TaxTMI 
TaxTMI 
1989 (11) TMI 306
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....oncern' 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 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 allo....
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....en 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. B....
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.... 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 ....
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....ccount, 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. 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 ....
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.... 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. ....
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.... 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 between a habitue and a newcomer, but between a person for whom the bank performs a casual service ...........
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....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 crossed 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 the....
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....use 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....
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....erved 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 section as having been negligent by reason ....
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....d 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 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) [19....
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....ling 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 someone whom ....
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....tomers? 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 favo....
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....hould 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 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. too....