Opening of Bank Account and Liability of a Collecting Banker

Banking is the heart and soul of any economy in the world. The banking system dates back several centuries and has developed throughout time. The system exists in one form or the other. In this article, we are dealing with one of the important facets of banking, being opening an account with any bank and also the liability of the collecting banker.

Opening of a bank account by a bank is largely a procedure driven exercise. There are guidelines issued by the Reserve Bank of India (RBI). Based on these guidelines, there are internal guidelines framed by the board of the bank that are to be adhered to by the bank while opening a bank account. There are various kinds of bank accounts, viz. savings bank account, current account, partnership account, corporate account, NRI account, etc. In this article, we are not distinguishing the nature of the account. The focus is only on the opening of any account and also the liability of a collecting banker.

Generally, before the banking system digitalized and data started being collected on computers, any new account which was being opened by a bank was based upon the introduction of the existing customer. There was no Aadhaar card and/ or passport and/ or any specific document required by the bank for opening of an account and an introduction of the existing account holder would suffice. Presently, the opening of the bank account is guided by the circulars of the Reserve Bank of India, which are issued under the title “Know Your Customer (KYC)”. The RBI, while issuing any such circular to the banks, also guides the necessity of the documents required and precautions so as to address the issues arising from money laundering, combatting financing of terrorism and related obligations of the bank under Prevention of Money Laundering Act. The introduction of the existing account holder is now not being insisted upon and the banks are generally insist on the following documents:

i) Identity proof in the nature of Aadhar Card / Passport / Voter ID Card

ii) PAN Card

iii) Any other document so specified under the Internal Policy of the bank.

Therefore, in the event of there being default or negligence by the bank in opening the account, the bank can be made liable for any loss suffered by third party resulting from the operation of any such account. However, even if the bank is in complete compliance with the requirements for opening the bank account, still the bank can be made liable as a collecting banker under certain circumstances.

Before answering and dealing with this aspect of the matter, we shall like to refer to Sections 131 and 131-A of the Negotiable Instruments Act, 1881. (NI Act):

131. Non-liability of banker receiving payment of cheque.—A banker who has in good faith and without negligence received payment for a customer of a cheque crossed generally or specially to himself shall not, in case the title to the cheque proves defective, incur any liability to the true owner of the cheque by reason only of having received such payment.

131A. 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.

Now, the expression ‘good faith’ and ‘without negligence’ is a defence available to a banker in any action brought against the bank alleging wrongful collection of amounts in a bank account. The onus is on the bank to demonstrate good faith and to show that it was not negligent in opening the account. The bank's inability to prove that it was not negligent in opening the bank account will deprive it of protection under Section 131 of the NI Act.  

To explain the position illustratively, suppose ‘A’ opens an account by impersonating himself as ‘B’ and provides all the required documents to the bank necessary to open a bank account in the name of ‘B’, and the bank in good faith and without negligence opens the account of ‘A’ in the name of ‘B’ by believing that ‘A’ is ‘B.' The question emerges as to under what circumstances could the bank be made liable for any action brought by ‘B’ alleging wrongful collection of amounts.

In a situation like this, the Court would examine as to whether the opening of the account by the bank in the name of ‘B’ and the collection of the cheque, which was drawn in favour of ‘B’, was the same set of transactions and/ or the Court may also examine if the cheque in question was put into account so shortly after the opening of the account so as it to lead to an inference that it was part of the opening of the account. More importantly, the withdrawal of the amount, which is the subject matter of cheque, would weigh heavily in the mind of the Court to make the bank responsible. Therefore, the opening of the account by the bank by taking all due care may still make the bank liable under various circumstances but this will depend on the facts of each case.

Expanding the above illustration further, if a bank account is opened in the name of 'B' and there were ongoing transactions over an extended period of time (though not fixed criteria can be suggested but assuming for a period of more than 7-8 months) and no claim was made by ‘B’ for such an extended period and the account continued to be operated by debit and credit entries by ‘A’, then in such a situation the action which is brought by ‘B’ against the bank as a collecting banker would fail, provided the bank establishes that the account was opened in terms of the mandate of the RBI and/or internal guidelines. Many a times large cash withdrawals post the deposit of the cheque and the failure of the bank to check those cash withdrawals can make the bank liable.

Simultaneously, another question which arises in this context is the opening of a bank account by the bank based on forged identity proof submitted by the customer. In this context, the law laid down by the Courts in India is that the bank is not an investigator. If there is no negligence and/ or lack of good faith, the bank cannot be held responsible only for the reason that the account was opened based on forged identity proof, provided the opening of the account and transaction in the account is not part of the same transactions.

In this context, we shall rely on various judgments passed by the Hon’ble Supreme Court as well as by various High Courts in arriving at the above conclusions. Reference is firstly made to the judgment in the matter of Indian Overseas Bank vs. Industrial Chain Concern, (1990) 1 SCC 484, wherein it was held that there must be sufficient connection between opening of the account and collection of a cheque before a defence under Section 131 of the Negotiable Instruments Act, 1881 could be held to be barred.

Reference is also made to the judgment of Kerala State Cooperative Marketing Federation vs. State Bank of India, (2004) 2 SCC 425, wherein there was gross negligence on the part of the bank at the time of opening of account and that the transactions of opening of account and depositing of the cheque and withdrawal were part of same transaction as they took place in close proximity to each other. Therefore, the bank was held liable.

In this context, we would like to refer a judgment of the Hon’ble High Court of Delhi passed in the matter of J.H. Jewellers vs. Umed Chindaliya & Ors., reported as 2023 SCC Online Del 3996. Briefly, the facts were that defendant no.1 was the accountant of the plaintiff. Defendant no.1 opened an account with the bank in the name of the plaintiff by submitting documents in accordance with the RBI mandate. Defendant no.1 then started depositing cheques, which were received by him in the name of plaintiff in the account opened with the bank and over a period of more than two years, committed a fraud of over ₹10 crores. On the fraud being discovered, the plaintiff filed a suit against the accountant (defendant no.1) and also against the bank. The High Court did not find the bank liable, but the suit was decreed against the other defendants. It was held by the Court that the bank was not negligent and acted in good faith. The Court summarized its conclusion by holding as under:-

“61. Applying the aforesaid principles to the facts and circumstances of the present case, it cannot be said that the defendant no.4 bank did not act in good faith or negligently collected cheques on behalf of a customer. The aforesaid conclusion is on account of the following factors:

(i) There was no negligence in opening of the bank account as the defendant no.4 bank complied with all the prescribed formalities before opening the pseudo account including conducting the enhanced due diligence.

(ii) The account was opened by the defendant no.4 bank on the basis of the defendant no.1’s cheque drawn on a nationalized bank.

(iii) There was no connection between opening of the account and depositing of the cheques, inasmuch as this was not the case where the account was specially opened for the purposes of deposit of a particular cheque and immediate withdrawal of the amount therefrom.

(iv) The cheques were deposited over a period of two years and there was no immediate withdrawal of the entire amount.

(v) There were no suspicious circumstances with regard to the cheques that were deposited. It is not the case of the plaintiff that the cheques were interpolated by the defendant no.1.”

Further, in the case of JH Jewellers (supra), the Court also held that in the light of RBI circulars, there was no mandatory requirement for the bank to take an introduction from the existing account holder before opening the account. The Court, while giving its verdict, considered the judgment of Hon’ble Supreme Court given in the matter of Indian Overseas Bank (supra) and Kerala State Cooperative (supra).

Thus, the discussion above be summarized to say:

(a) Any account opened by the bank without complying the mandate of RBI and/ or internal guidelines made by the Board will make the bank liable for any loss resulting to a person on account of wrongful collection.

(b) Even if the account is opened by the bank in compliance with the RBI circular and following the internal policies, the bank can still be made liable for wrongful collection of the cheque in the account by a true owner if the bank fails to prove good faith and non-negligence.

(c) Generally, the bank cannot be made liable based on an allegation that the opening of the account was based on forged identification proof, provided the opening of the account and operation in the accounts is not part of the same set of transactions and especially in a case, where the account was active for a long period of time.

(d) Even if the account is opened in accordance with the RBI mandate and internal guidelines, the bank can still be liable if the transaction in the account and opening of the bank account is part of the same transaction.

About the authors: Sanjay Gupta is the Managing Partner - Dispute Resolution at SNG & Partners. Amol Sharma is an Associate Partner at the Firm.