Indian Overseas Bank Vs. Industrial Chain Concern
EmailAppeal: Civil Appeal No. 2842 of 1982.
(From the Judgment and Order of the High Court of Judicature at Madras, dated 1-10-1981 in Appeal No. 516 of 1977)
(From the Judgment and Order of the High Court of Judicature at Madras, dated 1-10-1981 in Appeal No. 516 of 1977)
Petitioner: Indian Overseas Bank
Respondent: Industrial Chain Concern
Apeal: Civil Appeal No. 2842 of 1982.
(From the Judgment and Order of the High Court of Judicature at Madras, dated 1-10-1981 in Appeal No. 516 of 1977)
(From the Judgment and Order of the High Court of Judicature at Madras, dated 1-10-1981 in Appeal No. 516 of 1977)
Judges: K.N. SAIKIA & M. FATHIMA BEEVI, JJ.
Date of Judgment: Nov 07, 1989
Appearances:
Mr.C. Seetharamaiah, Sr. Advocate, Mr.P. Krishna Rao and Mr.K.R. Nagaraja, Advocates with him for the Appellant.
Mr.S. Balakrishnan, Advocate for the Respondent.
Head Note:
BANKING LAW
Opening of bank account
Opening of an account – Care to be taken by a Bank – Negligence – Tests to be applied – Whether Rules or instruction of Bank were followed or not – S opened another account in the name of the plaintiff firm and operated it himself as its proprietor – Manager himself knew S and gave the introduction – Held that there was no violation of any instruction or rules – Bank was not negligent in opening the account.
Held:
(i) 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. (Para 8)
(ii) 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. … 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 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. (Paras 11 and 12)
(iii) 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 cash 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 bankers 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. (Para 16)
Cases Reffered:
1. Woodbrier v. Catholic Bank, AIR 1958 Kerala 316.
2. Bharat Bank Ltd. v. Kishanchand Chellaram, AIR 1955 Madras 402.
3. Sanyasilingam v. Exchange bank of India, AIR 1948 Bombay 1.
4. Bapulal Premchand v. Nath Bank Ltd., AIR 1946 Bom. 482.
2. Bharat Bank Ltd. v. Kishanchand Chellaram, AIR 1955 Madras 402.
3. Sanyasilingam v. Exchange bank of India, AIR 1948 Bombay 1.
4. Bapulal Premchand v. Nath Bank Ltd., AIR 1946 Bom. 482.
Foreign Cases Referred:
1. Karak Rubber Co. Ltd. v. Burden (No.2), (1972) 1 All E.R. 1210.
2. Barclays Bank Ltd. v. Astley Industrial Trust Ltd., (1970) 1 All E.R. 719.
3. Marfani & Co. v. Midland Bank, (1968) 2 All E.R. 573.
4. Orbit Mining & Trading Co. v. Westminster Bank, (1962) 3 All E.R. 565 – Distinguished.
5. Arab bank Ltd. v. Ross, (1952) 1 All E.R. 709.
6. Penmount Estates Ltd. v. National Provincial Bank Ltd., (1945) 173 LT 344.
7. Motor Traders Guarantee Corpn. v. Midland Bank Ltd., (1937) 4 All E.R. 90.
8. Lloyds Bank Ltd. v. E.B. Savory and Company, (1933) AC 201.
9. Lloyds Bank Ltd. v. Chartered Bank of India, Australia and China, (1929) 1 K.B. 40.
10. Underwood v. Bank of Liverpool, (1924) 1 K.B. 775 – Distinguished.
11. Commissioner of Taxation v. English Scottish and Australian Bank, 1920 AC 683.
12. Ross v. London County, Westminster and Parr’s Bank Ltd., (1919) 1 K.B. 678.
13. Ladbroke & Co. v. Todd, (1914) 30 TLR 433.
14. Turner v. London and Provincial Bank, (1903) 2 Legal Decisions Affecting Bankers 33.
15. Capital and Counties Bank v. Gordon, 1903 AC 240.
Books, Treatises and Articles Referred:
Halsbury Laws of England, 4th Edition, Vol. 3, Paras 46.
Halsbury Laws of England, 4th Edition, Vol. 3, Paras 103.
Sheldon, H.P. : Practice and Law of Banking, 11th Edition, Chapter 5, p.64.
Tannan, M.L. : Banking Law and Practice in India, 18th Edition, p.198.
JUDGEMENT:
K.N. SAIKIA, J. :
1. 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.
2. The ~4~ Industrial Chain Concern as plaintiff filed Original Suit No. 7667 of 1975 in the City Civil Court, Madras for recovery of Rs. 26,383.49 p. 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 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.
3. 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 nor 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.
4. 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.
5. 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 the 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 face 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.
6. The first question to be decided, therefore, is whether the bank was negligent in opening the account in the name of Sethuraman, as proprietor, Industrial Chain Concern. Mr. S. Balakrishnan, for the respondent, defends the High Court’s Judgment.
7. Evidence of DW-1 Muthukrishnan, Manager of the Bank at the relevant time is that the account was opened by Ext. B-1, the Account Opening Form, 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, DW-1 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 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 Nullathambi 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. You are the only agent known to me and that is why I have come to Nungambakkam Branch.” D.W.-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 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.
8. 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.
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 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 reference concerning a proposed customer, he may later have cause for regret.”
10. 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 making necessary inquiries from the reference 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.”
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. 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…”
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 the 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 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 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.
14. 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 account for the purpose 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 question 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 baker for collection, and not when it was paid.
15. 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.
16. 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 cash 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 bankers 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.
17. 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…. 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.
18. 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.
1. 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.
2. The ~4~ Industrial Chain Concern as plaintiff filed Original Suit No. 7667 of 1975 in the City Civil Court, Madras for recovery of Rs. 26,383.49 p. 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 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.
3. 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 nor 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.
4. 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.
5. 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 the 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 face 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.
6. The first question to be decided, therefore, is whether the bank was negligent in opening the account in the name of Sethuraman, as proprietor, Industrial Chain Concern. Mr. S. Balakrishnan, for the respondent, defends the High Court’s Judgment.
7. Evidence of DW-1 Muthukrishnan, Manager of the Bank at the relevant time is that the account was opened by Ext. B-1, the Account Opening Form, 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, DW-1 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 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 Nullathambi 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. You are the only agent known to me and that is why I have come to Nungambakkam Branch.” D.W.-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 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.
8. 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.
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 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 reference concerning a proposed customer, he may later have cause for regret.”
10. 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 making necessary inquiries from the reference 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.”
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. 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…”
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 the 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 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 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.
14. 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 account for the purpose 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 question 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 baker for collection, and not when it was paid.
15. 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.
16. 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 cash 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 bankers 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.
17. 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…. 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.
18. 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.
