Bharat Bank Ltd., Madras vs Kishinchand Chellaram

Venkatarama Aiyar, J.—This appeal arises out of a suit instituted by the respondent, which is a firm of cloth merchants carrying on business

among other places, .at Madras, for the recovery of a sum of Rs. 5225-12-9 from the Bharat Bank Ltd., who are the appellants. On 24-11-1943

the respondent drew a cheque for Rs. 5225-12-9 on the Chartered Bank of India, Australia and China at Madras payable to their Benares branch

or bearer. The cheque was crossed and sent by ordinary post to the payee at Benares. Exhibit P. 2 is a photographic copy of the said cheque.

On 6-12-1943 a person who gave out his name as Matha Frasad 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. Prasacl Gupta operated on this account by issuing a cheque for Rs.

200, Ex. P. 4(a) and another cheque tor Rs. 2,225 Ex. P. 4(b) both dated 6-12-1943 and drawn in tavour of one Seetharam. On 7-12-1943 he

drew a cheque for Rs. 126 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. 124-9-0.

The plaintiff discovered .the loss of the cheque in March 1944 and lodged a complaint with the police. Investigation which followed thereon

revealed that the person who had cashed the cheques, Exs. P. 4 and P. 4(b), and signed his name as Sectharam 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 cheques 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 a copy; that Jawahar Lal forged the signature of the payee therein and that the proceeds thereof had

been taken by Jawahar Lal and Misra. Thereafter Jawahar Lal turned approver; Misra 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 this appeal has arisen for the recovery of the amount of the cheque from the appellants on

the ground that Jawahar Lal 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 realising the cheque they had acted in good faith and without negligence and that they

were accordingly protected by Section 131, Negotiable Instruments Act.

The suit was tried by Mack J. He held that Matha Prasad Cupta had been pennitted by the Bank authorities to open an account without proper

introduction, that Ex. P. 2 had been cashed without due examination of the endorsements there on and that such examination Would have revealed

the true character of the transaction, that the Bank had been negligent at all stages, of tile matter and was, therefore, not entitled to rely on Section

131 of the Act, in answer to the claim. In the result the suit w3s decreed. The defendants prefer this appeal.

The only point for decision in .this appeal is whether the appellants are entitled to the protection afforded by Section 131 of the Negotiable

Inslru-inents Act on the ground that they received payment of the cheque ""in good faith and without negligence"" as provided in the section, the

burden of establishing the same being unquestionably on them.

Though the section requires good faith and absence of negligence in the receipt of the payment of the cheque amount, the sense of the matter

requires that these elements should be present at all stages of the transaction culminating in .the cashing of the cheque. The section is intended to

give protection to the Bank not merely at the stage of the realisation of the cheque but also at the earlier stages leading to it. The basis of the action

against which Section 131 grants protection is conversion and an action in conversion will he only with reference to chattels and in strict theory,

therefore, no action will lie in conversion by a customer in respect of money standing to his credit in a bank as he has no property in specific coins.

To get over this difficulty the theory has been adopted that the piece of paper called the cheque might be treated as converted and an action in

conversion could be maintained for its value - vide - ''Morison v. London County and Westminster Bank Ltd.'', 1914 3 KB 356 (A) and - ''A.L.

Underwood Ltd. v. Bank of Liverpool, 1924 1 KB 775 (B).

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. That clearly could not have been the

intention of the Legislature in enacting Section 131 and therefore, when the section speaks of receipt of payment it has obviously in mind all the

preceding stages leading up to the encashment of the cheque and in that view the requirement that the bank should act in good faith and without

negligence would apply to all those stages.

The following remarks on Section 82 of the English Bills of Exchange Act of 1882 corresponding to Section 131 of the Negotiable Instruments

Act in Paget''s Law of Banking (Fifth Edn., page 294) may be quoted:

The obligation and the protection must be correlative and co-extensive. If the words ''receives payment'' are to be read as involving protection to

the banker for all preliminary operations leading up to the. receipt of the money, the condition precedent to that protection, viz., that the banker

shall act in good faith and without negligence, must cover the same ground...... .The whole transaction, then, from the taking of the cheque to the

receipt and disposition''of the money, must be in good faith and without negligence"".

We may now examine the evidence as to how the cheque came into the possession of the Bank. On 6-12-1943, a current account was opened

in the-name of Matha Prasad Gupta with a cash deposit of Rs. 250 and the cheque in question was put into that account on the same date. There

is some dispute as to whether the account itself.was opened with the cheque in question or whether it was put into the account later. The evidence

on the matter is not clear but there is no reason to differ from the finding of Mack J. that ""Matha Prasad Gupta opened the account with a cash

deposit of Rs. 250.

The circumstances under which the account came to be opened have now to reviewed. Matha Prasad Gupta was a new customer and the rules of

busi- . ness of the bank provided that the current accounts are to he opened ""for persons known to the bank or properly introduced"". The

appliction for open jug the current account by Matha Prasad Gupta shows that he was introduced by one M. Krishna-swami, who was then in the

service of the bank and it also bears the initials of the accountant.

Apart from this, there is practically no evidence throwing any light on the circumstances under which the current account came to be opened. D.

W. 3 was the manager of the Mount Road branch at the material dates. The practice of the bank, as spoken to by him, is that a person. who wants

to open'' a new account goes in the first instance to the ledger clerk, who satisfies himself as to whether a new account could be permitted to be

opened. When he is satisfied .he takes a formal application from the customer and passes it on the chief accountant or. the manager for counter-

signature, these being the two officers, who have the authority to permit open ing of a new account. The account is then opened '' and a cheque

book and a pass book are issued to the customer. The application presented by Matha Prasad Gupta was, as already stated, recommended by

Mr. Krishnaswami and it bears the initials .of. the Chief accountant. D. W. 3 deposes that it did not come to him for approval and that he did not

see either Matha Prasad Gupta or make any enqui ries, about him. The Chief accountant has not been examined nor Krishnaswami. Thus apart

from what appears on the face of the application there is. no independent evidence to show that the bank had made any enquiries in the matter. ''

It was argued for the appellants that as the application had been recommended by Krishnaswami it must be held that the customer had been

properly introduced but Krishnaswami had not been examined in these proceedings and his deposition in the Criminal court which has been

marked as Ex. D. 2 does not very much assist the appellants. He stated therein:

I was a clerk in the Bharat Bank at Mount Road, Madras in 1943. One Matha Prasad Gupta opened a current account on 6-12-1943 with Rs.

The account opening form, Ex. P. 98 was filled up by Matha Prasad Gupta. I introduced him to the bank. Exhibit P. 98 bears my signature as

well. I did not know him before. I introduced him thinking that it would add to the business of the bank and it would help me in my prospects.

It is clear from this deposition that what Kirshna-swami did was to introduce a person whom he did not know and the bank evidently acted 011

his introduction and made no further enquiries.

Mr. M. Sundaram, the learned advocate for the appellants, argues that on these facts the bank must be held to have acted without negligence,

inasmuch as they acted on the recommendation of their employee who, it is not disputed, was a respectable person, and the fact that he acted

negligently is not a ground for depriving the bank of its protection u/s 131, as what they did was in strict accordance, with the rules. But the

question is not whether the rules of the bank had been observed but whether the bank had ""acted without negligence in opening a new account and

though the fact of the observance of the rules would be a material factor in determining that question, it is not decisive.

In - ''Motor Traders Guarantee Corporation v. Midland Bank Ltd.; 1937 4 All ER 90 (C) .the point arose for consideration whether the bank

could be said to have acted with negligence"" merely because its officers had failed to observe the rules of the bank for the conduct of its business.

In answering the question in the negative Goddard J. observed;

I am far from saying that the plaintiffs, or any other person whose property has been converted are entitled to rely upon a literal performance, or

are entitled to require a literal performance by the Bank of these regulations. The bank does not owe a duly to them to carry out this rule, that rule,

or the other rule. Indeed I doubt whether they owe their own customers the duty of carrying out all the rules which they may Jay down as counsels

of perfection.

The question in every case is not whether the bank requires a particular standard of conduct, but whether the particular acts which are done are

enough to discharge the onus which is upon the bank either in respect of their own customer or in respect of some other customer.

Conversely. proof by the Bank that its rules bad . been observed by its officers would not be an answer to a claim in conversion though that would

be a material element in establishing that the Batik -had acted without negligence as required by Section 131.

It is next contended by Mr. M. Sundaram that what Section 131 requires is absence of negligence in the realisation of the cheque, that even

construing it as including negligence in the ""preliminary operations leading upto the receipt of the money"", it cannot include negligence in the opening

of accounts and the decision of the Privy Council in - ''Commrs. of Taxation v. English, Scottish and Australian Bank Ltd.'', AIR 1920 PC 88 (D)

is strongly relied on in support of this contention.

There, the facts were that on 6-6-1917 one Mr. . Friend drew a cheque on the Australian Bank of Commerce for the amount of Income Tax

payable by him and delivered it to the Commissioner of Taxes. A person calling himself Thallon appeared before the Accountant of the respondent

bank and wanted to open a current account. He complied with the usual formalities and paid � 20 and an account was opened on the 7th. Next

day he put into his account the cheque of Mr. Friend and the same was cashed in the usual course. On the 9th, llth and 12th of June 1917 Thallon

issued three cheques for substantial amounts and thereafter disappeared. In fact there was no person of the name of Thallon at the address given.

The Commissioner of Taxes claimed the amount of the cheque from the respondent bank on the ground of conversion. The defence was that the

Bank was protected by Section 88 of the Australian Bills, of Exchange Act corresponding to Section 131 of the Indian Negotiable Instruments

Act. In upholding this defence, .Lord Dunedin observed at page 90:

The remaining point is, was there negligence On the part of the bank ""in collecting the cheque? Their Lordships say ""in collecting the cheque"",

because that is in a slightly different phrase from what the statute says, ""without negligence receives payment for a customer"". It is not a question of

negligence in opening an account, though the circumstances connected with the opening of an account may shed light on the question of whether

there was negligence in collecting a cheque"".

It is contended that on the facts the present case . is indistinguishable from AIR 1920 PC 88 (D) 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, the 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 gives. 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.

Mr. K. Umarnaheswaram, the learned counsel for the respondent; relied on the decisions in - ''Ladbroke &'' Co. v. Todd'', (1914) 111 LT 43

(F) and - ''Hampstead Guardians v. ""Barclays Bank Ltd.'', (1923) 39 TLR 229 (G) and certain observations in - ''Lloyds Bank Ltd. v. Savory &

Co.'', 1933 AC 201, as establishing that if the bank did not make proper enquiries before an account is opened, that would amount to negligence

for the purpose of Section 82 of the English Act.

In (1914) 111 LT 43 (F) a cheque payable to Jobson was stolen and a person pretending to be Jobson opened an account with the defendant

bank with that cheque. The cheque was cleared in the usual course or business and the amount was drawn by the pretender, Jobson. In an action

in conversion by the drawers of the cheque the bank relied by way of defence on Section .82 of the English Bills of Exchange Act. Bailhache J. in

overruling the same, referred to the evidence which established that it was the practice of the banks to make enquiries before opening new

accounts and observed:-""It was true that banks were willing to take cheques, but before they would allow them to be operated upon they must be

satisfied as to the respectability of the intended customer. Sometimes that was done by references, and sometimes by an introduction through a

customer.... The defendant, in fact/ did fall short of that degree of care ordinarily exercised by bankers, and therefore, he was guilty of negligence"".

It was observed in Bapulal Premchand Vs. The Nath Bank, Ltd., that this decision could not be regarded as good law in view of the later decision

of the Privy Council in AIR 1920 PC 88 (D).

In (1923) 39 TLR 229 (G) which was decided in 1923 & in which reference is made to the decision in AIR 1920 PC 88 (D) Acton J. held that in

order to entitle a bank to protection u/s 82 it must prove that it made reasonable enquiries before, opening an account. .

In - ''Lloyds Bank v. Chartered Bank of India, Australia and China'',, 1929 1 KB 40 (I), Sankey L. J. quoted the decision in (1914) 111 LT 43

(F) as authority for the position that ""a bank may be negligent in not making enquiries as to a customer on opening an account.

In 1933 AC 201 (H) the position was thus summed up by Lord Wright: ""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 Duncdin says in AIR 1920 PC 88 (D) in view

also 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 banker. It is now recognised to be the usual practice of bankers not to open an account for a customer without obtaining a

reference and without an enquiry 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 if a cheque were converted subsequently in the history of the account; this rule was applied by Bailhache J. in

(1914) 111 LT 43 (F) who on that ground held that the banker had not made out his defence u/s 82. The matter is now so well appreciated by

bankers that the appellants have a printed rule saying that no new current account is to be opened without knowledge of or full enquiry into the

circumstances and character of the customer"". The law is thus stated in Halsbury''s Laws of England, Vol. I, paragraph 1330, page 811: ""It is

negligence not to make enquiries as to customer upon opening an account and collecting a cheque for him.

The position in law may thus be summarised; When in an action in 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 will, however, be relevant u/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 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 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 u/s 82 of the English Act, the opening of the account and the

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

The observations in AIR 1920 PC 88 (D) 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 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,

Oil the facts of this case no difficulty arises as to the true position. The account was opened on 6-12-1943 with cash; the cheque was put into the

account on the same date and drawn by cheques dated 6th, 7th and 9th December. All these clearly form parts of a single scheme and negligence

at the stage of opening the account must accordingly be held to deprive the bank of the benefit of Section 131.

Mack J. further held that the endorsements on the cheque were suspicious and sufficient to put the bank oa enquiry and as no enquiry was

made that would also be negligence which would prevent the bank from, relying on Section 131. The points to be noticed in connection with these

endorsements are these; The cheque was made payable to the plaintiff''s firm at Benares and it is a matter for suspicion that it should have been

presented for collection at Madras. While the issue of the cheque by the plaintiff''s firm bears its stamp, the endorsement by the same firm at

Benares is without stamp. There are three endorsements ostensibly by three different persons but all of them would appear to be in the same

handwriting and a remarkable feature about them is that in all of them the word ""proprietor"", describing the signatory, is spelt as ""propritor"". How,

three wits ""jumped on an error is a matter which must have excited suspicion and provoked enquiry but no enquiry whatever was made. There

cannot, therefore, be any doubt that the Bank had acted negligently, in not scrutinising the endorsements.

But it is argued for the appellants that the cheque is made payable to bearer and that in such a case there is no need to examine the

endorsements because the bank is bound to pay the amount to whoever was its holder. Reference was also made to Section 85(2), Negotiable

Instruments Act which enacts that the drawer of a bearer cheque is discharged by payment in due course to the bearer and it is argued that in view

of that section there is no obligation cast upon the bank to examine the endorsements in bearer cheques. Reliance is also placed on the evidence of

D. W. 1 that endorse-ments on bearer cheques are never looked into But this contention proceeds on a misapprehension of the true position.

Section 85(2) applies to a paying bank and has DO bearing on the rights of a collecting bank which must be determined in accordance with the

provisions of Section 131. If a claim were to be made by the plaintiff against the Chartered Bank of India, Australia and China for refund of the

amount of the cheque, then Section 85(2) will come into operation and that bank can plead discharge under that section. But in an action in

conversion against the collecting bank where the defence is based on Section 131 the endorsement becomes material as an element in determining

whether the bank had acted without negligence. If there had been no endorsement at all, it might be that no inference of negligence could be made;

but if in fact there is one and that conveys a warning that all is not well with the title of the holder it will be negligence not to heed to it and pursue

the matter.

In fact the evidence is that when the holder presents a bearer cheque at the counter he is asked to sign it before receiving payment and that was

also done in this case and if at that stage the bank shuts its eyes to what plainly appears on the back of the cheque it would clearly be negligence,

such as will deprive it of the protection under S. 131.

To sum up, the bank was negligent in opening an account in the name of Matha Prasad Gupta without making an enquiry; the cheque came to

the possession of the bank as part, of the opening of the account and the endorsements on the cheque are sufficiently suspicious to put the bank on

enquiry. On these facts it must be held that the bank had acted with negligence at all stages of this matter and they are not entitled to rely on S. 131

in answer to the claim. In the result we confirm the judgment of Mack J. and dismiss this appeal with costs.