Indian
Overseas Bank Vs. Industrial Chain Concern [1989] INSC 334 (7 November 1989)
Saikia,
K.N. (J) Saikia, K.N. (J) Fathima Beevi, M. (J)
CITATION:
1989 SCR Supl. (2) 27 1990 SCC (1) 484 JT 1989 (4) 334 1989 SCALE (2)1014
ACT:
Negotiable
Instruments Act--Section 131--Bank can avail of immunity as collecting
banker--Opening of account--Duties of bank.
HEAD NOTE:
The
plaintiff--respondent filed original suit No. 7667 of 1975 against the
appellant-Bank in the City Civil Court Madras for recovery of Rs.26,383.49 p.
together with interest and costs, being the amount of loss suffered by it on
account of the negligence and conversion on the part of the appellant who
negligently allowed one Sethuraman, Manager of the plaintiff's firm to open a
"fictitious account" in the name of "Industrial Chain
Concern" as its proprietor and helped him to pay in stolen drafts and cheques
drawn in favour of the plaintiff, and by collecting the same and paying the
proceeds thereof to Sethuraman, and closing the account thereafter. The
plaintiff's case was that it was doing extensive business in steel Roller
chains and sprockets with leading Industries and Government undertakings and
had supplied goods to seven parties who sent to it drafts and cheques for Rs.26,383.49
p. which were received by Sethuraman, its Manager, who opened fictitious
account in the name of the firm with the bank, and withdrew the amount
defrauding the plaintiff. According to the plaintiff the Bank was negligent and
guilty of conversion in opening the account as also in collecting the cheques.
Hence it was liable to make good the loss suffered by it. The appellant Bank
denied the allegations of negligence levelled by the plaintiff. It stated that
Sethuraman, who was a College mate of the Manager of the Bank was known to him
earlier and at the time of opening the account he had represented to the Bank
that he, as proprietor, had started a firm under the name and style of
"Industrial Chain Concern" and had shown in that connection some
business papers on the basis of which the Manager gave the introduction
necessary to open the Account but the manager declined to grant overdraft
facility asked for by him. The bank asserted that it acted in good faith
throughout the dealings till the closure of the account.
The
Trial Court held that the appellant bank had acted in good faith but not
without negligence in opening the account and operating the same in the process
of collection of cheques/drafts and that it was not 28 entitled to protection
of section 131 of the Negotiable of Instruments Act. Accordingly it decreed the
plaintiff's suit Bank's appeal to the High Court against the decree of the
trial Court was dismissed. Hence this appeal by Special Leave.
Allowing
the appeal, this Court,
HELD:
As a general rule a banker before accepting a customer, must take reasonable
care to satisfy himself that the person in question is of good reputation, and
if he fails to do so he will run the risk of forfeiting the protection under
section 131 of the Negotiable Instruments Act.
What
is "reasonable care", will depend on the facts and circumstances of
the case. [45F-G] The courts have tended to accept the practices and procedures
which bankers lay down for themselves, but that can by no means be decisive.
[45G] Till an account is opened, no banker-customer relationship exists between
the bank and the person proposing to open an account. Once the account is open,
the relationship is created and with it mutual rights and obligations between
the banker and the customer are created under law. Opening an account by
depositing cash is slightly different from opening one by a cheque as in that
case, the Bank has to act according to the tenor of that instrument and its
collection and payment involves the Bank's avowed duty to its real owner if the
proposer happens not to be its real owner. Even when an account is opened by
depositing cash but so soon after the opening of the account any cheque is paid
into it as to make it part of the same transaction with the opening, the same
duty may be implied by law. [34D-F] One of the tests of deciding whether the
Bank was negligent, though not always conclusive, is to see whether the Rules
or instructions of the Banks were followed or not. In the instant case,
Sethuraman having been known to the Manager who gave the introduction there was
no violation of any instruction or Rules. [35E; 36D] Except when circumstances
of a case so justify in making inquiries the bankers attitude may be solicitious
and not detective. It is difficult to hold that the Bank was negligent in
opening the account, accepting the deposit of cash by a person known to the
Manager of the Bank under the circumstances. [37G; 38B] 29 The bank normally
has an obligation to collect the customer's cheques paid into his account.
[42H] In every case of opening an account bank takes a mandate and, until
changed, controls the operation of the account. In the instant case having
already opened the account the Bank was not concerned to question the
customer's title to a cheque paid in by him, when a cheque was drawn in favour
of 'industrial Chain Concern'. [41A-B] If a banker fails to present a cheque
within a reasonable time after it reaches him, he is liable to his customer for
loss arising from the delay. A banker receiving instructions paid in for
collection and credit to a customer's account may collect solely for a customer
or for himself or both. Where he collects for the customer he will be liable in
conversion if the customer has no title. However, if he collects in good faith
and without negligence he may plead statutory protection under section 131 of
the Act. [41D-E] To enable a bank to avail the immunity under section 131 as a
collecting banker he has to bring himself within the conditions formulated by
the section. Otherwise he is left to his common law liability for conversion or
for money had and received in case of the person from whom he took the cheques
having no title or defective title. The conditions are: (a) that the banker
should act in good faith and without negligence in receiving a payment, that
is, in the process of collection, (b) that the banker should receive payment
for a customer on behalf of him and thus acting as a mere agent in collection
of the cheque and not as an account holder (c) that the persons for whom the
banker acts must be his customer and (d) that the cheque should be one crossed
generally or especially to himself.
The
receipt of payment contemplated by the section is one from the drawee bank. It
is settled law that the onus of bringing himself within the section rests on
the banker.
There
is very little evidence relating to the deposit and particulars of cheques
deposited and hence it is difficult to hold that the Bank ignored obvious
indications and was negligent at that time. [41G-H; 42A; 48G] Commissioner of
Taxation v. English Scottish & Australian Bank, [1920] AC 683; Ladbroke
& Co. v. Todd, [1914] 30 TLR 433; Turner v. London & Provincial Bank,
[1903] 2 Legal Decisions Affecting Bankers 33; Mariani & Co. v. Midland
Bank, [1968] 2 ALL E.R. 573 at 582; Lloyds Bank Ltd. v. E.B. Savory &
Company, [1933] AC 201; Capital & Counties Bank v. Gordon, [1903] AC 240;
Barclays Bank Ltd. v. Astley Industrial Trust Ltd.. [1970] 1 All E.R. 719; Arab
30 Bank Ltd. v. Ross, [1952] 1 All E.R. 709; Karak Rubber Co. Ltd. v. Burden
(No. 2), [1972] 1 All E.R. 1210; Penmount Estates Ltd. v. National Provincial
Bank Ltd., [1945] 173 LT 344; Motor Traders Guarantee Corpn. v. Midland Bank
Ltd., [1937] 4 All E.R. 90; Bharat Bank Ltd. v. Kishanchand Chellaram, AIR 1955
Mad. 402; Sanyasilingam v. Exchange Bank of India, AIR 1948 Bombay 1; Woodbrier
v. Catholic Bank, AIR 1958 Kerala 316; Orbit Mining & Trading Co. v. Westminister
Bank, [1962] 3 ALL E.R. 565; Underwood v. Bank of Liverpool, [1924] 1 K.B. 775;
Bapulal Premchand v. Nath Bank Ltd., AIR 1946 Bom. 482; Lloyds Bank Ltd. v.
Chartered Bank of India, Australia & China, [1929] 1 K.B. 40 and Ross v.
London County, Westminister & Parr's Bank Ltd., [1919] 1 K.B. 678, referred
to.
CIVIL
APPELLATE JURISDICTION: Civil Appeal No. 2842 of 1982.
From
the Judgment and Order dated 1.10.1981 of the Madras High Court in Appeal No.
516 of 1977.
C. Seetharamiah,
P. Krishna Rao and K.R. Nagaraja for the Appellant.
S. Balakrishnan
for the Respondent.
The
Judgment of the Court was delivered by K.N. SAIKIA, J. This defendant's appeal
by special leave is from the Judgment of the High Court of Judicature at Madras
dated 1.10.1981 passed in Appeal No. 516 of 1977 dismissing the appeal and
affirming the decree in O.S. No. 7667 of 1975.
The
respondent--Industrial Chain Concern as plaintiff filed Original Suit No. 7667
of 1975 in the City Civil Court, Madras for recovery of Rs.26,383.49p. together
with interest and costs, being the total amount of loss sustained by it on
account of the alleged negligence and conversion on the part of the
defendant--Indian overseas Bank having its central office at 151, Mount Road,
Madras-2, hereinafter referred as 'the Bank', by negligently allowing one
Sethuraman, Manager of the plaintiff firm at Madras to open a 'fictitious
account' in the name of 'Industrial Chain Concern' as its proprietor and
helping him to pay in stolen drafts and cheques drawn in favour of the
plaintiff and collecting the same and paying to Sethuraman the proceeds thereof
and closing the account thereafter. It was the case of the plaintiff that it
was doing extensive business in Steel Roller Chains and Sprockets with leading
industries and Government undertakings. Its head office was situate at 36, Linghi
Chetti Street, Madras-1. It had supplied goods to seven parties who sent to it
drafts and cheques in its 31 name amounting to Rs.26,383.49 and those drafts
and cheques had been received by Sethuraman, its Manager, who after opening the
'fictitious account' in the Bank's Nungambakkam Branch paid in the stolen
drafts and cheques and the Bank collected those and allowed Sethuraman to
withdraw the same defrauding the plaintiff. The plaintiff averred that the Bank
was negligent and guilty of conversion in opening of the account, collection of
the cheques and drafts and allowing Sethuraman to withdraw the same and
therefore, it was liable to make good the plaintiff's loss.
The
appellant Bank as defendant resisted the suit contending, inter alia, that it
was not negligent in allowing Sethuraman to open the account inasmuch as
approaching the Bank Sethuraman represented that he, as proprietor, had started
a firm under the name and style of "Industrial Chain Concern" and
proposed to open an account in that name. Since the Manager of the Bank at
Nungambakkam Branch was erstwhile classmate of Sethuraman he (the Manager) knew
him and gave the introduction relying on which the current account was opened
and after opening the account, which was a real account and not a 'fictitious
account' as alleged, various cheques and drafts had been paid into the account
by the customer for collection and the Bank in good faith and without
negligence, in course of its business, collected them and credited the account
and Sethuraman as customer withdrew money from his account, and that neither at
the time of opening the account for at the time of paying in and collection of
the cheques, nor at the time of allowing money to be withdrawn there was
anything to arouse any suspicion regarding the bona fides of the representation
made by Sethuraman. Later on the customer having expressed a desire to close
the account because, as he said, he was winding up his business, the account
was closed. There was, therefore, no negligence on the part of the Bank acting
in good faith and it was not liable for conversion.
At the
trial the plaintiff firm examined its Manager D.R. Murthy (PW-1) while the
defendant Bank also examined its Manager S.P. Muthukrishnan (DW-1). The trial
court decreeing the suit held that the defendant Bank had acted in good faith
but not without negligence in opening the account and operating the same and in
the process of collection of the cheques and drafts and it was not entitled to
invoke the protection of section 131 of the Negotiable Instruments Act and,
consequently, it was liable to make good the loss with interest as claimed by
the plaintiff. The Bank having appealed therefrom, the High Court agreed with
the findings of the trial court and dismissed the appeal.
32 Mr.
C. Seetharamiah, the learned counsel for the appellant submits, inter alia,
that the finding of the courts below that the defendant Bank was negligent in
opening the account is contrary to law inasmuch as there were no circumstances
antecedent or present to arouse any suspicion and there was no obligation on
the part of the Bank to compare and verify the name and address given by
Sethuraman as proprietor, industrial Chain Concern with the address of the then
existing plaintiff's firm of the same name; that the High Court's finding that
tile Bank was negligent in clearing the amounts of the cheques is equally
contrary to law inasmuch as there was nothing ex facie to put the Bank on guard
and there was no warning or indication of defective title on the race of the cheques
and drafts to arouse suspicion of the Bank and it was not necessary for it to
make thorough enquiry about the cheques and drafts to have been entitled to
invoke the protection of section 131 of the Negotiable Instruments Act: and
that even assuming, but not admitting that the Bank was negligent, the
plaintiff itself contributed to it by entrusting Sethuraman to receive the cheques
and drafts and to deal with them for a long time and that even when the
complaint was made to Deputy Commissioner of Police on 19.2.1975 it was about
two cheques only, and there was still no complaint about other cheques and
drafts.
The
first question to be decided, therefore, is whether the Bank was negligent in
opening the account in the name of Sethurarman, as proprietor, Industrial Chain
Concern. Mr. S. Balakrishnan, for the respondent, defends the High Court's
Judgment.
Evidence
of DW1 Muthukrishnan, Manager of the Bank at the relevant time is that the
account was opened by Ext. B1, the Account Opening From, on 3.10.1974 by
Sethuraman under the title Industrial Chain Concern, the sole proprietary
concern. It was signed by Sethuraman for Industrial Chain Concern with a rubber
stamp as proprietor. Muthukrishnan, DW1 deposed:
"This
account was opened by R. Sethuraman under the title Industrial Chain Concern sole
proprietary concern. Sethuraman is the sole proprietor. Before that date I knew
Sethuraman. He was my college mate in 1955-57 in Vivekananda College. I was
meeting him in social gathering. When he went to open an account, he
represented that he had just started as commission agent under the name and
style of Industrial Chain Concern as sole proprietary concern. He wanted to
open an account with Overdraft facility. I declined his request for overdraft
because he himself stated that he had just started commission business. I 33
was able to identify him as the college mate and to open his account I have
signed the introduction in my personal capacity ............... It was an
ordinary current deposit account. The introduction given by me was in the
normal course of banking business. Before opening account, he showed me some
business correspondence and orders. Some of the orders were placed by India
Sugars and Refineries and Madras Fertilisers. At that time there was nothing to
show that the Industrial Chain Concern was not a proprietary concern or that
Sethuraman was an employee of the firm. He opened an account with cash deposit
of Rs. 100 as he described himself as a proprietary concern and as he just then
started the business and as I did not grant loan facility there was no occasion
for calling credit reports from other bankers.
There
was normal operation of the account.
Cheques
given in the name of the concern were deposited in the account and after realisation
they were withdrawn." Comparing the statement of Account and Ext. B1 with
the above evidence there is nothing to doubt this witness. He denied that at
any stage the Bank had acted with negligence or without good faith or that
there was no proper introduction for opening an account. He clearly said that
the address given in Ext. B1 was Nallathambi Mudali Chetti Street and that he knew the location and
it was far away from Nungambakkam. That was the place of business of Sethuraman
mentioned at the opening of account and the Mount Road Branch of the defendant
Bank was the nearest Branch for that place. Opening of an account by Sethuraman
with a trading place at Nallathambi
Street with
Nungambakkam Branch occurred to him as unusual but it did not create any
suspicion as he asked Sethuraman why he wanted to open an account in
Nungambakkam Branch and Sethuraman replied: "I am a commission Agent. I
want overdraft facility. Your are the only agent known to me and that is why I
have come to Nungambakkam Branch." DW-1 also said that in opening the
Current Account he glanced through the order and correspondence shown to him by
Sethuraman regarding supplies but he did not check up the address given in the
correspondence by these companies in the name of the Industrial Chain Concern.
He denied that he had not checked up the business credentials for the account
to be opened in the name of the business concern and that he was negligent in
that aspect. He said:
"I
declined overdraft facility. That itself shows that I was not negligent. Once I
declined overdraft facility it did not strike me to refer Sethuraman to the
nearest branch from his trading place. I did not refer him to the 34 Mount Road Branch. I suggested he can go to
the Mount Road Branch. He came with another request that his overdraft
application might be considered after the period of about one year, after his
business had improved. Therefore, he wanted to open an account in Nungambakkam
Branch." Both Courts below held that the Bank acted in good faith. We
agree. The question is whether the Bank could be held to have been negligent
while opening the account.
It is,
however, necessary to bear in mind that this question is often associated with
the question of negligence in collecting cheques, etc. for the customers paid
into the account. This is because till an account is opened no banker-customer
relationship exists between the bank and the person proposing to open an
account. Once the account is opened, that relationship is created and with it
mutual rights and obligation between the banker and the customer are created
under law. Opening an account by cash is a little different from opening an
account by a cheque as in that case the Bank has to act according to the tenor
of that instrument and its collection and payment involves the Bank's duty owed
to its real owner if the proposer happens not to be its real owner. Even when
an account is opened by depositing cash but so soon after the opening of the
account any cheque is paid into it as to make it part of the same transaction
with the opening, the same duty may be implied by law.
What
is the standard of care to be taken by a Bank in opening an account? In the
Practice and Law of Banking by H.P. Sheldon, 11th Edition, in Chapter five at
page 64 it is said:
"Before
opening an account for a customer who is not already known to him, a banker
should make proper preliminary inquiries. In particular, he should obtain
references from responsible persons with regard to the identity, integrity and
reliability of the proposed customer.
If a
banker does not act prudently and in accordance with current banking practice
when obtaining references concerning a proposed customer, he may later have
cause for regret." M.L. Tannan in Banking Law and Practice in India, 18th
Edition at page 198 says:
"Before
opening a new account, a banker should take certain precautions and must
ascertain by inquiring from the person wishing to open the account, if such
person is unknown to the banker, as to his profession or trade as well as the
nature of the account he proposes to open. By mak35 ing necessary inquiries
from the references furnished by the new customer, the banker can easily verify
such information and judge whether or not the person wishing to open an account
is a desirable customer. It is necessary for a bank to inquire, from
responsible parties, given as references by the customer, as to the latter's
integrity and respectability, an omission of which may result in serious
consequences not only for the banker concerned, but also for other bankers and
the general public." One of the tests of deciding whether the Bank was
negligent, though not always conclusive, is to see whether the Rules or
instructions of the Banks were followed or not. We may accordingly consult
those instructions. Ext. B6 contains the general instructions regarding
constituent accounts for bank. Mark II deals with opening of accounts. It says:
"Except
at large branches where the sub-agent or accountant may be authorised to open
Current Accounts, no new Current Account shall be opened without the authority
of the agent manager who is solely responsible for all Current Accounts being
opened in the proper manner. A written application on the appropriate form must
be submitted and will be initialled by the agent at the top left corner after
he has satisfied himself of the respectability of the applicant(s). It is
important that every party must be introduced to the Bank by a respectable
person known to the Bank, who must normally call at the Bank and sign in the
column specially provided for the purpose in the account opening form. In all
cases his signature must be verified with the specimen lodged and attested. The
agent or accountant may introduce constituents to the Bank provided they are
known to him personally and in such cases he should sign the application form
at the appropriate place in his personal capacity. When the introduction of any
other member of the staff is accepted, the agent must invariably make
independent inquiry and record his findings on the account opening form for
future reference if the need arises ........." Mark IV deals with accounts
of proprietary concerns. It says:
"An
individual trading in the name of concern should fill in form F.S. 5 and sign
it in his personal name and also affix his signature on behalf of the concern
as proprietor in the space provided." 36 if the Banker was negligent in
following up the references given at opening of account and subsequently cheques
etc. are collected for the customer paid into that account and those happened
to be of someone else the Bank may be liable for conversion, unless protected
by law. In the instant case, Sethuraman having been known to the Manager who
gave the introduction, there was no violation of any instruction or Rules.
It was
held in Commissioner of Taxation v. English Scottish and Australian Bank,
[1920] AC 683, that a negligence in collection is not a question of negligence
in opening an account, though the circumstances connected with the opening of
an account may shed light on the question whether there was negligence in collecting
a cheque.
In
Ladbroke & Co. v. Todd, [1914] 30 TLR 433, the plaintiff drew a cheque and
sent it to the payee by post. The letter was stolen and the thief took it to
the defendant, a banker, and used it for the purpose of opening an accountfor
the purpose of which he forged the payee's endorsement.
The
defendant accepted believing him to be the payee. He was not introduced to the
Bank and no references were obtained.
The
defendant opened the account and the cheque was specially cleared at the request
of the thief, and he drew out the proceeds on the next day. On the discovery of
the fraud the plaintiff brought an action against the defendant for conversion.
One of the main questions raised was whether the account having been opened by
payment in all the cheques to be collected the defendant could be properly
regarded as having received payment for a customer. It was held that as account
was already opened when the cheque was collected, payment had been received for
a customer. The drawer thereupon sent another cheque to the real payee and took
an assignment of his rights in the stolen cheque and, as holders of the cheque
or alternatively as assignees, brought an action against the bank to recover
the proceeds collected by the bank as money had and received to their use.
Evidence was given that it was the general practice of bankers to obtain a
satisfactory introduction or reference. It was held that the banker had acted
in good faith, but was guilty of negligence in not taking reasonable precautions
to safeguard the interests of the true owner of the cheque and that therefore
he had put himself outside the protection of section 82 of the Bills of
Exchange Act, 1882. Bailbache, J.
also
said that the banker would have been entitled to the protection of the section
as having received payment for a customer, but had lost it owing to his want of
due care. It was also held that the relation of banker and customer began as
soon as the first cheque was handed in to the banker for collection, and not
when it was paid.
37 In
Turner v. London and Provincial Bank, [1903] 2 Legal
Decisions Affecting Bankers 33, evidence was admitted as proof of negligence,
that the customer had given a reference on opening the account and that this
was not followed up.
In the
instant case there was no question of a reference inasmuch as the Manager
himself knew Sethuraman and gave the introduction. The account was not opened
by depositing any cheque but by depositing case of Rs. 100. The first cheque
was paid into the account later and there is nothing to show that it formed
part of the same transaction. No particulars have been proved as to the tenor
of that cheque. The Manager made several inquiries which in the facts and
circumstances of the case, in our view, were sufficient, for it is an accepted
rule that the banker may refrain from "making inquiries which it is
improbable will lead to detection of the potential customer's purpose if he is
dishonest and which are calculated to offend him and may drive away his
customer if he is honest," Marfani & Co. v. Midland Bank, [1968] 2 All
E.R. 573 (582). Except when circumstances of a case so justifies, in making
inquiries the banker's attitude may be solicitous and not detective. Sethuraman
was believed when he said that he was the proprietor of Industrial Chain
Concern which he recently started. He showed some orders and references in
proof of his business. The banker believed in existence of his business but did
not meticulously examine the addresses. Sethuraman was asked as to why he
wanted to come to that branch and his reply was that he expected there to have
overdraft facility and when that was refused he expressed that after his
business improved he would expect to be granted overdraft facilities after one
year. There is no doubt that Sethuraman was a rogue, but he prepared the plan
intelligently and the banker in good faith believed in his statements. We,
therefore, find it difficult to hold that the Bank was negligent in opening the
account accepting the deposit of cash by a person known to the Manager of the
Bank under the above circumstances.
Mr. Balakrishnan
has argued that a cheque for Rs.2,800 was paid in on the same date which was a
stolen cheque and it ought to have aroused suspicion of the banker. But there
is nothing to show that it formed part of the same transaction. As we have
already observed, once an account is opened the relationship of banker and
customer begins. Duration is not of the essence. As was held in Ladbroke &
Co. (supra) the mere opening of an account without the actual transaction was
sufficient to constitute the relationship and this view was followed in
Commissioner of Taxation v. English Scottish and Australian Bank (supra) and it
was stated that the word 'customer' signifies a relationship of which duration
is not of the essence. The contract is not bet38 ween a habitue and a newcomer,
but between a person for whom the bank performs a casual service
............... and a person who has an account of his own at the bank. Lord
Chorley has even expressed the view that for the purpose of establishing the
relationship of banker and customer there appears to be no logic in the actual
opening of the account, and when the banker agrees to accept the customer the
relationship comes into existence at that time though the account may not be
opened until later. According to the author "the relationship being
contractual should be subjected to the normal rules of contract law and the
making of the contract depends on the acceptance of the offer. This contract
could clearly be effected before an account had actually been opened though it
would state that there must be an agreement to open an account before the
banker and customer relationship can exist." In the instant case there is,
therefore, no doubt that the first cheque was subsequently paid in by
Sethuraman as a customer and the Bank was to collect it on account of the
customer. The Bank, therefore, in collecting the cheque and paying the proceed
to Sethuraman acted as a Collecting Banker and can be held negligent, if at
all, only as such as it was to collect it on account of the customer. In fact,
from the statement of account it is clear that the account was opened on October 3, 1974 and was closed on February 1, 1975 and there were a number of
transactions of deposits and withdrawals. The detailed particulars of the cheques
paid into the account are not in evidence, it is, therefore, difficult to know
whether each individual cheque or draft should have aroused suspicion in the
mind of the Banker before accepting the same for collection from its customer.
The
High Court did not analyse the legal position and did not consider the facts
and circumstances in this regard in proper perspective. We are not inclined to
hold the Bank negligent in opening the account considered alone.
The
next question is whether the Bank was negligent in collecting the cheques. In
collecting a cheque on account of a customer the banker is protected by section
131 of the Negotiable Instruments Act, 188 1 (26 of 1881) hereinafter referred to
as 'the Act' which reads:
"131.
Non-liability of banker receiving payment of cheque--A banker who has in good
faith and without negligence received payment for a customer of a cheque
crossed generally or specially to himself shall not, in case the title to the cheque
proves defective, incur any liability to the true owner of the cheque by reason
only of having received such payment.
Explanation--A
banker receives payment of a cros39 sed cheque for a customer within the
meaning of this section notwithstanding that he credits his customer's account
with the amount of the cheque before receiving payment thereof." In the
section the words 'a cheque crossed generally or specially to himself' are
important to be noted. Section 131 corresponded to section 82 of the Bills of
Exchange Act, 1882 of England which was repealed by the Cheques
Act, 1957 and the protection there is now given by section 4 of the Cheques
Act, 1957. English decisions can, therefore, be guide in this regard.
In
Lloyds Bank Ltd. v. E.B. Savory and Company, [1933] AC 20 1, the bank was held
to be negligent (depriving it of the protection of section 82) not to ask a
customer though respectively introduced the name of his employer and in the
case of a married woman the name of her husband's employer.
This
is a case where a fraud had arisen through an employee stealing cheques from
his employer and placing them into the credit of his account. Had the bank
known his employer, enquiries would have been made.
The
request for special collection as in case of Ladbroke & Co. (supra) was absent in this case as the account
continued for quite some time. Even in case of special collection it was held
that it was desired for the purpose of learning quickly whether or not the cheques
will be paid.
This case
was mentioned in Marfani and Co. Ltd. v. Midland Bank Ltd., (supra) where the
Midland Bank had make a special collection without being asked by their
customer. It was decided that this did not indicate that the bank's suspicions
were aroused which would require further inquiry. It was found that the bank
took upon a special collection for the reasons (a) that the cheque was for a
large sum, so that it was in their interest to collect quickly and (b) that the
customer about to buy a restaurant might require the proceeds quickly. In the
Court of Appeal, Diplock LJ said that the 'significance' of the special
clearance depends upon the Judge's assessment of the credibility of the bank
officials who gave evidence; and he saw no reason to differ from him.
In the
instant case we have no reason to disbelieve what was said by the Manager, DW1.
In the
instant case in the absence of any evidence giving the details of the cheques
and their tenor, we are unable to hold that there were notices and
circumstances which ought to arouse suspicion on the part of the bank. The bank
normally has an obligation to collect the customer's cheques paid into his
account. In Halsbury Laws of England, 4th Edn., Vol. 3 at para 46 we read:
40
"46. Customer's title to money paid in. In the absence of notice, express
or implied the banker is not concerned to question the customer's title to
money paid in by him. although if a person entrusted with a cheque wrongfully
pays it to the bank to the credit of someone who is not entitled to it, the
true owner, if he has given notice to the bank of his title while the credit
remains, may recover the amount from the bank as money had and received; or as
damages for conversion ...........
A
banker should be very cautious in accepting for a customer's account any cheque
drawn by him as agent upon his principal's account, however broad may be the
authority to draw. If the court detects circumstances which should arouse
suspicion that the agent was abusing his authority, the banker will be liable
to the principal even though the cheque was crossed." This is because in
every case of opening an account bank takes a mandate and, until changed,
controls the operation of the account. In the instant case, having already
opened the account the Bank was not concerned to question the customer's title
to money paid in by him, when a cheque was drawn in favour of Industrial Chain
Concern.
In
Capital and Counties Bank v. Gordon, [1903] AC 240, the House of Lords accepted
the position that a bank acts basically as a mere agent or conduit pipe to
receive payment of the cheques from the banker on whom they are drawn and to
hold the proceeds at the disposal of its customer. Unless crossed the banker
himself is the holder for value. He may be a sum collecting agent or he may
take as holder for value or as holder in due course. As an agent of the
customer for collection he is bound to exercise diligence in the presentation
of the cheques for payment within reasonable time. If a banker fails to present
a cheque within a reasonable time after it reaches him, he is liable to his
customer for loss arising from the delay. A banker receiving instruments paid
in for collection and credit to a customer's account may collect solely for a
customer or for himself or both. Where he collects for the customer he will be
liable in conversion if the customer has no title. However, if he collects in
good faith and without negligence he may plead statutory protection under
section 131 of the Act.
In the
instant case in the absence of evidence on record we find it difficult to
ascertain whether the bank was collecting the cheques merely as agent of the
customer or as holder for value or as holder in due course. Some of the entries
in the statement do show deposits and 41 withdrawals of lesser amounts on the
same date, but that is not enough for arriving at any conclusion whether the
bank was collecting as a holder for value and not merely as an agent of the
customer.
To
enable a bank to avail the immunity under section 131 as a collecting banker he
has to bring himself within the conditions formulated by the section. Otherwise
he is left to his common law liability for conversion or for money had and
received in case of the person from whom he took the cheques having no title or
defective title. The conditions are:
(a) that
the banker should act in good faith and without negligence in receiving a
payment, that is, in the process of collection,
(b)
that the banker should receive payment for a customer on behalf of him and thus
acting as a mere agent in collection of the cheque and not as an account holder
(c) that
the person for whom the banker acts must be his customer and
(d) that
the cheque should be one crossed generally or especially to himself.
The
receipt of payment contemplated by the section is one from the drawee bank. It
is settled law that the onus of bringing himself within the section rests on
the banker.
In
Capital and Counties Bank v. Gordon, (supra) as we have seen, the conception of
a collecting banker was that of "receiving the cheque from the customer,
presenting it and receiving the money for the customer, and then, and not till
then, placing it to the customer's credit, exercising functions strictly
analogous to those of a clerk of the customer sent to a bank to cash an open cheque
for his employer." If the banker performs these functions in course of his
business, in good faith and without negligence he will be within section 131 of
the Act.
We
have already observed that the principle enunciated in the Commissioners of
Taxation v. English Scottish and Australian Bank, (supra) is that the opening
of the account is material as shedding light on the question whether there was
negligence in collecting a cheque does bring out the true position that there
must be sufficient connection established between the opening of the account
and the collection of the cheque before a defence under section 131 could be
held to be barred. The question would then be one of facts as to how far the
two stages can be regarded as so intimately associated as to be considered as
one transaction. We have already found that in the instant case there was no
evidence to show that the opening of the account and the collection of the cheques
and drafts formed part of the same transaction. Where a banker in good faith
and without negligence receives payment for a customer of a cheque and the
customer has no title or a defective title to the cheque, the banker does not
incur any liability to the true owner of the cheque by reason only of having
received such payment. The banker is not to be treated for purposes of the
protective 42 section as having been negligent by reason only of his failure to
concern himself with absence of, or irregularity in, endorsement of the cheque
or other instrument to which the section applies. This has to be so because the
drawer of the cheque is not a customer of the bank while the payee is.
Where
the protection attaches, it covers the receipt of the cheque and every step
taken in the ordinary course of business and intended to lead up to the receipt
of payment. Even if there was negligence in opening of the account that act
ipso facto would not result in loss to the true owner of the cheque collected.
While collecting the cheque for a customer the bank is under obligation to present
it promptly so as to avoid any loss due to change of position. When it receives
the money collected then also there is no direct loss to the true owner. It is
only when the amount is paid or withdrawn by the customer that the loss
results. During this period what is important to note is that at every step in
collection of the money and making payment the banker is bound by the
banker--customer relationship and rights and obligations flowing therefrom.
Even so, if there was anything to rouse suspicion regarding the cheque and
ownership of the customer the banker may find itself beyond the protection of
section 131. The scope or ambit of possible suspicion will depend on various
situations that may have prevailed between the drawer of the cheque and the customer.
In the instant case Sethuraman having been believed to have been the proprietor
of Industrial Chain Concern the cheques payable to Industrial Chain Concern
left little scope to have aroused any suspicion in the minds of the Bank. The
position may have been different if Sethuraman was known as acting as an
employee of Industrial Chain Concern and the cheques were payable to that
concern, but were deposited into personal account of the employee which was not
the case here. The requirement of receiving payment for a customer enunciated
clearly in Capital and Counties Bank Ltd. v. Gordon, (supra) was extended in
Barclays Bank Ltd. v. Astley Industrial Trust Ltd., [1970] 1 All E.R. 719
wherein it was held that the banker may receive payment for himself and yet be
entitled to the protection where, acting in a purely collecting capacity, he
has nevertheless a lien or is otherwise a holder for value.
There
can be no doubt that the existence of a Current Account created relationship of
banker and customer in this case. Sethuraman would be a customer even if his
account was over drawn until that account was closed. In Halsbury's Laws of
England, 4th Edn., Vol. 3 at para 103 it is said:
"If
the banker wishes to plead the statutory protection, his dealings throughout
must be in good faith and without negligence. The alternative liability arising
from negligence 43 renders the question of good faith practically superfluous,
and it is seldom, if ever, raised. Negligence in this connection is breach of a
duty to the possible true owner, not the customer, created by the statute
itself, the duty being not to disregard the interests of the true owner."
It is a settled law that the test of negligence for the purpose of section 131
of the Act is whether the transaction of paying in any given cheque coupled
with the circumstances antecedent and present is so out of the ordinary course
that it ought to arouse doubts in the banker's mind and cause him to make
inquiries. Lloyds Bank Ltd. v. E.B. Savory and Co., (supra), Marfani & Co.
Ltd. v. Midland Bank Ltd., (supra), Arab Bank Ltd. v. Ross, [1952] 1 All E.R.
709 and Karak Rubber Co. Ltd. v. Burden, (No. 2) [1972] 1 All E.R. 1210.
are
some of the authorities laying down the above rule. The banker is bound to make
inquiries when there is anything to rouse suspicion that the cheque is being
wrongfully dealt with in being paid into the customer's account. However, the
banker is not called upon to be abnormally suspicious, as was held in Penmount
Estates Ltd. v. National Provincial Bank Ltd., [1945] 173 LT 344. It was held
in Motor Traders Guarantee Corpn. v. Midland Bank Ltd., [1937] 4 All E.R. 90,
that disregard of the bank's own regulations may be evidence of negligence. In
the instant case no such regulation of the bank has been produced so as to
establish that in collecting the cheque and allowing the customer to withdraw
the bank violated its own regulations. Nor has the plaintiff been able to show
that the transactions in paying in the drafts and cheques coupled with the circumstances
antecedent and present were so out of the ordinary that it ought to arouse
doubts in the Banker's mind and cause him make inquiries. As we have observed
that the Bank's negligence in not making inquiries as to the customer upon
opening an account if there was any, could shed light in its negligence in
collecting the cheques for him. But we have found that there was no such
negligence in this case. Mr. Balakrishnan's submission that in this case while
opening the account, the appellant should have inquired of the plaintiff's firm
does not reasonably follow in view of the fact that what Sethuraman said was
that he was the proprietor off the newly established firm "Industrial
Chain Concern" and if that was the name of the payee in the cheques, Sethuraman
having been accepted as its proprietor there would be no room for suspicion
that the firm's cheques were being paid into the proprietor's personal account.
There is no allegation and proof that the collection and payment were made
contrary to the tenors of the instruments. Carelessness could occur at the time
of collection especially if there was failure to pay due attention to the
actual terms of the mandate. The actual circumstances at the time of 44 paying
in for collection, if the amount was very large one might raise suspicion. But
in this case the first cheque paid in was of 2,800.17p. which could not be
regarded as such a large amount to have aroused suspicion considering the fact
that the firm was 'Industrial Chain Concern', dealing in industrial chains and
pulleys.
Bharat
Bank Ltd. v. Kishanchand Chellaram, AIR 1955 Madras 402; Sanyasilingam v.
Exchange Bank of India, AIR 1948 Bombay 1; Woodbrier v. Catholic Bank, AIR 1958
Kerala 316, applied the accepted principles to the facts. In Orbit Mining &
Trading Co. v. Westminister Bank, [1962] 3 All
E.R. 565, Harm LJ said: "It cannot at any rate be the duty of a bank
continually to keep itself upto date as to the identity of a customer's
employer", though he is presumably required to know the identity of the
employer. That case is distinguishable on facts. Underwood v. Bank of
Liverpool, [1924] 1 K.B 775, was a case of a Director paying into his own
private account cheques in favour of the company duly endorsed by himself as
sole Director and as such distinguishable on facts.
In Bapulal
Premchand v. Nath Bank Ltd., AIR 1946 Bom.
482, Chagla
J, as he then was, in the facts of that case expressed that in his opinion,
there was no absolute and unqualified obligation on a bank to make inquiries
about a proposed customer and that modern banking practice required that a
customer should be properly introduced or the bank should act on the reference
of some one whom it could trust.
Therefore,
perhaps in most cases it would be wiser and more prudent for a bank not to
accept a customer without some reference. But he was not prepared to go so far
as to suggest that after a bank had been given a proper reference with regard
to a proposed customer and although there was no suspicious circumstances
attendant upon the opening of the account, it was still incumbent upon the bank
to make further inquiries with regard to the customer. In that case the manager
of the defendant-bank accepted. the reference of the cashier Modi and also in
fact made certain inquiries of Modi as to the position and status of the
customer. It was held that it was not obligatory upon the defendant-bank to
make any further inquiries about his customer and in having failed to make any
such further inquiries in his Judgment they were not guilty of negligence. In
the instant case the Manager himself gave the introduction.
As a
general rule a banker before accepting a customer, must take reasonable care to
satisfy himself that the person in question is of good reputation; and if he
fails to do so he will run the risk of forfeiting the protection given by
section 131 of the Act but 'reasonable care' will 45 depend on the facts and
circumstances of the case. The courts have tended to accept the practices and
procedures which bankers lay down for themselves, but that can by no means be
decisive. The "type of necessary inquiry at the opening of an account
seems to be less stringent at present than it was a generation ago, and it is
difficult to spell out from the cases any hard and fast rules." This is so
because, in the words of Lord Chorley, the use of banking facilities at the
present day "has become so wide spread and has penetrated so far into
social strata where banking accounts were previously unknown, that precautions
at one time considered necessary are now difficult in the press of business to
apply. One of the obvious problems is that of the dishonest employee who may
wish to open a bank account for the purpose of getting cheques collected for
which he has stolen from his employer. If the banker is aware of his employment
he will naturally watch that those cheques of which the employer is payee, or
in which he is otherwise interested, do not pass through the account. But how
far can he be expected to keep himself informed of the employment of all his
customers? This is typical of the problems which have faced the judges, and on
which their views have tended to vary from time to time, and indeed from judge
to judge." The above problem has been realised by the courts in England and India. In Marfani & Co. v. Midland Bank (supra) a man called Kureshy
who was minded to cheat his employers, the plaintiffs in the case went to a
branch of the defendant bank and asked to open an account giving the name of
Sheik Eliaszade and also those of the referees. He was allowed to do so
immediately, before the references had been taken up, and paid Pound 50 the
same day. The next day he paid in a further Pound 35 in cash and the
plaintiffs' cheque for Pound 3,000 made payable to one Eliaszade which he had
stolen from them. His object in opening the account was to get this cheque
collected by the defendant bank.
The
defendants in fact had this cheque collected specially on the day it was paid
in, and on the same day wrote to the referees. On the next day the defendants received
the proceeds of the cheque, and one of the officers of the bank on same day had
an interview with one of the referees who was a customer at the same branch and
who gave a favourable account of Eliaszade which satisfied the manager--the
other referee never replied. During the following days Kureshy drew out the
whole of the Pound 3,000; indeed he tried to draw out substantially more. On
discovering the fraud the plaintiffs sued the defendant bank for the conversion
of their cheque. When the defendants pleaded section 4 of the Cheques Act,
1957, the plaintiffs contended that they had been negligent under four heads:
46
(i)
They had taken no steps to identify the proposed customer, without which the
referee's good opinion was valueless.
(ii)
No inquiry was made as to the antecedents of Kureshy.
(iii)
Only one referee responded to the bank's inquiry
(iv)
The cheque was in fact collected before the references had been taken up.
The
defendants called evidence that they had done all that was usual in such a
case, and claimed that this proved that they had acted with due care. It was
held that the defence succeeded.
It is
thus clear that the question of negligence or no negligence depends entirely on
the facts of each individual case and thus makes it difficult to judge in
advance how any particular litigation involving allegations of negligence will
go. In the instant case Sethuraman had in effect opened another account in the
name of the plaintiff firm and operated it himself as its proprietor.
As we
have already observed, carelessness on the part of the bank is most likely to
occur at the time of collection of cheques especially in failure to pay due
attention to the actual terms of the mandate. It is not here a case of playing
the detective but of a careful examination of everything which appears on the
front and back of the instrument. Each set of circumstances produces its own
requirements. The instruments, crossing, type of crossing, per pro, pay cash or
order etc. are important. The banker may be negligent in acting contrary to
such mandate under appropriate circumstances. In the instant case, however, no
details regarding such mandates on the alleged cheques are available.
The
High Court took the view that if the Manager of the Bank gave the introduction
of Sethuraman to open the account in the plaintiff's name showing him is its
proprietor without making any enquiry as to its true relationship with the
concern then he was taking a risk and when it transpired that Sethuraman had
made fraudulent representation then the Manager should be taken to have acted
negligently. We are not inclined to agree inasmuch as while dealing with a
customer for collecting a cheque, there is no contractual relation between the
collecting banker and the true owner.
The
duty is implied by law. A conduct beneficial to the customer at the expense of
the true owner when the Bank acts in good faith and without negligence, is no
47 breach of that duty. It is from this position of the true owner that
question of negligence under section 131 of the Act has to be viewed. The
formula approved in Lloyds Bank Ltd. v. Chartered Bank of India, Australia and
China, [1929] 1 K.B. 40, is that broadly speaking, the banker must exercise the
same care and forethought in the interest of the true owner, with regard to cheques
paid in by customer, as a reasonable man would bring on similar business of his
own.
Lord
Dunedin in Commissioner of Taxation (supra) said that the bank's action must be
in accordance with the ordinary practice of banking and bank cannot be held
liable merely because they have not subjected an account to a 'microscopic
examination'.
In
Ross v. London County, Westminister and Parr's Bank Ltd., [1919] 1 K.B. 678, Bailhache
J. took the view that the clerks and cashiers of the defendant bank would be
attributed the degree of intelligent and knowledge ordinarily required of a
person in their position to fit them for the discharge of their duties but that
no microscopic examination of cheques paid in for collection was necessary and
that it was not expected that officials of banks should also be 'amateur
detectives'. It could not be said that before opening an account in the name of
a firm the Bank would be required to enquiry always whether any firm of the
same name was already in existence or not. What facts ought to be known to the
Bank, what inquiries he should have made and what facts were sufficient to
cause the Bank reasonably to suspect that Sethuraman was not the true owner in
the facts and circumstances of the case would depend on current banking practice.
What was the practice long time back when the use of banking facilities by the
general public was much less widespread may not be a proper guide. It should
also be noted that the duty of care owed by the Bank to the plaintiff as owner
of the cheque did not arise until the cheque was delivered to the Bank by the
customer Sethuraman. It was then only that duty to make inquiries about the cheque
arose. Those inquiries would depend on the apparent tenor of the cheque and the
knowledge of facts that earlier inquiries ascertained. What we have to do is to
look at all the circumstances at the time of the paying in of the cheque by
Sethuraman and to see whether those circumstances were such as would cause a
reasonable banker possessed of the information gathered about Sethuraman to
suspect that he was not the true owner of the cheque. There is very little
evidence relating to the deposit and particulars of the cheques deposited and
hence it is difficult to hold that the Bank ignored obvious indications and was
negligent at that time.
It is
difficult to accept so speculative a proposition as what would have happened if
inquiries had been made which were not made. It does not constitute any lack of
reasonable care to refrain from making 48 such inquiries which it was
improbable to have led to detection of the customer's fraud.
While
arriving at the above conclusion we have borne in mind the standard of
reasonable care and the banking practices and its trend in a developing banking
system in the country. Any stricter liability may not be conducive. It will
also be observed that expansion of the banker's liability and corresponding
narrowing down of the banker's protection under the provision of section 131 of
the Act may make the banker's position so vulnerable as to be disadvantageous
to the expansion of banking business under the ever expanding banking system.
This is because a commercial bank, as distinguished from a Central bank, has
the following characteristics, namely (a) that they accept money from, and
collect cheques for, their customers and place them to their credit; (2) that
they honour cheques or orders drawn on them by their customers when presented
for payment and debit their customers accordingly; and (3) that they keep
current account in their books in which the credits and debits are entered. The
receipt of money by banker from or on account of his customer constitute it the
debtor of the customer.
The
bank borrows the money and undertakes to repay it or any part of it at the
branch of the bank where the account is kept during banking hours and upon
payment being demanded.
The
banker has to discharge this obligation and normally the banker would not
question the customer's title to the money paid in. Applying the above
principles of law to the facts of the instant case we are not inclined to hold
that the Bank was negligent either in collecting the cheques and drafts or
allowing Sethuraman to withdraw the proceeds.
As we
have taken the view that the bank was not negligent, it is not necessary to
deal with the question of contributory negligence. Let the loss lie where it
falls.
In the
result, this appeal succeeds. The impugned judgments are set aside and the
appeal is allowed, but without any order as to costs.
Y. Lal
Appeal allowed.
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