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TMI Blog1989 (11) TMI 306X X X X Extracts X X X X X X X X Extracts X X X X ..... rders 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. - Civil Appeal No. 2842 of 1982 - - - Dated:- 7-11-1989 - SAIKIA, K.N. AND FATHIMA BEEVI, M., JJ. For the Appellant :C. Seetharamiah, P. Krishna Rao and K.R. Nagaraja For the Respondent : S. Balakrishnan JUDGMENT K.N. SAIKIA, J. 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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opening the account for at the time of paying in and collection of the cheques, nor at the time of allowing money to be withdrawn there was anything to arouse any suspicion regarding the bona fides of the representation made by Sethuraman.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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en 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 ........." 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 be 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. It was held in Commissioner of Taxation v. En ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 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 banker's attitude may be solicitous and not detective. Sethuraman was believed when he said that he was the proprietor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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. The next ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the cheque was for a large sum, so that it was in their interest to collect quickly and (b) that the customer about to buy a restaurant might require the proceeds quickly. In the Court of Appeal, Diplock LJ said that the 'significance' of the special clearance depends upon the Judge's assessment of the credibility of the bank officials who gave evidence; and he saw no reason to differ from him. In the instant case we have no reason to disbelieve what was said by the Manager, DW1. In the instant case in the absence of any evidence giving the details of the cheques and their tenor, we are unable to hold that there were notices and circumstances which ought to arouse suspicion on the part of the bank. The bank normally has an obligation to collect the customer's cheques paid into his account. In Halsbury Laws of England, 4th Edn., Vol. 3 at para 46 we read: "46. Customer's title to money paid in. In the absence of notice, express or implied the banker is not concerned to question the customer's title to money paid in by him. although if a person entrusted with a cheque wrongfully pays it to the bank to the credit of someone who is not entitled to it, the true owner, if he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holder for value and not merely as an agent of the customer. To enable a bank to avail the immunity under section 131 as a collecting banker he has to bring himself within the conditions formulated by the section. Otherwise he is left to his common law liability for conversion or for money had and received in case of the person from whom he took the cheques having no title or defective title. The conditions 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 for whom the banker acts must be his customer and (d) that the cheque should be one crossed generally or especially to himself. The receipt of payment contemplated by the section is one from the drawee bank. It is settled law that the onus of bringing himself within the section rests on the banker. In Capital and Counties Bank v. Gordon, (supra) as we have seen, the conception of a collecting banker was that of "receiving the cheque from the customer, presenting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e true owner. It is only when the amount is paid or withdrawn by the customer that the loss results. During this period what is important to note is that at every step in collection of the money and making payment the banker is bound by the banker--customer relationship and rights and obligations flowing therefrom. Even so, if there was anything to rouse suspicion regarding the cheque and ownership of the customer the banker may find itself beyond the protection of section 131. The scope or ambit of possible suspicion will depend on various situations that may have prevailed between the drawer of the cheque and the customer. In the instant case Sethuraman having been believed to have been the proprietor of Industrial Chain Concern the cheques payable to Industrial Chain Concern left little scope to have aroused any suspicion in the minds of the Bank. The position may have been different if Sethuraman was known as acting as an employee of Industrial Chain Concern and the cheques were payable to that concern, but were deposited into personal account of the employee which was not the case here. The requirement of receiving payment for a customer enunciated clearly in Capital and Count ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en able to show that the transactions in paying in the drafts and cheques coupled with the circumstances antecedent and present were so out of the ordinary that it ought to arouse doubts in the Banker's mind and cause him make inquiries. As we have observed that the Bank's negligence in not making inquiries as to the customer upon opening an account if there was any, could shed light in its negligence in collecting the cheques for him. But we have found that there was no such negligence in this case. Mr. Balakrishnan's submission that in this case while opening the account, the appellant should have inquired of the plaintiff's firm does not reasonably follow in view of the fact that what Sethuraman said was that he was the proprietor off the newly established firm "Industrial Chain Concern" and if that was the name of the payee in the cheques, Sethuraman having been accepted as its proprietor there would be no room for suspicion that the firm's cheques were being paid into the proprietor's personal account. There is no allegation and proof that the collection and payment were made contrary to the tenors of the instruments. Carelessness could occur at the time of collection especial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... make any such further inquiries in his Judgment they were not guilty of negligence. In the instant case the Manager himself gave the introduction. As a general rule a banker before accepting a customer, must take reasonable care to satisfy himself that the person in question is of good reputation; and if he fails to do so he will run the risk of forfeiting the protection given by section 131 of the Act but 'reasonable care' will depend on the facts and circumstances of the case. The courts have tended to accept the practices and procedures which bankers lay down for themselves, but that can by no means be decisive. The "type of necessary inquiry at the opening of an account seems to be less stringent at present than it was a generation ago, and it is difficult to spell out from the cases any hard and fast rules." This is so because, in the words of Lord Chorley, the use of banking facilities at the present day "has become so wide spread and has penetrated so far into social strata where banking accounts were previously unknown, that precautions at one time considered necessary are now difficult in the press of business to apply. One of the obvious problems is that of the dishone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idence that they had done all that was usual in such a case, and claimed that this proved that they had acted with due care. It was held that the defence succeeded. It is thus clear that the question of negligence or no negligence depends entirely on the facts of each individual case and thus makes it difficult to judge in advance how any particular litigation involving allegations of negligence will go. In the instant case Sethuraman had in effect opened another account in the name of the plaintiff firm and operated it himself as its proprietor. As we have already observed, carelessness on the part of the bank is most likely to occur at the time of collection of cheques especially in failure to pay due attention to the actual terms of the mandate. It is not here a case of playing the detective but of a careful examination of everything which appears on the front and back of the instrument. Each set of circumstances produces its own requirements. The instruments, crossing, type of crossing, per pro, pay cash or order etc. are important. The banker may be negligent in acting contrary to such mandate under appropriate circumstances. In the instant case, however, no details regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances of the case would depend on current banking practice. What was the practice long time back when the use of banking facilities by the general public was much less widespread may not be a proper guide. It should also be noted that the duty of care owed by the Bank to the plaintiff as owner of the cheque did not arise until the cheque was delivered to the Bank by the customer Sethuraman. It was then only that duty to make inquiries about the cheque arose. Those inquiries would depend on the apparent tenor of the cheque and the knowledge of facts that earlier inquiries ascertained. What we have to do is to look at all the circumstances at the time of the paying in of the cheque by Sethuraman and to see whether those circumstances were such as would cause a reasonable banker possessed of the information gathered about Sethuraman to suspect that he was not the true owner of the cheque. There is very little evidence relating to the deposit and particulars of the cheques deposited and hence it is difficult to hold that the Bank ignored obvious indications and was negligent at that time. It is difficult to accept so speculative a proposition as what would have happened if inqu ..... 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