Holding

The bank failed to discharge the burden of proving good faith and absence of negligence and therefore is not protected by Section 131 of the Negotiable Instruments Act.

Summary

The Kerala State Co‑operative Marketing Federation (appellant) received a cheque for Rs 1,00,000 which was stolen, altered and used to open a fictitious account with State Bank of India (respondent No.1). The fraudster deposited the cheque, withdrew Rs 50,000 and then disappeared. The bank claimed protection under Section 131 of the Negotiable Instruments Act, arguing it had acted in good faith. The Supreme Court held that the opening of the account, the deposit of the large cheque and the withdrawal were part of a single scheme and that the bank failed to show it acted without negligence, especially because it made no proper enquiries about the account holder. Consequently, the bank could not rely on Section 131 and was liable for conversion. The trial court’s decree in favour of the appellant was restored and the appeal was allowed.

Issues considered

Whether the collecting banker is entitled to protection under Section 131 of the Negotiable Instruments Act when the account was opened with minimal verification and the cheque was deposited shortly thereafter.
Whether the series of transactions (account opening, cheque deposit, and withdrawal) constitute a single scheme that defeats the bank’s claim of good faith and absence of negligence.

Legislation cited

Negotiable Instruments Act, 1881s. 131

Subjects

Negotiable Instruments ActSection 131bank liabilitygood faithnegligenceconversioncheque fraudaccount openingstop paymentbanking law

Judgment

. THE KERALA STATE CO-OPERATIVE MARKETING A
FEDERATION
v.
STATE BANK OF INDIA AND ORS.

JANUARY 30, 2004
B
[S.N. VA RIA VA AND H.K. SEMA, JJ.]

Negotiable Instruments Act, 1881-Section 131-Protection under-
Customer opening bank account with a meagre amount, thereafter depositing
exact amount for obtain;ng cheque book-Subsequent deposit of cheque qf
c
I·
Rs. J lakh and withdrawal of Rs. 50,000-Stop payment instructions received-
Thereafter customer not troceahle-Liability of Bank-Banker claiming
protection-Held: All the above incidents are part of the same transaction
which took place in close proximi(y to each other and the Bank failing to
discharge the burden which lay upon it to show that it had acted in goodfaith D !
and without negligence-Hence, Bank not entitled to protection.

Appellant received a cheque for Rs. 1,00,000 from respondent No.3
drawn on respondent No.1-bank. He sent the cheque by post, however it
,. . was stolen. It was altered to read as if it was payable to K .and a person

... calling himself K opened an account with respondent No. i-bank for a
meagre amount. Thereafter, K deposited exact amount for being entitled
E

,
.
to receive cheque book. He then deposited a cheque for Rs.1 lakh •
I Respondent No.I collected the same on behalf of his client. K then
withdrew Rs. 50,000 after which banker received stop payment
instructions. Thereafter K was not traceable. Appellant claimed the F
... amount of Rs. 50,000 from respondent No.I, who claimed protection under
Section 131 of the Negotiable Instruments Act. Thereafter, appellant filed
recovery suit which was decreed. However, High Court set aside the decree
and dismissed the suit. Her•~e the present appeal.

Disposing of the appeal, the Court G
HELD: In the instant c~~e, the transaction of opening of the account
for a meagre sum,. depositing the exact amount for being entitled to receive
--..., " a cheque book, depositing of the cheque of Rs.1,00,000/- and the
withdrawal of the sum of Rs. 50,000 were all part of the same transaction
1 H
2 SUPREME COURT REPORTS [2004) 2 S.C.R.

;, 1\. and all these took place in close proximity to each other. From the evidence
of the Bank Manager it is clear that the person who called himself K,
opened an account on the introduction of an account holder by name D
and in the Account Opening Form ·an absolutely vague address was given.
ln cross-examination the Branch Manager admitted that the Bank made
B no enquiries as to the credit worthiness of the said K or as to his full
address, his telephone number, the nature and place of his business or the
name or the occupation of the person introducing the account holder.
Respondent No.I-bank does not seem to have put on its guard, even when
a cheque for a very large amount i;e. Rs.1,00,000 was deposited soon
thereafter. After it was found out that the cheque had been forged and
C stop payment notice had been issued, Bank made no enquiry with the
introducer. When questioned, it answered that the bank has no
responsibility to look into it. Also, the Bank made no attempt to lead the
evidence of the person who had introduced the account holder. Therefore,
Respondent No. I-Bank has not discharged the burden which lay upon it
to show that it had acted in good faith and without negligence.
D 119-C-D)

Indian Overseas Bank v. Bank of Madura ltd., (1992) Vol. 75 Company
Cases 481; Syndicate Bank v. United Commercial Bank, (1991) 70 Comp~ny
Cases 748; Brahma v. Chartered Bank, AIR (1956) Calcutta 399; Central
E Bank of India Ltd v. Gopinathan Nair, (1972) Kerala Law Times 518; Indian
Bank v. Catholic Syrian Bank Ltd., AIR (1981) Madras 129 and Indian
Overseas Bank v. Industrial Chain Concern, 11990) l SCC 484, referred to.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 151 of I 998.

F From the Judgment and Order dated 5.10.1995 of the Kerala High
Court in A.S. No. 252 of 1988.

M.P. Vinod for the Appellant.

R. Molian, V.G. Pragasam, Romy Chacko and Rajiv Mehta for the
G Respondents.
The Judgment of the Court was delivered by

S.N. VARIA VA, J. This Appeal is against a Judgment dated 5th
October, 1995.
Briefly stated the facts are as follows:
KERA LA STA TE CO-OPERATIVE MARKETING FEDERATION v. S.B.l. {VARIAVA, J.] 3

The Appellant received a cheque for Rs. 1,00,000/- from the 3rd A
Respondent. The cheque was drawn on the 2nd Respondent Bank. The
Appellant sent the cheque by post along with some other cheques. However,
the cheque in question was stolen in post and was altered to read as if it was
payable to Shri K. Narayhanan, A person calling himself K. Narayhanan
opened a bank account with the Ist Respondent Bank on 24th December, B
1982. The account was opened with a sum of Rs. 20/-. The customer then
asked for a cheque book and was informed that the minimum balance had to
be Rs. I00 to obtain a cheque book. He therefore put in Rs. 80/- into the
account. He was then issued a cheque book. Thereafter on 29th December,
1982 the cheque for Rs. 1,00,000 was deposited into the account and the
same was collected by the 1st Respondent on behalf of its client. On 30th C
December, 1982 a sum of Rs. 50,000/- was withdrawn from the account just
prior to stop instructions being received.

The said K. Narayhanan turned out to be a fictitious person. He was
never traced again. The remaining balance of Rs. 50,000 was ultimately
returned to the Appellant. When the Appellants claimed the sum of Rs. 50,000 D
from the Ist Respondent they claimed protection of Section 131 of the
Negotiable Instruments Act.

The Appellant thus filed a Suit for recovery of the sum of Rs. 50,000.
,.. The Suit was decreed by the trial Court. However, the High Court has allowed
the Appeal of the Ist Respondent, set aside the decree of the trial Court and E
dismissed the Suit. Hence this Appeal.

Section 131 of the Negotiable Instruments Act reads as follows:

"131. Non-liability of banker receiving payment of cheque. A banker
who has in good faith and without negligence received payment for F
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."

It is thus to be seen that a banker, who encashes a cheque, in respect of which G
his client had no title, would become liable in conversion or for money had
and received. However, Section 131 of the Negotiable Instruments Act protects
... the banker, provided he has received payment in good faith and· without
negligence of a cheque crossed generally or specially.
H
4 SUPREME COURT REPORTS (2004] 2 S.C.R. I •
\ ,,
A In the case of Indian Overseas Bank v. Bank of Madura ltd' reported I
\
in ( 1992) Vol. 75 Company Cases 481, the receiving banker was held guilty
of negligence and lack of good faith inasmuch as it had allowed the 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. It was held that the opening of
\
B the account, the presentation of the draft and withdrawal of the amount were
part of one integral scheme. The fact that the person who introduced the
account holder had not been examined in the suit was held against the Bank.
In the case of Syndicate Bank v. United Commercial Bank, reported in (1991)
70 Company Cases 748, it was held that the Appellant bank had to prove that
it had acted in good faith and without negligence. It was held that the fact
C that the customer had just opened the account and .had only one transaction
with the bank, namely the encashment of the cheque, showed that the bank
had not acted in good faith and without negligence.

In the case of Brahma v. Chartered Bank, reported in AIR ( 1956)
Calcutta 399, it has been held that the onus of proving "good faith" and
D "absence of negligence" is on the banker claiming protection under Section
. 131 of the Negotiable Instruments Act. It is held that in deciding whether a
collecting banker has or has not been negligent it becomes necessary to take
into consideration many factors such as the customer, the account and the
surrounding circumstances. It is held that if the cheque is of a large amount,
E then the bank has to be more careful unless the customer was a customer of
long standing, good repute and with great personal credit and was one who
regularly deposited and withdrew cheques of large amounts.

The same principles are reiterated in the cases of Central Bank of
India Ltd. v. Gopinathan Nair reported in ( 1972) Kerala Law Times 518 and
p Indian Bank v. Catholic Syrian Bank Ltd., reported in AIR (1981) Madras
129.

This Court has also considered this question in the case of Indian
Overseas Bank v. lndustriai Chain Concern reported in (1990] 1 SCC 484.
In this case, on the basis of evidence lead by the bank (evidence of the
G Manager and the accountant of the bank) the bank was exonerated. However,
principles which governed such cases were noted' from various decisions.
The relev·ant portion reads as follows:

"9. 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, I I th
H edn., in chapter 5 at page 64 it is said :
. KERALA STATE CO-OPERATIVE MARKETING FEDERATION v. S.B.l. [VARIAVA, J.) 5

"Before opening an account for a customer who is not already A
known to him, a banker should make proper preliminary
inquiries. In particular, he should obtain references from
responsible persons with regard to the identity, integrity and
reliability of the proposed customer.

If a banker does not act prudently and in accordance with B
current banking practice when obtaining references
concerning a proposed customer, he may later have cause
for regret."

I0. M. L. Tannari in Banking Law and Practice in India, 18th edn. at
page 198 says : c
"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 D
from the references 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 inquire, from responsible parties, given
as references by the customer, as to the latter's integrity and
t" E
... 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."
11. One of the tests of deciding whether the bank was negligent,
though not always conclusive, is to see whether the Rules or
F
instructions of the banks were followed or not. We may accordingly
consult those instructions. Ex. B-6 contains the general instructions
regarding constituent accounts for bank. Mark II deals with opening
of accounts. It says :
'"Except at large branches where the sub-agent or accountant
G
may be authorised to open Current Accounts, no new Current
Account shall be opened without the authority of the agent
I 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 initialled by the
agent at the top left corner after he has satisfied himself of the H
('
'

6 SUPREME COURT REPORTS [2004) 2 S.C.R.

A 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
B 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
c findings on the account opening form for future reference if the
need arises ... "

12. Mark IV deals with accoun(s 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
D signature on behalf of he 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
E 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.

13. It was held in Commissioners of Taxation v. English, Scottish
F and Australian Bank (1920 AC 683), that a negligence in collection
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 whether there was negligence in collecting a
cheque.
G 14. In Ladbroke and Co. v. Todd, (1914) 30 TLR 433 : (1914) 111
LT 43 : 19 Com Cas 256), the plaintiff drew a cheque and sent it to
the payee by post. The letter was stolen and the thief took it to the
defendant, a banker, and used it for the purpose of opening an account
for the purpose of which he forged the payee's endorsement. The
H ,defendant accepted believing him to be the payee. He was not
KERA LA STA TE CO-OPERA Tl VE MARKETING FEDERATION v. S B.l. [VARIA VA, J.] 7

introduced to the bank and no references were obtained. The defendant A
opened the account and the cheque was specially cleared at the request
of the thief, and he drew out the proceeds on the next day. On the
discovery of the fraud the plaintiff brought an action against the
defendant for conversion. One of the main questions raised was
whether the account having been opened by payment in all the cheques B
to be collected the defendant could be properly regarded as having
received payment for a customer. It was held that as account was
already opened when the cheque was collected, payment had been
received for a customer. The drawer thereupon sent another cheque
to the real payee and took an assignment of his rights in the stolen
cheque and, as holders of the cheque or alternatively as assignees, C
brought an action against the bank to recover the proceeds collected
( by the bank as money had and received to their use. Evidence was
given that it was the general practice of bankers to obtain a satisfactory
introduction or reference. It was held that the banker had acted in
good faith, but was guilty of negligence in not taking reasonable
precautions to safeguard the interests of the true owner of the cheque D
and that therefore he had put himself outside the protection of Section
82 of the Bills of Exchange Act, 1882. Bailhache, J. also said that the
banker would have been entitled to the protection of the section as
having received payment for a customer, but had lost it owing to his
want of due care. It was also held that the relation of banker and E ·
customer began as soon as the first cheque was handed in to the
banker for collection, and not when it was paid.

15. In Turner v. London and Provincial Bank (1903) 2 Legal Decisions
Affecting Bankers 33 : (1903) XXIV Journal of Institute of Bankers
220), evidence was admitted as proof of negligence, that the customer F
had given a reference on opening the account and that this was not
followed up. ·

The principles governing the liability of a collecting banker have also
been extracted in the impugned judgment. They read as follows:
G
"(I) As a general rule the collecting banker shall be exposed to his
usual liability under common law for conversion or for money had
and received, as against the 'true owner' of a cheque or a draft, in the
event the customer from whom he collects the cheque or draft has no
title or a defective title.
H
8 SUPREME COURT REPORTS [2004] 2 S.C.R.

A (2) The banker, however, may claim protection from such nomial
liability provided he fulfils strictly the conditions laid down in S. 131
or S. 131 A of the Act and one of those conditions is that he must
have received the payment in good faith and without negligence.

(3) It is the banker seeking protection who has on his shoulders the
B onus of proving that he acted in good faith and without negligence.

(4) The standard of care to be exercised by the collecting banker to
escape the charge of negligence depends upon the general practice of
bankers which may go on changing from time to time with the
enom1ous spread of banking activities and cases decided a few decades
C ago may not probably offer an unfailing guidance in determining the
question about negligence today. ·

(5) .Negligence is a question of fact and what is relevant in determining
the liability of a collecting banker is not his negligence in opening
the account of the customer but negligence in the collection of the
D relevant cheque unless, of course, the opening of the account and
depositing of the cheque in question therein form part and parcel of
one scheme as where the account is opened with the cheque in question
or deposited therein so soon after the opening of the account as to
lead to an inference that the depositing the cheque and opening the
account are interconnected moves in a iritegrateq plan.
E
(6) 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 an account of an unknown person or non-existing
person or with dubious introduction may lead to a cogent, though not
F conclusive, proof of negligence particularly if the cheque in question
has been deposited in the account soon after the opening thereof.

(7) The standard of care expected from a banker in collecting the
cheque does not require him to subject the cheque to a minute and
microscopic examination but .disregarding the circumstances about
G the cheque which on th~ face of it. give rise to a suspicion may
amount to negligence on the part of the collecting banker.

(8) The question of good faith and negligence is to be judged from
the stand point of the true owner towards whom the banker owes no
contractual duty but the statutory duty which is created by this section
H and it is a price which the banker pays for seeking protection, under
._,

KERALA STA TE CO-OPERATIVE MARKETING FEDERATION"· S.B.I. [VA RIA VA, J.] 9

the statute, from the otherwise larger liability he would be exposed A
to under common law.

(9) Allegation of contributory negligence against the paying banker
could provide no defence for a collecting banker who ha~ not collected
the amount in good faith and without negligence."
B
On the basis of the above law, let us now see whether the 1st
Respondent bank has discharged the burden which lay upon it to show that
it had acted in good faith and without negligence.

The facts narrated hereinabove indicate that the transaction of opening
of the account, depositing the exact amount for being entitled to receive a C
cheque book, depositing of the cheque of Rs. 1,00,000 and the withdrawal of
' the sum of Rs. 50,000 were all part of the same transaction. All these took
place in close proximity to each other.

The 1st Respondent's Branch Manager gave evidence. From his evidence
it is clear that the person who called himself K. Narayhanan opened an D
account on the introduction of an account holder by name Dharman Panicker.
! In the Account Opening Form the address is given only as "Kaniyarath P.O.,
Kallisseri". Thus an absolutely vague address was given. The Bank made no
enquiries as to the credit worthiness of the said K. Narayhanan or as to his
full address or even about his telephone number. Thereafter even though E
initially the account was opened with only Rs. 20 the exact amount of Rs. 80/
- was deposited for purposes of receipt ofa cheque book. The 1st Respondent
bank does not seem to have put on its guard, even when a cheque for a very
large amount i.e. Rs. 1,00,000 was deposited soon thereafter. In cross-
examination the Branch Manager admits that in the Account opening fonn
neither the name nor the occupation of the person introducing had been filled F
up. He admits that no enquiry was made regarding the nature of business of
K. Narayhanan or where the place of business was. Even after it was found
out that that a cheque had been forged and stop payment notice had been
issued, no enquiry was made by the Bank with the introducer.. When asked
why no enquiries were made, the answer given was that the bank has no G
responsibility to look into it. Another factor which mitigates against the 1st
.. Respondent Bank is that it made no attempt to lead the evidence of the
; person who had .introduced the account holder.

It appears to us that the above mentioned facts discloses that the 1st
Respondent bank has not discharged the burden which lay upon it to show H
...

10 SUPREME COURT REPORTS [2004] 2 S.C.R.

A that it had acted in good faith and without negligence.

In this view of the matter, we are unable to sustain the impugned
Judgment. It is accordingly set aside. The decree of the trial Court is restored.
This Appeal stands disposed of accordingly. There will be no order as to
costs.

N.J. Appeal disposed of.

l

'