The Kerala State Co-Operative Marketing Federation Vs. State Bank of India
& Ors  Insc 58 (30 January 2004)
N. Variava & H. K. Sema S. N. Variava, J.
Appeal is against a Judgment dated 5th October, 1995.
stated the facts are as follows:
Appellant received a cheque for Rs. 1,00,000/- from the 3rd Respondent. The cheque
was drawn on the 2nd Respondent Bank. The Appellant sent the cheque by post
along with some other cheques.
the cheque in question was stolen in post and was altered to read as if it was
payable to Shri K. Narayhanan. A person calling himself K. Narayhanan opened a
bank account with the 1st Respondent Bank on 24th December, 1982. The account was opened with a sum of Rs. 20/-. The
customer then asked for a cheque book and was informed that the minimum balance
had to be Rs. 100/- to obtain a cheque book. He therefore put in Rs. 80/- into
the account. He was then issued a cheque book. Thereafter on 29th December, 1982 the cheque for Rs. 1,00,000/- was
deposited into the account and the same was collected by the 1st Respondent on
behalf of its client. On 30th
December, 1982 a sum
of Rs. 50,000/- was withdrawn from the account just prior to stop instructions
said K. Narayhanan turned out to be a fictitious person. He was never traced
again. The remaining balance of Rs. 50,000/- was ultimately returned to the
Appellant. When the Appellants claimed the sum of Rs.50,000/- from the 1st
Respondent they claimed protection of Section 131 of the Negotiable Instruments
Appellant thus filed a Suit for recovery of the sum of Rs. 50,000/-. The Suit
was decreed by the trial Court. However, the High Court has allowed the Appeal
of the 1st Respondent, set aside the decree of the trial Court and dismissed
131 of the Negotiable Instruments Act reads as follows:
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." It is thus to be seen that a
banker, who encashes a cheque, in respect of which his client had no title,
would become liable in conversion or for money had and received. However,
Section 131 of the Negotiable Instruments Act protects the banker, provided he
has received payment in good faith and without negligence of a cheque crossed
generally or specially.
case of Indian Overseas Bank vs. Bank of Madura Ltd. reported in (1992) Vol. 75
Company Cases 481, the receiving banker was held guilty of negligence and lack
of good faith inasmuch as it had allowed the opening of an account with a small
amount and shortly thereafter, i.e. within 9 days allowed withdrawal of a sum
of Rs. 9,500/-. It was held that the opening of the account, the presentation
of the draft and withdrawal of the amount were part of one integral scheme. The
fact that the person who introduced the account holder had not been examined in
the suit was held against the Bank.
case of Syndicate Bank vs. United Commercial Bank reported in (1991) 70 Company
Cases 748, it was held that the Appellant bank had to prove that it had acted
in good faith and without negligence. It was held that the fact that the
customer had just opened the account and had only one transaction with the
bank, namely the encashment of the cheque, showed that the bank had not acted
in good faith and without negligence.
case of Brahma vs. Chartered Bank reported in AIR 1956 Calcutta 399, it has been held that the onus
of proving "good faith" and "absence of negligence" is on
the banker claiming protection under Section 131 of the Negotiable Instruments
Act. It is held that in deciding whether a collecting banker has or has not
been negligent it becomes necessary to take into consideration many factors
such as the customer, the account and the surrounding circumstances. It is held
that if the cheque is of a large amount, then the bank has to be more careful
unless the customer was a customer of long standing, good repute and with great
personal credit and was one who regularly deposited and withdrew cheques of
same principles are reiterated in the cases of Central Bank of India Ltd. v. Gopinathan
Nair reported in 1972 Kerala Law Times 518 and Indian Bank vs. Catholic Syrian
Bank Ltd. reported in AIR 1981 Madras 129.
Court has also considered this question in the case of Indian Overseas Bank vs.
Industrial Chain Concern reported in (1990) 1 SCC 484. In this case, on the
basis of evidence lead by the bank (evidence of the Manager and the accountant
of the bank) the bank was exonerated. However, principles which governed such
cases were noted from various decisions. The relevant portion reads as follows:
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 edn., in chapter 5 at
page 64 it is said :
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.
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."
L. Tannan in Banking Law and Practice in India, 18th edn. 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 making 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.
accordingly consult those instructions. Ex. B-6 contains the general
instructions regarding constituent accounts for bank. Mark II deals with
opening with opening of accounts. It says :
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 from 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 from
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 :
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 he concern as
proprietor in the space provided." 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.
was held in Commissioners 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.
Ladbroke and Co. v. Todd ((1914) 30 TLR 433 : (1914) 111 LT 43 : 19 Com Cas
256), 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 account for 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.
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. Bailhache, 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
Turner v. London and Provincial Bank ((1903) 2 Legal
Decisions Affecting Bankers 33 : (1903) XXIV Journal of Institute of Bankers
220), 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." The
principles governing the liability of a collecting banker have also been
extracted in the impugned judgment. They read as follows:
As a general rule the collecting banker shall be exposed to his usual liability
under common law for conversion or for money had and received, as against the
'true owner' of a cheque or a draft, in the event the customer from whom he
collects the cheque or draft has not title or a defective title.
The banker, however, may claim protection from such normal liability provided
he fulfils strictly the conditions laid down in S. 131 or S. 131A of the Act
and one of those conditions is that he must have received the payment in good
faith and without negligence.
is the banker seeking protection who has on his shoulders the onus of proving
that he acted in good faith and without negligence.
The standard of care to be exercised by the collecting banker to escape the
charge of negligence depends upon the general practice of bankers which may go
on changing from time to time with the enormous spread of banking activities
and cases decided a few decades ago may not probably offer an unfailing
guidance in determining the question about negligence today.
Negligence is a question of fact and what is relevant in determining the
liability of a collecting banker is not his negligence in opening the account
of the customer but negligence in the collection of the relevant cheque unless,
of course, the opening of the account and depositing of the cheque in question
therein from part and parcel of one scheme as where the account is opened with
the cheque in question or deposited therein so soon after the opening of the
account as to lead to an inference that the depositing the cheque and opening
the account are interconnected moves in a integrated plan.
Negligence in opening the account such as failure to fulfill the procedure for
opening an account which is prescribed by the bank itself or opening an account
of an unknown person or non-existing person or with dubious introduction may
lead to a cogent, though not conclusive, proof of negligence particularly if
the cheque in question has been deposited in the account soon after the opening
The standard of care expected from a banker in collecting the cheque does not
require him to subject the cheque to a minute and microscopic examination but
disregarding the circumstances about the cheque which on the face of it give
rise to a suspicion may amount to negligence on the part of the collecting
The question of good faith and negligence is to be judged from the stand point
of the true owner towards whom the banker owes no contractual duty but the
statutory duty which is created by this section and it is a price which the
banker pays for seeking protection, under the statute, from the otherwise
larger liability he would be exposed to under common law.
Allegation of contributory negligence against the paying banker could provide
no defence for a collecting banker who has not collected the amount in good
faith and without negligence." On the basis of the above law, let us now
see whether the 1st Respondent bank has discharged the burden which lay upon it
to show that it had acted in good faith and without negligence.
facts narrated hereinabove indicate that the transaction of opening of the
account, depositing the exact amount for being entitled to receive a cheque
book, depositing of the cheque of Rs. 1,00,000/- and the withdrawal of the sum
of Rs. 50,000/- were all part of the same transaction. All these took place in
close proximity to each other.
1st Respondent's Branch Manager gave evidence. From his evidence it is clear
that the person who called himself K. Narayhanan opened an account on the
introduction of an account holder by name Dharman Panicker. In the Account
Opening Form the address is given only as "Kaniyarath P.O., Kallisseri".
Thus an absolutely vague address was given. The Bank made no enquiries as to
the credit worthiness of the said K. Narayhanan or as to his full address or
even about his telephone number. Thereafter even though initially the account
was opened with only Rs. 20/- the exact amount of Rs. 80/- was deposited for
purposes of receipt of a cheque book. The 1st Respondent bank does not seem to
have put on its guard, even when a cheque for a very large amount i.e. Rs. 1,00,000/-
was deposited soon thereafter. In cross-examination the Branch Manager admits
that in the Account opening form neither the name nor the occupation of the
person introducing had been filled up. He admits that no enquiry was made
regarding the nature of business of K. Narayhanan or where the place of
business was. Even after it was found out that that a cheque had been forged
and stop payment notice had been issued, no enquiry was made by the Bank with
the introducer. When asked why no enquiries were made, the answer given was
that the bank has no responsibility to look into it. Another factor which mitigates
against the 1st Respondent Bank is that it made no attempt to lead the evidence
of the person who had introduced the account holder.
appears to us that the above mentioned facts discloses that the 1st Respondent
bank has not discharged the burden which lay upon it to show that it had acted
in good faith and without negligence.
this view of the matter, we are unable to sustain the impugned Judgment. It is
accordingly set aside. The decree of the trial Court is restored. This Appeal
stands disposed of accordingly.
will be no order as to costs.