Duty to open the account with references and sufficient documentary proof :

The duty to open an account only after the new account holder has been properly introduced to is too well grained into today’s banker’s mind that it would be impossible to find an account without introduction. The necessity to obtain introduction of a good customer is to keep off crooks and fraudsters who may open accounts to collect forged cheques or other instruments. As an added precaution RBI has insisted that while opening accounts photograph of the customer and sufficient documentary proofs for constitution and address be obtained.

In this regard the English Decision Ladbroke v. Todd (1914) 30 TLR 433 can be referred to. In this case a thief stole a cheque in transit and collected the same through a banker where he had opened an account without reference and by posing himself as the payee whose signature the thief forged. After the cheque was collected the thief withdrew the amount. The bank was held liable to make good the amount since it acted negligently while opening the account in as much as it had not obtained any reference.

In Syndicate Bank v. Jaishree Industries and Others AIR 1994 Karnataka 315, the Appellant opened an account in the name of “M/s Axle Conductor Industries Ltd. by the Proprietor, R.K. Vyas”. The introduction was given by one Nanjunde Gowda, who was having a small shop at the address given by the account holder. The address of the account holder, given by the account holder, was just opposite the Appellant Bank. In the account opening form the name of the account holder was given as “M/ Axle Conductor Industries by the Proprietor R.K. Vyas”. No information was sought or inquiry held as to the incorporation of the account holder nor was the Memorandum of Association, Resolution, etc., scrutinized. On 3 January 1979, partners of Firm “A” purchased a draft for ` 2,51,125 from State Bank of India, Ahmednagar, in favour of M/s Axle Conductor Industries Ltd. The draft was deposited in the account with the Appellant on 5 October 1979 and the amount was collected by the Appellant and credited to the account on 9 October 1979. On 10 October 1979, the monies were withdrawn from the account. The partners of “A” filed a suit against the Appellant and State Bank of India for recovery of ` 2,51,125 wrongly collected by Appellant and paid by State Bank of India.

The High Court held that there was failure to follow the proper procedure for opening account in the name of a limited company, that the account was opened as if it was a proprietary concern, the staff of the Appellant Bank did not bestow sufficient care even to notice the word “Ltd.” on several occasions, such as, at the time of opening of the account or withdrawal of amounts from the account. The High Court felt that having accepted the application as if it was an application by a proprietary concern, strangely the Appellant Bank allowed the account to operate in the name of the limited concern. There was, therefore, lack of care on the part of the Appellant Bank in the entire transaction.

The conditions to be satisfied for claiming protection under Section 131 of the Negotiable Instruments Act are: (a) that the banker should act in good faith and without negligence in receiving payment, i.e. in the process of collection, (b) that the banker should receive payment for a customer, i.e. act as mere agent in the collection of the cheque, and not on his account as 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 specially to himself.

The High Court stated that if the draft was drawn in favour of a fictitious person, it could not be said that the ownership stood transferred to a non-existent person for the purpose of examining the question whether the bank as a collecting banker acted negligently or not. The ownership would pass to the true owner. The High Court did not consider it necessary to decide as to what extent a person obtaining a draft in favour of a fictitious person would lose the ownership in favour of a bona fide “holder in due course”.

In view of the aforesaid, the Appellant Bank was held to have acted without taking any care, and was found negligent throughout and was not entitled to the protection under Section 131 of the Negotiable Instruments Act.

In Indian Bank v. Catholic Syrian Bank AIR 1981 Mad 129, the Madras High Court had occasion to consider negligence of collecting banker which had opened an account after proper introduction.

Briefly the facts were that one D had opened an account with Salem branch of bank A. A customer of that branch had taken D to the said branch and had informed the Manager that D was a man from Indore and that he wanted to open a bank account to enable him to purchase carpets from Salem. Although bank A had claimed that the customer, who had introduced D, was a well-known customer of bank A and was a leading merchant of Salem and had a large volume of business, it was found in the evidence recorded by the Court, that these claims were not true. The introducer had an account and also had some fixed deposits with bank A. The transactions were for paltry amount and the amount standing to the credit of the introducer at the relevant time, was only Rs. 192.57.

On 12 June 1969, M obtained a demand draft for Rs. 20 from the branch at Singanallur of the bank B. The draft was drawn on the branch office of bank B in favour of D and company. By means of clever forgery, the draft was altered for Rs. 29,000 drawn in favour of D. The draft was presented by D on 13 June 1969 for credit to his account opened with Salem branch of bank A and the amount was collected by bank A from bank B and credited to the account of D.

On 14 June 1969, the Salem branch of bank B came to know from its Singanallur branch that the draft was issued for Rs. 20 and was drawn in favour of D and company, payable at Cochin and that no draft for a sum of Rs. 29,000 had been issued. At once the Salem branch of bank A was contacted and was informed of the fraud, but unfortunately by then, bank A had already paid a large part of the draft amount to D under a self cheque.

Bank B (Paying banker) filed the suit against bank A (collecting banker) for recovery of ` 29,000 on the ground that the collecting banker had been negligent while opening an account in the name of D and by reasons of its negligence and want of good faith, the forged draft got to be wrongly converted.

The High Court observed that the collecting banker had opened the account, in the name of D on a mere introduction of one of its account holders, knowing fully well that the said account holder was not a well-known leading merchant and had no large business with it at the relevant time. Further the collecting banker had not independently questioned D about his business and his credit worthiness before allowing him to open an account. When D stated that he had come from Indore, the Manager of the collecting banker did not even care to find out his permanent address, more so when in the application for opening account filed by D, the address given was of that of the introducer. Moreover, when D told the Manager of collecting banker that he had not till then opened any account although he had come from Indore to Salem to do business, the collecting banker, before opening the account, should have been more alert.