2018 (3) TMI 510 - HC - Indian Laws

Bank Negligence: Liability for Unauthorized Withdrawals

Indian Overseas Bank Versus HDFC Bank Ltd. & Another

The Supreme Court held that HDFC Bank acted negligently and without good faith in opening an account and allowing large withdrawals, making it liable to ... Benefit of provisions of Sections 131 and 131-A of the Negotiable Instruments Act, 1881 - The cause of action in the suit is that the plaintiff/bank paid under a forged bank draft to the defendant no. 1/bank and therefore defendant no. 1/bank is liable for conversion and receiving the amount under the forged bank draft and thereafter paying most of the amount to defendant no. 2 - Whether the plaintiff bank is entitled to the relief claimed? - Whether there is any cause of action against defendants? - Whether the defendant no. 1 was negligent in opening the account in the name of Majit Singh Sethi as alleged in the plaint and if so, to what effect? - Whether the plaintiff-bank is entitled to claim interest, if so, at what rate and for what period? Held that: - Supreme Court in the case of Kerala State Cooperative Marketing Federation [2004 (1) TMI 714 - SUPREME COURT] shows that ordinarily once there is undue haste and lack of proper verification in opening of a bank account, a collecting banker will not be able to seek exemption of its liability by relying upon the provisions of Sections 131 and 131-A of the Negotiable Instruments Act. Want of good faith and negligence of a banker is not only with respect to opening of an account but also with respect to operation of the account and there cannot be large cash transactions in the account immediately after opening of the account and if it is so found then the collecting banker would have to be held guilty of negligence and want of good faith and thereby disentitled to avoid its liability by taking the defence under Sections 131 and 131-A of the Negotiable Instruments Act. The opening of the account, crediting of the amount of bank draft in the account of defendant no. 2 by defendant no. 1/bank and withdrawal by the defendant no. 2 of the total amount of ₹ 75,00,000/- is to be taken as part and parcel of the same transaction and an integral scheme - the defendant no. 1/bank cannot take the benefit of the statutory provisions of Sections 131 and 131-A of the Negotiable Instruments Act. Whether the suit is bad for non joinder of necessary parties? - Held that: - it is the moneys of the plaintiff/bank which were converted by the defendant no. 1/bank and therefore it was the defendant no. 1/bank who became independently liable to the plaintiff/bank and not to Bank of Montreal. This is to be taken with the fact that a contributory negligence of a paying banker does not absolve a collecting banker such as defendant no. 1/bank once there is found want of good faith and negligence in opening of an account by the collecting banker - the issue decided in favour of the plaintiff/bank and against the defendant no. 1/bank. The defendant no.1/bank is liable as the plaintiff/bank has proved that the subject bank draft allegedly was a forged bank draft of Bank of Montreal, the defendant no. 1/bank is guilty of want of good faith and in fact has acted negligently in opening the account of defendant no. 2, the transactions of withdrawal of large amounts of ₹ 75,00,000/- took place within four days of opening of the account of defendant no. 2 by the defendant no. 1/bank etc. All these aspects are all part and parcel of the same integral scheme/transaction showing lack of good faith and existence of negligence of the defendant no. 1/bank in opening the bank account of defendant no. 2 The plaintiff/bank will be entitled to pendente lite and future interest from the defendants at 12% per annum simple. Plaintiff/bank is also held entitled to costs of the suit in its favour and against the defendants - The defendants are held jointly and severely liable to pay the decreed amount to the plaintiff/bank - suit disposed off. Issues Involved:1. Entitlement of the plaintiff bank to the relief claimed.2. Existence of a cause of action against the defendants.3. Suit's validity concerning non-joinder of necessary parties.4. Negligence of the defendant bank in opening the account.5. Entitlement of the plaintiff bank to claim interest and its rate and period.6. Relief.Issue-wise Detailed Analysis:ISSUE Nos. 1, 2, 4, and 5:The plaintiff, Indian Overseas Bank, filed a suit for recovery of Rs. 1,35,11,409/- along with interest, against HDFC Bank (defendant no. 1) and another individual (defendant no. 2). The plaintiff alleged that it paid under a forged bank draft to HDFC Bank, which acted negligently and in bad faith, thus not entitled to protections under Sections 131 and 131-A of the Negotiable Instruments Act, 1881.The facts reveal that defendant no. 2 impersonated an NRI to open an SBNRE account with HDFC Bank and deposited a forged bank draft of Rs. 92,45,234/-. The draft was cleared by the plaintiff on the same day, and defendant no. 2 withdrew almost the entire amount within four days. HDFC Bank opened the account without proper verification and allowed large withdrawals immediately, indicating negligence and lack of good faith.The Supreme Court's judgment in Kerala State Cooperative Marketing Federation Vs. State Bank of India and Others, (2004) 2 SCC 425, outlines the liability of collecting bankers and the necessity for good faith and absence of negligence. The judgment emphasizes the need for proper verification before opening accounts and the standard of care expected from bankers.In this case, HDFC Bank failed to verify the identity of defendant no. 2 properly and allowed large cash withdrawals soon after opening the account, which were part of an integral scheme. This negligence and lack of good faith disqualify HDFC Bank from the protections under Sections 131 and 131-A of the Negotiable Instruments Act.ISSUE No. 3:HDFC Bank argued that the Bank of Montreal should be added as a party to the suit. However, the court held that the plaintiff's money was converted by HDFC Bank, making it independently liable to the plaintiff. Contributory negligence by the paying banker (plaintiff) does not absolve the collecting banker (HDFC Bank) from liability if there is negligence and lack of good faith in opening the account.CONCLUSION:The court concluded that HDFC Bank acted negligently and without good faith in opening the account and allowing large withdrawals. Defendant no. 2, who withdrew the amount, is also liable. The plaintiff bank is entitled to recover Rs. 75,00,000/- as the principal amount, with pendente lite and future interest at 12% per annum, and the costs of the suit. Both defendants are held jointly and severally liable.RELIEF:The suit is decreed in favor of the plaintiff bank for Rs. 75,00,000/- with 12% interest per annum and costs. The defendants are jointly and severally liable for the decreed amount.