INDIAN OVERSEAS BANK versus INDUSTRIAL CHAIN CONCERN

Citation: [1989] SUPP. 2 S.C.R. 27 · Decided: 07-11-1989 · Supreme Court of India · Bench: K.N. SAIKIA · Disposal: Appeal(s) allowed

Judgment (excerpt)

INDIAN OVERSEAS BANK 
v. 
INDUSTRIAL CHAIN CONCERN 
NOVEMBER 7, 1989 
[K.N. SAIKIA AND M. FATHIMA BEEVI, JJ.] 
Negotiable Instruments Act-Section 131-Bank can avail of 
immunity as collecting banker-Opening of account-Duties of bank. 
-A 
B 
The plaintiff-respondept filed original suit No. 7667 of 1975 
against the appellant-Bank in the City Civil Court Madras for recovery 
C 
of Rs.26,383.49 p. together with interest and costs, being the amount of 
loss suffered by it on account of the negligence and conversion on the 
part of the appellant who negligently allowed one Sethuraman, 
Manager of the plaintiff''s firm to open a "fictitious account" in the 
name of "Industrial Chain Concern" as its proprietor and helped him 
to pay in stolen drafts and cheques drawn in favour of the plaintiff, and o 
by collecting the same and paying the proceeds thereof to Sethuraman, 
and closing the account thereafter. The plaintiff's case was that it was 
doing extensive business in steel Roller chains and sprockets with lead-
ing Industries and Government undertakings and had supplied goods to 
seven parties who sent to it drafts and chequ•S for Rs.26,383.49 p. 
which were received by Sethuraman, its Manager, who opened ficti-
E 
tious account in the name of the firm with the bank, and withdrew the 
. amount defrauding the plaintiff. According to the plaintiff the Bank 
was neglig~nt and guilty of conversion iri opening the account as also in 
collecting the cheques. Hence it was liable to make. good the loss 
suffered by it. The appellant-Bank denied the allegations of negligence 
levelled by the plaintiff. It stated that Sethuraman, who was a College-
F 
mate of the Manager of the Bank was known to him earlier and at the 
time of opening the account he had represented to the Bank that he, as 
proprietor, had started a firm under the name and style of "Industrial 
Chain Concern" and had shown in that connection some business 
papers on the basis of which the Manager gave the introduction neces-
sary to open the Account but the manager declined to grant overdraft G 
facility asked for by him. The bank asserted that it acted in good faith 
throughout the dealings till the closure of the account. 
The Trial Court held that the appellant bank had acted in good 
faith but not without negligence in opening the account and operating the 
same .in the process of collection of cheques/drafts and that it was not 
H 
27 
28 
SUPREME COURT REPORTS 
[ 1989] Supp. 2 S.C.R. 
J 
A 
entitled to protection of section 131 of the Negotiable of Insiruments 
Act. Accordingly it decreed the plaintiff's suit Bank's appeal to the High 
Court against the detree of the trial Court was dismissed. Hence this 
appeal by Special Leave. 
B 
Allowing the appeal, this Court, 
HELD: 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 under section 131 of the Negotiable Instru-
ments Act. What is "reasonable care", will depend on the facts and 
c 
circumstances of the case. [45F-G] 
The courts have tended to accept the practices and procedures 
which bankers lay down for themselves, but that can by no means be 
decisive. [45G] 
[) 
Till an account is opened, no bankerRcustomer relationship exists 
between the bank and the person proposing to open an account. Once 
the account is open, the relationship is created and with it mutual rights 
and obligations between the hanker and the customer are created under 
law. Opening an account by depositing cash is slightly different from 
E 
opening one 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 avowed duty 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 
F 
may be implied by law. [34D-F] 
One of the tests of deciding whether the Bank was negligent, 
though not always conclusive, is to see whether the Rules or instructions 
of the Banks were followed or not. In the instant case, Sethuraman 
having been known to the Manager who gave the introduction there was 
G no violation of any instruction or Rules. [35E; J6D] 
Except when circumstances

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