Axis Bank vs Punjab National Bank And Ors.

Ranjit Singh, J

Respondent, Punjab National Bank, had filed OA before the Tribunal below for recovery of Rs. 13,10,044/- from the appellant Axis Bank Ltd. and Shri Dinesh Arora (respondent No. 2) impleaded as one of the defendants with the Axis Bank. The amount was claimed with pendente lite and future interest @ 14.75% per annum from the date of filing of the OA till realization. Mr. Dinesh Arora (respondent No. 2) had deposited two drafts for a sum of Rs. 3,58,7000/- and of Rs. 4,97,400/- payable at Delhi in his account with Axis Bank and these were presented to respondent Punjab National Bank for payment by way of collection on 1.12.2001 and 10.12.2001 respectively. The amount was to be credited in the saving Bank account maintained by respondent No. 2 with the appellant Bank. The appellant Bank collected the said drafts from Delhi Local Clearing branch in usual course of its Banking business and credited the amount in the account of the respondent No. 2. Later on, the said drafts were found to be fake and forged. Alleging that the appellant Bank had not followed the RBI guidelines while opening the account in the name of respondent No. 2, the Punjab National Bank preferred a claim against the appellant Bank for the amount which stood paid to respondent No. 2. It is alleged that despite repeated requests the appellant Bank did not bother to make any payment to the respondent Bank for these fake and forged drafts of which the payment was received from the respondent Bank. With this grievance, ultimately, the respondent Punjab National Bank filed OA No. 108 of 2004 for recovery of sum as already noticed.

In response to the notice, the appellant Bank put in appearance and raised various objections. Considering the plea raised by the appellant Bank, the Tribunal below has held the appellant Bank liable to make payment of a sum of Rs. 8,56,100. The Tribunal below has not fastened the appellant Bank with the liability to pay interest though the Tribunal has allowed the claim with interest @ 12% simple which is allowed against respondent No. 2 alone. Aggrieved against this order, the Axis Bank has filed the present appeal.

The Counsel for the appellant has made two-fold submissions before me. The Counsel would first submit that though the OA was filed claiming a sum of Rs. 13,10,044/-, but in actual fact, the amount claimed was only Rs. 8,56,100/- which was less than Rs. 10 lacs. As per the Counsel, the respondent Bank had inflated the claim by adding interest just to bring the claim within the jurisdiction of the Tribunal below to entitle the Bank to file OA instead of invoking any other remedy which would be available in such a case where the amount claimed is less than Rs. 10 lacs. The Counsel would then relate it to the amount finally allowed by the Tribunal below which is a sum of Rs. 8,56,100/- and if element of interest is excluded, it would clearly show that the Bank had wrongly invoked the jurisdiction of the Tribunal below.

As per the Counsel, there was no negligence on the part of the appellant Bank and the Tribunal below was not justified in giving a finding of negligence on the part of the appellant Bank and then making it liable to make the payment of the sum as claimed by the respondent Bank. To substantiate his submission that there was neither any negligence on the part of the appellant Bank nor such negligence could be so made out from the facts of the case, the Counsel has made detailed reference to the transactions which took place in this case. The Counsel states that the account was opened with the appellant Bank by respondent No. 2 on 27th October, 2001. The first demand draft for a sum of Rs. 3,58,700/- was deposited on 1st December, 2001 and the same was cleared on the same date and the proceeds were transferred and credited to the account of respondent No. 2. On 10th December, 2001 second draft was deposited for a sum of Rs. 4,97,400/-, which was also cleared on the same date and deposited in the account of respondent No. 2. It is only after expiry of 18 days of the first payment that the respondent Bank took action to inform the appellant Bank that both the drafts were fake by sending a communication dated 19th December, 2001. From this, the Counsel would urge that intimation about the draft deposited on 10th December, 2001 being fake was given after 18 days of the first payment and after nine days of the date the amount was credited in respect of the second draft. The Counsel would accordingly urge that if the respondent Punjab National Bank had been vigilant enough to detect the demand drafts being fake or fabricated and had sent intimation in time to the appellant Bank, the loss could have been checked. As per the Counsel, it is only because of delay on the part of the respondent Punjab National Bank that respondent No. 2 was able to siphon the amount from the account opened with the appellant Bank.

The Counsel for the appellant would also contest the view formed by the Tribunal below that any defect in opening the account by respondent No. 2 with the appellant Bank would in this case invite any material consideration to draw inference of negligence on the part of the appellant Bank. His submission in this regard is that mere opening of account, even though may be with some want of care, would not be enough to attribute negligence on the part of the appellant Bank to fasten it with liability. The Counsel urges that something could be said about negligence if the account was opened just prior to deposit of the fake drafts leading to the payment thereof to urge some negligence on the part of the appellant Bank. That being not the position, the Tribunal below was not justified in recording the conclusion that infirmity, if any, in opening the account would be enough to attribute negligence or the part of the appellant Bank.

The Counsel for the respondent Punjab National Bank, however, would contest submissions made by the Counsel for the appellant Bank. He would first submit that at the time of filing of OA the Bank was fully entitled to claim interest payable on the amount of which the respondent Bank was wrongly deprived of and, therefore, no fault can be found with the action of respondent Bank in filing the OA claiming a sum of Rs. 13,10,044/-. As per the Counsel, the appellant Bank was utterly negligent in opening the account without any introduction of the new account holder which was opened without seeking introduction from some old customer well-known to the Bank. In this manner, the appellant Bank not only has been deceived but is responsible for the loss caused to respondent Bank as well. The Counsel for the respondent Punjab National Bank would further submit that the negligence is writ large in this case and it is not appropriate on the part of the appellant Bank to plead that there was no negligence on its part. The Counsel for respondent Bank also attempted to make submissions on some other issues which might have been raised by the Bank in its reply filed in the O.A. but have not been raised as none of those have been pressed before me. He was asked to confine himself to the pleas now raised by the appellant. I do not consider any need to touch these issues as these are not now pressed before me. These have been unnecessarily touched and agitated by the Counsel for respondent Bank.

In support of his pleas, the Counsel for the appellant Bank has invited my attention to the judgment in the case of Indian Overseas Bank v. Industrial Chain Concern, (1990) 1 SCC 484. The Counsel has referred to that portion of the judgment where the Apex Court has dealt with aspect of negligence in opening the account I have examined the case minutely. As is observed, once an account is opened, relationship Banker and customer begins. It is noticed that relation is not relevant. Mere opening of account is sufficient to constitute the relationship. Reference is made to Lord Chorley who had said that for the purpose of establishing relationship of Banker and Customer, there appear to be no logic in the opening of account and when the Banker agree to accept the customer, the relationship comes into existence at that time though the account may not be opened until later. The relationship being contractual should be subject to normal rules of contract law and the making of contract depends upon the acceptance of offer. The contract could clearly be effected before an account has been opened though there must be an agreement to open an account before the Banker and customer relationship can exit.

In this case, the Hon'ble Supreme Court has decided the case on the facts in the case. The facts in the case were that there were number of transactions of deposits and withdrawals and the account after opening had been closed as well. The detailed particulars of the cheques paid into the account were not in evidence. So, it is held that it would be difficult to know if each cheque or draft should have aroused suspicion in the mind of the Banker. No such issues arise in this case.

Talking about the standard of care to be taken by a Bank in opening account, the Court has noticed from law of Banking by H.P. Sheldon 11th Edition in Chapter five, which is as under:

"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 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."

M.L. Tannan in Banking Law 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 enquire, 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."

The Court has noted that one of the tests to know if the Bank was negligent, though not always conclusive, is to see if rules of instructions of Banks were followed or not. About opening of account, instructions noted are that:

"Except at large branches where the sub-agent or accountant may be authorized 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 initialed by the agent at the top left comer 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 account opening form for future reference if the need arises.......

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."

The Court has also discussed and dealt with the issue of protection available under Section 131 of the Negotiable Instruments Act (for short, the Act). As is observed by the Hon'ble Supreme Court in this case, to enable a Bank to avail the immunity under Section 131 of the Act as a collecting Banker, it has to bring itself within the conditions contained in the section. As observed in this case, otherwise Bank is left to common law liability for conversion or for money and received in case of the person from whom he took the cheques having no title or defective title. The Court has also noted conditions in this regard, which are:

(a) that the Banker should act in good faith and without negligence in receiving a payment, that is, in the process of collection;

(b) that the Banker should receive payment for a customer on behalf of him and thus acting as a mere agent in collection of the cheque and not as an account holder;

(c) that the person from whom the Banker acts must be his customer; and

(d) that the cheque should be one crossed generally or especially to himself.

Thus, to enable a Bank to avail the immunity under Section 131 as a collecting Banker it has to bring itself within the conditions formulated by this section. It is 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. (See: Lloyds Bank Ltd. v. E.B. Savory and Co., 1933 AC 201 : 1932 All ER Rep 106 : 38 Com. Cas 115, Marfani and Co. Ltd. v. Midland Bank Ltd., (1968) 2 All ER 573, Arab Bank Ltd. v. Ross, (1952) 1 ALL E.R. 709 and Karak Rubber Co. Ltd. v. Burden (No. 2) (1972) 1 All E.R. 1210. The Banker is bound to make inquiries when there is anything to arouse suspicion that the cheque is being wrongfully dealt with in being paid into the customer's account. The Banker, however, is not called upon to be abnormally suspicious [See: Paramount Estates Ltd. v. National Provincial Bank Ltd., (1945) 173 LT 344]. It was held in Motor Traders Guarantee Corporation v. Midland Bank, (1937) 4 All E.R. 90 that disregard of the Bank's own regulations may be evidence of negligence.

The Counsel for the respondent Bank has referred to the case of The Kerala State Coop. Marketing Federation v. State Bank of India & Ors., II (2004) BC 1 (SC) : I (2004) SLT 826. In this case also, the Hon'ble Supreme Court has considered the case law in detail and so also the effect of Section 131 of the Negotiable Instruments Act. In the case of Indian Overseas Bank v. Bank of Madura Ltd., (1992) Vol. 75 Company Cases 48, the receiving Banker was held guilty of negligence and lack of good faith inasmuch as it had allowed opening of an account with a small amount and shortly thereafter i.e. within 9 days allowed withdrawal of a sum of Rs. 9,500/-. The presentation of the draft and withdrawal of the amount were considered part of one integral scheme. In the case of Brahma v. Chartered Bank, AIR 1956 Calcutta 399, it is held that onus of proving 'good faith' and 'absence of negligence' is on the Banker claiming protection under Section 131 of the Negotiable Instruments Act. It is also observed that if the cheque is of a large amount, then the Bank has to be more careful unless the customer had long standing, good repute and with great personal credit and was one who regularly deposited and withdrew cheques of large amount. In this case only, reference is made to Indian Overseas Bank's case (supra) and what all was observed in the said case in regard to the legal position.

In Turner v. London and Provincial Bank, (1903) XXIV Journal of Institute of Bankers 220, evidence was admitted as proof of negligence, that the customer had given a reference on opening the account and that this was not followed. Negligence in opening the account such as failure to fulfill the procedure for opening an account which is prescribed by the Bank itself or opening of an account of an unknown person or non-existing person or with dubious introduction may lead to a cogent, though not conclusive, proof of negligence particularly if the cheque in question has been deposited in the account soon after the opening thereof.

The Counsel for the respondent Bank has further relied upon some observations recorded in the case of Brahma Shum Shere Jang Bahadur and Another v. Chartered Bank of India, Australia and Chin & Ors., AIR 1956 Calcutta 399. The Calcutta High Court while considering Section 131 of the Negotiable Instruments Act has observed that the protection under this section is afforded only if the Banker has received payment in good faith and without negligence, otherwise the Bank which receives payment on a forged cheque or a cheque to which the customer has no title or only defective title, liable in action for conversion to the true owner. Accordingly, the Counsel would contend that protection under Section 131 of the Negotiable Instruments Act would not be available to the appellant in this case.

Having heard Counsel for the parties, I am of the view that no interference is called for in the impugned order. Legal position, as would emerge from the judgments noticed above, would clearly provide for the responsibility of the Bank at the time of opening of an account. When a customer is already not known to the Bank, the Banker is required to make proper preliminary inquiry. The Banker should obtain reference from a responsible person with regard to identity, integrity and reliability of the proposed customer. As already noticed, before opening an account, the Banker should take certain precautions and must ascertain from the person wishing to open the account to enquire if such person is known to the Banker. By making necessary inquiry from the reference furnished, the Banker can easily verify such information and judge whether or not the person wishing to open account is desirable customer. As per instructions of the Bank, it is important that every party must be introduced to the Bank by a responsible 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. The Bankers are required to verify the signatures with specimen signatures lodged and attested lying with the Bank. Where opening of an account was lodged with a small amount and there was huge withdrawal soon thereafter, the same was held to be lacking in good faith and was found suffering negligence. Cheque involving large amount would be cashed very carefully unless the customer is of long-standing Even where customer had given reference on opening of the account which was not valid, the Banker was held negligent. In the present case, the account was opened without any reference which statedly was in violation of the instructions issued by the Bank. That being the factual position, the appellant Bank cannot escape the responsibility and certainly is found negligent. It is not denied by the appellant Bank that the account in this case was opened without any proper introduction. On this count alone, the appellant Bank cannot plead that there was no negligence on its part. Negligence on the part of the appellant Bank, thus, is made out in the manner it permitted opening of the account which ultimately facilitated respondent No. 2 to commit fraud. There is, however, also contributory negligence on the part of the respondent Bank in not taking timely action to detect that the drafts were fake and false. Had they been little more vigilant and had informed the collecting Bank about the fake drafts, fraud may have been detected a bit earlier. The Tribunal below, therefore, in my view has rightly balanced the liabilities. While decreeing the amount of the drafts claimed by the respondent Bank, the Tribunal below has not burdened the appellant Bank with liability to pay interest. The impugned order passed by the Tribunal is, therefore, just, fair and reasonable. The appeal is accordingly dismissed.