Vijaya Bank Limited vs United Commercial Bank and Others

S. Mohan, J.—The first defendant is the appellant before us in this appeal, which arises out of O.S.No. 9477 of 1978 on the file of the VI

Additional Judge, City Civil, Madras. The short facts are as follows: The said suit laid for the recovery of a sum of Rs. 40,565.91 P. on the

following allegations as stated in the plaint: The second plaintiff, Messrs. Seshasayee Paper and Boards Ltd., is a customer of the first plaintiff, the

United Commercial Bank, Madras Main Office. The second plaintiff issued a cheque bearing No. 029775 on 20.11.1975 for a sum of Rs. 25,636

in favour of Messrs. I.C.I. (India) Private Limited, Bombay. It appears the cheque was intercepted by the second defendant, I.C. Pal Industries.

The same was presented to the first defendant Bank (the appellant herein) for collection after altering the name from I.C.I. (India) Limited to I.C.

Pal Industries. There was an alteration in relation to the date as well from 20.11.1975 to 28.11.1975. The first defendant made an endorsement

''Payees'' Account credited'' and the cheque was sent for collection through the clearing house. The first plaintiff acted bona fide and in the usual

course of business having regard to the apparent tenor of the instrument. Further, relying on the endorsement of the first defendant, the cheque was

honoured, and the statement of account was sent in due course. The second plaintiff received a letter from I.C.I. (India) Private Limited on

10.2.1976, intimating that they did not receive any cheque. Thereupon, the first plaintiff drew the attention of the first defendant to the complaint of

the second plaintiff by its letter dated 20.2.1975, calling upon the first defendant to reimburse the said sum of Rs. 25,636. The first defendant

denied the liability, but would, however, add that it was the customer who was criminally liable. Correspondence ensued between the parties. It

appeared that after the collection the first defendant allowed the entire amount to be withdrawn by the second defendant and there were no further

transactions. The first defendant did not make proper enquiries before opening of the account by the second defendant, and the conduct of the first

defendant was totally negligent. There were enquiries into the antecedents of the second defendant. They had not taken due care and caution as

required on their part. It is on account of the first defendant''s endorsement the first plaintiff parted with the money. In so far as the first defendant

acted negligently as the collecting banker and by their conduct, and the second defendant having fraudulently altered the cheque, they are bound to

reimburse the said amount with interest at 16 per cent per annum. Though a notice of demand was issued, the demand had not been met and hence

the suit.

The first defendant, in their written statement, urged that the service on the second defendant cannot be complete and the address of the second

defendant furnished in the plaint as care of the first defendant Bank is incorrect. The first defendant further contended that the cheque in question

was lodged with them by the second defendant on 28.11.1975 for collection. Subsequently, on 1.12.1975, out of the amount credited. The

second defendant drew a sum of Rs. 465 and another sum of Rs. 24,000 by self cheques. The first defendant had no knowledge about the

alterations in the date as well as in the name of the payee. Only after receipt of the letter from the first plaintiff, the first defendant came to know

that the cheque was not issued in favour of the second defendant. The first defendant had only merely acted as collecting banker for their customer.

There was nothing on the face of the cheque to rouse the suspicion of the first defendant. There was no negligence on their part and they had acted

in good faith. They are therefore protected u/s 131 of the Negotiable Instruments Act. On the contrary, it was the first plaintiff that was negligent. If

only the first plaintiff had scrutinised the cheque with the aid of ultra-violet lamp, they could have detected the tampering. The non-examination of

the cheque with the aid of ultra-violet lamp clearly established gross negligence on the part of the first plaintiff. Then again, there is enormous delay

in the first plaintiff reporting about the wrong credit. The first defendant is not, in any manner, liable.

The second defendant had opened an account with the first defendant with a deposit of Rs. 101 on 27.11.1975. They were properly

introduced. The first defendant had no reason to suspect the bona fides of the second defendant. The suit is bad for misjoinder of parties. The first

defendant is not liable to pay the amount.

As far as the second defendant was concerned, notice was ordered by publication to the address furnished by the first defendant, and they

remained ex parte.

On the above pleadings, the learned trial Judge framed the following issues for trial:

Whether the first defendant was negligent and did not take due care and caution in the opening of the account by the second defendant and in

dealing with the cheque in question?

Whether the first defendant is an unnecessary party to the suit?

Whether the first defendant is not liable for the suit claim for the reasons stated in the written statement? and

To what relief are the plaintiffs entitles?

On the side of the plaintiffs, two witnesses were examined and their documentary evidence consists of Exhibits A.1 to A.14. On the side of the first

defendant, equally two witnesses were examined, their documentary evidence being Exhibits B.1 to B.3. On a consideration of this evidence, the

learned trial Judge, on Issues 1 and 3, came to the conclusion that the first defendant was negligent and did not take due care and caution, in the

opening of the account by the second defendant or dealing with the cheque in question. On issue No. 3, he held that the first defendant cannot

avert liability either u/s 131 of the Negotiable Instruments Act or on other grounds stated in their written statement. Thus, he found both the Issues

in favour of the plaintiffs. Issue No. 2 was found against the first defendant. Under Issue No. 4, it was held that the claim from interest at 16 per

cent was reasonable. Accordingly, the suit was decreed as prayed for with costs, and the first defendant was granted three months'' time to pay the

amount to the plaintiffs. Thus aggrieved by the judgment and decree, the first defendant has preferred the appeal.

C. Chinnaswamy, learned Counsel for the appellant, would urge that there was absolutely no negligence on the part of the appellant Bank in

opening the account because the second defendant had been properly introduced by a customer. Merely because the form relating to the opening

of the account had not been produced, that does not mean an adverse inference could be drawn against the appellant. Nor, again, could it be said

that by an ordinary perception the tempering of the cheque in question could ever be found. There was no suspicious circumstances attending to

the same. There was not any latent defect so as to arouse the suspicion of the Bank. Therefore, having regard to the totality of the circumstances as

laid down in Marfani & Co Ltd. v. Midland Bank Ltd. (1968)2 A11. E.R. 573, certainly the appellant Bank would be protected u/s 131 of the

Negotiable Instruments Act. It is this vital aspect of the matter which had been lost sight of by the trial Court.

Even assuming there was negligence with reference to the opening of the account, that cannot be inter-related to the encashing of the cheque.

On the contrary, it was the duty of the first plaintiff to have examined the cheque carefully under ultra-violet lamp and discovered the fraud. Having

failed to do so and made the payment, the first plaintiff cannot seek reimbursement against a collecting Bank like the appellant. In any event, the

rulings relied on by the court below in Bharat Bank Ltd., Madras Vs. Kishinchand Chellaram, and Indian Bank Vs. Catholic Syrian Bank Ltd., ,

require reconsideration.

V. Sridevan, learned Counsel for the plaintiff-respondents, says that the case on hand is practically concluded by the ruling in Bharat Bank Ltd.,

Madras Vs. Kishinchand Chellaram, . The proposition laid down therein had been reiterated in Indian Bank Vs. Catholic Syrian Bank Ltd., . In

short, how the matter is to be looked at is, do the opening of the account and the encashing of the cheque form part of a contemporaneous

transaction and so intimately associated so as to be considered as one transaction? If the answer is in the affirmative, then, undoubtedly, protection

u/s 131 of the Negotiable Instruments Act disappears. That precisely is the situation here. The cheque was issued on 20-11-1975. It was

intercepted by the second defendant, an amount was opened on 27-11-1975, and the cheque was encashed on 28-11-75 and two sums of Rs.

465 and Rs. 24,000 were drawn by self-cheques on 1-12-1975. Having regard to the proximity of the events, it is very clear that, as laid down by

both the above rulings (2 and 3 supra), if the collecting Bank seeks to claim protection u/s 131 of the Negotiable Instruments Act, it has to absolve

itself of this negligence. As was held in those cases, negligence with regard to opening of the account and the encashment of the cheque would go

together, At least in Indian Bank Vs. Catholic Syrian Bank Ltd., the customer who introduced the client was examined. But, in this case, not even

the form relating to the opening of the account is produced. As a matter of fact, D.W.2, in his evidence, would plead ignorance about the

availability of the form and disability to produce the same. In those circumstances, to claim protection u/s 131 of the Negotiable Instruments Act is

improper and has been rightly disallowed by the trial Court having regard to the authoritative pronouncements in the above two cases, which do

not require reconsideration because every aspect of the matter had been considered therein, including stating that this is not an inexorable rule, but

each case has to be decided with reference to its own circumstances. Marfani & Co. Ltd. v. Midland Bank Ltd. (1968)2 All. E.R.573 has no

relevance to the facts of this case, and even there, what was laid down was that the totality of the circumstances will have to be taken into

consideration which, so taken, would undoubtedly point out that there was negligence on the part of the appellant. It is no use saying that on seeing

the cheque in question, there was nothing to arouse the suspicion of the first defendant-appellant, nor again; there was any latent fraud. The very

argument was considered in Bharat Bank Ltd., Madras Vs. Kishinchand Chellaram, , and was repelled on the test propounded therein, which is

reiterated before this Court.

Having regard to the above arguments, the one and the only question that arises for out consideration is whether the appellant Bank is entitled to

protection u/s 131 of the Negotiable Instruments Act. We will now extract that provision;

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.

The law on this section has been laid down with such lucidity that we find no scope for improving upon what is laid down in Bharat Bank Ltd.,

Madras Vs. Kishinchand Chellaram, . That was a case where the cheque was issued on 24-11-1943. An account was opened on 6-12-1943 and

a cheque for Rs. 125 was encashed on 7-12-1943 and another cheque was issued for a sum of Rs. 2,800 on 9-12-1943 and the money was also

drawn. Under these circumstances, a Division Bench of this Court consisting of Rajamannar, C.J., and Venkatarama Aiyar, J., considered the

matter. Venkatarama Aiyar, J., speaking for the Bench, analysed the case-law with reference to English law as well and laid down the crux of the

matter as follows:

The result then is that the receipt of the stolen cheque would itself be conversion even without reference to cashing and if section 131 is not

applicable at that stage, the Bank will be without protection even if it acts bona fide and without negligence.

From this it is clear that in so far as it is a stolen cheque, as rightly contended by Mr. Sridevan, the protection u/s 131 of the Negotiable

Instruments Act cannot be extended at all. Be that so.

The very argument that is raised before us was also raised before the Division Bench, which was rejected. The relevant passage runs thus:

It is contended that on the facts the present care is indistinguishable from Commissioners of Taxation v. English, Scottish and Australian Bank Ltd.

AIR 1920 P.C. 88 : AIR 1920 P.C. 88 that negligence on the opening of an account, as is observed therein, has no direct bearing on the question

whether there was negligence in the encashment of the cheque and that, therefore that fact that the Bank had not made proper enquiries regarding

Matha Prasad Gupta before opening an account in his name was not a ground for denying to the appellants, the protection which Section 131

given. Reliance was also placed on the decision in Bapulal Premchand Vs. The Nath Bank, Ltd., wherein Chagla, J., as he then was, held that

there was no absolute duty cast on a Bank to make enquiries about an intending customer and that it cannot be said to have acted with negligence

if it acts on a proper reference and there are no suspicious circumstances.

In rejecting the above contention, it was observed by the Division Bench:

The position in law may then be summarised when in an action is conversion a defence is raised u/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 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 of it, then

negligence in the matter of opening the account must be treated as negligence in the matter of realisation of the cheque.

It might happen that even when an account is opened without a proper enquiry, it might continue to be operated upon satisfactorily for some time,

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 u/s 82 of the English Act, the opening of the account and the

deposit of the cheque were contemporaneous or so close in point of time as to be regarded as one transaction.

The observation in AIR 1920 P.C. 88 that the opening of the account is material as shedding 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 u/s 131 could be held to be barred. The question would than 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.

In our considered view, this case affords a complete answer to all the arguments of the appellant and there is no escape for them. The propositions

laid down in this ruling have come to be reiterated in Indian Bank Vs. Catholic Syrian Bank Ltd., . There also, the Division Bench of this Court

referred to this ruling as well as some other ruling and held:

We are fortified in our conclusion by the following view taken in one of the leading cases on the subject, viz., Lloyds Bank Ltd. v. Savory & Co.

1932 A11. E.R. R. 107 :

It is true that the question of absence of negligence must be considered separately in regard to each cheque, but it is also true that the matter must

be considered, as Lord Dunedia says, in Commissioners of Taxation v. English, Scottish and Australian Bank Ltd. (1920) A.C. 68 : AIR 1920

P.C. 88 ''in view of all the circumstances antecedent and present''. There may thus be relevant negligence in connection with the opening of the

customer''s account by the Bank. It is now recognised to be the usual practice of bankers not to open an account for a customer without obtaining

reference and without inquiry as to the customer''s standing; a failure to do so at the opening of the account might well prevent the banker from

establishing his defence u/s 82 (Bills of Exchange Act, 1882) if a cheque were converted subsequently in his history of the account (vide also

Halsbury''s Laws of England, Fourth Edn. Vol.3. Page 32, Para 39).'' We therefore hold that as a collecting Bank, the appellant Bank cannot

invoke Sections 131 and 131-A of the Negotiable Instruments Act, to it especially when it is found that the opening of the account for Desai was

not done without negligence and the presentation of Exhibit A-1 draft from collection was done so proximately as would suggest a close nexus with

the opening of the account itself.

Learned Counsel for the appellant argued in vain that the respondent Bank too is guilty of contributory negligence. Though this contention has

found acceptance with the trial Judge in some measure, we are of opinion that the plea of contributory negligence cannot be sustained. It has been

held is Bapulal Premchand Vs. The Nath Bank, Ltd., and by a Division Bench of this Court in Kanyalal Thakurdas, Bankers Vs. The Bombay

Cycle Importing Company, Cycle dealers, that contributory negligence on the part of the true owner can be no answer by the person, who

converts the article, that he should be let off from his liability because of the negligence of the true owner. As a matter of fact, the evidence does

not warrant the acceptance of the appellant''s contention that the respondent Bank had also been negligence in passing Exhibit A-1 for payment.

When the draft was sent for collection, no duty was cast on the respondent Bank to first was sent for collection, no duty was cast on the

respondent Bank to first obtain clearance from the Singanallur branch of the Bank and then pay the amount covered by the draft to the collecting

Bank. Merely because the respondent Bank had contacted the Singanallur branch Agent on 14-6-1969 and acquired intelligence that Exhibit A-1

draft had not been issued by that branch for Rs. 29,000, it does not follow that the respondent Bank should not have paid the proceeds of the

draft before receipt of the advice from the Singanallur Branch.

It could be seen from a reading of the above, that the Division Bench rejected the theory of contributory negligence and had also laid stress with

reference to the enquiry to be made at the time of pending of the account and the antecedents of the new customer. In this very ruling, the case

cited on behalf of the appellant, viz., Marfani & Co. Ltd. v. Midland Bank Ltd. (1968)2 All. E.R.573 was considered is paragraph 10 and the

Bench observed as follows:

As pointed out in Marfani & Co. Ltd v. Midland Bank Ltd. ''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 these 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.

With this background, we go on to the matter on hand. First of all, with reference to the opening of the account. D.W.1 had no personal

knowledge of the opening of the account. He was not aware whether the introducers, M/s. J.P. Buildings, personally knew the second defendant.

He could not say anything about the relationship between J.P. Builders and the second defendant. He was not in a position to say as to who

supplied the account opening form to the second defendant. No enquiry was made whether the second defendant. Without making such enquiries,

he would attest the signature of the introducer. Even the ordinary enquiry whether the second defendant had some other Bank account, had not

been made. According to D.W.1, he opened the account on the representation of Paramanandam. The said Paramanandam has not been

examined. In this connection it requires to be noted that in Indian Bank Vs. Catholic Syrian Bank Ltd., , the person who introduced was examined

and his evidence also came to be considered. Here, we are left with no evidence of that character. D.W.1 does not speak about the opening of the

account, but only speaks with reference to the encashing of cheques. Therefore, his evidence is not helpful. In this case, it has to be carefully noted

that Exhibit A-1 cheque had been crossed. Therefore it was all the more the reason why, as was held in Indian Bank Vs. Catholic Syrian Bank

Ltd., , the first plaintiff could not be accured of having been negligent by not examining the cheque under ultra-violet lamp, as was deposed to by

D.W.1.

As rightly pointed out by the learned trial Judge, it was only the opening of the account which enabled the second defendant to commit this

fraud. It is somewhat surprising that with all necessary instructions available at the elbow, the appellant Bank had not even chosen to follow the

procedure with regard to the opening of the account. The only object, as was pointed out by the learned trial Judge, in the second defendant

opening the account appears to be to encash the intercepted cheque which it came in possession of. In that instant case, we do not have the

slightest hesitation in holding that the evidence, tested in the light of the prepositions laid down by the rulings referred to above clearly leads to the

one and the only conclusion that the protection u/s 131 of the Negotiable Instruments Act would not be available to the appellant. At the risk of

repetition, we may say that the events with reference to the opening of the account, the encashing of the cheque and the ultimate withdrawal of the

entire amount leaving a small balance, would already go to establish that the opening of the account and the deposit of the cheque were

contemporanceous so close in point of time as to be regarded as one transaction. Therefore, the negligence with regard to the opening of the

account and the deposit of the cheque must be held to be so intimately associated as to be considered as one transaction. If so considered, the

conclusion is irresistible and the Court transaction. If so considered, the conclusion is irresistible and the Court below is right in holding that

protection u/s 131 of the Negotiable Instruments Act is not available to the appellant. We fully concur with the finding of the learned trial Judge and

dismiss the appeal, with costs.