1989 (11) TMI 306 - SC - Indian Laws

whether the Bank was negligent in opening the account in the name of Sethurarman, as proprietor, Industrial Chain Concern? Held that - 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 case of ₹ 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. 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. Appeal allowed.

Summary

Issues Involved:
1. Negligence in opening the account.
2. Negligence in collecting the cheques.
3. Applicability of Section 131 of the Negotiable Instruments Act.
4. Contributory negligence by the plaintiff.

Detailed Analysis:

1. Negligence in Opening the Account:
The plaintiff alleged that the defendant Bank negligently allowed Sethuraman, the Manager of the plaintiff firm, to open a fictitious account in the name of 'Industrial Chain Concern' and facilitated the deposit and withdrawal of stolen drafts and cheques. The Bank contended that Sethuraman represented himself as the proprietor of a newly established firm and was introduced by the Bank Manager, who was an erstwhile classmate of Sethuraman.

The trial court and the High Court held that the Bank acted in good faith but was negligent in opening the account. However, the Supreme Court found that the Bank Manager made sufficient inquiries and that the account was opened by depositing cash, not a cheque. The court concluded that the Bank was not negligent in opening the account, as the Manager knew Sethuraman personally and there was no violation of any banking rules or instructions.

2. Negligence in Collecting the Cheques:
The plaintiff argued that the Bank was negligent in collecting the cheques and drafts, which were stolen and deposited by Sethuraman. The Bank claimed it acted in good faith and without negligence.

The Supreme Court analyzed the standard of care required by a bank in collecting cheques and found that there was no evidence to show that the cheques and drafts deposited should have aroused suspicion. The court noted that the Bank had a duty to collect cheques for its customer and that there was no indication that the Bank violated its own regulations or acted negligently in the process.

3. Applicability of Section 131 of the Negotiable Instruments Act:
Section 131 of the Negotiable Instruments Act provides protection to bankers who collect cheques in good faith and without negligence. The trial court and the High Court held that the Bank was not entitled to this protection due to negligence.

The Supreme Court, however, found that the Bank acted in good faith and without negligence in collecting the cheques. The court emphasized that the Bank's duty to make inquiries arises when there are circumstances that should arouse suspicion. In this case, there were no such circumstances, and the Bank was entitled to the protection under Section 131.

4. Contributory Negligence by the Plaintiff:
The appellant Bank argued that the plaintiff contributed to the negligence by entrusting Sethuraman with the cheques and drafts for a long time. The Supreme Court did not find it necessary to address this issue in detail, as it concluded that the Bank was not negligent.

Conclusion:
The Supreme Court allowed the appeal, setting aside the judgments of the trial court and the High Court. The court held that the Bank was not negligent in either opening the account or collecting the cheques and drafts. Consequently, the Bank was entitled to the protection under Section 131 of the Negotiable Instruments Act, and the appeal was allowed without any order as to costs.