that where the banker-customer contract expressly provides for repayment “on demand”, demand becomes an essential contractual requirement.
Time only begins to run after:

• demand is issued; and
• repayment is refused.

The court therefore held that the twelve-year limitation period applied.


Principle
Where express contractual terms exist between banker and customer, the courts will generally enforce those terms according to the intention of the parties.


Rights and Duties in the Banker–Customer Relationship
Duties Owed by Banks
Banks owe customers duties including:

• duty of confidentiality;
• duty to honour valid payment instructions;
• duty to exercise reasonable care and skill;
• duty to comply with contractual obligations;
• duty to comply with banking regulations.

Duties Owed by Customers
Customers owe obligations including:

• repayment of loans;
• payment of interest;
• compliance with banking agreements;
• fulfilment of contractual conditions;
• reasonable care in issuing instructions.

Where customers breach these obligations, banks may:

• suspend facilities;
• withhold further drawdowns;
• recall loans;
• enforce securities.

Bekalan Sains P & C Sdn Bhd v Bank Bumiputra Malaysia Bhd
Bekalan Sains P & C Sdn Bhd v Bank Bumiputra Malaysia Bhd
Facts
The company operated a cattle business and obtained various banking facilities including:

• overdrafts;
• letters of credit;
• trust receipts;
• banker’s guarantees.

After suffering losses, the company sought restructuring of the facilities.
The bank initially agreed but later imposed additional conditions including:

• a 1:1 deposit requirement;
• monthly interest payments.

The company argued that the bank breached the restructuring agreement.
The bank argued that the borrower failed to comply with the conditions precedent and repayment obligations.


Held
The Court of Appeal held that:

• the restructuring agreement remained subject to conditions precedent;
• the borrower failed to pay agreed interest;
• the bank was entitled to suspend further facilities.

Principle
A bank may lawfully withhold further drawdowns where the borrower breaches repayment obligations or fails to comply with restructuring conditions.


Practical Application
Suppose a borrower fails to pay interest required under a restructuring agreement.
Where the agreement expressly provides that continued facilities depend on compliance with repayment conditions, the bank may suspend further facilities until the borrower complies.
Similarly, where a customer issues valid payment instructions, the bank must generally honour those instructions unless lawful reasons justify refusal.


Critical Analysis
The banker-customer relationship is unique because it combines:

• contract law;
• banking regulation;
• commercial practice;
• fiduciary-like responsibilities.

Earlier cases focused mainly on identifying who qualifies as a customer.
Modern authorities increasingly emphasise reciprocal obligations:

• banks must act carefully and honour contractual obligations;
• customers must comply with repayment obligations and banking conditions.

Modern banking also creates new challenges involving:

• online banking;
• digital payment systems;
• cyber fraud;
• AI-driven banking;
• electronic banking platforms.

Traditional contractual principles therefore continue evolving to accommodate modern banking systems.


Solutions to Banker–Customer Disputes
Several measures may reduce banking disputes:
1. Clear Contractual Documentation
Banks should clearly explain:

• repayment obligations;
• default consequences;
• restructuring terms.

2. Transparent Communication
Customers should fully understand:

• interest obligations;
• conditions precedent;
• suspension rights.

3. Strong Credit Monitoring
Banks should monitor borrower compliance continuously.


4. Consumer Education
Customers should understand:

• repayment responsibilities;
• legal consequences of default;
• banking obligations.

5. Regulatory Reform
Malaysia may consider clearer statutory provisions governing banker-customer obligations in modern digital banking environments.


Conclusion
The banker-customer relationship forms the legal foundation of Malaysian banking law.
The definition of banker depends upon:

• deposit-taking;
• current account operations;
• cheque payment and collection;
• continuous banking activities;
• statutory licensing.

Customer status depends upon the existence of a genuine banking relationship.
The banker-customer relationship is contractual in nature and creates reciprocal rights and obligations between banks and customers.
Authorities such as:

• Joachimson v Swiss Bank Corporation;
• United Dominions Trust Ltd v Kirkwood;
• Bank Pertanian Malaysia v Mohd Gazzali Mohd Ismail;
• Bekalan Sains P & C Sdn Bhd v Bank Bumiputra Malaysia Bhd;

continue to shape Malaysian banking law today.
Modern banking law now balances:

• contractual rights;
• banking stability;
• customer protection;
• financial regulation;
• digital banking developments.

Published on

May 21, 2026

Malaysian Banking Law – Updated Notes on Banker, Customer and Banker–Customer Relationship

Malaysian Banking Law – Updated Notes on Banker, Customer and Banker–Customer Relationship
Bekalan Sains P & C Sdn Bhd v Bank Bumiputra Malaysia Bhd
[2011] 5 MLJ 1, Court of Appeal
Facts
Bekalan Sains P & C Sdn Bhd was involved in the cattle business. Since 1993, it had obtained several banking facilities from Bank Bumiputra Malaysia Bhd, including:

• overdraft facilities;
• letters of credit;
• trust receipts;
• banker’s guarantees.

The company later faced financial difficulties and could not settle its outstanding trust receipts. It requested the bank to restructure the facilities.
After negotiations, the bank agreed on 26 February 1996 to restructure the total facilities amounting to RM8.8 million.
However, on 26 April 1996, the bank informed the company that its head office required a 1:1 condition. This meant that for every RM100 letter of credit requested, the company had to deposit RM100 with the bank. The company was also required to pay RM15,000 monthly towards interest.
The company argued that the bank had breached the restructuring agreement by imposing the new 1:1 condition unilaterally.
The bank argued that the company had failed to comply with the conditions precedent and had not paid the RM15,000 monthly interest. Therefore, the bank was entitled to suspend further credit facilities.


Held
The Court of Appeal dismissed the appeal.
The court held that:

• the dispute involved a banker-customer relationship;
• the borrower had failed to pay interest;
• the borrower had not fulfilled the restructuring conditions;
• it is settled law that a bank may withhold further drawdowns where the borrower breaches its obligation to pay interest.

Therefore, the bank was entitled to suspend further facilities.


Principle From Bekalan Sains
The case confirms that the banker-customer relationship creates reciprocal rights and duties.
A bank owes duties to its customer, but a customer must also comply with banking obligations, especially:

• repayment of loan facilities;
• payment of interest;
• fulfilment of conditions precedent;
• compliance with restructuring agreements.

Where the customer breaches these obligations, the bank may lawfully:

• suspend further drawdowns;
• recall facilities;
• impose protective conditions;
• enforce its contractual rights.

Definition of Customer
A customer is a person who has entered into a banking relationship with a bank.
A person may become a customer by:

• opening an account;
• maintaining an existing account;
• depositing money;
• obtaining an overdraft;
• obtaining letters of credit or trust receipts;
• obtaining banker’s guarantees;
• entering into negotiations that directly lead to a banking agreement.

In Bekalan Sains, the Court of Appeal explained that a customer includes a person who has banking facilities such as overdrafts, letters of credit, trust receipts and banker’s guarantees.
The court also stated that all depositors are customers, but not all customers are depositors. This is because the word “depositor” is narrower than “customer”.


Authorities on Customer Status
Great Western Railway Co v London and County Banking Co Ltd
The existence of an account is an important factor in determining whether a person is a customer.
Commissioners of Taxation v English, Scottish and Australian Bank Ltd
Duration is not essential. A person may become a customer immediately once the banking relationship begins.
Ladbroke & Co v Todd
The banker-customer relationship may begin once the first cheque is accepted for collection.
Robinson v Midland Bank Ltd
The chief criterion of customer status is the existence of an account through which banking transactions are passed.
Woods v Martins Bank Ltd
A person may become a customer where negotiations and contractual dealings directly lead to a banking agreement.
Importers Co Ltd v Westminster Bank Ltd
A bank may also become the customer of another bank where banking services, such as cheque collection, are performed between them.


Definition of Banker / Bank
Under section 2(1) of the former Banking and Financial Institutions Act 1989, a bank was defined as a person carrying on banking business.
Banking business included:

• receiving deposits on current, savings, deposit or similar accounts;
• paying or collecting cheques drawn by or paid in by customers;
• providing finance.

The Bills of Exchange Act 1949 defines “banker” as including a body of persons, incorporated or unincorporated, carrying on the business of banking.
However, the Act does not fully define “business of banking”.


United Dominions Trust Ltd v Kirkwood
The main characteristics of banking business are:

1. conducting current accounts;
2. paying cheques drawn on the bank;
3. collecting cheques for customers.

These remain the classic indicators of banking business.


Modern Meaning of Banking
The Court of Appeal in Bekalan Sains recognised that modern banking has moved beyond traditional banking activities.
Modern banking may include:

• credit cards;
• charge cards;
• foreign exchange dealings;
• telegraphic transfers;
• electronic transfers;
• internet banking transactions;
• trade finance;
• share financing;
• money market transactions;
• investment services.

Therefore, it is difficult to define “bank” or “banker” narrowly because banking practice continues to evolve.


Nature of the Banker-Customer Relationship
The banker-customer relationship is contractual.
For deposit accounts, the parties must agree to terms that bind them.
The essence of the contract is:

• the bank may use the customer’s money for its own purposes;
• the bank undertakes to repay an equivalent amount;
• repayment may be on demand or at a fixed time;
• interest may or may not be payable depending on the agreement.

The relationship is generally one of debtor and creditor, not trustee and beneficiary.


Foley v Hill
The House of Lords held that when money is paid into a bank, the bank becomes debtor to the customer.
The bank may use the money as its own, but must repay the equivalent amount to the customer.
Thus:

• the bank is not normally a trustee;
• the customer is a creditor;
• the bank is a debtor.

Joachimson v Swiss Bank Corporation
This case gives the classic explanation of the banker-customer contract.
The bank undertakes to:

• receive money;
• collect bills;
• repay the customer upon demand;
• honour valid written payment instructions;
• give reasonable notice before ending the relationship.

The customer undertakes to:

• exercise reasonable care when issuing instructions;
• avoid misleading the bank;
• avoid facilitating fraud or forgery.

Rights of the Banker
A banker may have rights including:

• right to service charges;
• right to commission;
• right to interest;
• right of set-off;
• right to suspend facilities after default;
• right to recall facilities where contractual terms permit.

Rights of the Customer
A customer may have rights including:

• right to draw cheques;
• right to repayment of funds;
• right to interest where agreed;
• right to have valid instructions carried out;
• right to confidentiality;
• right to reasonable care and skill from the bank.

Duties of the Banker
A bank owes duties to the customer, including:

• duty of confidentiality;
• duty to exercise reasonable care and skill;
• duty to follow customer instructions;
• duty to honour valid mandates;
• duty to inform customers of substantial changes to facility terms.

In Abdul Rahim Abdul Hamid v Perdana Merchant Bankers Bhd, the Federal Court emphasised that a bank has an elementary obligation to inform its customer of substantial changes inserted into a facility agreement.


Duty of Care in Customer Instructions
In Redmond v Allied Irish Banks Plc, the court stated that a bank must take reasonable care and skill in interpreting and acting on customer instructions.
This means the customer’s mandate is very important.
A bank must not blindly act in a way that ignores the customer’s instructions or agreed contractual terms.


Equity and Fiduciary Issues
The banker-customer relationship is generally commercial and contractual, not fiduciary.
In Bank of Scotland v A Ltd, the court explained that where an account is in credit, the bank is debtor, not trustee.
However, in exceptional cases, equity may impose liability where a bank dishonestly assists in breach of trust or knowingly receives trust property.
Therefore:

• ordinary banking relationship = debtor and creditor;
• exceptional fraud or trust cases = possible equitable liability.

Bank Pertanian Malaysia v Mohd Gazzali Mohd Ismail
[1997] 3 CLJ Supp 299
This case confirms the importance of express contractual terms in banker-customer relationships.
Where a loan agreement states that repayment is “on demand”, demand becomes necessary before the bank may sue.
The court held that:

• the express term must be enforced;
• time does not run until demand is made and repayment refused;
• the bank was entitled to an order for sale.

Practical Application
If a customer obtains banking facilities and later fails to pay agreed interest, the bank is not required to continue releasing further credit.
For example, if a restructuring agreement requires monthly interest payments and the borrower fails to pay, the bank may suspend further drawdowns.
This is exactly the principle applied in Bekalan Sains P & C Sdn Bhd v Bank Bumiputra Malaysia Bhd.


Critical Analysis
The banker-customer relationship is no longer limited to simple deposit accounts and cheque payments.
Modern banking involves complex facilities such as trade finance, electronic transfers, internet banking and investment services.
However, the legal foundation remains contractual.
The courts try to balance:

• customer protection;
• bank autonomy;
• commercial certainty;
• financial stability;
• contractual fairness.

The law protects customers by requiring banks to act carefully and transparently. At the same time, it protects banks by allowing them to suspend facilities where borrowers fail to comply with repayment obligations.


Solution to the Case Scenario
Applying Bekalan Sains, Agro Livestock is unlikely to succeed if it failed to pay the agreed monthly interest and failed to fulfil the conditions precedent under the restructuring agreement.
The bank would likely be entitled to:

• withhold further drawdowns;
• impose protective conditions;
• suspend further facilities;
• rely on the borrower’s breach.

Therefore, the likely conclusion is that the bank did not breach the restructuring agreement. Instead, the borrower’s failure to pay interest justified the bank’s refusal to continue extending facilities.


Conclusion
The banker-customer relationship in Malaysian banking law is contractual in nature.
A banker is generally an institution carrying on banking business, including accepting deposits, maintaining current accounts, paying and collecting cheques, and providing finance.
A customer is a person who has entered into a recognised banking relationship with a bank, whether through an account, deposit, credit facility or banking agreement.
The key cases show that:

• Foley v Hill establishes the debtor-creditor relationship;
• Joachimson explains the contractual duties of banker and customer;
• United Dominions Trust v Kirkwood identifies the classic features of banking;
• Bank Pertanian Malaysia confirms that express terms such as “on demand” clauses must be enforced;
• Bekalan Sains confirms that banks may withhold facilities where borrowers breach repayment obligations.

Together, these principles form the foundation of Malaysian banking law on the rights, duties and obligations of banker and customer.

​

Published on

May 21, 2026

Malaysian Banking Law – Debtor–Creditor Relationship, Banker–Customer Duties and the Absence of a General Investment Advisory Duty

​Malaysian Banking Law – Debtor–Creditor Relationship, Banker–Customer Duties and the Absence of a General Investment Advisory Duty


Definition of Debtor and Creditor in Banking Law
Debtor
A debtor is a person who owes money or is under an obligation to repay money to another party.
In banking law:

• where a customer deposits money into a bank account,
  the bank becomes the debtor because it owes repayment to the customer;
• where the bank grants a loan or financing facility,
  the customer becomes the debtor because the customer owes repayment to the bank.

Creditor
A creditor is a person who is legally entitled to receive repayment of money owed by another party.
In banking law:

• for deposit accounts:
  • the customer is the creditor;
  • the bank is the debtor.
• for loans and financing:
  • the bank is the creditor;
  • the customer is the debtor.

This debtor-creditor relationship forms the legal foundation of the ordinary banker-customer relationship.


Foley v Hill
Foley v Hill
This landmark House of Lords decision established that:

• money deposited with a bank becomes part of the bank’s general assets;
• the bank is not a trustee of the money;
• the bank merely owes repayment as debtor.

Lord Brougham explained that the business of banking involves receiving money and using it as the bank’s own money subject to repayment obligations.
Thus:
the banker-customer relationship is generally one of debtor and creditor, not trustee and beneficiary.


Definition of Customer
A customer is generally:
A person who enters into a recognised banking relationship with a bank.
A customer may:

• open an account;
• deposit money;
• obtain financing facilities;
• obtain overdrafts;
• use remittance services;
• use letters of credit;
• use trust receipts;
• use banker’s guarantees.

The relationship arises once the bank accepts the customer and banking transactions commence.


Nature of the Banker–Customer Relationship
The banker-customer relationship is fundamentally contractual.
The essence of the contract is:

• the bank may use the money deposited for its own purposes;
• the bank undertakes to repay an equivalent amount;
• repayment may be:
  • on demand;
  • at a fixed time;
  • with or without interest.

This principle was reaffirmed in:

• Standard Chartered Bank v Tiong Ngit Ting (f).

Standard Chartered Bank v Tiong Ngit Ting (f)
Standard Chartered Bank v Tiong Ngit Ting (f)
Facts
The customer claimed RM10,000 together with interest based on a letter allegedly acknowledging a fixed deposit.
The bank denied liability and argued that:

• the alleged deposit did not appear in its records;
• the document lacked essential fixed deposit particulars;
• the alleged deposit was not reflected under the Unclaimed Monies Act 1965.

The Sessions Court allowed the customer’s claim, but the bank appealed.


Held
The High Court allowed the appeal.
The court held that the document was not a valid fixed deposit receipt because it omitted essential contractual terms such as:

• the period of deposit;
• the maturity date;
• the interest rate.

The court emphasised that a fixed deposit contract requires certainty of terms.
Without such terms, no proper fixed deposit agreement exists.


Abdul Kadir Sulaiman J
The learned judge explained that:

• the relationship of banker and customer is contractual;
• the bank’s right is to use the money for its own purposes;
• the bank’s obligation is to repay an equivalent amount.

The court further explained that:

• current account funds are generally repayable on demand;
• fixed deposits are repayable at a fixed date or upon agreed terms together with interest.

Fiduciary Relationship vs Contractual Relationship
The courts distinguish between:

1. ordinary contractual banking relationships; and
2. exceptional fiduciary advisory relationships.

Kian Lup Construction v Hong Kong Bank Malaysia Bhd
Kian Lup Construction v Hong Kong Bank Malaysia Bhd
Justice Ramly Ali identified three categories of banking relationships:
1. Traditional Banking Relationship
Where the customer deposits money into accounts.
This creates:

• a debtor-creditor relationship;
• not a fiduciary relationship.

2. Advisory Relationship
Where the bank acts as financial advisor.
Here, fiduciary obligations may arise.
The court referred to:

• Hedley Byrne & Co Ltd v Heller & Partners Ltd.

A fiduciary or advisory duty may arise where:

• the customer seeks advice;
• the bank knows the advice will be relied upon;
• the customer relies upon it;
• loss results.

3. Lending Relationship
Where the bank grants loans or financing.
Again, this relationship is ordinarily contractual and based on debtor-creditor principles.


Lee Cheong Chee v HSBC Bank Malaysia Bhd
Lee Cheong Chee v HSBC Bank Malaysia Bhd
Facts
The customer held two credit cards issued by HSBC Bank Malaysia Bhd and entered into cardholder agreements with the bank.
Over approximately ten months, the customer used the credit cards to make payments exceeding RM1 million to four purported foreign brokerage companies.
The customer authorised all the transactions himself after relying on promises of high investment returns made by the merchants.
The customer also fully repaid the bank for all transactions made.
Subsequently:

• the customer did not receive the promised profits;
• the customer lost access to the brokerage accounts;
• the customer alleged that the merchants were scammers.

The customer then claimed that the bank negligently failed to protect him from the scam.


Customer’s Allegations
The customer argued that the bank owed a duty of care to:

1. conduct due diligence on the merchants;
2. warn him about suspicious accounts;
3. suspend suspicious transactions;
4. investigate whether the merchants were licensed by:
   • Bank Negara Malaysia;
   • Securities Commission Malaysia;
5. protect him from financial scams.

The customer relied on:

• Barclays Bank plc v Quincecare Ltd

and argued that the bank owed a “Quincecare duty of care”.


Bank’s Arguments
The bank argued that:

• the banker-customer relationship was purely contractual;
• the customer himself authorised all the transactions;
• the cardholder agreement imposed no such duty on the bank;
• the bank was not involved in the investment arrangements;
• the bank had no obligation to investigate the customer’s commercial decisions.

Held
The High Court struck out the customer’s claim.
The court held that:

• the banker-customer relationship was contractual;
• the bank owed no general duty to investigate the investment transactions;
• there was no duty to assess licensing status or investment risks;
• the bank was not required to suspend the authorised transactions.

Contractual Terms Relied Upon by the Court
The cardholder agreement provided that:

• the customer must verify transactions;
• disputes with merchants must be resolved directly with the merchants;
• the bank was not liable for acts or omissions of merchants;
• disputes with merchants do not excuse repayment obligations;
• the bank was not liable for circumstances beyond its control.

The court held that these contractual terms excluded the alleged duties claimed by the customer.


Distinction Between Advisory Banks and Financing Banks
The High Court drew an important distinction between:

• banks acting merely as financing/payment institutions; and
• banks acting as financial advisors.

The customer did not seek investment advice from the bank.
Therefore:
the bank was not responsible for ensuring that the customer made a wise investment decision.


Rejection of General Investment Advisory Duty
The court refused to impose a general duty requiring banks to:

• investigate every investment transaction;
• verify every merchant;
• assess legality of investment schemes;
• warn customers about commercial risks.

The court held that imposing such duties would make banking operations commercially impracticable.


Wan Muhammad Amin Wan Yahya JC
The learned judge stated:
“It would be incredibly unfair if the Defendant is made to pay for the sums the Plaintiff had paid the Merchants when the Defendant is not privy to the Transactions.”
The court emphasised that:

• the alleged fraud was committed by the merchants;
• the bank neither committed nor participated in the fraud;
• the bank was not privy to the investment arrangements.

Commercial Practicality
The court further held that requiring banks to investigate every customer transaction would:

• disrupt banking operations;
• impede commercial activity;
• create unreasonable burdens on banks.

The court referred to:

• Co-operative Central Bank Ltd (In Receivership) v Feyen Development Sdn Bhd

where Edgar Joseph Jr FCJ warned that courts must consider the impact of decisions on the commercial community.


Chang Yun Tai v HSBC Bank (M) Bhd
Chang Yun Tai v HSBC Bank (M) Bhd
The Federal Court similarly held that the banker-customer relationship is contractual.
The court explained that:

• it is generally the customer’s responsibility to ensure the validity of transactions entered into by the customer;
• banks are not automatically responsible for the customer’s commercial decisions.

The court referred approvingly to:

• Redmond v Allied Irish Banks Plc

where the court stated:
“I can see no basis for a duty to advise or warn a customer that there are risks attendant upon something which the customer wishes to do.”


Principle Established by Lee Cheong Chee
The case establishes that:

• ordinary banker-customer relationships are contractual, not fiduciary;
• banks generally owe no broad investment advisory duty;
• banks are not automatically liable for scams entered into by customers;
• Quincecare-type duties will not automatically apply in ordinary customer-authorised transactions;
• customers remain responsible for their own investment decisions unless the bank expressly undertakes an advisory role.

Practical Application
Suppose a customer transfers money to an online investment platform promising unusually high returns.
If:

• the customer authorised the transaction;
• the bank merely processed payment instructions;
• the bank did not provide investment advice,

the bank will generally not be liable merely because the investment later turns out to be fraudulent.
However, different considerations may arise where:

• the bank itself acts as financial advisor;
• the bank knowingly participates in fraud;
• the bank dishonestly assists wrongdoing;
• the bank ignores clear evidence of misappropriation.

Critical Analysis
The decision reflects judicial concern about imposing excessive duties upon banks.
Modern banking processes millions of transactions daily. Requiring banks to independently investigate every customer-authorised transaction would:

• delay commerce;
• increase operational burdens;
• undermine banking efficiency.

The courts therefore continue to treat ordinary banking relationships primarily as:
contractual and commercial relationships rather than fiduciary relationships.
At the same time, banks still owe important duties including:

• confidentiality;
• reasonable care in executing instructions;
• compliance with customer mandates.

The law therefore seeks to balance:

• customer protection;
• commercial practicality;
• financial stability;
• efficient banking operations.

Conclusion
The banker-customer relationship under Malaysian banking law is generally contractual and based on debtor-creditor principles.
Cases such as:

• Foley v Hill;
• Joachimson v Swiss Bank Corporation;
• Standard Chartered Bank v Tiong Ngit Ting (f);
• Kian Lup Construction v Hong Kong Bank Malaysia Bhd;
• Lee Cheong Chee v HSBC Bank Malaysia Bhd;

confirm that:

• banks are generally debtors to depositors and creditors to borrowers;
• ordinary banking relationships are contractual, not fiduciary;
• fiduciary duties arise only in exceptional advisory relationships;
• banks owe duties of care in carrying out instructions, but not a general duty to advise customers on investment wisdom or commercial risks;
• customers remain responsible for their own investment decisions unless the bank expressly assumes an advisory role.