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CASE NO.: Appeal (civil)  151 of 1998

PETITIONER: The Kerala State Co-operative Marketing Federation       

RESPONDENT: State Bank of India and Ors.                             

DATE OF JUDGMENT: 30/01/2004

BENCH: S. N. VARIAVA & H. K. SEMA

JUDGMENT: JUDGMENT

S. N. VARIAVA, J.

       This Appeal is against a Judgment dated 5th October, 1995.         Briefly stated the facts are as follows:

The 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.   However, 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  On  30th December, 1982 a sum of Rs. 50,000/- was withdrawn from the  account just prior to stop instructions being received.         The 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 Act. The 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 the Suit.   Hence this Appeal.         Section 131 of the Negotiable Instruments Act reads as follows: "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."

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.         In the 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

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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.   In the 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.            In the 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 large amounts.         The 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.           This 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: "9. 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 :  "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."  10. M. 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

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in serious consequences not only for the banker  concerned, but also for other bankers and the  general public."  11. 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. Ex. B-6  contains the general instructions regarding constituent  accounts for bank. Mark II deals with opening 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 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 ..."  12. 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 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.  13. It 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.  14. In 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

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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. 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 paid.  15. In 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: "(1) 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.   

(2)     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.

(3)     It is the banker seeking protection who has on his  shoulders the onus of proving that he acted in good faith  and without negligence.

(4)     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.

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(5)     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.

(6)     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  thereof.

(7)     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 banker.

(8)     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.

(9)     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.    The 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.    The 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

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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.   It 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.   In 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.   There will be no order as to costs.