LEGAL PROTECTION FOR BANKS

By:
RIAZ HUSSAIN
M.A. (English) LL.B, DBL, DLL (Pb).
Advocate High Court

QUALIFIED PROTECTION FOR COLLECTING BANKS
U/S. 131 NEGOTIABLE INSTRUMENT ACT

IN GOOD FAITH AND WITHOUT NEGLIGENCE INTERPRETED

The collecting banks face very difficult position when they receive cheques from customers for collection. They collect cheques for their customers then what are the consequences if the title of the sending customers happen to be defective or no title at all.

Banks have no means of safeguarding themselves against their mistakes and then legislature affords protection subject to the condition that the banker has acted "in good faith and without negligence" while collecting money and must be acting as collecting agent for the customer of cheques crossed in the favour of the customer.

Sec 131 Negotiable Instrument Act(quoted)

NON LIABILITY OF BANKER RECEIVING PAYMENT OF CHEQUE

“Subject to the provision of this Act relating to cheques crossed "account payee" where a banker in good faith and without negligence receives payment of a customer of a cheque crossed generally or specially to himself, and the customer has no title or defected title thereto, the banker shall not incur any liability to the true owner of the cheque by reason only of receiving such payment."

Before seeking protection U/S. 131 a banker shall have to prove that he received payments for the customer's cheque crossed in the favour of customer, as his agent and the banker acted under such situation "in good faith and without negligence", failing which the banker will incur liability to the true owner of the cheque if title of sending customer happens to be defective or no title at all.

"IN GOOD FAITH" DEFINED

Anything shall be deemed to be done in good faith where it is infact done, honestly, whether it is done negligently or not. This definition includes only honesty and does not require that the person concerned must act without negligence. So in this situation the banker shall have to prove both the things that the act was done honestly and due care and attention has been shown while doing so.

ONUS OF PROOF

Burden is on the accused to prove the facts that he acted "in good faith and without negligence". This is a departure from the general rule that burden of proof lies on the person who asserts the claim or who loses when the fact is not proved.

A banker will be guilty of negligence where it ignores a direction on cheque like "account payee" or where it credits the amount of the cheque to the personal account of the managing director of a company where it is payable to the company or fails to note a discrepancy between the name of the payee as given into the bill and that given in the endorsee. There should be nothing in the circumstances of the cheque to create a suspicion about the title of the customer if there exist some cause of suspicion due inquiries should be conducted failing which the bank may be held guilty of negligence.

CASE LAW

AL UNDER WOOD LIMITED VS BANK OF LIVER
POOL ETC 1924

One A was the sole director and principal shareholder of the plaintiff company. Cheques payable to the company were indorsed by him to himself in his capacity as director and paid into his personal account with the defendant bank for collection. The bank received the money and allowed him to withdraw. Subsequently the company went into liquidation. The liquidator commenced the action against the bank for conversion of its cheques the bank was held liable. The bank no doubt, acted in good faith but was guilty of negligence. The bank should have inquired that for what reasons the director was diverting the company's cheque into his personal account. There should have been plausible reasons for the unusual conducts of the director.

The extent of the inquiry depends upon the circumstances of the case. The banker should be aware of and conscious of most obvious circumstances which should put him on his god. Sometimes the banking history of the customer may become the cause of suspicion. Thus where a cheque was collected on behalf of customer who had misappropriated by forging and endorsement, the banker making some inquiry but not as such as the antecedent of the history of the customer whose cheques had been frequently dishonored, demanded the banker to conduct an inquiry about it failing which he was held guilty of negligence.

The question of negligence by the bank is a pure question of fact. Where the evidence showed that the bank had not made any inquiry at all to test the credentials of the persons before opening his account it was held that the findings as to the negligence on the part of the bank could not be interfered with in second appeal by re appreciating the evidence.

But the banker is not bound to regard every new customer as a potential criminal. He does not have to embark upon along a detailed scrutiny of every available piece of evidence and does not have to be abnormally suspicious. For money must be paid out with reasonable dispatch.

Hence inquiry is necessary only when the circumstances called for it or justify it.

If bankers for fear of offending their customer will not make inquiries into unusual circumstances they must take, with the benefit of not annoying their customer, the risk of liability because they will not inquire.

The following guiding principles have to be subjected by NIELD J in this connection.

(a) that the standard of care is to be derived from the ordinary practice of the bankers

(b) that the standard of cares required of bankers did not include the duty to subject the account to microscopic examination.

(c) The bank must not have been negligent in accepting a new customer and opening a new account.

(d) The onus lay on the bank to show that it had acted without negligence

The Supreme Court has emphasized one more point in connection with this duty, namely, "while collecting a cheque for a customer the banker is under an obligation to present it promptly so as to avoid any loss due to change of circumstances"

Negligence by bank in opening account. After a bank has been given a proper reference with regard to a proposed customer, and when there are no suspicious circumstances attendant upon the opening of the account, it is not incumbent upon the bank to make further inquiries with regard to the customer or to notice the account of the customer from time to time. But where the account was opened by the petitioner Bank without any proper enquiry and in clear violation of the instructions contained in its own Manual of Deposit for opening of new accounts. The onus of proving good faith and absence of negligence as contemplated by Section 131 is on the Banker claiming protection under the Negotiable instruments Act.

When in an action in conversion a defence is raised under Section 131 the primary question for determination is whether in the matter of realization of the cheque the collecting Bank had acted without negligence. Where there has been 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 has acted with negligence in the opening of the account will be relevant under Section 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 is 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 realization of the cheque. The question as to how far the two stages can be regarded as so intimately associated as to be considered as one transaction is a question of fact. Where the account of the customer was opened without obtaining a reference and without any inquiry, and where the manner in which the account was operated upon was peculiar and where the name as endorsed on the demand draft collected by the bank did not tally with the name of the customer as given in the application form and specimen signature. It was held, that taking all these circumstances into account it must be held that the bank failed to prove that it was not guilty of negligence in collecting the amount of draft.