Karnataka High Court
State Bank Of India vs Sir M Vishweshwaraiah Co-Operative ... on 14 August, 2013
Author: Anand Byrareddy
Bench: Anand Byrareddy
1
®
IN THE HIGH COURT OF KARNATAKA AT BANGALORE
DATED THIS THE 14th DAY OF AUGUST 2013
BEFORE:
THE HON'BLE MR. JUSTICE ANAND BYRAREDDY
REGULAR FIRST APPEAL No.652 OF 2010
BETWEEN:
State Bank of India, a Bank
Constituted under the provisions
Of State Bank of India Act, 1955,
having its Corporate Centre at
Madame Cama Road,
Nariman Point, Mumbai - 400 021
and a Local Head Office at 65,
St. Marks Road,
Bangalore - 560 001 and
a Branch at Bangalore known as
Bangalore Branch, Bangalore - 560 001
Represented by its
Manager, A. Subramanyam Bhat. ...APPELLANT
(By Shri. S. Krishnaswamy, Advocate)
AND:
1. Sir. M. Vishweshwaraiah
Co-operative Bank Limited,
BTM Layout,
Bangalore - 560 076,
2
Represented by its Branch Manager.
2. Sri. Raj Kishore,
No.1186, 13th Main,
BTM Layout,
Bangalore - 560 078.
3. Sri. Amit Kumar Agarwal,
Son of Nityanand Agarwal,
Hindu, Major,
RBDPD Lane,
Mawaratola Bhagalpur. ...RESPONDENTS
(By Shri. S.S. Srinivasa Rao, Advocate for M/s. Lexicon,
Advocates for respondent No.1
Notice to respondent no.2 is dispensed with vide order dated
18.2.2011
Respondent no.3 - deleted)
*****
This Regular First Appeal filed under Section 96 of the
Code of Civil Procedure, 1908, against the judgment and decree
dated 21.11.2009 passed in O.S.No.9110/2003 on the file of the
XII Additional City Sessions Judge, Bangalore (CCH-27) partly
decreeing the suit against defendant no.2 therein for recovery of
money and dismissing the suit against defendants 1 and 3 therein.
This Regular First Appeal having been heard and reserved
on 05.08.2013 and coming on for pronouncement of Judgment
this day, the Court delivered the following:-
3
JUDGMENT
This appeal is by the plaintiff before the trial court.
2. The parties are referred to by their rank before the trial court for the sake of convenience.
3. The plaintiff was the Bangalore branch of the State Bank of India (Hereinafter referred to as the 'SBI', for brevity). It was the case of the plaintiff that a demand draft bearing no.462749, dated 9.1.2001, in favour of one Raj Kishore, for a sum of Rs.25,000/- was issued by SBI, Bhagalpur city, drawn on SBI, Bangalore branch. The same was said to have been presented in the clearing house by defendant no.1, Sir M.Visweshwaraiah Co- operative Bank Limited on 17.1.2001 and the proceeds were said to have been paid to the payee.
However, the purchaser of the demand draft, one A.K.Agarwal, the third defendant herein, is said to have made a 4 representation to SBI, Bhagalpur, dated 12.1.2001 that the said demand draft was lost by him and had requested the bank to stop payment. Notwithstanding such intimation, the demand draft had been encashed by a person posing himself as the payee who would have apparently also opened a bank account with the first defendant, through which account, the proceeds under the demand draft had been encashed.
Further, since Agarwal had made a request to be issued with a duplicate demand draft, in the belief that the lost demand draft was never encashed, SBI, Bhagalpur, is said to have made enquiries with SBI, Bangalore, as to whether the first demand draft had been presented for encashment. Inexplicably, SBI, Bangalore, is said to have confirmed in writing that the said demand draft had not been presented for encashment. It is on that basis that SBI, Bhagalpur, issued a duplicate demand draft no.0971060234 dated 9.1.2001 for Rs.25,000/- (on 7.6.2001), the said demand draft was said to have been duly encashed in course of time.
5
It is only in September 2002 that SBI, Bhagalpur placed the third defendant on notice that he was not entitled to the duplicate demand draft and hence was bound to refund an amount of Rs.25,000/- with interest, as there was dual payment.
It was in the above background that the suit was filed.
4. It was alleged that the first defendant had opened the account of an impostor on an improper introduction, without exercising due care and caution. It had opened the account in the name of a person claiming to be the second defendant with a nominal deposit of Rs.250/- and had enabled that person to deposit the demand draft dated 9.1.2001 that was said to have been lost by the third defendant, and had allowed him to encash the same. The third defendant who had also acted carelessly in allowing the demand draft to reach the wrong hands was also liable to make good the loss, jointly and severally.
The first defendant contested the suit and denied its liability.
6
5. The trial court framed the following issues :
"1. Whether the Plaintiff proves that the defendants responsible for the loss incurred by the plaintiff?
2. Whether plaintiff proves that the plaintiff is the true owner of the loss Demand Draft?
3. Whether the plaintiff proves that the defendants 1 to 3 are jointly and severally liable to pay the suit claim?
4. What decree or order? "
The trial court had answered Issues nos.1 and 2 in the negative and Issue no. 3, partly in the affirmative and decreed the suit against the second defendant. It is that which is under challenge.
6. The learned counsel for the plaintiff contends that the suit as against defendant no.1 ought to have been decreed. It is asserted that the said defendant could not have been held entitled 7 to protection under Section 131-A of the Negotiable Instruments Act, 1881 (Hereinafter referred to as the 'NI Act', for brevity).
It is contended that as a collecting banker, the first defendant was negligent in opening an account in the name of the second defendant without verifying the credentials of the said person.
The first defendant had not discharged the burden of establishing that it had acted in a prudent manner and followed the guidelines issued by the Reserve Bank of India in opening the said bank account.
It is contended that the finding of the trial court that the plaintiff was negligent in having made dual payments and was entirely to blame for the loss, is contrary to the settled legal position that it is the collecting bankers responsibility if it is a case of a fictitious person having opened an account is enabled to encash the instrument.
8
The learned counsel places reliance on the following authorities in support of the case of the plaintiff.
(a) Short Notes of cases, 1989(1) Kar.LJ 11,
(b) Bharat Bank Limited, Madras vs. Kishinchand Chellaram, AIR 1955 Mad.402,
(c) Central Bank of India Limited, Bombay-1 vs. V.Gopinathan Nair and others, AIR 1970 Kerala 74,
(d) Indian Bank vs.Catholic Syrian Bank Limited, AIR 1981 Mad.129,
(e) Syndicate Bank vs. Jaishree Industries and others, AIR 1994 Kar.315,
(f) United Bank of India vs. M/s Central Scientific Supplies Company Limited and others, AIR 1999 Madras 1,
(g) Manager, Mandvi Co-op Bank Limited, Bombay vs. M/s Viswa Bandhu and others, AIR 2006 Madras 47.
7. The learned counsel for the first defendant seeks to justify the findings of the trial court. And would assert that if not 9 for the plaintiff's negligence in having issued a non-drawal certificate on the query made by SBI, Bhagalpur as regards the encashment of the lost demand draft, there would have been no occasion for the second payment being made on the duplicate demand draft that was issued by SBI, Bhagalpur - on the assurance of the plaintiff itself.
8. The learned counsel for the plaintiff would state, by way of reply, that there is certainly an element of contributory negligence on the part of the plaintiff. But this does not absolve the first defendant of all blame, when admittedly the manner in which the introduction of the person who had been enabled to open an account in the name of the second defendant - was clearly found wanting in care and caution and was certainly not in accordance with mandatory guidelines issued by the Reserve Bank of India.
10
9. From the above facts, it is evident that the plaintiff was to blame for the dual payment having been made on the same demand draft. Defendant no.2 had been set ex-parte. As it is the case of the plaintiff that Defendant no.1 ought to have been made liable jointly and severally along with defendant no.2, for having enabled the encashment of the first demand draft, which had been reported lost by defendant no.3 as on 12.1.2001, the point for consideration is restricted to whether or not defendant no.1 could claim protection under Section 131 of the NI Act.
In terms of Section 131-A of the NI Act, the provisions of Chapter XIV shall apply to a draft, as if the draft were a cheque. Section 131 of the NI Act, which affords protection to a banker receiving payment of a cheque (or draft) is reproduced hereunder for ready reference.
"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.11
[Explanation - I]:- 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].
[Explanation II:- It shall be the duty of the banker who receives payment based on an electronic image of a truncated cheque held with him, to verify the prima facie genuineness of the cheque to be truncated and any fraud, forgery or tampering apparent on the face of the instrument that can be verified with due diligence and ordinary care."
The assertion of the plaintiff that the first defendant had not ensured the proper introduction of the person, for whom an account had been opened and that his address had not been verified and therefore was answerable for the ultimate loss that has occasioned is not a tenable argument. The mere opening of an account cannot be treated as part of the subsequent act of collecting the amount covered under the draft or cheque from the payee bank. These are two distinct stages and are to be addressed separately while considering the question of good faith or the lack of it and negligence or the absence of the same. There is no reason to suspect the bona fides of a person introduced by a long standing customer of the bank. The fact that the bank made no 12 enquiries about the customer and his address would not disentitle the bank to protection under Section 131 of the NI Act. On the facts of this case , it cannot be said that there were circumstances warranting the collecting bank to suspect that its customer was not the true owner of the crossed demand draft. The amount involved was relatively, a nominal amount and did not warrant the bank to make detailed enquiries into the bona fides of its customer , when the demand draft was presented for payment several days after the account was opened.
The case law referred to by the counsel for the plaintiff would not enable the plaintiff to draw any sustenance from the same, having regard to the peculiar facts of each of those cases, which are briefly discussed hereunder:
(a) Item no.12, Short Notes of cases, 1989(1) Kar.LJ 11, supra, was a case involving a cheque that was tampered with and presented and on facts, it was found that the collecting bank had acted negligently in overlooking the obvious mischief. 13
(b) In the case of Bharat Bank Ltd, supra, the facts were as follows :
On 6.12.1943, a person who gave out his name as Matha Prasad Gupta opened an account with the Mount Road branch of the appellants with a cash deposit of Rs.250 and then put into his account the cheque drawn by the plaintiff on 24.11.1943 and the same was cashed by the Bank in the usual course of business through the clearing house on 7.12.1943. Matha Prasad Gupta operated on this account by issuing a cheque for Rs. 200, Ex.P.4(a) and another cheque for Rs.2,225 Ex.P.4(b) both dated 6.12.1943 and drawn in favour of one Seetharam. On 7.12.1943 he drew a cheque for Rs.125 in favour of a watch-maker Ex.P.4(d) and on 9.12.1943 himself drew a cheque for Rs.2,800 Ex.P.4(c), and thereafter disappeared. The balance remaining to the credit of his account at that time was Rs.124-90.
The plaintiff discovered the loss of the cheque in March 1944 and lodged a complaint with the police. Investigation 14 which followed thereon revealed that the person who had cashed the cheques, Exs.P.4 and P.4(b), and signed his name as Seetharam was in truth a person called R.P.Misra of Benares; that the person who gave out his name as Matha Prasad Gupta was in fact a person called Jawahar Lal; that they along with others had conspired to commit theft of cheuqes and to cash them by forging signatures; that in pursuance of this conspiracy one Jai Narayanan had stolen the cheque of which Ex.P.2 is copy; that Jawahar Lal forged the signature of the payee therein and that the proceeds thereof had been taken by Jawahar Lal and Mistra. Thereafter Jawahar Lal turned approver; Mistra was prosecuted along with nine others for various offences in Sessions Case No.15 of 1945 on the file of the Court of the Additional Sessions Judge, Benares and convicted and sentenced to imprisonment.
Meantime, the plaintiff instituted the suit out of which the appeal has arisen for the recovery of the amount of the cheque from the appellants on the ground that Jawarhar Lal 15 alias Math Prasad Gupta got no title to it and that by receiving the amount due thereon the Bank had become liable to the plaintiff in conversion. The appellants pleaded that in realizing the cheque they had acted in good faith and without negligence and that they were accordingly protected by S.131 of the NI Act.
The trial court held that Matha Prasad Gupta had been permitted by the Bank authorities to open an account without proper introduction, that Ex.P.2 had been cashed without due examination of the endorsements thereon and that such examination would have revealed the true character of the transaction, that the Bank had been negligent at all stages of the matter and was, therefore, not entitled to rely on S.131 of the Act, in answer to the claim. In the result the suit was decreed. The defendants preferred the appeal.
The point for decision was whether the appellants were entitled to the protection afforded by Section 131 of the NI Act. 16
On a review of the case law, the Madras High Court held thus :
".... .... The position in law may thus be summarized: When in an action in conversion a defence is raised under S.131, Negotiable Instruments Act, the primary question for determination is whether in the matter of realisation of the cheque the collecting Bank had acted without negligence - negligence not merely at the stage of encashment but at the prior stages from the receipt of the cheque in question.
The question whether the bank had acted with negligence in the opening of the account will however, be relevant under S. 131 to this extent that if the opening of the account and the deposit of the cheque are really part of one scheme, as where the account itself is opened with the cheque in question or where it is put into the account so shortly after the opening of the account as to lead to the inference that it is part f it, then negligence in the matter of opening the account must be treated as negligence in the matter of realisation of the cheque".
(Emphasis supplied) It might happen that even when an account is opened without a proper enquiry it might continue to 17 be operated upon satisfactorily for sometime but long afterwards a cheque might be put into the account which might turn out to be forged. In such a case it cannot be laid down as an inexorable rule that negligence in the opening of an account must be treated as negligence in the receipt of the amount of the cheque. In all the decisions in which negligence in opening the account was held to preclude a defence under S. 82 of the English Act, the opening of the account and the deposit of the cheque were contemporaneous or so close is point of time as to be regarded as one transaction.
The observations in AIR 1920 PC 88 (D) that the opening of the account may shed light on the question whether, there was negligence in collecting a cheque does, with respect, 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 S.131 could be held to be barred. The question would then be one of fact as to how far the two stages can be regarded as so intimately associated as to be considered as one transaction."
18
(c) In Central Bank of India case, supra, the Kerala High Court while holding that protection under Sections 131 and 131 A is afforded only if the banker has received the payment on behalf of a customer in good faith and with due diligence, reference is made to the decision of the Privy Council in Commissioners of Taxation v. English Scottish and Australian Bank Ltd. AIR 1920 PC 88, which is illuminating.
The facts of that case were as follows :
One A. Friend of Sydney, put a cheque drawn by himself on the Australian Bank of Commerce for £786.13.3 into an envelope, along with some other cheques drawn by other members of his family, and addressed the envelope to the Commissioners of Taxation. George Street North, Sydney. This cheque was in payment of an assessment 'for income-tax. It was crossed with the word "Bank", that is to say, generally not specially. This cheque was stolen by some person unknown and was never cashed by the Commissioners of Taxation. On the following day a man who gave his name as Steward Thallon 19 entered the head office of the respondent's Bank at Sydney and stated that he wished to open an account. The Accountant took his name and address which this man gave at certain well known residential chambers in Sydney. He then handed in a sum of £20. The Accountant filled up the 'paid-in' slip and the account was duly opened and a cheque book issued to Thallon. On the following day the stolen cheque was handed in by Thallon; and on the next day Thallon withdrew three sums of £483.16.6, £260.10.0, and £50.12.6 by cheques drawn by himself. Thallon was never seen again and it was found that no person of that name lived at the address he had given.
The Commissioners of Taxation then filed an action from which the appeal went to the Privy Council against the Bank for conversion of the cheque. The Supreme Court for New South Wales held that the bank was not guilty of negligence.
In discussing the question of negligence, the Privy Council pointed out that the negligence with which the Court was 20 concerned was not in opening the account but "in collecting the cheque" though the circumstances connected with the opening of an account may shed light on the question whether there was negligence in collecting the cheque, and the test of negligence adopted was whether the transaction of paying in any given cheque coupled with the circumstances antecedent and present was so out of the ordinary course that it ought to have aroused doubts in the bankers' mind and caused them to make enquiry. It was emphasized that negligence was a question of fact and they rejected the argument of the learned Chief Justice of the Supreme Court that the care that the bankers should take should not be less than a man invited to purchase or cash such a cheque for himself might reasonably be expected to take. It was held that it was no part of the business or ordinary practice of individuals to cash cheques which were offered to them, whereas it was part of the ordinary business or practice of a bank to collect cheques for their customers.21
The argument that was presented to the Board was that the bank was negligent in collecting the cheques for a customer who was of recent introduction and about whom the bank knew nothing. It was pointed out that there was nothing suspicious about the way the account was opened; there was nothing suspicious in the fact that a cheque was paid into that account for collection one day after the account had been opened; it was also held that if it was laid down that no cheque should be collected without a through inquiry as to the history of the cheque, it would render banking business as ordinarily carried on impossible; customers would often be left for long periods without available money. But if the cheque had been for some unusually large sum, perhaps suspicion might have been aroused; but whether the cheque is or is not for an unusually large sum is really a question of degree. It was finally held that in the cheque presented by Thallon there was no note of alarm or of warning which could have aroused the suspicion of the Bank. Under the circumstances, 22 the appeal was dismissed and it was held that the Bank was not negligent.
The above decision of the Privy Council may even be read in favour of the first defendant.
(d) In Indian Bank case, supra, it was found that the instrument involved was tampered with and forged. It was then required to address to the antecedents of the person who had introduced the person who had opened the account to encash the same.
(e) In Syndicate Bank's case, supra, a division bench of this court has while noticing gross negligence of the collecting bank in overlooking glaring discrepancies in the cheque in question and the substantial sum that was involved, all of which made the difference in this court having held that the banker could not claim protection under Section 131 of the NI Act, has referred to the decision in Marfani & Co Ltd. v. Maitland Bank Ltd. (1968) 23 2 All ER 573. The observations therein are drawn upon and it is therefore usefully reproduced :
In the above case, the Court of Appeal was considering the scope of a provision similar to Sec. 131 of the Negotiable Instruments Act. Kureshy was an employee of Marfani. Kureshy calling himself as Eliasade, cultivated Ali, for sometime. In the meanwhile Marfani issued a cheque in favour of a firm called Elaszade and handed it over to Kureshy on 17th January. On 24th January, Kuresh opened an account in the respondent Bank, giving his name as Eliaszade; while opening the account he gave Ali's name as a reference who was an old customer of the Bank; he also gave one more reference. Bank open the account; Ali responded to the reference made to him by the Bank and gave a favorable reply, though the other persons to whom reference was made did not reply. Kureshy presented the cheque drawn in favour of Eliaszade for collection through the newly opened account and subsequently collected the amount. Question was whether the Bank was negligent. Court of Appeal held that the Bank was not 24 negligent and that having regard to the prevailing banking practice, enquiry with Ali was sufficient for the Bank to admit Kureshy as a customer, believing him to be Eliaszade. The Court of Appeal held that the strict liability of the Bank to the real owner of the cheque, at common law, was to some extent modified by the statute and if the Bank was not negligent in opening the account and collecting the cheque, Bank cannot be made liable to the true owner. In this connection Diplock, L.J., observed at p. 579:
"Where the customer is in possession of the cheque at the time of delivery for collection, and appears on the face of it to e the 'holder', i.e., the payee or endorsee or the bearer, the banker, is, in my view, entitled to assume that the customer is the owner of the cheque unless there are facts which are known, or ought to be known, to the banker which would cause a reasonable banker to suspect that the customer is not the true owner.
What facts ought to be known to the banker, i.e., what inquiries he should make and what facts are sufficient to cause him reasonably to suspect that the customer is not the true owner, must depend on current banking practice, and change as that practice changes. 25 Cases decided thirty years ago, when he use by the general public of the banking facilities was much less widespread, may not be a reliable guide to what the duty of a careful banker, in relation to inquiries and as to facts which should give rise to suspicion, is today.
The duty of care owned by the banker to the true owner of the cheque does not arise until the cheque is delivered to him by his customer. It is then, and then only, that any duty to make inquiries can arise. Any antecedent inquiries that he has made are relevant only in so far as they have already brought to ascertain about his customers before accepting for collection the cheque which is the subject matter of the action, and so have relieved him of any need to ascertain them again when the cheque which is the subject-matter of the action is delivered to him. What the court has to do is to look at all the circumstances at the time of the acts complained of, and to ask itself were those circumstances such as would cause a reasonable banker possessed of such information about his customer as a reasonable banker would possess, to suspect that his customer was not the true owner of the cheque."
It was indicated in the opinion of the learned Judge that an undue suspicion about the customer is not called for, it was also held that,-26
"the relevant time for determining whether the banker has complied with his duty of care towards the true owner of the cheque is ..... the time at which the banker pays out the proceeds of the cheque to his customer, and so deprives the true owner of the right to follow the money with the banker's hands."
It is necessary to note the particular facts of the above case. Bank had no reason to suspect that Kureshy was not Eliaszade, and Bank's longstanding customer had introduced Kureshy as Eliaszade and cheque was drawn in favour of Eliaszade. When the cheque was presented for allocation, no further enquiry was called for in respect of the said cheque. In opening the account, the then current banking practice was fully satisfied. There was nothing in the circumstances, requiring the bank to know any other facts. The known facts were such that they could not evoke any suspicion.
The Court of Appeal also pointed out that there cannot be a permanent guiding test to find out the nature of the inquiries to be made by the Bank and the tests applied at a time when banking 27 practices were much less widespread may not be applicable to govern all future situations.
(f) In the United Bank case, supra, it was found as a fact that the introduction made was found to be dubious. And the opening of the account and encashment of the instrument was deemed one transaction, which the court held ought to have roused the suspicion of the collecting bank.
(g) In Mandvi Co-op Bank case, supra, the Madras High court has dismissed the second appeal on the ground that no substantial question of law arose for consideration. The facts of the case are briefly narrated. There is no indication that there were circumstances which ought to have alerted the bank as to the encashment of demand drafts by a person who was apparently not the intended beneficiary.
Therefore, none of the above decisions would advance the case of the appellant.
28
The appeal is accordingly dismissed.
Sd/-
JUDGE nv*