Chapter 9 Case Laws on Responsibility of Collecting Bank – CS Professional Banking Law and Practice Notes is designed strictly as per the latest syllabus and exam pattern.
Case Laws on Responsibility of Collecting Bank – CS Professional Banking Law and Practice Study Material
Explain the Scope of Section 131 A of the Negotiable Instrument Act, 1881.
Application of Chapter to drafts. – The provisions of this Chapter shall apply to any draft, as defined in section 85A, as if the draft were a cheque.”
Conditions applicable for protection under Section 131 and 131A:
The NI Act does not provide an absolute immunity or protection to the bank. Protection to a collecting bank is subject to compliance by the bank of the following:
(a) banker acting in good faith and without negligence in receiving payment;
(b) should have received the payment for and on behalf of its customer; and
(c) the cheque should have been crossed generally or specially to himself, it follows from the above that to fulfil these conditions, a banker should have performed some duties in this regard.
To prove that the banker has acted in good faith and without negligence, he should have taken the following precautions:
(a) Opening of accounts: The bank should have observed proper KYC procedures while opening the account by obtaining proof of Identity and address; also it should have made proper enquiries and back checks as per bank’s policy of opening of new accounts. KYC documents submitted by the customer should have been independently verified through verification policy of the bank.
The banker should risk classify its customers and monitor account operations and transactions right from the opening of the account. Any suspicious activity in the account should be investigated and monitored. If the banker fails to do observe regular monitoring and investigation may be considered negligent.’ In the recent times RBI has been very active on stipulation of KYC norms, to ensure that due and proper care is taken by banks while opening and maintenance of accounts.
(b) Crossing cheques: At the time of acceptance of the cheque/DD for collection the bank should ensure that the cheque is crossed either generally or specially in favour of its customers, on behalf of whom the bank is acting as a collecting bank.
If the cheque is not crossed the customer should be requested to cross the cheque or if the cheque is specially crossed to some other banker, the banker should refuse to collect the same. If a cheque is crossed to particular account holder and if it is sought to be credited to another account, the such requests are required to be rejected, failing which a bank may be considered negligent.
(c) Verification of instruments: Before accepting the instrument, for collection, a banker should scrutinize the same to rule out any material defect apparent on the instrument.
(d) Status of accounts: The general nature of credits and debits in an account should be ordinarily correspond to employment, profession, business etc. of the account holder. Any large value credits which does not seem appropriate in relation to the employment or profession of the account holder should receive due attention of the banker and investigated, if required to rule out misappropriation, fraud or money laundering activities. Any account over a specific value of credit are required to be monitored at regular intervals by the bank.
(e) Collection cheques payable to third parties: The collecting bankers are required to make necessary enquires before collection of cheques tendered by customers on behalf of third parties.
Explain the case law of Axis Bank Vs Punjab National Bank related to Negotiable Instruments.
Axis Bank Vs Punjab National Bank & another Facts of the case:
One Mr. A, approached the branch of Axis Bank at Pithampura at Delhi, submitting necessary forms and documents. Axis Bank sends a letter of thanks to the customer as address verification and the customer collected a cheque book from the bank on production of the thanks letter. Two months later, Mr. A, deposited certain demand drafts purported to be issued by PNB from Kurukshetra.
The drafts were presented for payment by Axis Bank and was also cleared by PNB. Later PNB informed Axis Bank that the drafts were not issued by them and the demand drafts were actually issued in favour of Registrar, Delhi University for an amount of ₹ 100/-. Upon receiving the information, Axis Bank immediately froze the account and initiated the same to PNB.
PNB fled a claim against Axis Bank under the provisions of the Debt Recovery Tribunal Act (the “DRT Act”), which was ordered in favour of PNB. Axis fled an appeal before the appellate tribunal, which was also decided in favour of PNB. Axis then appealed to the High Court at Delhi.
Decision of the High Court:
The court observed that” 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. To fasten the responsibility for cheating on account of fabrication, the forgery or tampering must be such as can be detected from the face of the instrument by applying ordinary care and diligence.”
Further, in this case, the High Court found that there was no proximate connection between the opening of the account or the deposits of the forged instruments so as to treat the said events as intimately associated with each other. There is no undue hurry shown by the fraudster in making the withdrawals.
It is not the case of PNB that the forgery could have been detected by the collecting bank from the face of the instruments. The fact that the forgery could not be detected by the centralized draft payable centre of PNB itself shows that the collecting bank could not have entertained any doubts as to the genuineness at the time of receiving the drafts from the customer or for making them over to the drawee bank for collection.
The DRAT has found PNB also to have been negligent in these transactions. The Court decided that Axis Bank was wrongly denied the immunity of a collecting banker under Section 131. Therefore, it is very important for the banks to observe due care and diligence in the ordinary course of business of opening accounts and processing payments.
Explain the Liability on account of negligence of third parties. Under the Negotiable Instruments Act 1881.
Liability on account of negligence of third parties A trader RKB of Delhi, under a contract, supplied goods to Government department and received its full payment. The contract bills submitted by suppliers were usually audited by Government Auditor before payment of the bill amount.
The Government Auditor while auditing some bills of the trader, fraudulently omitted to make cancellation on the inspection notes and handed over uncancelled inspection notes to another person by name MCJ. MCJ opened account in the name of RKB with a bank and presented bill purporting to be drawn by RKB accompanied by one of the stolen inspection notes.
The bank sent the bill for collection and credited the account of RKB on collection. MCJ withdrew the amount subsequently. Similarly another bill was also collected in the same manner and MCJ withdrew the amount. When the fraud came to light, the Government (i.e. Union of India) fled a suit against the bank to recover money on the ground of conversion.
Observation and decisions of the Court
The trial court at Delhi observed that bank which collected the bills on behalf of MCJ was merely acting as collecting agent and there was no evidence the officials of the Government were deceived into issuing the cheques.
The bank further failed to produce any evidence to show that it acted without negligence by opening the account on the recommendation of any reliable referee. The court, therefore, held that the manner in which the account was opened by the Bank and allowed operations does not show the absence of negligence as to entitle it to avail of protection under Section 131.
The High Court of Delhi held that the Banker had no means, machinery or material to scrutinize whether the bills and the inspection notes on which the bills were based were a forgery or that the two uncancelled inspection notes were obtained by RKB by means of fraud. It was the Govt.
Department who had the means of knowledge to ascertain whether the inspection notes accompanying the two bills were fraudulently kept uncancelled and whether or not any payment was due under the particular acceptance of tender. The Court held that the negligent conduct of the Government Dept was the real cause of the loss and the Government Dept was therefore stopped from claiming the amount from the bank. (Union of India vs. National Overseas and Grindlays Bank Ltd., 1978, 48 Company cases 277 Del.)
Discuss the case study of Indian Overseas Bank vs Industrial Claim Concern, related to Negotiable Instruments.
Indian Overseas Bank v. Industrial Claim Concern 1989 (2) LW 437 (SC)
Facts of the case
Suit was fled by the defendant for recovery of loss it claimed to have sustained on account of the alleged negligence and conversion on the part of the bank. The matter reached Supreme Court on appeal by the bank.
Though the trial court decided that the bank was negligent in allowing the firm to open a ‘factitious account’ and permitting the customer to withdraw proceeds and also close the account.
Decision of the Court
The Supreme Court held that the facts and materials available on record did not show that the bank was acting negligently. Though the Supreme Court made certain observations on banking practice, it concluded that the bank was not negligent and protection under Section 131 of the NI Act was available to the bank.